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

Okay. Thanks, everyone, for joining us this morning. Pleasure to have with us QIAGEN. We have the CFO, Roland Sackers. And I think from Investor Relations, we have Phoebe Loh. For some reason, John Gilardi is not with us, but hi to John, he's listening remotely. So with that, Roland, thanks for spending the time with us this morning.

Yes, thanks, [indiscernible] Vijay.

So it's been a while since I've looked at the story closely. But I was just at a high level, Roland, the base business, I mean, this has been on a tear, right? That's growing at a teens rate -- when I go back pre-pandemic and this could be historical, like I remember seeing like a 6, 7 or high single-digit aspiration at one point in time, Roland. What's changed? What is driving these trends? There's been some questions about customer stocking pull forward of demand. Have there been any one-off items? Or is this like clean growth that we're seeing for QIAGEN.

First of all, thanks for the compliment. And again, thanks for having us. It's a pleasure and I'm looking forward to having early or late again physical meetings with all of you. But I do think one thing that we always tend to forget because COVID is already worn for a couple of years, and there was clearly a time pre-COVID. But for QIAGEN, there was clearly something happening, which still on forth its positive impact, which is go back to 2019, we stopped one significant endeavor, which was developing our own sequencing platform. And instead of putting 60% of our R&D money into that at that time, I would say, a good decision by saying, okay, you what we develop 3 new platforms, QIAstat, NeuMoDx and QIAcuity, all in PCR, all in our core competence and get them up and running. Then of course, we were in brackets having the benefits until today of getting a significant tailwind by COVID helping us to place these instruments. And now, of course, we're seeing the benefit of that because there's clearly a significant larger offering from QIAGEN, not only in instruments, but our portfolio and general opportunities. And that gives us the opportunity to grow and what we see right now double digit is also what we, by the way, expect for next year. Is it all in brackets real underlying, I don't think so. There's still a certain normalization going on. I do also think that next year is a certain normalization going on. So that's the 18% we have seen last quarter is a real 18%, might be 10%, might be at 12%, who knows? But there's clearly a good overall environment.

Got you. Got you. And some of your peers -- they've spoken about a slowdown in lab activity, Europe [indiscernible]. And it's been hard for us to get our arms around this [indiscernible] . And has -- I mean given it's your background, what is QIAGEN seeing here from a macro perspective?

Of course, we are also looking at the macro trends. And as you said, living in Europe. It's hard to neglect that. we try to address what was the bigger risk for us, which was gas supplier. As you know, we switched it over to oil and [indiscernible] so we are not in shortage with, which you might be in Europe, as you know. Budgets are healthy. You still see money getting spend also discussion on health care budget and research budget for next year are okay. So I don't think that is a bigger concern. I do think one thing which is important to understand as well what is helpful for us which is not sometimes as visible. So let me explain that. A good example is, for example, if you look at sample prep, you know that sample prep for us is clearly a business which a lot of people would say, your own. You have a significant market share. What people typically forget is that it's significantly still a manual business. One of the pushes we also did over the last 2, 2.5 years was bringing a new sample prep automation platforms to the market, which are quite successful. So we see also now a better utilization around that. But because, if you assume right now, I think what your number is Vijay even some time ago, we have a 60% market share. That means the customer does 10 different sample prep solution, you get 6 from QIAGEN, now he has automated solutions. For sure, he's asking himself, okay, should I not buy 2 more from QIAGEN because I have some machine, I can utilize it. That is helping us, of course, as well.

That's extremely helpful perspective, Roland. And I -- just one last topic on this on the macro side. I've been asking some of your peers on this and China, there's been some recent headlines on lockdowns, et cetera. Can you give us some context on what China has done for you in the last 2 to 6 months? And have you seen any change from this ongoing lockdowns.

First of all, I think we have seen a positive growth for the first 2 quarters of the year were slightly negative in the third quarter. We expect more or less flattish in the fourth quarter might be slightly positive. The benefit we're having is that we sell COVID-related components into China to COVID players. So I think that's been helpful and getting offsetting some of the impacts we see on the non-COVID side as well. But also to be clear, we haven't seen like non-COVID falling apart. Yes, there was some volatility but rather in the single-digit area or low double digit, but not like significantly swing. So therefore, what is hitting us typically is the local lockdowns and probably sometimes more on our production side and on the selling side because that is much more widespread. Of course, what we all don't know is what is happening on ongoing right now into China with the current unrest. It's just something that again, is for a certain time period. I think that's too early to say. Right now, we believe we have seen a positive trend in the quarter. If that continues, we probably stay on that for next year as well. We will not guide or forecast a significant improvement in China right now because I think even if you put COVID aside right now, I do think that you should expect some, call it, more national legislation trends in China as we see in other countries. So I do think that is something where at least you should be careful and see how it unfolds.

