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

My name is Peter Welford. I'm the European pharma biotech and life sciences analyst at Jefferies in London. My pleasure to be hosting the next company in this track, which is QIAGEN. Here from QIAGEN, we have the CFO, standing up there, Roland Sackers; and we also have Phoebe Loh from IR as well with me on the table. It's a fireside chat. Roland is going to make a few introductory remarks, and then we'll open for Q&A. [Operator Instructions] We'd love to get questions if you do have them. But with that, over to you, Roland. Thank you.

Yes. And thanks, Peter. Thanks for having us. It's always good to see you again and have physical meetings. It clearly makes a difference even if sometimes carry too many people in small hotel rooms, but it's a different story. Nevertheless, you might have seen that we just last week released results, and we had a very strong set of numbers, I would say. We were able to beat both on revenues as well on earnings, and therefore, also, we're able to increase our guidance. I think it's particularly important for us that the non-COVID business did actually quite well. We had another quarter with a double-digit growth rate in non-COVID business, which is more or less 18% on constant exchange rates, which I think is now the seventh consecutive quarter where we were able to beat our guidance in terms of non-COVID revenue numbers. And that's clearly something we feel quite strong about. Because if you go back in more or less a pre-COVID days, back to 2019 and before, clearly, QIAGEN was in a very different stage. And we changed a lot. We clearly were also able getting the tailwind of COVID to work, and we're able to not only place a significant number of instruments, but more important to expand our menu very well. We were doing that very focused. We are working around what we call 5 pillars of growth. And for sure, we're going to highlight all of them today. And I would say, so far, they're all well on track. We also were able to reconfirm the guidance for the 5 pillars of growth for this year as well. So not only increasing the overall guidance in terms of revenues as well as in terms of profitability, but also the single growth drivers behind that. Overall, it's clearly important to say that we are in a not easy environment. The world has clearly a significant volatility. But despite that, I would say, health care so far delivers quite well. We have seen, actually, as I said, not only a good revenue growth but also good order income. It's also increased. For the fourth quarter outlook, it's driven by that, but we see actually a quite stable environment. And even areas like, for example, China, where it is, I would say, challenging because of the zero-COVID policy, based on our particular setup, having also COVID-related revenues in China, we're able to offset some of the pressure in other areas. So we're still probably for the full year, delivering growth also in China. So I would say, in general, we're looking actually forward also into '23. We were able to say on our call that also for '23, we are expecting a double-digit growth for the non-COVID business. And a good thing that is a strong continuation of the trends we have seen now, as I said, over the last 7 quarters. With that, Peter, all yours.

So let's -- before we go on to some of the pillars of growth, let's just start off talking about some of the sort of bigger picture issues. Perhaps firstly, we can just talk about inflation on both sides of this, I guess. Can you talk a little bit about, first of all, what you've managed to do with prices, I guess, during the course of this year and how we should think about price rises? And equally, I guess, on the other side, can you just talk a little bit about how inflation on the cost base as well hits you?

Inflation is clearly an important topic all around, and clearly that's in our industry. And while we started the year with, I would say, a quite regular price increase, we were able to implement another price increase as of July 1. So overall, we most likely are seeing, if you look at our contribution for this year, impact. Again, it's probably a bit early to say somewhere around 4, 5-ish points. And I do think that is, again, compared to the other year, still quite significant. It will take some time before it rolls in because, as you know, a number of customers are also on longer-term contracts, and then you have some renewal dates, which will become effective. But we're also reviewing right now again what we have to do as of January 1. If you see what most players contemplating in our industry right now is another round of price increases in early '23. I would say it's too early to say what we're finally going to do, but we're clearly working on different scenarios and different options. On the -- at the end of the day, it's about sharing the burden because on the other side, it is exactly, as you said, we're clearly also impacted by inflation-driven costs to a certain extent, I would say. For us, clearly, it's mainly around freight costs because, unfortunately, our industry did a great job in educating customers that whatever the order, we ship in 24/48 hours. So shipping costs are clearly an important factor for us, and that is one driving factor. But also clearly, our suppliers have also increased costs and trying to do what everybody is trying to do, shares their burden also with us. So there is clearly that component into it as well. I think energy for us is, as a cost factor, not as critical. We were clearly at risk in terms of overall gas supply in Germany. Of course, as you know, Germany still has a potential that we might run short on gas at some point early next year. The good news for QIAGEN is we were able -- because we started that early in February -- more or less with the announcement of the war to implement the second supply and then working right now on the third one. So we can switch our main site now more or less by the hour to all and also to wood pellets. And so again, we don't at least have that risk of shortage so we still can be operational. On the cost side, I think it's probably a single million dollar amount, which is probably energy costs higher next year for us than this year. Other factor, where I think it's still too early to say, where the trend will finally end is clearly salaries because it's quite obvious that we are in a business where humans are a significant part of the overall cost. It's probably around 60% of our overall cost is salary related. And I think it's fair to expect that salary increases next year will be higher than what we have seen in the past. Plus, we are -- also announced in the call that we are implemented a onetime payment for our employees, which will go out in the fourth quarter, particular to the ones who have inflation pressure. Some countries clearly also gave here some tax incentives to the employees, e.g., Germany, for example, you can pay EUR 3,000 per employee, gross for net, so no tax deduction, no social security deduction, and that is clearly something where we will be making use of. Overall, I do think that we should be able to cover inflation-driven costs to a large part, if not all, by price increases.

