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

All right. Welcome, everybody. Good morning. I'm Matt Sykes, the Life Sciences Tools and Diagnostics analyst at Goldman Sachs. And I have a pleasure to welcome Thierry Bernard, the CEO of QIAGEN here today. Thierry, thank you very much for being here.

Thanks for having us.

And maybe why don't we just start out, let you kind of set the stage a little bit. Last quarter, you once again exceeded expectations for net sales growth and EPS in the quarter. Maybe walk us through some of the key accomplishments and any expectations you have over the course of this year?

So first of all, good morning, everybody, and thanks for your interest in QIAGEN. So Q1, even if it seems far away already, but obviously, the first matter of satisfaction for us was the non-COVID double-digit growth. As you know, we gave a guidance to the Street to be at non-COVID double-digit growth for the full year, but it was not a quarterly guidance. But starting the year here, at already double-digit growth for the non-COVID part of the portfolio is obviously extremely encouraging. And if you drill down, what we call, the 5 pillars of growth, extremely reassuring to see sample tech non-COVID still going very well above double digits, good performance, both on manual testing and automated testing for sample prep, which proved once again that first, we were right to put sample prep in Q1 of our pillars of growth, second, that we are still definitely a key leader on this market. Second, QuantiFERON still performing very well, which is once again proving 2 things. First, that the partnership with DiaSorin is working quite well. And any time we are able to convert QuantiFERON, let's say, traditional customers to automation with DiaSorin, we do it at a premium price. So we see a double impact on QuantiFERON. Volume is growing and pricing is going well as well. And the second good element for QuantiFERON is that we still have a significant market to convert on skin test. And I know that some people are always asking us, but you see competition coming on QuantiFERON, but still the main market remains skin test and this potential of conversion. Then you look at our U.S. platform, I would say that for QIAcuity, good quarter of placement as well. It is extremely interesting to see that the system that we have launched barely 2.5 years ago, is now accumulating more than 1,300 placements. It's probably the fastest-growing installed base in digital PCR in the world. QIAstat, QIAcuity for -- NeuMoDx, QIAstat good level of placement knowing that in the U.S., which is still the main market for Syndromic testing, we still have a relatively poor menu. We are still waiting for the approval of GI by the FDA for the second half of the year, but a good level of placement, especially driven by Europe. But especially what is very encouraging for both QIAstat and NeuMoDx is that the non-COVID part of those 2 platforms, we know that they have been helped in the past by COVID are growing by double digit. On NeuMoDx, it's up to 50% growth on the new COVID -- on the non-COVID on NeuMoDx. Apart from the 5 pillars, good performance also on HID. You know that ForenSeq is an activity where we have recently invested with the acquisition of Verogen. This is unfolding very well. PHC, oncology and companion diagnostic performing well. We had and we noted -- we highlighted that in our Q1 release, some volatility in our OEM business, some volatility in China, but it's not a matter of concern. OEM is always volatile year after year. So what can we say now is, we believe that we have our guidance for the full year still in hand with what we see with our pipeline, with our development. We believe that our guidance on EPS at $2.10 is also under control. We have our cost under control, which is extremely encouraging in this volatile environment, of course.

Got it. Very helpful. Maybe staying high level, you've talked about the resetting of the non-COVID organic growth rates, double digits. Historically, we saw sort of mid-single digits, and you've successfully done that over the course of the last number of quarters. So I think we can start to call that durable. Could you talk about how that reset growth algorithm on the top line -- how that will impact free cash flow and EPS growth going forward and how we could kind of see a different QIAGEN in that regard as well?

