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

I think this is the last thing between you and lunch. So stick with it, and we're going to. My name is Peter Welford. I'm the European Pharma Biotech and Life sciences analyst at Jefferies in London. It's my pleasure to host the next company in this track, which is QIAGEN. We'll be doing a fireside chat. It's our pleasure to have here today, the CFO, Roland, who is going to make a few introductory comments. After that, we'll get straight into Q&A. [Operator Instructions]. With that, over to Roland or I should say, we have got John Gilardi as well of IR on the front as well. So with that, over to Roland, and thank you very much.

Yes. Thanks, Peter, for having us. It is always good to see people in person. Yes, let me kick it off a bit with just a brief summary where we are. And I am quite sure that most of you have seen in our press release and the Q1 results, which I do think, in general, actually a good start of the year for QIAGEN. We were able to beat actually our own guidance in terms of [ growth ] in terms of revenue expectations, but also in terms of EPS. We clearly had another quarter of double-digit non-COVID growth rate, which I do think is testament to the strength of the overall five pillars of growth, which we identified. I think it's also fair to say that overall, we clearly have a year where COVID revenues are going down significantly. Most likely, it's probably also the last year where we have to talk about COVID revenues at all. At least our internal plan is that we just have one revenue number going forward starting next year. And I hope that no pandemic setting is going to change it anytime soon. More importantly, I think it's also fair to conclude that if we review our five pillars of growth, we have seen two areas which probably did a bit better than we even guided for, one that's being QuantiFERON is our latent TB test, which had another quarter of good double-digit growth rate, 19% growth rate, clearly still driven by the conversion of the traditional skin test market, which is still 65% of the global market. So QuantiFERON continues to be a good roll-up and conversion story. And the second area is clearly our sample preparation business, the market where, I guess, most analysts, including, Peter, believe we have a significant market share, and we see here a good penetration as well, particularly driven also by good efforts from QIAGEN over the last few years to expand menu, but also having a wider offering on automation solutions. But also two other products did quite well, one being QIAstat, which is our decentralized testing solution instrument, where we typically sell around about 150, 200 placements quarter-over-quarter. Q1 was probably more on the higher end side. So I would say, also here, a good start in the year. And QIAcuity, which is our digital PCR offering a highly attractive market. Clearly, it has seen experienced some acceleration starting in the third quarter last year when we launched a set of panels for the biopharma market that, I would say, increased offering accelerated both instrumentation platforms, but also utilization of existing platforms. We also believe that is going to continue. NeuMoDx, on the other hand side, clearly had a more difficult start. It's clearly also a product which had end of last year, a significant COVID revenue share on its platform around about 2/3 of the revenues last year were COVID related, 1/3 were non-COVID-related and while we see, I would say, a good growth rate and even double-digit growth rate on the non-COVID piece, clearly the drop on the COVID side is significantly larger. So we have -- probably need some time to work through that. Last but not least, profitability, as I said also here, a good start into the year, good growth rates in terms of EPS growth rate. We were, I think, outspoken on our conference call as we have said that we expect sequential growth quarter-over-quarter in terms of EBIT margins. We believe gross margins for the year stays probably below 67%, reason for that is utilization of our existing production environment as we still, again, have to digest this year to more or less drop away from some COVID-related revenues. Once we are out of that headwind, I think also overall gross margin should be a more positive contribution factor for QIAGEN mid to long term. Let me leave it here and Peter, I'm quite sure if you have one or two questions left.

Yes. Let's start off with I think what is one of the hot topics in the industry at the moment, which is demand for instruments. Can you just talk a little bit about what you're seeing with regards to demand for instruments. In particular, maybe it makes sense to break it down as far as you've obviously got in your segment, the Life Sciences, Academia, Pharma type thing, but also as well on the clinical side and talk a little bit about what you're seeing.