Understood. And if I just -- given where we are in the year, Roland, I mean the comps in '22 are pretty up. It's a teens comp, right, on the base business. But also you have a lot of momentum when I look at your -- how you break out between those 5 major growth drivers. There's a lot of momentum there. Can -- should we be thinking of fiscal '23 as still a double-digit organic comp on the base business side for QIAGEN?

Yes. I would say we feel quite optimistic about that. Again, we will give official guidance end of January, early February. But as of today, I don't have any reason to believe that it shouldn't be double digit on the non-COVID side. Again, as I said, we had 18% last quarter. We expect good growth but also in the fourth quarter, trends are good. But I think it has to do also with what people again have to reflect is we have some benefit of quite a significant new portfolio. Again, 3 brand-new platforms, which are all state-of-the-art, again, very competitive single [indiscernible] compared to [indiscernible], all others. Yes, we have some menu work to do in U.S., but ex U.S., we have a full menu full stop, right? Same for QIAstat, we have now reached a point where we have more non-COVID than COVID-related sales. Yes, things have to sell in. And yes, COVID will be negative next year, at least in our guidance, if it actually will be negative, who knows, right? We started this year exactly. Again, we started this year with a guidance EPS of $2.05. We are now guiding for $2.40. I would say it's a good [indiscernible] most likely. And I think we will do it similar, hopefully, for next year, not including anything on the COVID side. So if it doesn't come, no harm. If something comes should be beneficial.

That's quite impressive. And then the other variable, when I think about for '23, Roland has been in the COVID revenues. Year-to-date, I think so far, it's been over $400 million. What is an [indiscernible] run rate? How should we think about COVID contribution for '23?

Yes. Again, most likely end of this year is probably, again, who knows but, let's say, around $500 million. Obviously talk [indiscernible] . So I think that is probably what is probably more realistic as of today. Again, we will take the guidance cautious. I know that you probably look at a number for next year around [ 250 ]. Again, when we give guidance end of January, we'll probably know what happened in Q1, so up or down a bit. But I do think that is probably the direction to look at.

Got you. That's helpful. I think that's pretty consistent with how your peers have...

I'm using your number. [indiscernible].

Okay, okay. And then the other drivers here, pricing, what has been the pricing contribution fiscal '22? How should we think about pricing given the inflationary environment for '23?

Let me be precise here because I got a lot of this question on pricing. As you know, QIAGEN typically is in the markets where we are in, we try to be #1 or #2 so we have a significant market position. A lot of people would argue because you're #1 or #2, you can actually be up front on pricing and being the leader here as well. To be honest, we'd rather do the opposite. We believe because we are #1 or #2, we have a certain responsibility. And the one thing we do not want to be in brackets making our customers mad because we're stretching it too much. Our goal is that we can cover our inflation-related cost increases that we share the burden equally. And that's the way we look at pricing. So that's also why we are looking at doing another price increase, as most companies are doing early next year. We do not have decided on how large or which magnitude it will have because we don't know how inflation looks as you know, different numbers right now expected. So we will try to do that measurable but not aggressive.

Understood. And then that sort of at least [ weight ] of the margin -- margins for next year, right? You have pricing, you have insulation. You do have COVID revenues dropping off. And I'm assuming COVID testing margins were higher. When you roll all of that together, I think the Street is modeling 29% operating margins for '23. It doesn't seem right to you or maybe talk about the variables we should be thinking about for margins for '23.

Yes. As you know, what we set so far is that we clearly left or record we had, I think, 27-plus percent. And if you do the [ calcs ] for this year, given the guidance we have set, you're probably at 30-plus percent. So I think it's fair to argue that because overall, COVID will go down in terms of revenues next year, non-COVID business growing double digits. All in might be is flattish, slightly negative revenues plus inflation, as you just said, that overall, the margin probably will not be at [ the 30's ] level. A little bit between 27 and the 30 percentage point, we clearly try to aim to the higher side. We will tell you, it's also a question on currency [indiscernible] to tell you end of January, what we expect.

Got you. Sorry, is FX a headwind to margins for you guys?

Absolutely, again, relative and absolutely for next year, it should be a headwind because you know where the euro is. But in all fairness, we'll see with this day is already the first difficult question because quite sure that Europe also has to cover up certain interest rates. The good news is I would expect that a lot of the answers are given in the next 4 to 8 weeks, particularly in that environment.

Got you. And just sort of based on euro hovering around at parity to the dollar or around [ 1.04 ]. I think the latest take. Any way to think about what it means to...

Yes. Right now, probably, again, I think the calc we did is that it compared to last year is somewhere between $0.03 and $0.05 EPS as a headwind.

Got you. Got you. And then on the testing side, what have you guys said on what the decremental margins are if you're -- as COVID revenues come down?