So thanks for saying durable. I mean, once again, let's not be complacent. I mean, the objective is still to achieve our guidance quarter after quarter. And it's clear that we are coming from a significant number of quarters in a row where we did achieve the guidance on the top line and on the EPS. It's more than ninth quarter in a row with double-digit growth on the non-COVID, which is our clear obsession. COVID for us, we -- I have always said that we were relevant, but we are not depending on COVID, and we will continue to be relevant to whatever happens. So first of all, I think this double-digit on non-COVID proves that we were right to show that focus on the 5 pillars of growth. And I just would like to highlight here, I mean, why 5 pillars is our focus, once again, is because we are a mid-cap. And when you are a mid-cap, you have to focus where you take -- you can take significant meaningful market shares on the market. For me, it's between #1 and #3 on the market. And that was necessarily because before probably this company was a bit spread to FIN. Second, when you look at why those 5 pillars is that out of the, let's say, roughly $11 billion market, which is addressable for QIAGEN, the 5 pillars represent at least $6 billion out of $11 billion. So it's a significant market size to conquer. And most of those markets are very much growing fast. I mean, obviously, Sample tech is a slower growing market. We always said that on sample prep, it's a market growing between 3% to 5%. But then if you look at latent TB or if you look at Syndromic testing or digital PCR, we are talking about double-digit growth market. And when you are in a good either challenger or #1 position, then you can serve on that way, I would say. High throughput PCR like NeuMoDx, it's a slower growth market, but we have such a differentiated instruments that we can continue to grow there. So now to your question on the growth rate, on the EPS, on the free cash flow. What I tried to do when I proposed the 5 pillars is to find a good balance into those -- inside those 5 pillars between mature, number one, that we need to try to protect and expand its Sample tech and QuantiFERON. This is high-margin generation obviously. There is no reason for this to not continue. And obviously, a fast-growing platform with promising growth perspective, it's QIAstat, it's NeuMoDx and digital PCR. So it translates, obviously, in the kind of split of margins. Obviously, when you try to enter into new markets like Syndromic and digital PCR, obviously, the tension on the margin at the beginning are a bit higher. Why? Because it takes time to achieve a good ratio between your volumes of test and the cost of goods. But this is clearly what is happening when you look at the evolution of the profitability of QIAstat. For example, it's going under our plan. So long story short. What can we say? We are slightly below gross margin-wise, the typical average of QIAGEN, which was 68%, 70%. By the way, being at 67% plus for the company that has both clinical activities and life science is a significantly good performance if you benchmark with other companies. When we are going to continue to increase volume on those 3 new components, once again, QIAstat, NeuMoDx and QIAcuity, I saw no reason for QIAstat -- for QIAGEN not to come back between the 68% to 70% basically in a 3 years' time horizon. That's the objective for me, clearly. But we have to basically achieve that improvement of cost of goods due to volume. Most of the CapEx investment for these are behind us. So that's already factored in our plan. From an EBIT margin standpoint, we are still investing, as you know, into those 5 pillars of growth. The trajectory for us is very clear. We always said that post-COVID, we would do better than pre-COVID. We have ticked that box. Now for us, the vision is to go progressively closer to 30% -- 29%, 30%, which is once again a significantly high number. And for this, I give the company a kind of 2 to 3 years horizon, clearly. Next objective for me is to be able -- especially once we have stabilized the post-COVID time the impact on COVID on our results, is to be able year-after-year to grow the EPS at the same time as the growth rate. That's the objective for this company to basically have a very good synergy because sales growth rate and EPS growth.

Got it. You touched on a little bit about menu expansion, and that's a key part of the strategy. Could you talk about how much there is to go on this front? And any potential bottlenecks? I mean, some of this is out of your control due to regulatory bodies approving. But could you talk about sort of the progression that you've seen so far in menu expansion? Is it up to your expectations so far? And how do you see that sort of propelling that non-COVID growth moving forward?

