Qiagen N.V. (QGEN) Earnings Call Transcript & Summary

Welcome to the 2022 Bank of America Healthcare Conference live from Las Vegas. I'm Derik De Bruin, the Senior Life Sciences and Diagnostics Tools analyst here at Bank of America. Our next company is QIAGEN and with us is Roland Sackers, CFO; and John Gilardi, Head of IR. Gentlemen, welcome. Thanks for making the trip over from Germany to do this. We appreciate it. So it's -- we started thinking about this as I watch a number of my competitors move on to other things, it's like I've been covering QIAGEN for 21 years. That's -- which is hard to believe when you sort of think about it, 21 years. And it's been an interesting time sort of over that period. And also for QIAGEN, it's sort of been an interesting few years since 2019. You've had -- you've exited some businesses, you changed CEOs, shareholders voted down the Thermo acquisition, but you've improved transparency, you've had COVID pandemic sort of coming through. And it's been a sort of like a real wild roller coaster.

So I guess when we -- Roland, we sit here today and we think about QIAGEN and I think about my history of it, how should we think about organic revenue growth trajectory versus the past? Because if you go to sort of like that period right before 2019, 4%, 5-ish percentage organic revenue growth. With everything you've got going on right now, what's the future look like?

First of all, thanks for covering us 21 years. And I think I made more or less all of them. So that's good. But I think you're pointing out to an important phase because, clearly, a lot of things have changed within 2019 and also, of course, afterwards. And I would say the most important trigger was -- clearly, for us, is that we stopped our own development of developing a sequencer in 2019 and was a focus very much on our PCR machines, QIAsymphony, NeuMoDx, decentralized symptomatic QIAstat and also digital PCR. And clearly then with COVID, these 3 machines got a huge tailwind, and it was clearly being helpful and putting us into a very different environment. And that is driven also, particularly, as you can see now the last couple of quarters with a very strong non-COVID performance. So I would say 2019 was an important year. We clearly refocused the company. A lot of people have forgotten that at that point in time, we had round about 40%, 50% of our R&D expenses going into this sequencing development. So just by redirecting that into a more focused approach around our, I would say, all these being strong PCR capabilities were the right thing in time and clearly had to reset the company. Clearly, as you said before, COVID was helpful. We placed that, now, 2.5 years, probably a 5-year number of instrument placements. But as we also know, all these machines have multiple uses. And then we see customers now really going left and right. Good example, and for sure, we'll look into that in more detail today as well also like first quarter ever, QIAstat had more non-COVID use than COVID use. So you see that there is an ongoing trend, which is helping us also the non-COVID business.

And a couple of things to sort of unpack there. So what's -- while I've got the NGS thing sort of in my mind, what's the relationships and statuses, sort of like -- you repositioned that business towards Illumina. You did the relationship there. When do we start seeing products starting to come out from that? I think that should be soon, right?

We have actually already ongoing benefits out of that because we do clearly developments with pharma companies, which are based on that. And we have seen, I think, the 3 quarters with a nice double-digit growth rate out of that. We clearly see also that the overall companion diagnostic business, which is part of that franchise as well, is -- [ get a impact attraction ]. It's a combination of both, I would say, revitalization of co-operation, which started pre-COVID then, of course, got somewhat defocused also at the pharma companies during COVID, and now going back to real life, but also new partnerships. So I would say that's going well. The same trend is clearly also what we call our universal use kits. Also here, now a couple of quarters, low double-digit growth rate, which I think is very sustainable.

Got it. Sort of going back and once again, the -- I think going back with historical thinking about it, it's like the business has always enjoyed very strong gross margins in 70s. Your operating margins are in the high-20s. How do we -- and you've talked about sort of like redirecting some of your R&D investments. So is there room to expand these levels? So how should we think about your R&D investment over the next couple of years and just SG&A? And I mean this is obviously going to segue into a labor cost, inflationary pressure conversation. But just sort of thinking about how should we think about the margin opportunity.