No, it's clearly a topic which we hear quite regular. And I do think from a QIAGEN perspective, the best way to bifurcate that is probably instrument, let's say, with a price to get north of $100,000 and then one below $100,000 because we do see slightly different, I would say, patents here as well. Instruments, which are below $100,000 and for QIAGEN, for example, it's like QIAcuity or QIAstat, which is probably more like USD 30,000 to USD 50,000 or even QIAcuity, which are sample prep platforms. Here, we see, I would say, more or less a regular business. We Clearly see that the customers from time to time go for an extra round in terms of paperwork and others, but in general, as I said, good start in the year and no larger changes. I would say that is different than what we see, particularly on the more expensive platforms, for example, for QIAGEN, NeuMoDx is an instrument, which is above $100,000 in terms of price point. Here, we clearly see a more cautious environment in addition to also more requests for [indiscernible] reagent rentals. So meaning customers rather want to buy that instrument in a contract over a 3- to 5-year period with increased consumable prices. This is something that we actually don't necessarily see as a negative because reagent rentals clearly have some benefit as well that you have a commitment from the customer side on the consumable side. We actually also have good visibilities on the contract and when it comes to an end after a couple of years, so I would say, overall, clearly more difficult, probably also a bit more difficult than we thought on the more expensive side, on the QIAcuity and QIAstat side, I would say things are pretty much normal.

And if we just think about then the other, I guess, trend for the industry is inflation, can you just talk a little bit about the challenges that you're facing with regards to current high inflation rates? And in particular, I guess, there's a whole topic price increases and how they're sticking, but equally, any other sort of inflation comments on the cost base as well.

Yes. I think first of all, I think to remind your audience that QIAGEN clearly has a share of 85% of the business being a consumable business and around about 15% of our revenues being an instrumentation business. And I think it's quite obvious that our consumable business is a very resilient business. I have seen it now actually personally in my 20 years of QIAGEN, I went through three recessions that, that is a business, which is actually quite stable in general. Clearly, there is some volatility, but it never went negative or whatever. And it has to do with a very simple fact that if people want to work, they need our consumables, you need sample preparation because it's like [indiscernible]. If you want to do some work, you have to have certain ingredients and consumables, it is important that it's clearly different on the instrumentation side. At the same time, the markets where we are in, five pillars of growth, but also genomics and other areas, QIAGEN typically is focused in areas where we either #1, #2 or #3 player. I think we also have a good quality and brand recognition, which clearly gives us also a certain pricing power. But I do think it's also important to say that we do not overstretch it because of our strength, and I would say because of our overall good margin profile and customers are clearly aware of that as well as we are, I would say, focusing on getting our inflation-based cost more or less covered by price increases as we did last year as we are going to be able to do this year. It is not our goal to squeeze another whatever 100 bps margin out of our customers just to get a better margin profile by price increases. We're actually playing it quite open. We give our sales reps documents on hand where they can show to the customers. This is actually the price increases we as a company experience, and that's the reason why we have to do certain price increases to compensate for that. So I would say we are reasonable players if it comes to inflation-driven price increases.

And then just you mentioned margins, but just sticking before we go into some of the product lines. We're just sticking with margin for a minute. I mean what do you still reiterate as your long-term sort of margin target? And within that, what's the optimal level of R&D we should be thinking about for QIAGEN longer term?

Yes. So I have seen in the first quarter numbers, R&D was a bit higher than normal. It was around 11-plus percent. We said on the same -- very same call that we expect this year to be around 10% of revenues for the full year. and mid and long term, we probably will go back to what is the very typical area for QIAGEN, let's say, 9-plus percent area of revenues. It's an area where, I would say, in the past, we have experienced a good ratio between in and output. This year, clearly, with overall negative revenue growth, of course, COVID going down. Again, we kept it up a bit higher, just to more or less execute on our existing pipeline, but we should expect some normalization. And the area where we expect more leverage to continue this year, but also going forward is clearly SG&A. We have seen that the whole digitalization in our industry made significant progress during COVID, same is true for QIAGEN. In the meantime, 65-plus percent of our revenues coming in via digital channels, significant leverage opportunity for us around sales and marketing, particularly as a company as we are like midsized, very focused, it helps us easily to reach our customers. In particular, if you have a business like we have like 85% being recurring revenue, consumable business, once you bought an instrument, you are typically [ filled up ] monthly and quarterly with even more consumables, having instruments doing that by yourself, giving time for sales reps to rather going for lead generation and introduction of new products is an important technology shift and shift step fast forward. And I do think we nicely progressed there over time, but for sure can do better as well going forward.

And then I guess, finally, just on capital allocation. Can you just talk a little bit about -- I mean, -- you've done a few acquisitions, but certainly it's been not that many. So can you just talk a little bit about how you think about allocating capital within the company and what we should perhaps think about in the future?