It will never be up to my expectation, obviously, and -- but that means that there are still room for doing better or for achieving better, it's no surprise, guys. I mean, not being approved or being delayed in approval, as I said. Being delayed in approval for GI in the U.S. for QIAstat last year was a significant disappointment and it had an impact on our numbers because it was budgeted. So this is why having this test approved this year by the FDA, once again, we expected for July or August is key. Submitting meningitis to the U.S. before the end of the year is also key because if the FDA comes back on track on the rhythm of approval, that means that we will have meningitis next year in the U.S., which means that in the main Syndromic market, we will have basically the 3 key parameters approved that are necessary to be competitive, which are respiratory, GI, meningitis. And then we will bring obviously the rest of the menu. So this is basically slightly delayed because of this hiccup with the FDA for QIAstat but let's not forget as well that in the meantime, COVID struck. And what does it mean is that when it was absolutely not planned, not budgeted, you have to develop a menu on COVID. For us, it was significant. We had to develop a single plex on QIAstat, on NeuMoDx. We had to develop 4-Plex on QIAstat and NeuMoDx, and obviously, a large plex on QIAstat and so on and so forth. So you constantly adjust also to your market environment. But QIAstat, I would say, is on track with that disappointment, but it's coming from a third party that we do not control. NeuMoDx, the menu in Europe is really good. We have more than 16 assays in Europe available on NeuMoDx. I mean, for you, Europe, 16 assays, it seems okay. This platform is 3 years old. 16 assays in Europe, it's a very good performance. The disappointment is in the U.S., but I think it's a calculated disappointment. Why? Because when we launched NeuMoDx 2.5 years, 3 years ago, it's perfectly normal for every new instrument, QIAGEN or not QIAGEN. At the beginning, you spend a bit of time stabilizing the platform. Those are complex systems. There is a lot of microfluidic parts moving inside the system. There is adjustment. It is, what we call, the mid time between failure. And we have been confronted with that on NeuMoDx. So we prefer to stabilize the platform and then start again, obviously, our wave of submission to the FDA. So we start, for example, with CT/NG at the moment, and we will have more during the year. So NeuMoDx is late in North America, but perfectly on track in Europe. QIAcuity perfectly on track. As you know, QIAcuity is a life science system, digital PCR for us at the moment. Life science. Last year, we launched the biopharma menu perfectly on time, even slightly in advance, and we are perfectly on track, which is even more important with our submission to make it a clinical system. So QIAcuity, digital PCR by QIAGEN will be clinical by Q1 of next year with 2 concomitant submission to the FDA and to the European authorities. And our strategy for digital PCR clinical will be oncology, as I said many times already, the first assay available on the platform will be BCR-ABL for blood-based cancers. QuantiFERON, you know that we are moving beyond latent TB. We have a partnership with DiaSorin online, which is probably one of the biggest untapped diagnostic disease. And so the test is already approved in Europe, will be submitted to the FDA before the end of the year. The main market, Lyme will make it in the U.S. or will never make it, it's very simple. And we have a very good test. The latest clinical trials that we are having and that we will submit to the FDA are showing a clear superior clinical impact than the traditional IgG, IgA methodologies. So provided that we can submit to the FDA online before the end of the year and provided that the FDA comes back to the normal time line to approve a 510(k), which is roughly 90 days, that means that we will have Lyme in the U.S. next summer. And this is a fantastic relay of growth for QuantiFERON.

Got it. Maybe shifting to Sample technologies. You mentioned sort of historically 3% to 5% growth market. But maybe talk about some of the trends, and you did better than that in Q1. Talk about how you're driving growth in Sample technologies, maybe easy to connect is one driver, but talk a little bit about how you're driving growth because we always thought that given your presence in that market, 3% to 5% might be on the low side of what that business could actually achieve is obviously subject to a lot of macro factors, everything like that, but maybe talk about how you're driving growth in Sample technologies moving forward?

So it's a very fair question and especially for us because it's clearly the DNA of this company. First of all, I don't want to be too long, but it's very important to highlight. We will never stop investing in sample prep, never. I know that some people believe sample prep belong to the past, many systems are completely integrated, which is not wrong, except belonging to the past. Why? Because it's a fundamental step in any biology run and especially in molecular biology. If you want to have a good result, whatever you say, HIV, oncology, whatever you want, you need to have a perfect sample prep. Second, because researcher, academic lab, life science activities, they are always needing new sample prep for new applications. Let's be clear, 5, 6 years ago, who was talking about the promises about microbiome. 2 years ago, 3 years ago, who was talking about plant analysis, soil analysis, development where you need very dedicated, very agile, flexible sample prep technology, and this is purely QIAGEN. So basically, the sky is the limit here in terms of new application. Key activity, sure, the market is not growing at double digits. It's probably 3% to 5%, as we said, but it's long-lasting customers, long-tail customers and high-margin customers. So how did we drive that? First of all, we leverage a market leadership, both on manual techniques and automated techniques. And I know that when COVID started, many on the market were saying, oh, this is very dangerous for QIAGEN, it might be a challenge to their market shares and so on. Many people are going to come. I mean, we need to see that post-COVID, we are much stronger in Sample tech than we were pre-COVID. Our numbers are growing at double digit for the non-COVID application, which is really proving that what we have been doing for the last 3 years is paying off. Ond what have we been doing? Only company in the world with a systematic program of upgrade of our instruments, one after the other. The first one, QIAcube became QIAcube Connect 3 years ago. The second one, EZ1 became EZ2 Connect last year. Third, we are also upgrading our QIAsymphony. And fourth, I won't go in many details today, we are already developing a new approach for other markets in Sample tech more to come in some months. So a fantastic, basically coherent effort into automation based on what we had on the market already. The only company in the world with probably more than 20,000 systems dedicated to sample prep. And in addition to that, we continue to invest into new application, as I said before, small applications, sometimes small volume. But once again, high-margin microbiome, liquid biopsy, digital PCR, sample prep, all this is very much growing. And this is explaining our performance at the moment.

