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

Okay. Good morning, everyone. If you find your seats, please. My name is Peter Welford. I'm the European Life Sciences Pharma and Biotech Analyst at Jefferies in London. My great pleasure to have the next company here in the track today, which is QIAGEN. And it's our pleasure to have with us here today, Roland Sackers, the CFO; and also John Gilardi from the Investor Relations team. I'll let Roland make a make a few sort of comments, but perhaps in particular, we'll see those start off as well talking about COVID-19 and I guess we'd ask at the start maybe, by all means for you to say a few comments about the company, but particularly as well, can you just talk a little bit about, I think what's become your catch phrase that you are COVID-19 relevant, but not COVID-19-dependent. So perhaps you can go from there and yes, over to you, and we'll kick off with -- maybe you want to make a few introductory comments.

Sure. Yes, and thanks Peter for having us. And if I look around, it looks like that COVID is over, nobody is wearing mask anymore and quite busy days. But I think the good news is clearly that we are in a different phase of COVID that is clearly also something what QIAGEN addresses and [indiscernible] and, as Peter was referencing to that, we do believe QIAGEN for sure, with this product is COVID-relevant, but we do not want to be COVID-dependent when we give guidance. That's the reason why we also for the second part of the year, for the second half of the year haven't put any incremental revenues from COVID into our guidance. It doesn't mean that we believe that COVID is fully over. But we clearly have seen, as you have seen over the last couple of quarters, there is a significant volatility in the market, and that volatility shouldn't be part of our guidance. So if COVID comes in quite strong as we have seen, for example, in Q1 in Europe, that might create an upside for us. We clearly -- that is a relevant part of that. We want to be ready to do supply. We clearly have invested a lot over the last couple of years coming into that situation. We scaled up production for any kind of products. So if there is a high demand for certain products, we typically are more than capable in fulfilling that, and that might then lead into quarters where we significantly above guidance. I do think, nevertheless, what is more important and that probably as a remark from my side, Peter, if I may, what is clearly key for us, how is the non-COVID business doing for QIAGEN. And while we admit that clearly the overall COVID franchise was very helpful for us, particularly in placing instruments in the market, and as you all know, all of our instruments are not single-trick ponies, there was a wonderful battery of different panels. That is clearly something what was also very strong in Q1. We had another quarter with a double-digit growth rate on the non-COVID side, and we believe that is key for us going forward.

So let's start off just going through some of those pillars of growth. I think it's probably the most sensitive things and then we'll come back to financials, those topics. By the way, so if anyone in the question room has a question that burning dying drives, by all means jump up and down, and we will try and get a question from the audience too.

So let's start off with Sample Tech. This is obviously your bread and butter. Can you just talk a little bit about here, what is your unique offering and strength within Sample tech? And in particular, how do we see that business evolving? Is this a mature franchise or what are the future drivers of this business?

The Sample prep is clearly the product with QIAGEN is very much known for and clearly one where we build, I would say, a significant franchise in a market avoiding all other routes. It's clearly a product, which I think is also important to understand, which is probably 20 different technologies, probably north of 100 different products. So it is not like one product serving all different needs. It is rather a product group where depending on your biological sample, you use, might be blood, might be saliva, might be sputum, might be a stool sample you need and for which kind of biological information you're looking for, you need a slightly different product to perform that extraction and preparation. QIAGEN is the company who has built that portfolio over the last 20 years, clearly with a significant market share. I'm not sure what your number is, Peter, but I do think most analysts have us somewhere at 60-plus percent market share into that market. And that is clearly something where we also during COVID gained a nice momentum. It was clearly a part of our success. And given the market share we have, we believe it's probably going overall as most markets are doing. Again, it's a product which serves the life science as well as the clinical market. So I would assume that in average, we're probably growing somewhere around mid-single-digit, but on a very consistent basis.

And perhaps you can just talk a little bit about, in particular about QIAsymphony because maybe you actually get necessarily a lot of airtime now with some of the other platforms. But obviously, I mean, that presumably now has built up a pretty big installed base and there's a lot of recurring revenues sort of into that. But just talk a little bit about the contribution from that and how we should see that evolving.