And then perhaps, again, speaking with the bigger picture for a minute. If you could just talk about margins, there was a lot of discussion about this on the third quarter call as well. Can we just talk about -- if we think about going into '23 and then beyond, how should we think about the margin trend for QIAGEN, both in terms of what is an optimal level of R&D investment and what are the levers you can pull to drive leverage over the next few years?

Overall, I think it's important to know, of course, that compared to pre-COVID, we will have probably higher -- probably much higher margin in post-COVID. There's no question that we all should see leverage coming all of that. Despite that, we have clearly also to acknowledge that we have this year around about -- again, we'll see where the year ends and how COVID is going to do, but we probably have around about $500 million of COVID-related revenues in the year 2022. That will go down also in '23, at least what we're going to guide for. If things might be very different and we will see another wave going through, you know that might or might not happen, but you do not want to be dependent on our guidance on that. So we are not going to guide for, I would say, a significant COVID business next year. So there is an expectation that, that will lead to a negative revenue growth overall, which, of course, also makes the basis more difficult for in terms of leverage. Nevertheless, I do believe there's opportunity for us, not only next year but also years on to improve profitability. I would expect over time to see, for example, gross margin benefits because, typically, we see with increasing volume, particularly on QIAstat, but also NeuMoDx, leverage coming in. These are clearly businesses where, right now, for example, do more and more full automated production steps. In QIAstat, we just started with a new production line here in Germany, which is very different than what we had before, which was much more manual and which has a good pricing impact and will probably again being helpful for next year. But it will take some time before that rolls in. At the same time, we said on the call that we were clearly given the good year of '22, and we are clear here again where, every quarter, able to increase our guidance. We also use the opportunity to increase some of the activities and accelerated them into '22. So again, also that is something which not necessarily means that they stay steady for '23 as well. So I would say there's also an opportunity around that. So I would say margin, we said 27% plus was pre-COVID. We're ending this year probably with 30% plus. It will be somewhere in between, and we try to be on the higher end. Again, it's too early to say because you have inflation data, you have an ongoing war. We all were probably, yesterday evening for 10 minutes, significantly all shocked with what happened. I'm not sure that we're hanging ourselves out in the window right now and give you better numbers.

And then if we perhaps just move again beyond then, again, just thinking about capital structure before we go to the pillars of growth. I guess the last sort of big picture idea, obviously, you're seeing accumulating at the moment pretty significant amounts of capital. Can you just talk a little bit about how QIAGEN thinks about capital allocation?

Yes. First of all, just to clarify, as of September, we had roughly $1.8 billion, and -- but we paid also in October around about $400 million, which were regular to do. So I think right now, it's a -- net debt to EBITDA, I think, is 0.4. And so we have full flexibility. But I think our capital allocation policy really hasn't changed since 2012, which means we feel still quite strong on the one hand side, bolt-on acquisitions but also doing share buybacks. And you have seen that we actually asked for approval this summer on our AGM for a larger share buyback because in Netherlands, we have sometimes very individual structures. And so we have the opportunity to do that as well. And at a given time, we will do probably both because I do think both is in parallel, impossible because I don't think -- while we can't exclude larger extraction by definition, because if there's another QuantiFERON deal, and we're happy to do so because it clearly worked out, but the likelihood is clearly much more focused on bolt-on acquisitions.

So let's move on then to the pillars of growth. First of all, sample tech -- or sample prep, obviously, the biggest and the sort of core original business of QIAGEN. Can you just talk a little bit about what is it that is the sort of core strength of QIAGEN in this business? And I mean how should we think about the growth of this business going into the future?