Got it. Maybe shifting to digital PCR. The market has shown rapid growth. You launched QIAcuity, I believe in October 2020. Maybe talk a little bit about the competitive landscape into digital PCR and how QIAcuity is positioned versus peers?

So first of all, you are perfectly right. It's a very high-growth market. It's interesting to see that since we got into that market, some of our competitors started to give extraordinary numbers on the size of the market and its growth rate. QIAGEN believes that at this moment, this is, let's say, $450 million market total, digital PCR. probably growing at 20%, a bit more than that per year, which means that before 2 years -- before 3 years for me, this market is at least $1 billion. This is what we have to highlight. Beyond 3 years, this market is probably around $3 billion market. So it's significant. And make no mistake, you will see year after year, this activity at QIAGEN being one of our growth drivers, and I give a target for this activity not at low double digit, but I had double digit, I see it over 20% year after year. When we got into the market, as you said, 3 years ago, a bit less than that, but okay, we were extremely differentiated in many ways. First of all, we are not using the typical technology called a Droplet Digital PCR. We have another proprietary technology. Second, compared to competition where you had to piecemeal different instruments to run a workflow in digital PCR, we were the first company to come with one box sampling result out, and we didn't launch only one system, but 3 systems at the same time for 3 different throughputs, 1 plate, 4 plate, 8 plate. Why is the word 1 plate? Very interesting. It's not a system where we have the best pull-through per system. But QIAGEN is currently the company which is literally democratizing access to digital PCR to thousands of labs in the world because it's so easy to use, so convenient and the cost efficiency is fantastic. So technology-wise, then after, because of that simplified workflow plus our technology, we are much quicker than any other competitor in the world. I mean, time to result for QIAGEN is around 1 hour and 1 hour slightly above that. For most of competitors, it's 3 to 5 hours, and that's a significant differentiation. Now obviously, the objective is what continue to complete the menu. I talked about the biopharma menu last year, why is it important? Because biopharma gives you access to high-throughput customers. The 8-plate customers, significant throughput on every system. Second, develop that system for the clinical market. I talked about it. It will be done in Q1 of 2024. So we have basically competitors of different size. One is very known. It has created the market of digital PCR, kudos to them. But I do believe that this system, QIAcuity, is better from a technology standpoint, from a throughput standpoint. And as a result, there's no arrogance here, we need to give that system the objective of becoming the #1 on that market. It's not #2. It's not #3. It's #1 on that market.

Got it. Maybe talk a little bit about the dynamic of reagent rentals versus capital sales. You said last quarter that placements reagent rentals were preferred versus sort of pure capital instrument sales. Any insight into your thought process there and how that's resonating in the current environment that we're in right now?

