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

All right, great. I'm Catherine Schulte. I cover life sciences and diagnostics here at Baird. Very excited to have QIAGEN here joining us today. From the company, we have the CEO, Thierry Bernard. So thanks so much for joining us.

Thank you, and thanks for your attention and interest in QIAGEN. Thanks.

And we're going to dive right into Q&A. So if anyone from the audience has any questions, you can send it to [email protected], and I will pass it along. So maybe to kick things off, just talk about your outlook for '23. I think the back half of the year, guidance implies 6% CER growth, which is markedly better than what we're seeing peers with instrumentation headwinds, China, I'm sure we'll get into. But maybe just talk about the differentiation of your portfolio versus what we're seeing across some of the rest of the tools space.

Sure. I think to understand the full year '23, we need to come back on H1 as well and Q2, which I qualify as a very solid quarter where the company again exceeded guidance both on the top line and on the EPS. And with some topics of good satisfaction. Obviously, the core business growth, H1 was 10%, which is probably putting QIAGEN at the very top tier of growth stories at the moment among peers. Inside that growth percent, significant highlights such as QuantiFERON at 28%, for example, or the placement of instruments, which continue to be quite healthy across different product portfolio, digital PCR, syndromic testing, even Sample tech. But obviously, we had some challenges as well in H1. One of them was across business. I think even if we were conservative for 2023 on the level of COVID testing, we have all been surprised by the very brutal deceleration of COVID testing, especially in the second half or starting the second half of Q1. So we had to take that into account, obviously, for the second half of the year. Also, I think it's not just QIAGEN, but we were, at a point, betting on the kind of sequential improvement of the Chinese market situation, not only the Chinese economy, but also the Chinese health care market, it's not happening. And also, we had a specific challenge that we highlighted in our Q2 result, which is the volatility. We always qualified it as a volatile but of our OEM business. Which is basically big sales of bulk deliveries to a limited number of customers. So we always have year-on-year some base effect, but it's nothing structural. As a result of this and taking into account also the volatility of the environment, we adjusted, slightly lowered our guidance for the year, but still posting more than 8% core growth for the full year, which is again situating QIAGEN in the very top tier of growth stories. Our new guidance fully factor the fact that our OEM situation for '23 is not going to improve. We are not factoring any kind of improvement on the COVID side. We believe that COVID will stay as it is, regardless of potential surge of contamination or new variants. And last but not least, we are not factoring any improvement on the China situation, at least for the year 2023. So if we can execute on that, it will be, I think, a rather good performance for the core portfolio, which is very solid. The conclusion of '23 is that despite that volatility, the fundamentals of the QIAGEN -- of the company are very, very strong.

And so for COVID, you talked about lowering expectations for the year in this last quarter. Just remind us of what the baseline was in 2019? And as we get into '24, are we pretty much behind the COVID headwinds?

Yes. I think, first of all, in an effort to allow the market to really understand the performance on COVID once the pandemic started, we always told you that we had part of our portfolio pre-COVID of products that were not used for COVID, pre-COVID, obviously, but then were massively used for COVID, post-COVID. And we always said we highlight that because this part of the portfolio, once COVID stops, will stay in our revenues, obviously, but for other applications than COVID. I hope it's not too complicated as an explanation. And this business was around $143 million, pre-COVID, $143 million, say, rounded $150 million, okay? Full COVID business at QIAGEN in 2022 was rounded around $500 million, which means that the pure, pure COVID testing was around $350 million. For 2023, we took a conservative approach. I remind you that we were probably the first company back in 2021 to fully decouple our P&L from the COVID volatility. We always said this is not going to be long run. This is going to be volatile. So the focus is on the non-COVID. But anyway, for 2023, we said it's going to be probably around $200 million to $220 million, including once again, the previous $150 million. And here was -- even if some people were telling us at that time, December, January, it's a bit conservative. It was not conservative enough. Because the real number will probably be between $160 million, $170 million, including once again the previous $143 million. So what does it mean for the future? As we always said, we are not going to take any assumptions on COVID for the coming months or for 2024. If there is a new surge of contamination, we have the products to answer the customer needs. If we need to bring back some contractors to increase some manufacturing, we will do that. But it will not be in our numbers. And even the distinction between non-COVID and COVID numbers is going to disappear because it's not relevant anymore.

Okay. And maybe on China, you mentioned it in response to the first question, but maybe just walk through what you're seeing there? Differences between the Life Sciences side of your portfolio versus Diagnostics.

