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

Good morning, everybody. Luke Sergott from Barclays to cover life sciences tools and diagnostics. With me I have the pleasure of meeting John Gilardi, IR and Roland Sackers, CFO of Qiagen. I guess, to kick it off, just kind of go over the high, real high points of the quarter. What you guys are seeing from a demand perspective and then how that's really progressing versus what you guys were expecting?

Sure. First of all, thanks for having us, and thanks for organizing, nice weather, we clearly deserve that. Yes, as you all know, we clearly finished the year '22 quite strong, not only the year, but also particularly in the fourth quarter, had a strong finish, particularly on the non-COVID growth rate, overall good growth rate. I think we were very pleased that all our [ platforms ] delivered on what we were expecting and adding to the market. And I know that some investors clearly had some concern about instrumentation business in general. Also having, I would say, a strong finish for the year for instrumentation was clearly important for us. Because at the end of the day, we know [indiscernible] is on the overall sales, which is our recurring business. Moving into this year, you know clearly that we reiterated our guidance for non-COVID growth rate being double digit for this year. I do think we were quite outspoken that we believed that Q1 for 2 particular reasons is probably a bit softer than the rest of the year. Particularly China is something where I think not only we, but many other companies also take a more careful stance moving into the year. On top of that it's quite obvious that last year, we had a very strong Q1 with COVID-related revenues, which hopefully not is repeating by itself. I'd like to get the revenues, but I don't like to get the COVID again. So I do say that normalization is going on. Other than that, I would say trends are, particularly on the consumable side are quite strong. We see good demands coming in. Our growth drivers, I would say, on the consumable side are doing quite well.

All right. Let's dig on the China piece a little bit. So across your portfolio, the life sciences and the diagnostics, where are you seeing the most impact in 1Q and then talk about the trend lines that you're looking at from a recovery standpoint.

Have in mind that last year, QIAGEN was one of the very few companies who had all had a positive growth rate in China. And that was due to the fact that we had a good balance between, I would say, products we delivered in the COVID-related environment and non-COVID business. So in some quarters possibly offsetting each other, and therefore, again, a positive growth rate. We all know that China decided there is no COVID anymore and that's why there is no COVID testing. But there's clearly still some call it, health care issues, right? And -- where they have to work. So we all know it takes a certain time until the country more or less goes through this wave. And again, people are literally sitting sick at home. I don't think that is something unusual. It is something where you have to -- as a society to work through. That's what we're seeing right now. So even if you don't have official lockdowns, everything is not really 100% functional. So I would say we expect rather significant negative growth rate in Q1 going into a slightly negative growth rate in Q2 and then probably improving into positive territory in the third and fourth quarter. Again, it's included in our guidance, but it's a reflection. I don't think it's a particular either life science or clinical environment story. I do think it's really affecting in general.

Got it, yes. So from -- we see some data where the recovery seems to be coming on quite strong. I heard the companies talk about it being explosive. Within your end markets, what are you seeing from the recovery standpoint?

As I said, I do think that we probably expect sequential improvements over the course of the year. I don't see any reason that, that should be [indiscernible]. It will take some time.

Okay. And so on the Life Sciences side, backing up here, you're talking about the instrument growth in the fourth quarter. You guys put up a really good -- like you said, 14% guiding to double digits. What was the underlying demand on that instrument growth, like what's driving that?

I think it was actually -- I think we have some benefit. As you know, we have a good set of new instruments to the market, not only QIAstat, NeuMoDx and QIAcuity, but also some of our sample prep platforms like EZ2 and others, are being well received by the market. And I think that trend is something that gives again also as a good feeling now moving into the year '23. Nevertheless, I do think it's also important to realize that overall, the market for instrumentation is something which is very much also by a menu you put on platforms. Clearly, QIAGEN had a strong focus over the last, more or less 2 to 3 years in expanding menus on QIAstat, but also NeuMoDx. There's still more work to do here. We clearly have a gastro approval, hopefully coming up this year for QIAstat. And we have laid out on the last call, 3-year plans for expansion on NeuMoDx for U.S. menu. So that should also might help us there.