No, I think it's a fair comment. We clearly have excess cash right now. We have about more than $1 billion cash available while we have $400 million repayment of a convert coming up, which we're going to pay back in cash now in the third quarter. Nevertheless, net debt to EBITDA is around about 1, so we underleveraged. Nevertheless, we are focused on bolt-on acquisitions. As you said, we did two smaller ones now in the last 12 months. I would say right now, we are quite active. The market is, I would say, quite [ augmented ] kind of an environment. We will stay very focused on bolt-ons and on our five pillars of growth, which probably allows us, at the same time, to do a combination on share repurchase and bolt-on acquisitions, but also investing organically into our business. You will see on the agenda for our AGM this month, for example, the request for approval for our Board to do a [ $300 million ] share buyback.

So let's move on to the five pillars then. I'll start up with Sample tech, it's really the sort of bread and butter of the business. I mean I guess we saw that clearly during COVID with demand for your tech. Can you just talk a little bit about me, what is it that sort of underpins QIAGEN's offering here and the core strength that means that you are maintaining a leading market share in this area?

I think, as we said, we're clearly, by far, the leader in terms of sample preparation. It's a significant part of our revenues. And clearly, as an area which got a lot of R&D focus since 2019 when we stopped to developing our own sequencer, and we are focusing on around PCR technologies launching some of the platforms we just discussed, but clearly also pushed quite some incremental money into expanding our offerings around sample preparation and also sample prep portfolio expansion in general. Clearly, COVID was also helpful for us. We, as many other players, were able to sell a significant number of instruments into that market, which is now playing out quite nicely for us. Why? Because if you think about that sample prep is not one application. It's literally hundreds of different solutions, which you can run on one of the machine. And that still the majority for us like 60-plus percent of the sample prep we're selling is still handled manually. Automation is a nice upsell opportunity for our customers. Now if the customer bought an instrument, let's say, now within the last 2 years and runs 10 applications, given our market share, six from QIAGEN, he knows can automate on our platform and four from somebody else, which he still has to do manual. Over time, he asks himself, okay, why should I still do it manual because that's most likely a solution available from QIAGEN because we're anyway a market leader in that area. So the penetration actually got a nice incremental step-up from our perspective.

And then let's move on to QIAstat-Dx. Can you just talk a little bit about how you're going to expanding the menu of that, which I think obviously is a key driver for this. I think it's been a little bit slower than originally planned? And how you see this differentiated versus the -- what is a pretty competitive market, obviously, with a very entrenched peer?

Yes, I'm not sure it was -- you can [indiscernible] it was lower than planned in between, we had something like COVID and it changed the world and the respiratory was quite a focus. And I would say we also gained quite some incremental cash out of [ stat ]. So on purpose, we focusing thing. Nevertheless, we filed our gastro panel, which is the one you're referring to with the FDA actually end of last year and we do expect approval for that for the U.S. Mid of this year. In Europe, we have, of course, already on the market approval. And the reason why this is important and Peter has asked them for that is there's not an incremental revenue opportunity, it's probably, in general, I would say, 20 to 1/3 of the overall market. So it is a nice step-up opportunity for us. But there's clearly also opportunity to participate in tenders where you have to offer respiratory or any other kind of products in combination. So that is an incremental opportunity now where we can sell in. Again, here, I would say, approval from our perspective is expected sometime mid of this year.

And then can you just talk a little bit about the main setting for the 4-Plex respiratory tests and how we should think about that within the QIAstat-Dx market?

Yes, John, do you want to talk about the 4-Plex?

Yes, thanks. I'd say where we see the real testing volume for Syndromic testing with QIAstat-Dx is still with the full respiratory panel. We have more than 20 markers that you're looking at, remember that 2/3 of the market for Syndromic testing is in a hospital setting where you have a more severe situation in an emergency room or in an ICU or in dealing with children as well. So that's where you're going to be using that. The 4-Plex is moving more towards outpatient testing where the single-plex testing again for COVID or looking at Flu A, Flu B and then RSD, which became a much more open topic in the last couple of months that's being combined now into a 4-Plex test, but we see that more in an outpatient setting or that will be done on machines like NeuMoDx or these types of larger integrated clinical PCR machines.