As you know, COVID for us had different set of products, some were margin accretive, some were margin dilutive. Quarters like, for example, the first quarter this year where we had a lot of [indiscernible] sales that's probably more accretive s. Some other quarters where we had more OEM business than others, it was probably more dilutive. So I think overall, the differentiation wasn't too big. On an average larger spectrum on a quarterly business, it could be different.

Got you. Got you. I do want to pull it away from some of the near-term -- the growth drivers and the investments you made, Roland. QIAstat-Dx, that really -- it stands out. It's going in a very interesting market in a multiplex [indiscernible] market. I think that market is -- maybe I have a rough number, $700 million, $800 million growing very strong double digits. How does QIAGEN plan to win share in this market? I think your revenue base is north of $80 million. Is that like clean revenues? Or is that COVID revenues? Do you have a cost advantage, et cetera? What drives [indiscernible] revenues?

So I think we have every quarter, let's say, an average 200, 250 kind of number of placements. So I think it's going very well. And now as you know, we have also [indiscernible], which is a bigger machine, still doing the same thing, but with very small footprint. That should actually help us to accelerate to a certain extent, particularly the consumer [indiscernible] . Then the good news on QIAstat in all fairness, which is different than NeuMoDx. We have seen the switch from COVID majority to non-COVID majorities on QIAstat. We haven't seen that yet on NeuMoDx just to be very clear. So there is, again, clearly, a headwind on NeuMoDx, which we still have to reach. The big news for us next year will be the launch of the gastropanel for the U.S. We know we had for Europe and other panels in respiratory meningitis. But the gastropanel is a larger release for us. Why? Because there's also a good number of tenders out where we have to offer both gastro and aspirator. And of course, you have to have it for that. So I think that opens up also additional boxes for us. So that will happen in, hopefully, sometime mid next year, and that should be, again, incrementally helpful for us.

Got you. And on -- sorry, do you have a COGS advantage or anything on -- perhaps it's more automated?

Yes. I think that is already -- I wouldn't say tick mark in terms of done, but not tick mark in terms of being seen in the P&L, which means we started with our new large-scale line here in [ Italy ]. As you know, right now, we have a couple of small scale lines, a lot of manual work. We have now one with more automated work. So any incremental utilization of that machine is going to be significantly helpful for us in gross margin contribution for QIAstat, which was right now a nice-to-have product, but not necessarily the most productive or profitable for us. I think that is going to change over time with a better utilization.

Got you. I know we're almost at the end of time, but I had a couple of questions. One on NeuMoDx, Who do you compete with here, Roland? Is this the Cobas 6800 Hologic Panther and if it's -- those are your competitors, like how do you gain -- that's a tough market. How does QIAGEN win in that market?

Whatever market checks you do on your other companies are doing, you will see that the feedback on the [indiscernible] machine is best in class again. One of our business for us, [indiscernible] lowering, chemicals, very easy to get microplates. So I would say there's a lot of benefits others don't have. If we have a full menu in Europe and we clearly have to expand the menu. That is where we have clearly work and execution to do the platform [indiscernible] . And again, you are right, there are more players than us in the market. But as you know, for us, it is growing up. It's not -- we only can gain because we started at zero.

Yes. And what's the next major assay we should be looking at to launch a NeuMoDx?

In the portfolio. I don't think it's a market where you have just one plural assay, it's whether you have to have which the HR, HCVs and so on. We have some all in Europe. We have to get them more or less fine executed in the U.S. So it's not -- I don't think there's a scientific risk because we sell the stuff already in Europe, but we have to do the filings -- we have to do the execution work for the U.S. At the same time, we have to acknowledge the FDA still has some backlog. So I think the issues they are fighting to there as well.

Understood. And then maybe a last question here, Roland, now I was looking at the valuation, at least last week, when I was preparing the question, stock was at 6% for cash yield. [ 15 turns ] EBIT to EBITDA. For a company which is growing double digits top line, right, what are investors worrying about? Is this the amount of COVID revenues and impacted EPS. Is that what people are asking you? Or is there any macro risk here from a recession perspective.

No. I think first of all, I would say with every quarter, we closed the gap a bit with I think the last quarter was going quite well. And I think we clearly see to be honest a very good interest also along all is really getting new into that. Clearly, a lot of companies who are hold back at some time at par by all the rumors around. And I think, particularly [indiscernible] We see that fading away, which is good. As far as execution, let us deliver the numbers. Let us deliver hopefully a good solid set of also non-COVID double-digit growth numbers. I'm quite sure that gap closes over time.

Got you. Got you. And sorry, there is no -- like QIAGEN does not have any industrial exposure, if there's any recession risk, correct?

Yes, very limited.

Got you. Fantastic. I think with that, we're at the end of the time and thank you so much for spending the time with us this morning.

Okay. Thank you so much. Good to see you, Vijay.