Yes. QIAsymphony is one of the platforms which automates sample preparation. Again, by today, still a significant part of sample preparation is still manually performed. So there's still an ongoing automation in our industry. And as Peter was alluding to that, we clearly gained significant traction over time. We were selling now for the last couple of years, typically 200, 250-plus instruments year-over-year. And this kind of instruments clearly generating the one thing what we love most, meaning recurring revenue streams on the consumer side. In our industry, typical run rate is -- which was clearly probably increased during COVID that an instrument generates on a consumable suite typically is a 1-year purchase price of that instrument. The nice thing is customers, in a lot of cases, signed what we call reagent rental contracts. That means they don't necessarily buy the instrument, they commit to a consumable stream for a given period, typically 3 to 5 years. So you have a couple of things. You have a nice visibility on your consumable run rate. You clearly have very loyal and hopefully also very happy customers over the time period. But most important, of course, you clearly can expand from that to your portfolio quite nicely because any incremental step you can offer on that instrument is a pure win for the customer.

And then let's move on to one of the other pillars, QuantiFERON. So obviously, a product that was pretty hit pretty hard by the COVID-19 pandemic, but bounced back. I mean, how sustainable now do you think the growth we're seeing is? And do you think we can get back to sort of then the pre-pandemic sort of, I guess, high teens 20% growth going forward?

Yes. I think it's clearly a great product just to put it -- or to frame it a bit more. QuantiFERON is a product for us, mainly, which is a latent TB test, meaning tuberculosis testing, which is mandatory in a lot of situations. For example, if you think on back-to-school testing, if you're seeing on first-time responders emergency, it's a test, which regular gets performed for legal immigration. And at the end of the day, it's a conversion story because the traditional test is EUR 120 skin test. Most of you still remember the days at least the people in my age where you have to get this nice injection under your skin. You had to revisit the doctor after a couple of days and see if you develop a bubble or not. The traditional test, which is still the majority of the market, probably 60-plus percent clearly has a very different sensitivity and specificity compared to the modern test like the QuantiFERON test we are offering, which is very typically in the 99th and therefore, it's a nice ongoing penetration. As you said, during COVID, of course, people avoided this visits, schools were closed. And again, a lot of tests were not performed. Nevertheless, the rising year before COVID start to grow at $240 million in revenues, then it dropped to $190 million during COVID. Last year, we were already above it, I think, USD 280 plus million. And now we have seen 2 or 3 quarters with significant double-digit growth rate. Again, I don't think that we will keep the 40% growth rate, which we have right now forever. Goal is probably a very good double-digit growth rate. And -- but it's also important to note that we are -- while we are focusing here now just on the TB side of it, there's incremental opportunities for us. One product, which is also based on the same latent technologies, the line test, which we just launched more or less together with our partner, DiaSorin in Europe recently. The U.S. launch is probably coming up end of this year. So there's another $400 million to $600 million market opportunity. It's just one incremental product for us.

And then perhaps another product that's on the opposite side has benefited from COVID-19 with its rollout is the syndromic testing QIAstat-Dx. Could you just talk a little bit about, I guess, how that's been placed both in the U.S. and Europe? And how we should think about rolling out your menu of panels on QIAstat?

Yes. I think the one thing what we have -- what we should do when we talk about QIAstat is going back to 2019 because 2019 was clearly a year with a lot of events for QIAGEN and clearly, one significant event is -- was at that point of time that we stopped the development of our own sequencer. Was teamed up at that point of time with Illumina. And instead of putting money into the development of our own sequencer, we pushed forward 3 PCR machines. QIAstat is a machine you're talking about symptomatic testing machine for decentralized solutions, NeuMoDx of the highest throughput side and QIAcuity, which is a digital PCR platform. We clearly had then, of course, significant tailwind with COVID that there was a significant demand for this kind of testing. And what we're seeing right now is actually still a quite attractive growth rate momentum. We had actually record placements for our QIAstat machine in the first quarter this year instead of installments and an ongoing shift in terms from COVID testing to a non-COVID testing, might be other respiratory panels, might be gastro, might be meningitis. And it's clearly an effort which still is ongoing. There's clearly still a good number of COVID tests in that. But what is encouraging for us that we have still a good runway on placing these instruments. I would say, for the last couple of quarters, we had an average somewhere like 200, 250 instruments per quarter. And I do think that is encouraging for us.