For all, I think just for helping people who are not as familiar with QIAGEN, also on sample prep, of course, you have some COVID influences, right? And so while the overall number was actually negative for the third quarter, the non-COVID part was actually growing I think 14%. And I think that is what you're alluding to. And that is clearly significantly different than what we have seen in the years before. And I think it was now the second or third quarter in a row where we have seen double-digit growth rate. So what is driving that? I do think it's 2 factors. And again, my judgment would be it's probably half and half in terms of driver. One is there's still an ongoing recovery of our industry going more and more back to work to [indiscernible]. And the second driver is clearly also the success we had with what I was describing before, launching new products, launching new instruments, particularly on the sample prep side, and they are now generating more volume. I think most of you know that QIAGEN is probably seen as the leader in sample preparation, so not sure what your market share is, but unless most people have us somewhere 50%, 60-plus percent market share. And of course, if you have such a market share and then you have starting automation, you have customers out who say, okay, I have, let's say, 10 different sample prep solutions, I have 6 from QIAGEN, now I have an automated solution, why am I using for the 4 other still manual solution from somebody else? And I think that kind of offering is helping us right now. So the updating and launch of new sample prep instruments was actually quite successful for us.

And you mentioned the automation. Can you just talk a little bit about the QIAsymphony in terms of what is your installed base of QIAsymphony now? And I mean, how should we think about the sort of revenue pull through onto the QIAsymphony platform?

Symphony is one of our leading platforms, well established. And we are probably adding every year, probably it depends a bit on the year, I would say, somewhere between 100 and 200 instruments per year and also this year. And in terms of pull-through, you see, I think, everything from customers at USD 30,000 all the way up to USD 300,000, USD 400,000 because it depends a bit on which kind of laboratory or institute you are because symphony is also -- it's manual to use on the one hand side in the research lab, but also in the clinical lab. I think that's one of the strengths of QIAGEN that we're actually serving more or less both business, right? And the clinical business is roughly 50% of our business, and 50% is the research business and either on the pharma side or in research institutes, which is something what we would actually like because on the one side, you get this leverage in terms of products because most people still forget that, by far, the majority of our products goes into different -- in both channels, right? We have only very few instrument as well as products, which are just dedicated for clinical use, for example, and that kind of leverage is also true for QIAsymphony.

And then moving on to the syndromic testing with QIAstat-Dx. Obviously, a market that was established and built by one of your competitors, but you've obviously launched -- and I guess there's been a bit of a big COVID benefit to the launch to some extent, given the way respiratory, obviously, infections took off. But can you just talk a bit about how QIAstat is being used today? And I guess how you're transitioning from the pandemic to future sustainable business?

So QIAstat is doing very well in both. As you said, COVID was clearly a big driver, not only for us but for many companies in our industry in getting more or less market share and grabbing conversion because what we all have to understand is that is still a young market. What -- QIAstat is an instrument, which is not typically setting in a centralized lab but was either, for example, in the larger doctor's office or if you think on a hospital in emergency unit. What was the standard in, I don't know, let's say, even 2, 3 years ago is -- let's assume you are sick or you have a sick kid and you just want to have some checkups, you go to the -- on a weekend to the hospital. And if they were good, they were taking a sample and then send it to central lab and you had to wait 2, 3 days before you got the results. Today, with machines like our QIAstat and some others, they more or less can do it on site, it takes you for us, for example, 45 minutes, and you have some of the results checked for, I think it's now 22 or 24 pathogens, Phoebe, right?

Yes.

And you know exactly what it is. For example, on respiratory, you can see now. Is it regular flu? Is it COVID? And that is exactly what is the benefit of that. And that is one of the reasons why not only we, but I think a lot of people expect that in this stage, we are now moving in terms of COVID. This kind of testing will actually still be there or probably increase because, again, I'm not sure what your expectation of the flu season. We don't have any, so you don't have to ask the question. But if it is a larger flu season, people still don't know. Is it flu? Or is it COVID? But they want to know, and they get -- they have to have this kind of panel testing. And that's clearly a different animal because the test is clearly a different price point than an antigen test. So I would say, for us, a nice opportunity. To answer your question in general, also the non-COVID business on QIAstat is growing more or less quarterly, and therefore, I think it's a good franchise.

And then moving on to QuantiFERON. So I mean that's shown some pretty amazing growth over the last couple of quarters. I mean, obviously, some of this is the rebound. But can you just talk a little bit about, I mean, what is it that still drives QuantiFERON at the moment? And I mean how should we think about this product longer term?