Yes. So starting end of 2021, and especially in '22, many among you or other investors were very concerned because they were saying post-COVID because of the influx of capital expenses in mini labs, this will basically shut down. And I fundamentally disagree with that, not because I want to be optimistic, it's because by experience, on average, there is no fixed rule, but labs in the world are renewing their instrument on average in well-accepted numbers every 5 years. You might have lab, they have more money, they go faster. Some others, they go slower. But let's say, 5 years is a good average. What I said at the same time last year and I confirm that is that my bet is that at least for the coming 2 years, because indeed of that significant amount of spending in the last 3 years in instrumentation, labs will go much more to instrument placement, reagent rental or lease. But it's not an issue. We have been doing reagent rentals for more than 20 years. The key to success in reagent rental is making sure, and I highlight that because check with many other companies, it's not always the case, is making sure that, one, you have a clear contract with your customer; second, you have a volume contracted in that contract; third, you monitor how it goes and you do not hesitate to take back placement when it's not basically fulfilling the promises of the contract. This is what -- exactly what QIAGEN is doing. So it's factored in our revenue. This year in our budget and in our guidance, we have a much higher ratio of placement versus capital sales. It's more than 80% in our numbers. I see that numbers going down progressively, probably still strong in 2024. And then when we are going to completely swallow that COVID basically by '25 or '26, it might be better from a capital sales standpoint. This is the way I see it. It's not a decrease of instruments on the market. It's another way of dealing with them.

Got it. I think it would be helpful just given your presence in some of the different end markets, sort of what is your view on sort of the end market demand as it relates to academic government, biopharma. Where are you seeing some of the reluctance? Obviously, there's been a long called-out issue with the merchant biotech, where there's less exposure on your front. But maybe it would be helpful to kind of give your sort of high-level view on end market demand?

So first of all, I would repeat the same that I invite everybody, and I don't want to be facetious, but to keep always a cool head and look also at the mid to long term. You are not judging a market on a yearly basis, let alone on a quarterly basis. And so, we need to look at trends. First of all, I think COVID has proven 2 fundamental things, especially for a company like QIAGEN. One, is the critical relevance of diagnostic in the health care value chain, unprecedented. Second, is the superiority of molecular techniques in the diagnostic value chain. So yes, at the moment, because of volatility, financial volatility, economic volatility, sometimes geostrategy volatility, we sense that some customers are, let's say, a bit cautious on spending. Who is not? I mean, we are also very cautious on spending because we want to control our P&L. But I have not seen clear stop of projects saying, okay, we clearly divert from that. What I see sometime is decisions that are postponed. People want to know a bit more about how the economy is going to unfold. A key criteria for us is to always look at what's going to be the budget of the NIH, for example, or the CDC or some agencies in the world. For what it takes, we budgeted for 2023 that NIH will probably go up by 3%. This is exactly what they did. Even during the discussion, during the debt sealing, I have never heard about basically clear challenge on that level of spending. So in some of our activities which is very marginal and not impactful on our revenues, for example, we sell some bioinformatics solution to biotechs. And we know that they are sometimes a bit struggling for funding at the moment. It's not really impacting, but we noticed that once again, they don't stop their projects, they ask us to postpone or to spread the expense over a different month. We can do that. So overall, I remain extremely, extremely positive on the growth of diagnostic. It is up to us, by the way, industry of diagnostic to constantly remind the public authorities, the government, the NIH, the CDC, the HSS of the world that it's worth investing into activities, and that's what we are doing at QIAGEN. And obviously, there is a significant volatility out there. It's not just on our customers, it's on all of us, but we can navigate it. We can navigate it. Last year, suddenly in a matter of a week, it's not big for us, but still $16 million of revenue disappeared. Russia, because we immediately decided to suspend our activities. We basically were agile enough to find other ways and to compensate. Last year, because of the volatility of inflation, we didn't pass on price increase as we do every year. We passed 2 price increases, one in January as usual, another one in July, much stronger. So we need to be like bacteria basically. We work with them all the time. It's to constantly adjust to the environment and keep that flexibility. That's basically the key success factor for me.

Got it. And maybe shifting to China, which has been a big topic this week. Just to level set, that's sort of 6% to 7% of sales. So not a significant portion, but given your presence in your history in that region, how are you navigating the dynamic in the region? And what are maybe some sources of incremental upside or risks in China over the course of this year?