And can you just talk a little bit about the longer-term market opportunity you see for syndromic testing and particularly as well the competitive landscape? Because clearly there's been a couple of other big M&A deals in this space recently. I mean, how do you see this panning out?

I do think if you -- I know that you do so, do some research on our machines is that the QIAstat machine is clearly very unique and customers loves the machine a lot because it has good turnaround times, 45, 60 minutes. Clearly, we have to expand the menu, as we just said before. We just had recently a big milestone by having the gastro panel out, which again is a big one for Europe for us. So I would say a continuation of building the menu with a leading platform probably allows us to become quickly a #2 position. And I think that is what we are aiming for.

And then let's move on to the fourth platform then, NeuMoDx. So can you just explain, obviously, what is a very crowded, if you like, PCR marketplace. How is it that NeuMoDx fits in? And what does it bring really to the molecular diagnostics lab?

Sure. So what NeuMoDx brings for integrated clinical PCR testing is the ability of 2 things. One is speed. We can process in 1 hour -- less than 1 hour what the competitor systems often need 3 to 4 hours to do. And the second thing is ease of use. Our machine is much easier to load and walk away, what they call load and go. And that is critical these days for the clinical lab customers because they're having trouble like all of us finding people to do this kind of work. So those are the 2 benefits. In Europe, we have the broadest menu in the competitive landscape there. So what we're seeing there is 14 to 15 different clinical IVDR tests that we have running on that platform. And now the challenge for us going forward, the opportunity over the next couple of years is going to be to build up and replicate that menu in the United States. The system got a lot of acceleration in terms of the rollout through COVID-19. That's why we're expecting this year to have lower sales in '22 than we did in '21. We're not at a point yet like we are in QIAstat-Dx, where we have more non-COVID sales on QIAstat-Dx now than COVID. On NeuMoDx, we still have a reliance on COVID testing in terms of the use of that system, but that's something we want to be able to tackle in the next couple of years. But this is an opportunity where you still have a lot of labs that want to get an integrated PCR testing. That's about 1/3 of the market. Another part of the market is conversion of QIAGEN equipment and upgrading the system and about another 1/3 of the market is where you're competitive swapping out of the competitor system.

And then, I guess, moving on to the final pillar then, digital PCR QIAcuity. Can you just talk a little bit about what the opportunity for digital PCR is? And I guess where you so far -- the sort of applications so far you've found for this technology?

Let me kick it off, and John can answer that. Digital PCR is another good example of what I would call a conversion story. It's clearly a market where you have a nice opportunity with a new technology to come in and convert existing technologies, for example, qPCR, which by itself is probably a $2 billion, $2.5 billion market opportunity. Similar to some of the other products we talked about, QIAGEN develop here a set of instruments, which I would call leading in the space. We assume we have 2 different -- actually 3 different types of instruments depending on your expected throughput, you can pick the machine you need. That's what customers like a lot. And we see right now a significant demand coming out of the life science/pharma space. It's clearly something what goes right now significantly into research environment. Over time, we might see incremental opportunities in the clinical market side. John?

Digital PCR, like Roland is saying, is, again, a conversion story. You have a market now where you have 2, maybe 3 competitors in that market, but you're going to see more entries into that area, just like you saw with qPCR, where the technology becomes wider. There's ample opportunities for a lot of competitors to be in this market. This is not going to be, say, like NGS, where you have one company that dominates the market. There's just a much broader, wider application area. One of the key areas that you're seeing the growth right now is using translational medicine for cancer research. I'd say pharma companies are the most avid users of digital PCR right now. We see a lot of interest from also the area of wastewater testing. You saw recently the CDC came out with a guideline to do wastewater surveillance testing, not just for COVID, it's going to be expanded to other infectious diseases, and they awarded that contract or the approval was given to only 2 companies that offer digital PCR technology and QIAGEN is one of them. We are now present in more than 70% of all U.S. states in terms of public health lab utilization.

And then let's move on to financials in the interest of time as well. Can you just talk a little bit about what is your long-term margin target? And I mean, what are the key levers to get there perhaps is the key?

