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

So welcome, everyone, and a warm welcome to our fireside chat today hosted by the MS Global Healthcare Conference. I'm [ Aisha Noor ] from the European MedTech team here at Morgan Stanley, and I'm very pleased to be joined today by Thierry Bernard, CEO of QIAGEN. This session will take approximately 30 minutes, and you can participate with your questions for this session by just raising your hand, and I'll let you speak. With that, welcome Thierry, and thank you for joining us today.

Maybe if we start off with your 5 pillars of growth, starting off with sample tech. I mean, growth in your sample tech business, especially even in the non-COVID segment, was relatively strong in the first half. How much of that would you attribute to market recovery versus market share gains? And how sustainable do you think that is going forward?

Thanks, and thanks for your attention and for coming this morning. Sample tech is definitely one of the 5 pillars of growth for cash, and you know that it's obviously the DNA of the company. And we will continue to invest into that business. With COVID, we invested into a new solution for Sample tech. It's a segment where QIAGEN is present everywhere. What I mean by everywhere is geographically all over the world. A manual solution; automated solution. In addition to that, for the last now 3 years, we are systematically upgrading our automated solution with an updated system. QIAcube became QIAcube Connect. EZ1 became EZ2. We are preparing an upgrade for QIAsymphony to be available on the market probably around 2024. It is present for many kind of applications: life sciences applications, clinical applications, soil microbiomes, purely research. Or, obviously used in that key product as well, especially in the face of a pandemic like COVID. And now also relevant with monkeypox. Why? Because I think that you all understand that when we are at the beginning of a pandemic like COVID or monkeypox, as long as there are no commercial products available in the market, we sell Sample tech solutions to organisms like CDC or NIH and so on. This is what we are doing currently with monkeypox. So indeed, we are happy to see a 9% growth in the non-COVID sample tech business, which was our main objective. As we said before, we want to continue to be COVID relevant, but we don't want to focus on COVID. For us, the focus is on the non-COVID portfolio. In December 2020 during the virtual QIAGEN Day, we took an assumption and the commitment to you to grow this business at mid-single digits over the long run, and we confirmed that. And we believe that we can do that because of the investments we have done. COVID has probably reinforced our market shares. We are already there, but I think we are even more of a leader now. So the recovery is because of, obviously, pent-up demand for DNA sample tech beyond RNA and COVID; gains on market shares with those new launches of instruments; and new applications as well, as I said before. Microbiomes in soil analysis, for example.

Great. If we move on to QuantiFERON now, could you talk about the growth outlook for this business? Both in the context of the strong growth you've experienced in the last year, driving some of the tougher comps going forward, and then in context of the many expansions you have planned for the year this year and the next.

So first, let's remind everybody of the numbers. What are we talking about? So as you know, QIAGEN is now slightly above $2 billion revenue. QuantiFERON, by the end of the year, will be above $300 million of revenue. So, it's significant for our company. And this is why it obviously deserves to be a pillar of growth. In addition to that, we have been protecting and extending that franchise for the last 6 years. What do I mean by this? Way before Perkin Elmer, for example, acquired Oxford Immunotec, or way before people were talking about new tests on late-term tuberculosis by some competitors, we automated the test by a partnership with DiaSorin. The back end of the test. Not only did we automate the back end of the test with DiaSorin on the LIAISON system, we also automated the front end of the test with a specific agreement with Tecan and Hamilton. So it's a more automated workflow, the most automated workflow on the market. In addition to that, this brings value to the customers. And any time we transfer customers from traditional quantity to an automated solution with DiaSorin, we do it at a premium price. So, I always give the same numbers. In the U.S., on average, a latent TB test is $20; depending on the customer, it is $20. When we automate it on DiaSorin -- because the customers, once again, they see the value -- it's closer to $25. So there is a premium. So as a result, we continue to believe that the growth profile of QuantiFERON is double-digits. Probably now on the lower side of double-digits, I would say: 11%, 12% per year because, once again, it's a $300 million franchise and for a $300 million franchise, it's already a good performance. Beyond this, to answer your question, we continue to invest and develop new money and quantify on what we call interferon gamma technologies. So you have seen, again, the partnership with DiaSorin online, which is in Europe now and that we are going to push to the FDA for the U.S. We have tests also for the transmit market on Cytomegalovirus, and we want to continue to expand that. So clearly, R&D investment, commercial investment, will continue on QuantiFERON. We still have market shares to take because let's not forget something very clear. And this is why we are optimistic. Competition like Perkin Elmer, like potentially VIDAS and bioMérieux, of course, we take this into account. But the real competition are skin tests, which is an antiquated technology that we need to replace. And to give you an order of magnitude, we estimate that there are still, every year, at least 50 million to 60 million skin tests performed. In the U.S. alone, there are 16 million skin tests per year, at a fairly high price. So this is our target.