So, we have been extremely coherent, I think, on China for the last 4 years, at least since I was asked to take this position. I will never have the arrogance to say that I know China, but at least I've been working and living there for more than 5 years. And I must say that none of what is happening now is new on this market. And I'm sometimes a bit surprised to see, Oh, China is becoming more challenging. First of all, the market itself. There is no doubt it's a big market. In a record time, less than 15 years, it became the second market in the world for life science and clinical diagnostics. So it's a big market. But it's a very specific market. Specificity number one, is that there is a clear political ambition to localize that market as much as possible. So what does it mean? China favors local champions and local companies. Second, China pushes foreign companies to localize activities in China, either manufacturing or development. The beauty here is that you will never find a single definition of what local means in China. And it's on purpose, it allows the Chinese authorities to pick and choose, obviously. But this movement will not stop anytime soon. And even if you can claim that you are completely local in China, i.e., you have manufacturing, development, the full cycle, it's not guaranteed that you are going to be authorized to participate to tenders. Second, delays in registration. The equivalent of the FDA in China is called NMPA, submitting an approval for a foreign company in China means at least 3 years and it's at least with local clinical trials. For a local company, approval comes in 1 year, roughly. So there is a clear also disadvantage. Third, VBP, volume-based pricing. It's not new, has been created to target pharma companies and force them to lower their prices in China. But let's be clear, it's going to come in diagnostics as well. It came already in immuno assays and clinical chemistry. It will come in molecular biology. So what does it mean? So this market, pre-COVID, could be bringing on average, 10% growth year-on-year to a company like QIAGEN. And post-COVID, it's closer to 5% growth expectation. This is not going to stop anytime soon, that preference given to local companies is not going to stop. Second, the market will take quite some time before recovering because post-COVID, the Chinese market in diagnostic is quite depressed from a price standpoint. Why? because many companies, local companies in China have accumulated a significant amount of manufacturing capacity during COVID, and they need to put that to play now. So they are pouring the market with products on very low price. What does it mean for QIAGEN? Obviously, we cannot ignore a market of that size. Once again, it's the second market in the world. But we need to keep a cool head and be quite cautious. We have local manufacturing capacity, and we have capabilities and R&D capabilities, but we are also very cautious on local IP there. We also have a second brand in China, which is differentiating a bit from the rest of the competition. We have a company fully owned by QIAGEN, selling locally made product in China to Chinese customers. And they are operationally fully independent from our QIAGEN activities in China. That helps. But once again, over the long run, I think we will be much better, much more opportunities with our Life Science portfolio. And in clinical, I believe only our QuantiFERON portfolio will have significant expectation for growth. That's how we should see it. And as I said before, I expect basically a 5% growth in a normalized environment from China.

So for that 5% growth, should Life Sciences be more like high single digit and Diagnostics slower growth?

Absolutely.

And maybe on the OEM side of the business that you talked about and not expecting that to get better this year. I guess how much visibility do you have into customer inventory levels or when normalized ordering should...

So we have obviously -- so once again, to better understand it, what are we calling OEM at QIAGEN? It's sales to a very limited number of customers, very identified but large amount of revenues per customers and bulk deliveries. And so we have intense discussion with those customers, some of them being competitors of QIAGEN to whom we are delivering enzymes, oligonucleotides to develop their own product. And so once we have passed, and I think it's going to last until the end of the year, that phase where they were expecting higher inventories and building higher inventories to answer the demand for COVID. The demand of COVID, as we said, is falling down. So obviously, they have less need to order, I see the normalization coming in '24. So that business is roughly $80 million at QIAGEN and it will be like this in '24 as well.

Yes. Got it. And maybe on instrumentation, I think you still expect pretty healthy placements for the balance of the year. So can you just talk about any conservatism you see in spend from customers on the instrumentation side and maybe how your reagent rental model has gained traction or maybe helped position you better versus peers?