Yes, on NeuMoDx, I mean the deal that you guys finally closed it after the milestone. So you're guiding to roughly flat growth in that business. Talk about what's going on there and the slower uptake than what we were originally anticipating...

I don't think it's a slow uptake. I think what you have to realize, that is the difference between QIAstat, NeuMoDx. In QIAstat, the majority of revenues are, in the meantime, already non-COVID. And COVID is clearly coming down. Whereas NeuMoDx, there was still more than half of the revenues are actually on the COVID side and the lower part are on the non-COVID side. And as I said before, we had last year, won about $470 million in COVID-related revenues. This year, we expect, let's say, somewhere between $200 million and $210 million. Have in mind that we had more or less pre-COVID $150 million COVID-related revenues because we were selling RNA sample prep pre-COVID. So what I have to say is this year it is non-COVID, so it comes down. So we see NeuMoDx essentially growing actually nicely double digits. But of course, there's a drop to expect again in COVID. Again, if there is another wave we are not planning, we're not guiding for that. If it comes, happy to deliver, we are able to deliver. If not, I think NeuMoDx this year, as you said, probably slightly negative, which actually is good news. Because the good news is that quite significant double-digit growth for NeuMoDx as well.

Yes. So on the non-COVID piece of business growing strong double digits. It feels -- does it feel like it's hitting that inflection that QIAstat hit like 2 years ago?

Yes. Again, you know that you did your work here. If you clearly talk to customers, the instruments is very much like, right? It's turnaround time. This is 1 hour compared to that 4-hour, has all features you need to random access, continuous loading, very low consumption on consumables, so literally customers love that instrument. So you don't particularly has to have non menu in that. In Europe, we have a full menu, or to be more precise, ex-U.S., we have a full menu. It's a question of time.

What menu do you need to build up for a greater penetration...

It's a very typical menu which we have in Europe like infectious diseases, transportation and again [indiscernible]. And I think it's also something we have to realize we do not have to develop the menu. We have it in-house. We have to get a regulatory approval in the U.S. Again, I don't want to talk it down, but it's not like a larger idea, but it's a regulatory pathway.

Yes, you don't have to actually create anything like that with Bio-Rad. All right, that's helpful. Let's turn the corner here and talk a little bit about pricing and margins. So talk about the pricing environment that you have. I mean, it's been strong across tools for the last 2 years.

It's quite obvious that QIAGEN has a reputation of, I would say, high-quality brands, strong brand name, and therefore, I would say also, overall, a reflection of our overall good margin profile. Last year, we had 2 price increases, we had very regular one earlier this year -- last year. And then, of course, we have seen that inflation rates went up. So we did a second one, more or less to cover our costs in the middle of the year. Actually, I also want to be straight, we are not doing price increases necessarily to get extra margin, because we are typically in the markets where we're #1 or #2 player. If you overstretch it, it also comes with bandwidth. So we want to have a fair share with our customers in terms of inflation increases on a cost basis. I think we got that done by middle of the year, but I would say -- at the end of the year probably by, I don't know, 250, 300 bps on net price increases. We did another smaller price increase earlier this year to cover more or less incremental inflation costs as well. So our goal is more or less to keep the cost near to QIAGEN.

Yes. Did you learn anything on the past few years about price increases? Meaning that from where you thought there were more price-sensitive markets, mainly around RUO, all of a sudden that they're not as massive as you thought they might be.

I would say the feedback from customers overall in brackets was quite positive. So we didn't have any larger discussion which is, I guess, also meaningful in terms of let you understand where we are coming from and how we calculate it as we really tried to play that quite on. I think that was good. At the same time, I think it was a great confirmation that we get it also done in areas where some of our peers said that's actually lower price. So we did it also in certain other areas. So I do think it speaks for our brand.

Okay, And then continuing that on the margin front, talk about the additional leverage you have in the P&L outside of the pricing, your targets for how is that -- how you balance off the COVID rolling off as well?