Yes. Great. And then moving on now to QIAstat-Dx. I mean, given the larger European exposure in this business relative to competitors like VERIGENE, what's your reimbursement outlook over the midterm for multiplex testing in Europe, as well as the U.S.? Which countries do you think will be more receptive and which you think will take a bit longer to adopt multiplex testing?

That's a good question. I don't think that any company involved in clinical diagnostics are immune to reimbursement. But it's not the real focus for QIAstat. Why? Because 80% of the activity of QIAstat, -- depending on the panels, obviously, whether it's respiratory, GI, or meningitis -- is inpatient and not outpatient. When you are dealing with inpatients, you are basically under the hospital budget. They call it DRG in some countries, or product. And you are much less dependent on the reimbursement. Second, there have been rumors on syndromic reimbursement for so many years now. And I'm not saying it will never happen, but I'm just trying to give you some data points. If you remember that here in the U.S. 4 years ago, everybody was saying that because of the new Palmetto Guidelines, this would go down. I mean, it's fair to say that for the last 4 or 5 years, despite the arrival of new competitors, the respiratory panel has not really been going down in price. Between Europe and the U.S., we are still talking about €85, €90 depending on the volume, to $100. The GI panel is in the same range. Meningitis panel is sometime over the range of $100 because I think customers see the value in syndrome testing. So, we need to remain attentive. You have seen, for example, in Europe that Switzerland have decided post-COVID to decrease some of their reimbursement by 10%. So we factor that, obviously. But there is no general trend on pressure. And because we serve primarily inpatients, we basically avoid that.

Yes. How well positioned do you see your QIAstat product versus BioFire and ePlex and Verigene? And are there any specific market segments you're planning to strategically capture here?

So first of all, it would be good for me to highlight that operationally, we executed QIAstat on 2 things that we committed to you. First of all, we told you that we would launch meningitis in Europe after GI and respiratory: done. We told you that we would submit GI to the FDA at the end of last year: done. Obviously, now we wait for the FDA to approve it. And we told you that we would launch a higher throughput system for QIAstat called Rise: done as well, since its launch in Q2. So operationally, we execute the target or the market share that we are targeting. I always said, since I took over, that because we are a mid-cap, we need to try to focus our investment where we can take between the #1 and the #3 position on the market. It's a bit of an image, obviously. But what I mean by this is that if you are much lower than the #3 in the market and you are a mid-cap, you're at risk because it's going to be a price war. Especially against the big guy. And a price war is never worn by a mid-cap. Let's be clear. If I would tell you today, our objective with QIAstat is the #1 position in the market, I would lie to you. And it would be purely aspirational because we are too far behind BioFire. They have a greater menu. They have a greater presence, or a longer presence, on the market. But clearly, what I continue to say is that we are targeting the #2 position in the market because it's the only system with absolutely zero sample prep. Basically, you take a swab; put the swap on the cartridge; break the swab; insert the cartridge into the system; done, in less than 30 seconds of operator time. Second, unlike many solutions in syndromics, we do not just deliver a "yes or no, you have an infection." We delivered also Ct values. And if some of you in this room have been COVID-positive, which I hope is not too many, you know the importance of Ct values. It is basically delivering to your clinician a kind of quantitative estimation of the load of the virus in your organism and therefore, helping him to trigger a treatment quicker. That's a key differentiation. So, we fight against everybody. Sometimes we win against BioFire. Recently, in the Nordic countries on GI. Sometime against GenMark/Roche or Verigene/DiaSorin. But that's not our real issue. It's still a very big market. We estimate the market at QIAGEN to be at least $1.3 billion already, growing probably between 13% and 15%. Some of our competitors have declared and published that it's already $2 billion, not $1.5 billion, growing at 20%. So be it for it. For us, it's a big market. It's a market worth investing in. We want to be #2 here.

Yes. That's clear. Just to follow up on something you mentioned. You mentioned launching QIAstat-Dx Rise in May. Could you talk about how that launch is going? And what the initial kind of feedback has been so far?