So first of all and no arrogance of complacency, but I had the privilege to live and work in China for 4 years. So nobody knows the market. It's such a vast country, but it's always -- it gives you basically a hands-on perspective. Pre-COVID, if you would have asked me, what does a company like QIAGEN should expect from a growth rate perspective from China? I would have told you double digit, probably low double digit like 10%, 12% systematically because the market became the second market in the world, diagnostic-wise, in a record amount of time, and the internal level of demand in the market was quite significant. If you would ask me the same question now, I would tell you, 6% to 7% expectation. Why? One, is the confirmation of the trend that has begun more than 10 years ago, this country has decided to create a significant number of local champion and fully master and own their health care provider system. It's not the only country in the world who did that. The U.S. did that many years ago. The French did it. The British did it. That's not surprising. But in China, it is very acute at the moment. What does it mean? How does it translate? If you are not able to prove that you have a part of your activities localized in China, you can be literally excluded from local tenders purely. And it will come more and more now to national tenders. The beauty or the challenge is that you will never find any definition of what localization means. And it's on purpose because it allows them to be extremely pragmatic and decide as per, obviously, their need. But this trend is not going to stop. It's translated also on complete unfair treatment, let's call it "unfair treatment" when you go to register your products in China. As you remember, there has been 0, I insist on 0, COVID test from foreign origin approved in China compared to the number of tests from Chinese origin approved for COVID in the U.S. or in Europe. There has been no vaccine for an origin approved in China. Nothing COVID has been -- but if you submit today a product to the NFBA -- NMPA, I'm sorry, which is the equivalent of the FDA, for a foreign company is going to take you between 4 to 5 years, minimum 3.5 years to get it approved. If you submit it as a local company, it's going to be 1 year to 1.5 year, a scale at that. It's a fact. It's not an invention. Third, pricing are very low at the moment in China. And I'm not sure that, that trend is not going to stay for some time. Why is it so low? Because a lot of Chinese companies have been making millions with COVID, but now there is -- they're coming at a point where there is much less demand, and so they try to dent their extra capacity at very low price. So it's not rare even in molecular products, which are normally more pricey than others to see products in China at $3, $4 or $5 a test when they are $15, $20, $25 in other countries. Fourth, because they will continue to impose pricing pressure, especially on foreign companies, it's what we call the so-called VBP program, volume-based pricing or volume-based purchasing, it started with pharma. It is not impacting molecular techniques at the moment, the clinical chemistry, immunoassay and so on, the classical activities. But it will come at a point. Let's make no mistake. So it will come also to molecular. So what are the options? You need to localize. You need to localize your activities, everybody is doing that. We have an R&D side and develop -- and manufacturing sites in Shenzhen. Where I think QIAGEN is a bit more, let's say, agile potentially than some of competitors is that not only have we started to localize some of our activities, but we also have a second brand in China, which is a brand completely independent from QIAGEN, consolidated in our numbers, but it's different management, different sales force, different marketing. QIAGEN China is headquartered in Shanghai, that brand is localized in Beijing. And there, we sell only Chinese product to Chinese laboratory. That helps. However, clearly, now my stance on China is cautious. There is an added element of prudence, which is, I don't know, clearly, in a very humble way, what is going to happen in the U.S. and Chinese relation or in China and Taiwan, I don't know. So I prefer to be cautious. We cannot ignore that market, big market. We do the necessary local investment, not too much because IP is important as well. Let's not forget that. And for me, it's a market that deserve basically a 6% to 7% growth attention in the coming years. Nothing more and nothing less.

Got it. That was really helpful. Maybe in just a couple of seconds we have left, just capital allocation in terms of M&A versus buybacks, how are you thinking about that?

There is no -- it's not exclusive. Clearly, QIAGEN has a long history of both buyback. We are used to do that. We might do another one this year. I think the real question on buyback, it's not what, it's when, given the economic environment. As you have seen for Q1, we have a significant flow of revenues from interest at the moment at QIAGEN. So I mean, it's going to basically normalize by the end of the year when it's going to come to maturity. So -- but why not? Buyback is a good signal of trust and confidence in your company's performance. But let's be honest, I mean, it doesn't create growth in the long run. So what creates growth? It's smart M&As and so the same. We will continue as intense as possible program of M&A, mainly bolt-on. But as I've said for the last 3 years, M&A at QIAGEN will never be used to spread the company FIN again. M&A should be reinforcing either our core business or the 5 pillars of growth. Now the question is bolt-on or bigger. We have such a strong balance sheet that we can consider both. But once again, it's the same criteria. It's not for the sake of doing M&A, it has to make the company stronger in the 5 pillars or in the core business. So thanks a lot.

Great. Thank you very much, Thierry. Appreciate it.

Thank you.