I think for this year, of course, overall, we really have still to see that COVID was [indiscernible] and therefore, probably gross margin is somewhat flattish, and we might enter the year with let's say, EBIT margin, I don't know yet, let's say, somewhere between 27% and 28%. Looking now on '24 and beyond, I do think there's nice opportunities for us also to get extra leverage for a couple of wins. However I do think we should expect, as you said before, better utilization in some of our production environments, particularly in NeuMoDx and other, so better standard costing and higher utilization should drive also gross margin. R&D probably stays somewhere between 8% and 9%, which is quite comfortable. We said, we did some step-ups during COVID to get even more menu as we talked about it, [ explore ] our pipeline. I do think that it's normalizing over time to a certain extent. More significant leverage for us is still SG&A. There's a nice opportunity for us. As clearly also COVID taught our industry to become more digital. We had a significant effort in QIAGEN, and I think there's still more to come. Also, again, you see how our conferences and marketing activities have helped this. So I'm quite sure that we should be able to, I don't know, probably 30 to 60 basis points per year of our margin improvement. It depends a bit also on currency movements, of course, but there's a nice opportunity to get some leverage into the company.

All right. Yes, because I remember that actually you guys had a couple -- you did a couple of the re-orgs and re-rightsizing the sales force there a couple of years ago. Talk about where you are on that.

See this, again, as the organization is virtually developing. And for example, QIAGEN, I would say, did quite well in setting and utilizing what people will probably call in general, call business shared service centers. We have around 15 [indiscernible] local shared service centers, which is a very strong backbone, particularly in days like COVID. It was our strength where we were all able to scale our efforts as we did over the last 2 years in terms of revenue expansion and serving our customers. Because this concentration and consolidation is in this days, of course, being quite helpful, because it's much easier on backing if you have 5 people in the office and 20 people in the remote site. And so I think that's helpful and also the system environment is clearly quite nicely developed. Nevertheless, there's more to come. Overall we do this smaller bolt-on acquisitions, which are always something would be nicely integrated. And then typically enhance our growth quite a bit. But the same is -- we talked through a new expansion and other. It's not only going to the same kind of equipment and the same kind of customer group, it clearly also leverage the same frame, so I'm quite optimistic on the margin expansion. Yes, we do have clearly vast leading margins in the environment, but I do see the same record, we have also good track on building on that.

All right. And you said -- you touched briefly on the M&A. You just did Verogen. Can you talk about that?

Sure. One of the areas where QIAGEN has been active for the last 2 or 3 decades is human identification or forensics. And the core of that is really our sample prep business. And -- if you think about it, we estimate that every 10 seconds, there's a crime scene somewhere in the world being analyzed using QIAGEN kits. And the market has really been based on using what are called single tandem repeats to be able to identify a suspect, and then also to exonerate persons. But you had to be go and do one-to-one and look at a sample and compare that to what you see on TV all the time with the TV shows. What Verogen did as a spinout out of Illumina is to harness power of 2 things. One is that FGx technologies. And the second are these ancestry databases, which is one of the most popular hobbies for people in the United States. So for these 2 products together, we now have a new product that's being used by law enforcement. You saw that in the Golden State Killer. You saw that in the University of Idaho killer case, where they don't have a suspect, but they have a sample from a crime scene that they can identify. They will use the what we call GEDmatch PRO, our product, to be able to analyze and then be able to come up with an ancestral family tree, then be able to go back and identify the suspect. That's what you're doing now is using the power of NGS. We sell the Illumina MiSeq sequencer that's actually configured for use with forensic kits that we have. So we can give them a complete solution from the biological sample, getting the DNA and RNA. That's where QIAGEN is really the gold standard for crime scene analysis work into the sequencer and then into the bioinformatics. And then you're able to identify the suspects. We have about 98% coverage now in the United States in terms of being able to identify people through first degree of cousins, first, second degrees of cousins.

Make a second guess, doing those tests.

When you think about those [indiscernible] where your information can be shared with law enforcement and for scientific research in these areas, and the rate of people increasingly opting them is going up.

On the -- so I mean that business is growing at a 10% to 20% for a long time. So how big is that for you now?

Fortunately $100 million franchise for us for forensics, puts us in the top 3 players.

Good business. We -- as John said, I do think we'll bring it now to the next level because the Verogen franchise is clearly a great franchise and making a difference, not only to crime scenes, but again, I think, also on how much work. Unfortunately, the world has to do in locations like Ukraine and others where it really comes through identification and having the potential to make a difference, I think, is material.