First and foremost, I do think it's fair to say that we clearly have one of the industry leading margin profiles already, right? I think and again, I'm not even referring to the Q1 margin, which was clearly at a record high. But also here, it's probably a target for this year an adjusted EBIT line around 29-plus percentage point speaks for itself. Same is true for overall gross margin. Nevertheless, I think it's also important to understand that we believe there's further opportunities for us going forward. Clearly, for example, on the gross margin line, it's quite important to realize what I was alluding to before that QIAGEN more or less in the last 18 months did all the expansion plans for production, which was planned more or less for the next 5 years because we clearly have seen this significant easing. Means also that today, we're clearly not running on optimal utilization. So we just can grow into that over the next couple of years and therefore, getting clearly to a better utilization, therefore, also better standard costing for our products. Clearly, we also have, I would say, a good pricing power. QIAGEN is well-known as a high quality, I would say, a strong brand company, allowing us also to deal in the appropriate way with the current inflation environment as we did earlier this year as well. There's clearly opportunities for us around SG&A. COVID clearly did a lot of negative things to the world, but it clearly also helped us in transforming with other companies together also where we sell. There is much more digital sales in these days. We are probably right now having 60% digital share with total revenues. We will see more and more moving into higher numbers there because the way we sell today is clearly different. Most instruments in this world now work like in the days where we had to [indiscernible] which were filled like this, many of us, you take something out, you get billed, you get reordered. So that's clearly an advantage for the customers and of course, for the companies. We also have an extra effort this year going on, on the R&D side as we talked about menu buildout. I do think there's a certain normalization to expect going forward because there is, I would say, an extra effort this year. So all in, we also expect going forward a reasonable margin expansion for QIAGEN.

And perhaps also because something I get a question on a lot, the COVID-19 revenue, just help us understand, are they accretive or dilutive to your margin typically?

It depends a bit on a quarterly mix. I would say all in, I would probably say they have slightly lower margins than average because it depends a bit on the mix. As you know, some of the larger components are for us are sample products, which as well as a higher margin profile. Other larger components are also OEM enzymes and others, which have a significantly lower profile. So I think the niche is probably below average.

And then assuming also obviously, we're all acutely aware of is the cost inflation going on in the world at the moment. Could you just talk a little bit about your confidence that you can mitigate that or [indiscernible] for QIAGEN, what are the major things we should be on the lookout for with regards to the cost inflation?

As I said, first of all, I do think on the pricing side, it's clearly a benefit for a company if you have a strong reputation for your products and your qualities, and that is clearly being helpful, particularly also in a regulated environment where the loyalty of customers is typically quite high. Second, I do think we also have a track record of gaining efficiencies year-over-year. A good example of that is that we quite early for a company of our size started to build out business shared service centers. We have now globally around about 15% of our employees in business shared service centers and clearly continue to build there on as well. So we clearly set up QIAGEN in a quite global environment, which allows us actually to do both to address the needs and wishes of our customers on one hand side, but second, also in a quite efficient way. And again, we have invested in the past quite continuously into the setups. We talked about the operational side, but the same is true in ERP systems and other kinds, I would say, all areas is quite state-of-the-art.

And then perhaps you could just talk about capital structure. You've done a few bolt-ons recently, perhaps not as many as you did years ago. But can you just talk a little about how we should think about in terms of your thoughts on capital allocation and what sort of things are considered?

Yes. I do think you should expect a continuation of what we have done now for quite some years. I think since 2012, we started with share buyback programs that we, as you know, we do it in $100 million incrementals. I think there is no reason to believe that we're not going to continue with that kind of philosophy going forward, actually in combination with these bolt-ons because if you look on our financial profiles, I would say what now we are clearly under leverage, we are 0.7 after the first quarter. And we are actively working on some of this transaction again. We always will see if something comes out. We just recently announced one, as you said, in Europe. And we'll see how the overall market environment plays out. But I do think there is clearly -- particularly now with COVID not being a more regular challenge to us, also what you need as well, meaning management focus and capacity around that as well.

That's great. We've run out of time at the moment now. So we will close the session here. Thank you all very much for your attendance. Thank you, Roland and John and everyone. We will close here. Thank you.

Thank you for having us. Thank you.