Yes. QuantiFERON is our latent TB test. And as we all might recall from time to time, TB is clearly still a significant challenge to our world. I'm quite sure that per year, there's much more people dying because of TB than of COVID, right? And so testing for latent TB is still a significant responsibility. Unfortunately, still, that is one of the main drivers for us. 60-plus percent of the testing today is done with a so-called skin test. It's actually a 120-year-old skin test. Most of us, in my age at least, still remember that. You got a shot in your left or right arm, and you either develop a bubble or not. And -- but that sensitivity or specificity is around 50-plus percent. While if you use a test like our QuantiFERON test, you end up typically 99-plus percent rate. So there is a scientific advantage for using that test by actually similar price points because this skin test requires a second visit, you have to go back, which again is sometimes even very difficult, right? Because in the kind of environment you're focusing on, where TB has a larger in brackets opportunity, that is an issue. So what is driving it right now? It's conversion from the traditional test. It's that also our automation partner DiaSorin clearly had a lot of placements of the LIAISON platforms, which means that there's now more and more customers without any capital investment, just can start with the TB test. So conversion doesn't come with them for price. And I think that is helpful for us. And last but not least, it is not only the better test. We see clearly also trends in this world, which are in brackets helpful for TB, right? You have on one hand side, travel normalization. You have clearly a lot of refugees movements around the world, not only for an East to West, but also other regions. So a lot of reasons why TB testing is probably still a big topic.

And then if we move on -- in the interest of time, to talk about digital PCR as well. Can you just talk a little bit about how we should we think about the digital PCR market size to that? I man it's relatively small, but obviously big potential growth given the size of the overall qPCR market. What -- perhaps you can just talk about how QIAGEN's instrument is differentiated? And how should think about that space?

I think actually this should -- PCR as a market, you can even compare with some of the trends you see in QuantiFERON. Because at the end of the day, it is also a conversion story. It might be a conversion story, for example, from the qPCR market, which is probably today a $2.5 billion to $3 billion market, where digital PCR probably just has converted a couple of hundred million dollars, yes. And why is that? Because for a similar price point, you just get more information out of it. And with digital PCR, you are somewhere in the middle between a single PCR test where you have some information and sequencing, where you have tons of information, but it's a very different price point. With digital PCR, you can more or less put yourself in a middle and have a good selection. That is also, for example, very interesting for our pharma partners. Biopharma is, for example, a nice opportunity. But Phoebe, you probably can talk better about that.

Yes. I think the biopharma industry is one of the largest customer bases for digital PCR. So if you look at digital PCR applications, like Roland said, half of it is -- not half of it, but a big portion of it is coming from qPCR. And biopharma is also one of those, where they're doing a lot of quantification and quality control testing. And that's traditionally done with qPCR, and now they're switching over to digital PCR because of the amount of information and accuracy they get out of it. So for us, getting into the cell and gene therapy assays and also DNA quantification was a really big step for our digital PCR portfolio.

And then, I guess, finally, the last pillar, NeuMoDx, so if we just talk about that, obviously, again, COVID beneficiary. Therefore, this year, obviously, we're seeing the sort of rebound of the effects of that rather than a rebound. Can you just talk a little bit about how we should think about NeuMoDx going into the future?

Overall, also, we feel very well on track to make our full year number. COVID is clearly a driver or was a driver for NeuMoDx because NeuMoDx is our, what we call, big throughput to high-throughput instruments. So something that you rather find into a centralized lab because you can run up to 288 samples at the same time. It's actually an instrument, which is very much like from the customers. Why? It has by far the faster turnaround times. It's typically 60 minutes, where most competitors actually on 4 hours. It has all the features, which I think key these days, so continuous loading, random access. So very practical. And I think where a lot of investors sometimes are confused is we actually also have a full menu ex U.S. So it's a fully operational machine ex U.S. In U.S., in all fairness, it's different. And yes, we have only, I think, 4 approved panels, plus what is important and therefore also helpful for us in the U.S. in LDT feature, means laboratory-developed test, because still 50% around about of the testing market in the U.S. is LDTs. People always forget that they always believe that the labs only buy tests from us and other companies, which are more or less ready to use. Majority or still a big chunk is still they test it, they do by themselves, right? And then they like to mix that stuff, which, again, have that automated on a machine is clearly helpful for them. Nevertheless, I think it's fair to say we have to launch and we are going to launch more panels over the next few years to make it as competitive as in Europe. But we're gaining also here traction. The good news for us is it's still a new market. We are newcomers into that market, if you like. So we will have this year, I think, around $80 million, $85 million in revenues, which I think is not a bad start for quite a new instrument, and we'll take it for there. And also here, the non-COVID business is growing sequentially quarter-over-quarter.

That's great. Thank you very much. We've run the clock into negative charge, so we're going to end there. And thank you all for attending. Obviously, thank you, Roland and Phoebe, for your time. With that, we'll close. The next session will start shortly. Thank you.