All right. We will change gears here in the last 4 or 5 questions. So you do have significant academic, government exposure. So talk about the funding environment you see across the U.S. and Europe and Asia. Sequestration and the GOP budget is expected to come out, would be some pretty steep cuts. Give us a sense of how your business is positioned to do this work.

You used the [indiscernible] word.

Okay, I won't use the [indiscernible] word. Just talk about how you're positioned now versus you were...

Of course, we are monitoring all these -- much improvements right now. At the same time, I would say that this year, the budget, as you know, are out and so far, very reasonable in the U.S., also in Europe. You get very different signals on overall development. For us, of course, it's also important within this huge [indiscernible] budget, which I think is $48 million, $49 million, how things are getting allocated. So far, we have seen actually a very good growth rate, and I don't think that's going to change short term. The good news in the U.S. is typically it requires a bipartisan approach, and it's [indiscernible] bipartisan approach to support that budget has not [indiscernible], so I'm not too concerned. I would expect that if it becomes more difficult also with inflation and other topics that certain business like instrumentation business and others, people will think twice before they spend. While 85% of our business is consumable related recurring business, which is very resilient in this environment, I wouldn't expect larger changes here anyway.

Okay. It was just perfunctory question I had to get in there when you're thinking about where you guys play. So on the -- you just sold the bioinformatics business. Talk about it, when you bought the Ingenuity right? When you guys bought that, there was a clear synergy across the whole portfolio. So talk about the strategy here.

I think what we're doing here is nothing else definitely good for any other part of our business. We look for ways to enhance our value and also the value to customers. And our QDI business, QIAGEN Digital Insights, is clearly, let's say, a $100 million business, nicely double-digit growing, quite profitable, particularly in a market which has good momentum but also requires consolidation. And there's clearly an opportunity for us to set this new standard in the market. The question is, is this something that you do by yourself, or you do with a partner, you're doing in a joint venture type? So there's a lot of questions. I think you can raise, which we are trying to find some appropriate answers for that. So I don't think that our plan is to sell the business. Our plan is to enhance the value for that business. And if you have to do that with a partner because of [indiscernible] happy to do so. Because it's also fair to say that while there's a lot of businesses which have good growth rates, there's not too many businesses out there who have good profitability. And so it's easy to find something which whatever, $80 million in revenues. But probably [indiscernible] losses in revenue. And I'm not sure how much you would like that we do a couple of [indiscernible] for ourselves. So that's exactly what we are in. We try to add value and [indiscernible].

Comparison of all.

I'm not sure that the wholesale is [indiscernible].

Just to be clear on that, Luke...

Okay, that's my bet. On the QIAcuity and the digital PCR ramp here, really strong growth. Talk about the inflection in the portfolio, the portfolio they have around there.

Digital PCRs are entering into this new generation of using PCR technology. We've taken an approach where we see upside because we have a system where we have 4 different versions -- 3 different versions of the machine, 1-plate, 4-plate, 8-plate. First entry point was in the academic research. Now we're moving into the biopharma processing areas in terms of research and R&D work that's done in the biopharma. And then we're going to make some transition to the clinical. This is a big franchises moving ahead for us. And we see a lot of opportunities. We see it as the right now is probably the biggest play in our life sciences business beyond where we are with sample prep. That's proportional investment and attention.

And it's, I mean it's a really competitive market. So talk about the pricing environment. How you guys are positioned...

It's not the issue here right now. What we see though is, again, remembering qPCR, the predecessor technology, it became an ubiquitous technology, you have to find other ways to be able to differentiate. The technology is not the enabler. What we see is that the ability of your systems to provide a cost-efficient, scalable solution that can enable customers to move from qPCR to digital PCR, without having to spend a 6-figure amount of money to get into the technology like you have to do with the competitors. That is the advantage that we're giving people. We're democratizing, enabling access to digital PCR. This is an area where we have tremendous upside, and we're not cannibalizing our own business.

All right. Great. That's all the time we have.

Yes. Thank you. It's a pleasure.

Thank you, Luke, Thanks for having us.

Thank you. Bye.