See, couple of facts. First of all, as you said, QIAGEN is probably anyway one of the high-margin companies in our industry. Pre-COVID, I think we left the year 2019 with a 27% EBIT margin -- adjusted EBIT margin. Growth for this year is probably like 29-plus percent adjusted EBIT margin. And that is without any larger COVID impact for the second half of the year. As you know, we excluded that from our guidance for the -- more or less, for the second part of the year. And therefore, again, we will see if we do better than that, put it that way. But at the same time, there's a couple of factors which should be incremental positive for QIAGEN. First of all, we believe gross margin should, over time, develop in a positive way for 3 reasons. First of all, it's pricing. I do think right now, we clearly were able to improve prices this year because of inflation-driven costs. We clearly continue to look at that, how that is going to play out. Overall, on the cost structure, nevertheless -- on the cost of goods sold structure, that hasn't too much of an impact. Mix is being helpful. And the largest driver for us is actually better utilization because what we also did over the last 18 months is ramping up significantly our production capacity. We more or less realized all the plans which we had for the next 3 to 4 years over that period. And so right now we are running certain parts of our production lines clearly on underutilization. So just by increasing volume, that's going to help us in terms of cost structure. On the operational expense side, the single biggest driver for us is clearly digitalization. We have seen that a company like QIAGEN already ramped up significantly, particularly the digital sales channels, we have now more than 60% of our revenues coming through digital channels. That compares to pre-COVID, somewhere around 25 percentage points. We see that the trend is still [ gets ] going higher. We see that, for example, that our next current instrument generations work a bit like hotel minibus, you take it, you order it and you get the bill. So I think that makes, clearly for a company where like 80%, 85% of the revenues are recurring revenues, a significant difference in terms of efficiency for the sales forces. R&D, we feel typically comfortable with an 8% to 9% of revenues spending. I have to say, and you were alluding to that before, that this year, we probably will invest a bit more. Why? Because we have seen in the first quarter, we were able to increase guidance. But we, on purpose, decided that we will not push everything just through into profitability, but also take some of these extra proceeds what we expect so far and most likely might be more for this year, we'll see how it goes, into rather short-term R&D activities and some marketing activities so that we also have one of our, I would say, areas where we really want to do even better going forward, meaning menu expansion to get QIAGEN maximum speed on the street.

So a lot of questions in there as well. But let me just sort of ask this one because I get a lot from investors. So I think what struck me coming out of first quarter was just how strong the performance of everybody's non-COVID businesses were. It just wasn't QIAGEN, it was just across the street, things were just a lot better, particularly given China, particularly given macro, particularly given some of the other things going on in Europe. Are you seeing any sort of like stockpiling? You've seen any sort of issues in terms of people just worried about the future and trying to order?

Not really in Q1. Actually, in some parts of our business, it was actually Q1 last year where we had seen some of this recovery impact. So it was actually more difficult in terms of comparison periods. Q1 was, I would say, for example, for QIAGEN, a quarter with actually where we have still seen that things are in Europe, but also in Asia, as you were alluding to that, still not back to normal. We still have seen quite a significant COVID environment, as you know. And that clearly means also that laboratories are working not at 100% on a normal schedule. And that I think is rather somewhat negative for the non-COVID business. So in that environment, actually a 14% non-COVID growth rate, I would agree, was a good performance, in particular with a high share of that coming from instrumentation, where a lot of people, I would say, is still at [indiscernible] what happens post-COVID as instrumentation placements at worst. I think we have seen now that also in the first quarter, I don't think it's going to change over the course of this year, that the macro environment is still very positive for healthcare, I think also in particular, for diagnostics. We still see 2 trends, people investing into automated solutions to deal with a higher throughput, at the same time, clearly also making use some of the capacity they built and fading away from COVID to non-COVID because there was a lot of also deal which happened over the last 2 years with new launches, which gives extra opportunities for customers as well.

Got it. You mentioned investment in menu expansion. Can we talk a little bit about both QIAstat and NeuMoDx and sort of like where we are in those COVID tailwinds, headwinds, menu expansion, placements, all the lovely stuff, right?