It's very early, obviously. And I always took the commitment to you to be extremely transparent and very concrete. So, for this year, we have the ambition to place probably less than a handful of systems. Let's be clear. I mean, it's a very new system. It's a big system. We also need to continue to improve the connectivity of the system. But we are confident. Why? First of all, because it's the first system on the market which is at that level of automation. In other words, the technician doesn't have to load and unload the cartridges in the system. It potentially sounds unimportant to you. I can tell you that when you spend your time as a technician to load and load cartridges, it takes a toll on you. Second, it is a very flexible instrument. If you look at the system, the technician or the lab can open the side of the system whenever they want. And if they have a need to take one of the modules and decentralize it, for example, in the emergency room or elsewhere, they can do that. No other system can do that. So, obviously, we are confident that this is a system that should go to probably several dozen of system placements per year. Clearly, that's the objective. At the moment, it's just starting. There was a summer in Europe. As you know, in Europe, summer is rather slow. But the real moment of truth for us will be next year for Rise, of course.

Great. If we move on to NeuMoDx now, how are placements tracking there? And how are you thinking about the competitive landscape for NeuMoDx?

The competitive landscape -- I think you know it. It's a highly competitive market with significant players. Obviously, Hologic, Roche, Abbott. But yet it's a big market. It's more than a $3 billion market. I refer to that as the infectious diseases for PCR in core labs; $3 billion, probably growing still depending on the geographies between mid-single digit and high single digit. Mid-single digit in Europe or the U.S., high single digit in some emerging countries. And the beauty here, for us, is that for the last to 7 to 8 years, there has been no significant automation innovation in this market. COVID has not been really changing the planter either. Sometimes, there has been some improvement, but NeuMoDx is a completely innovation. Obviously, NeuMoDx, for us, has benefited from COVID. So we have now in that post-COVID phase, an install base that is much higher, both in the U.S. and in Europe than what we anticipated before. And we continue to add new menus. You have seen recent press releases talking about new menu in Europe. Now, the gain for us is to move this menu to the FDA. Obviously, we know that the FDA has a backlog of approval, so we might be impacted. It might take a bit more time. But the good thing in the U.S. is that NeuMoDx is the only platform in the world where a lab can run at the same time, in a complete random access, an LDT test or a regulated test. No other platform is able to do that on the market. And so we believe that the market in the U.S., even if we have much less menu, we have 2 assays approved at the moment. 3 assays approved, because we have 2 COVID, one quadruplex monoplex, and also GBS. It is significant for ADT. So we can go after that market. Now the ambition, first of all, is double-digit growth year after year. Obviously, ex-COVID. And it would be good on that huge market to get at least a 10% market share.

Yes. And with respect to these test menu expansions that you're planning, where are you on the test road map? And when can we expect these growth contributions from the new test things coming out?

So Europe is already complete. Very clear. In Europe, you have more than 15 assays which are approved. We need for some of them to be put to the recast system. 15 assays: I mean, obviously, we need to launch more. But 15 assays allows you to participate to any kind of tender because you have the BBs, what we call the blood bone viruses: HIV, HBV, HCV, most of the sexually transmitted diseases. So you can compete. In the U.S., we are not there, obviously. And in the U.S., I mean, the game would be submitting to the FDA, so meeting every year. On December 8, again at that virtual QIAGEN Day, we told you that we would have all the 15 assays approved in the U.S., probably by 2024. And I'm now saying that is probably 2025, not because of QIAGEN but because of the backlog at the FDA. I cannot speak in the name of the agency. I don't know when they are going to solve that backlog.

Great. Moving on to high-acuity or digital PCR, now. How do you think market adoption will pan out for digital PCR? And what do you think needs to happen to really drive this conversion from traditional to digital? Or will it stay kind of a niche area where people need it for rare mutation, genotyping, et cetera?

I think there's no way digital PCR is going to remain a niche, clearly not. So, what are we talking about? Currently, the strict market for digital PCR is probably around $400 million. But the real market for digital PCR is the total PCR market. So, we are way above here at the $3 billion market. Now, I need to highlight something that I constantly try to repeat. I do not believe in cannibalization in diagnostics. That doesn't mean that sometimes it doesn't happen, or there are no overlaps. But I've never seen a technology completely killing another one. Two examples: 20 years ago, 15 years ago, many people were saying molecular biology will kill culture. So Petri dishes and so on -- forget about that. It never happened. It never happened, and it will not happen. More recently, some people were saying, "Oh, next-generation sequencing. It's the end of PCR." No. Those technologies are creating new needs because they give another kind of answer. And for digital PCR, I think it's a good balance between PCR and NGS for one thing: you don't have to run the very large panels that you can run on NGS, because it's not needed by your patient. You can run shorter panels better than PCR at an affordable cost, and with an extremely better result time than NGS. And less complex intelligence. So that's why I think it's going to strive as a technology. I wouldn't be surprised to see it quickly over the $1 billion market and then continue like this. On this market, I'm very clear. I don't want to sound arrogant. But coming back to the #1 to #3 position in the market, the objective of QIAcuity here is in the range of, let's say, 4 years' horizon is to take the #1 position in the market because the system deserves it. You look at the competitive offer, and I respect them. Kudos to Bio-Rad for having developed the market of digital PCR, but we came with 3 different throughputs, 3 integrated boxes. Nobody is like this. Even the most recent announcement by Roche -- and we respect them a lot -- you have 2 boxes. It's not integrated as we are. So again, if we are not receiving that #1 position in the market. And if at the same time, obviously, we continue to improve the number of applications available on the solution. We moved it to clinical diagnostics. We have already started to invest, as we told you, to move it from life sciences to clinical diagnostics. If we are not achieving this, it's not because of the system, it's because of us. It's because of a lack of execution. It's as clear as that.