Okay. And let's move on to QuantiFERON then. I mean, I guess, simple question is, how sustainable is the double-digit growth we're seeing here? I mean year after year after year, we seem to see very solid double-digit growth of QuantiFERON and just can you remind us, I mean, what are the key drivers for this?

It's clearly a good market to be in. And it's clearly a market which for the last couple of even years did better than we expected. And I do think the major reason is actually a very simple one. The very simple reason is compared to the market is a literally 120-year-old skin test and that skin test has still around 60%, 65% of the overall market. And we all know that diagnostic in a clinical setting is one thing. It's very sticky. It took us many years to convince the market that there is a new standard, and now where we gain, I would say, a reasonable market share, it becomes a kind of a self-fulfilling story. You have more large customers starting with this. Then of course, the competitor of that customer want to do that as well. We have a lot of paper, studies available. And of course, you clearly also see that the overall market itself is growing. It becomes -- QuantiFERON, I think it's also important to know, it's through a large part [ mandatories ]. So it's a back-to-school test. It is an immigration based test. It is something that you do, for example, in U.S. mandatory for your first time responders, firefighters, army's prisoners have to get tested quite regular. So it's a global market and very broad. On top of that, of course, you see a couple of trends which you might call short, mid or long term because who knows, you have a significant refugee crises in Europe going on. You have just in Germany by [ ourself ], you have 3 million refugees coming from East Europe and it hasn't started yet. But over time, I would believe they unfortunately have to be integrated into our environment because the chance that they're going quite quickly is probably while we all hope for that, probably not short-term realistic. And that clearly gives incremental opportunities as legal immigration does. So I would say it's a nice opportunity. We clearly also, I would say, worked out a good cooperation with instrumentation partners like DiaSorin where it is now without any extra incremental CapEx cost for customers, easy to start with offering that test to their clients, to their customer base as well and make extra money out of that as well because it's also important to understand that latent TB test is one of the most commercial interesting test for labs in these days as well. So I think it's a nice win-win situation.

And then digital PCR, obviously, can you just talk a little bit about the opportunity you see for this and how perhaps QIAGEN is differentiated and different to where you're really your main competitor in terms of how you think about this market.

Yes. I think we -- in the meantime, became a very solid #2 player in end market. And even if you dig into that a bit more, I would even argue that on a quarterly basis, we are already placing more or less the same number of instruments than some other companies are doing. Big step forward for us was the offering of incremental menu starting with the third quarter last year around biopharma clients. Right now, it's more or less 100% going into the Life Science area. The clinical environment is opportunity probably '24 and beyond coming on top of that. But I do think the biopharma step-up has a couple of advantages. First of all, biopharma customers typically buy a slightly larger instrument. We sell that instrument more or less in three different settings. 1-Plex, 2-Plex, 4-Plex, 1-Plex, 4-Plex -- 8-Plex sorry, depending on the volume you need, you can take your dedicated instrument. So these customers rather buy a bit larger instrument and of course, also have a larger utilization. We are continuing to expand that menu, quite sure that, that is a double-digit growth for us for many years.

And then, I guess, the last pillar, then NeuMoDx. So we've got to touch on -- we still got time is in all those areas, as you said, it's been a bit more challenging recently because of the COVID headwind. Can you just talk a little bit about the launch and the plans in the U.S. for the menu? And really [indiscernible] simplify for us how NeuMoDx is different versus the competing systems that are obviously already out there.

I think NeuMoDx overall is actually a very solid instrument. And as you said, in Europe, it has a full menu, we have like, I think, in the meantime, 14 different panels available, everything from infectious diseases to the very typical settings. It has advantages, which none of the competitors have, turnaround time was around one hour where most competitive systems are around four hours, continuous load and random access, lower use of chemicals. So it's actually a great increment. I think it's a fair comment that in the U.S., we have a very limited menu approved around respiratory and LDTs. So we have to expand our menu. Unfortunately, that doesn't go overnight. It's probably something what again takes a couple of years. Also here, clearly COVID changed the plans quite a lot, probably also changed the market a little bit because there was a lot of focus around respiratory and COVID over the last 3 years. Nevertheless, we see sequential growth ex U.S., of course, on the non-COVID side, just a small base.

Very good. [Operator Instructions]. With that, then we'll close the session here. Thank you very much, Roland. Thank you, John. Thank you all for attending. With that, food will be served. So enjoy it. Thank you.

Thank you.