We're in the early innings of both QIAstat and NeuMoDx. Let's go back and remind QIAstat is our plain syndromic testing. This is a machine. We're approaching 3,000 placements now worldwide. This is a box where if you have a patient that comes into the ER and to the ICU, you don't know what they have in terms of respiratory, a gastrointestinal or a meningitis-type condition that you're able to test one sample against often more than 20 different pathogens to look for. Like Roland said, we've now reached a point where the non-COVID applications are getting more traction than the COVID, especially in Europe, where we have the start with the placements, where we have the full menu now of those 3 tests in the United States, we have the respiratory panel right now. We're in a situation where we're waiting for FDA approval this year, hopefully in Q4, for the gastrointestinal and then we'll be coming with the meningitis. So those are the big 3 tests that you need in that platform play there. But we are seeing very interesting applications in industrial settings where companies are buying this machine to be able to test their employees. Bank of America should also be doing that as well. And our other play in this area is NeuMoDx. This is a integrated clinical PCR testing platform. You see this in big university medical centers, larger hospitals that need to be able to do anywhere from up to 40 different types of molecular diagnostic tests from the big workhorse tests like hepatitis C or HIV down to your lactose intolerance type test that may be done in a molecular setting, all these tests. In Europe, we have 15 commercial tests available on that machine. Think of these as apps that you run on the machine. These are a very wide menu that we have -- broad menu. In the United States, we have 3 or 4 tests right now. They're mainly respiratory and chlamydia, gonorrhea-type test. And now the challenge for the next 2 years is to take that European test menu, build it up to the United States. On that system, we've reached over 215, 220 placements. That's also a machine that's competing in a market where we're actually seeing very strong placements after the COVID outbreak. So I think when you're talking about the first quarter, Derik, one of the things that was really important for us is that we had the highest level of dollar sales for instruments that we've had in the last 2 years. So even in a post-COVID environment, we're seeing very strong instrument placements. On NeuMoDx, what really is setting that machine apart are 2 things. Number one is the speed of getting the results. There's a clinical benefit there, yes, but also what's more important for the customers is they can do more tests and push them through the machine much faster, and they have a better total cost of ownership and better margin in terms of the reimbursement versus other systems. The second thing that we offer is the ability to process what are called laboratory-developed tests. These are the homemade, home-brewed tests that labs want to run. They're very lucrative for them from a profit margin. We supply them the chemistry to do that as well. But we have the ability to do that much better, faster than the other generation machines.

So on QIAstat and the multi syndromic testing as when you look at that, there was often a lot of pushback from inpatient versus outpatient sort of like the reimbursement is a little bit shaky. Has that -- has the pandemic sort of normalized some of that and sort of like made people more there? And how are you faring against the incumbents, BioFire and GenMark?

There's 2 markets for that testing on that system. Two-thirds of the market is inpatient testing, which is covered by DRG, which is covered by a different reimbursement here in the United States, 1/3 is the outpatient market. The inpatient market is going very well. The outpatient market is the one area where there's been some pushback on reimbursement for the larger respiratory panels and this idea to go down to what are called 4-plex test where you test for the 2 types of flu, flu A, flu B, along with respiratory syncytial virus, RSV and then with COVID. That's a panel we offer in Europe as well, and we're reviewing our options to offer that in the United States as an option for people who want to have a more [ eliminant ] there. But I think the overall what you've seen with COVID and the pandemic is the value of molecular testing has really come to the forefront. And that's where you're seeing that push. For example, in Europe, you still need to test yourself out of COVID. You still need a PCR test to get free in a lot of continental European countries. So when you think about it that my wife or relatives can tell me the difference between an antibody and antigen and a PCR test, pre-COVID, this was all nothing they could understand. Now this has become part of our daily lives. So the value of molecular testing is what's really going to drive these systems going forward.

Well, I used to joke that -- when I used to talk to my sales force, pre pandemic, nobody knew what the hell PCR was and that's changed. And now suddenly, everybody knows what PCR is. It's like, hey, we're relevant finally. So can we talk a little bit about QuantiFERON? I mean that's -- that deal has been a home run, probably one of the best deals you've done. And...

We got a lot of criticism in the early days. I still recall in 2012, when we acquired it, the business had a $20 million revenues and again we paid, more or less, let's say, [ $300 ] million. And today, we are clearly more than [ $300 ] million in revenues this year and with a very high gross margin profile. So clearly paid off. And it's still again clearly growing nicely. We got 40% over the last 3 quarters. I'm not going to promise that it'll continue that pace. Clearly also comparison gets more difficult in the second part of the year. But it's going to continue on a double-digit pace, I think, for 2 reasons. First of all, the ongoing conversion from the 120-year-old skin test, which is still the majority of the market. Probably right now, on a global basis, probably 35% is converted. The market by itself is growing. We clearly have benefits also that our instrumentation partner, DiaSorin, did quite well during COVID in terms of placements. So we have actually seen a huge incremental number of customers as greenfield opportunities because without any large CapEx, they can start this right away with QuantiFERON-TB testing that's driving growth quite nicely.

So beyond sort of like latent TB testing, what about some of the -- what about expansions for other T-cell analysis, Lyme?