Great. If we move on now to COVID testing. I mean, as are most diagnostics companies, you've been a strong beneficiary of COVID testing demand. Your installed base grew significantly. Do you think there might have been some excess purchasing here happening over the pandemic, which would then lead to a softening of instrument demand over the next one to 2 years, as utilization goes back to pre-COVID levels?

It might. I'm not trying to be facetious, but at the same time, on the market, there is a rolling constant movement of platform upgrades. Laboratories. I will give you a number which is quite accurate. It's not the same everywhere, but on average, a laboratory is upgrading their instruments every 5 years on a rolling basis. Some are sometimes keeping their instrument for 7 years or more, sometimes. That doesn't mean they take it out of the lab. Sometimes they keep it, but they upgrade it. They upgrade. So there are always opportunities. What the pandemic influx of new instruments might create -- this, I think, is more the point -- is that for a couple of years, we might see more placement than capital purchase. So laboratories saying, "I'm okay to expand my installed base, but I cannot buy it." It's leasing or placement. But basically, in this case, you amortize, you recover the amortization of the instrument on your reagent. So it should be okay. That's what I believe in, post-COVID. You might also consider: I take no commitment that many governments, many hospitals, did see more than ever with COVID that diagnostics is really the critical element of the health care value chain. And that the more you invest in diagnostic solutions, normally, you save on therapeutic expenses, we'll see. It might be balancing that movement.

Yes. I'm conscious of time, and I wanted to get through a few more topics. On cost inflation, how are you managing the cost inflation story so far across the various cost items, so raw materials, freight and shipping, labor costs, et cetera?

So obviously, there is no industry which is immune to the international or economic situation, or inflation. As we discussed with some of your colleagues this morning, it's clear that in health care, you're a bit more protected than in many other businesses, no doubt. But that doesn't, or shouldn't, drive us to be complacent. QIAGEN, with inflation. decided to pass a second price increase. We normally do one per year, which we prepare in December and implement to our customers in January. This year, we did that in January previously, but we passed the second one in July, to the tune of 6% to 8%, depending on the geography of the product. As I explained this morning, 6% to 8%, doesn't mean that everything is going to be increased by 6% to 8% because guys, we have some customers that are on purely annual contracts. There are some geographies where we didn't pass price increases because they don't have inflation. But basically, we try to protect our P&L. Net-net, what are we going to get from this 6% to 8%? I think it's reasonable to think that it's going to be net-net between 4% to 5%, and it's factored in our new guidance. And in December, we will work on the new price increase for 2023.

Yes. How should we be thinking about capital allocation for QIAGEN for this year and the next? And what's your view around a share buyback program?

We have done that in the past many times. So I think it's a tool where we are perfectly aligned with our Board. With our general assembly, as well. It's a good sign of confidence and trust in our company. At the same time, let's be clear, it doesn't create growth over the long run. We need to think about capital allocation in this way: if the environment is the good one for some meaningful share buyback, why not? M&A with greater attention, obviously. There is no doubt that QIAGEN, in the last 3 years, became a -- no arrogance here. I don't want to sound -- nothing can be taken for granted. And we need to have the same humble focus on execution. But over the last 3 years, we're probably now a stronger, more focused company. We have a significant leverage from a cash perspective. So obviously, we need to double down on M&A. Not only small ones, but very relevant ones, like we did in Poland in Q2 on enzymes. Potentially also bigger ones. So it's going to be a mix of both of them. And if we find a good target, potentially bigger ones. The only thing that I would like to highlight here is that whatever we do from an M&A standpoint, it will not be to spread the company thin again. It will be in the focus of the company, and that's a key criteria. And second, the speed of accretion is a key criteria. It has to be accretive to our company, I would say, in a maximum of 2 years.

And I think that takes us to the end of the session. Thank you so much, Thierry, for your time today. And thank you, everyone, for attending and listening.

Thanks a lot.