Lyme is clearly something what we launched end of last year in Europe. U.S. is probably second half of the year. So we will be having a couple of millions in terms of revenues this year. Next year will be more meaningful just because of the U.S. coming in. But it is an important market. It's probably a $400 million to $600 million market. Yet, have in mind that we sell it slightly different than we typically do. We -- DiaSorin is selling the product because of the way they have a leading franchise already in Lyme. They combine their product with our QuantiFERON product because it's a better offering with a larger coverage, earlier detection for Lyme disease than the traditional one. And therefore, we believe that should be also a very attractive package for the customer. So I think we will have a nice start there.

And just to add on TB, remember, the competition is the 120-year-old skin test. We're only at about 35% to 40% penetrated in the United States, 5 to 10 points lower on a global basis. One of the things that really happened during the COVID outbreak, and you read the New York Times, you read the other articles out there, the global fight on TB was set back by more than a decade. More people die today of TB than malaria and AIDS combined. There's -- the TB issue has just gotten worse during COVID. That means the demands for testing to do surveillance and bring this under control have just increased even more. So this is not a catch-up game as to what we're seeing here with sales. We haven't seen the migration -- immigration testing come back in the United States yet. There's a lot of runway ahead on this product.

So let's talk about some of the new products, another one that looks really interesting and one of our too many -- high-acuity. So digital PCR, I mean, I always looked at that -- it's always been a technology I've been very interested in, but it's also seemed to me as it's a technology and sort of like you have -- the market needs to be built around it, right? It's like there's still a lot of applications there, I mean sort of beyond wastewater testing for COVID. [indiscernible]. So what's the opportunity and some of the key applications that you're looking to build out here? And it's essentially you and Bio-Rad is sort of like the 2 companies that sort of sell those. Like, how is the competitive dynamic and platform comparison between the 2?

I think it's actually going very well, I think, for both of us, but let's focus on us a bit more. It's clearly a market opportunity where, right now, we focus on the life science, particularly also on the pharma industry. Clinical is probably something where, over time, we can expand into that. But the focus right now is in that environment. I do think the benefit we're having is clearly our platform has a very professional workforce and customers really like it. So now we have 3 different sizes. So depending on your [ arms ], who put you, more or less, picks the right machine. What we clearly also see that nice opportunities overall converting from the qPCR market, which by itself I think is at least a $2.5 billion market opportunity. So I think most of our customers can get, for the same price point, more data out. So I think, over time, that becomes the new standard as we have seen in other technologies as well. I do think one incremental opportunity, as what you were alluding to, is things like wastewater, which we -- surveillance for COVID, which are seeing -- John, when you asked, how many states are using it now?

You were right. 70% of all U.S. states are now using QIAcuity machines to do wastewater testing, and that's clearly the way to be able to see when you're going to have the next outbreak here in terms of COVID. But what we offer is a platform called GeneGlobe, where you can go in and configure any panel that you want to be able to use on that system. You can use the same GeneGlobe portfolio to build your NGS panels as well to run on any sequencer out there. So right now, we're in this life sciences push on this platform. It's going to move into the clinic in the next couple of years. Like Roland said, this is a conversion game, this is like going from Nokia phones to smartphones. This is going to become the new level -- standard that you expect in the lab in terms of PCR analysis. And we want to democratize the use of digital PCR for -- to make it available to any lab out there worldwide.

So any questions from the audience? Because I'm going to keep going if there's not, and I will keep going. So early in the pandemic, obviously, there was a sample prep shortage for RNA sample prep. You did see some other players coming to market. customers did something which was unusual as they usually do not switch but then they went out and [ had ] to go out and validate other suppliers. Sort of like how does that sort of sample prep market sort of unfold right now? And I mean, I know that DNA is still your bigger market. I mean it took years to get my PIs to switch from us doing dumb ass ultracentrifugation preps to [ KIO ] kits. So sort of kind of talk about your sample prep franchise and just...

Yes, it's clearly a franchise where QIAGEN, put it that word, has a leading franchise. And we actually do believe that we actually expanded our market share during COVID, what was clearly helpful for us. And again, just to give you some numbers, I think for this year, it's probably north of $750 million in total in revenues. DNA is probably 2/3 of that. And as we all know, COVID is rather the RNA part. But we also had $150 million of RNA sample prep pre-COVID just to put this thing into perspective. So I do think it is an area where we have seen nice momentum. So one thing I think what is helping us here is also that sample prep is not like one technology or one product. At QIAGEN, it's probably 20 different technologies with more than 200 different solutions set. What it means is depending on which kind of biological sample you're working with, and for which kind of information you're looking, we need a slightly different product. There's no way that somebody can come in and say, okay, I have now this new product and take something away. It took us 20 years to building that franchise. I know some of our peers tried a couple of years ago to be more aggressive in that area, cutting their price by half for 12 months period. Actually, they lost, in that period, market share. So I think we clearly have still the leading market share. And you have seen also in Q1, how much opportunities you have in that. Our QIAprep&amp product is clearly heading nicely to that. Our automation solution, which we actually, by the way, also invest into nicely, we don't talk too much about that sometimes, like QIAsymphony and other sample prep machines, are also adding nice and helpful to us in terms of growth. And again, clearly, there's a healthy margin profile. I think COVID was helpful for our sample prep business.

Every company sits up here and says they're the gold standard in whatever they do. But in sample prep QIAGEN is a gold standard. 35 Noble Prize winners in the last couple of years -- over the last decade or so, their work directly linked to QIAGEN sample prep products. And today, of all days, CSI Las Vegas sends a contract, and they want to use 9 QIAGEN machines in their studio filming a TV show because QIAGEN is the absolute gold standard for forensic analysis in terms of sample prep. And that's this reputation that's really hard to -- COVID hasn't changed that view of QIAGENs products.

Well, if CSI can make sample prep sexy, then I'd burn out my thumb doing sample prep. So let's talk capital deployment. Let's -- I mean, you've done some -- you've been out of the M&A market for a while. Can we talk -- I mean, your leverage ratio is low. Can we talk about share buybacks, capital deployment, all that sort of like good stuff.

Yes. I think for good reasons, as I said before, we were clearly busy, I would say, the last 2, 2.5 years by, again, first of all, addressing the opportunities around COVID, building up capacity, also addressing the non-COVID opportunities and clearly pushing a couple of platforms forward. So I do think we were busy and clearly something which we have overseen. At the same time, net debt to EBITDA, as you said, is now, I think, 0.7. We clearly had now a couple of quarters with also record free cash flows. I do think cash flow remains positive and helpful environment for us. So we're clearly focusing right now on both. On the one hand side, bolt-on acquisitions, I do think there is opportunities out helping us to strengthen our portfolio, menu expansion. Bioinformatics knowledge base is helping to expand our existing franchise. So you shouldn't expect that we add necessarily another platform or so, but rather around our existing focus areas to have a better portfolio. Nevertheless, also assume that we continue with our general capital allocation policy where we are quite successful since 2012, meaning doing the share buybacks.

Got it. And then the obligatory question I have to ask is like, obviously, the -- you were engaged to Thermo and then some shareholders stopped at the altar and said, no, we object to this. So what about your sort of like -- what about sort of like your plans on the company's plans and sort of thinking about -- I mean since I've covered this company, it's like every 6 months, there's a newspaper headline that somebody is dating you or wants to date you.

Only 6 months? No, I do think QIAGEN is clearly a very different company, a different position than in 2019. And you mentioned all the changes from CEO change to clearly stopping a large R&D project. And clearly, again, right now, rather having a non-COVID growth rate, which is for this year double-digit, and we'll see if we're able to keep it double-digit or might be high single-digit area. I think that time will tell. So I do think it's a different profile. Nevertheless, I do think the core industries continue with consolidation. I think there's no doubt on that. There's probably even new players in that. Of course, we clearly have this one group, which are the large players who always can do M&A. Now you have clearly also a certain group of companies who had a lot of value coming through COVID and probably facing a lot of headwinds going forward and still looking for opportunities. I think QIAGEN has shown with the mentioned discussion that we're willing to entertain and support. If there's a reasonable opportunity, time will tell.

Great. Any questions from the audience? If not, I will ask you my standard closing question. What's underappreciated about QIAGEN?

I do think the one thing that is really different and, as you said before, many years with QIAGEN, for many years, a lot of our growth was driven by one single product, either it was the HPV or it was the sequencing business or whatever. I think if you see, at QIAGEN today, the growth is really driven by a broad portfolio. Again, we talked about the 5 pillars of growth. But even what we call the core business, genomics, bioinformatics, companion diagnostics, actually all have quite a nice momentum. Quite sure that everything will go every quarter perfectly right. But given the broad portfolio and the overall momentum in that portfolio, I think we have a nice risk-adverse coverage in an even stronger market environment. I think that is what people have to realize.

With that, we're out of time. Roland, John, thank you for being here. Thank you, audience, for listening. We appreciate it. Have a great conference.