So first of all, the QIAGEN situation, I mean, we have a typical razor/razorblade business model. So our exposure to capital sales is rather limited. I mean, instrumentation is 10% of our revenues, whereas consumables and services are around 90%. But when the market was challenging us over the last 2 years saying, post-COVID, there will be a significant slowdown of instrument placement. I always challenge that because I've been in that business for 20 years roughly, and on average, it's not a scientific number, but on average, labs are upgrading or renewing their instruments every 5 years. It's a rolling movement all over the world. What we said, and I stick to that, is that post-COVID -- because of what happened in the investment during COVID, post-COVID, the ratio placement versus capital sales will be much more in favor of placements. And this is exactly what we are seeing now. We haven't seen a significant number of customers stopping projects. But sometimes, they come back to us and saying, "Look, I know that I told you that I would buy the system, but it's a bit more difficult than expected, can you place it?" It's fine. We are used to basically place instrument for many years. The obligation that it's creating for QIAGEN is to be extremely precise in monitoring the profitability of those placements. Because as you all understand, placing an instrument means that you are adding to the normal price of the consumable, the depreciation of the instrument, but the instrument remains on your balance sheet. So basically, we need to make sure that we have a clear contract, a clear volume and that if the customer doesn't achieve that volume, we bump up the price. That's what we are doing. So it's absolutely fine. Second, remember that 50% of the business of QIAGEN is Life Science, 50% Clinical Diagnostic, clinical -- like 50% Life Science. You do not place in Life Science. It's still capital sales. So I think we are pretty protected. And again, when they want to place, we can do it, if they postpone some of their investment, okay, we wait, but we will be there the day that they will trigger and take a decision. So...

And as you think about all these moving pieces and the underlying end markets, for '24, you've talked about being confident you can grow above market. Any expectations for market growth we could see next year? Is the 6% CER growth in the back half that you're expecting? Is that a reasonable jumping off point as we think about next year?

Yes. But let me give a bit of color to that, if I may. So first of all, you might have seen since -- for the last 4 years since I took over, I mean, something is very important for me, which is what I call realistic ambition. I don't believe in aspirational numbers, and I don't believe in big superlatives. So you have heard me saying quarter after quarter for the last 4 years. It's a solid quarter, we delivered. We have systematically delivered on guidance, quarter after quarter since end of 2019. And when we said starting 2021, we will grow our core business by 10%. We delivered on that as well. When the market at the beginning, was saying, are you sure, are you not a bit -- no, we did deliver on that as well. So what we are seeing for the last -- at least 1.5 years to 2 years is that we believe that we have the portfolio. We have the people to grow above market growth. Already, once again, if we deliver on the 8% for the full year, it would be quite a significant performance. For the years to come, it's fair to see QIAGEN above market growth, which is 5% to 6%. So in that range. If we execute perfectly, which means every plan launch is on time, every development is on time, which is not always easy in our business, you can potentially add 50 or 100 basis points to that, which is also meaning that when we think about M&A, we are basically targeting companies that could help QIAGEN getting closer to a double-digit growth rate because we believe that it's still an interesting case on this market. And this is what we are looking for.

Yes. Great. That makes sense. You touched on QuantiFERON earlier. It's been a standout for growth so far this year. How sustainable do you think these types of growth rates are? And maybe any comments you could make on the competitive landscape.

So with the risk of sounding arrogant, I hope it's not the case, but QuantiFERON and QIAGEN or by QIAGEN, it's kind of business school case study. Because the problem of being #1 as we are on this market, is that you can easily become complacent and arrogant. And basically, it has happened to QIAGEN on HPV 1, some years ago. And this is a completely different story. Way before the market was talking about PerkinElmer buying Oxford Immunotec our then main competitor. Way before the market was talking about bioMérieux, for example, launching a TB test on VIDAS or as I hear now apparently some rumors about Roche coming into that market. We prepared all those development and we took many actions to significantly raise the barriers to entry on that market. What did we do? First, and it was my first initiative when I joined QIAGEN in 2015 is automate the back end of the test, and this is the partnership with DiaSorin, which is extremely successful. And in addition to that, any time we convert a normal QuantiFERON customer to an automated, we do it at a premium price. So it works because customers are seeing the value of that automation. What people sometimes forget that not only did we fully automate the back end of the test, we fully automated also the front end of the test with agreement with Tecan and Hamilton, which is meaning that regardless of whoever comes with a solution in that market, we will always have the full universal automated workflow for [indiscernible], number one. Number two, we have systematically invested into making that test better. Back in 2017, we launched what we call the QuantiFERON fourth generation, which was adding CD8 into the test to make it even more specific and sensitive. And so there is a continuous improvement of the product itself. Third. Obviously, strategically, we think at a point later, TB testing might plateau at a point. But that's why we created new development for that franchise. And it's once again the partnership online with DiaSorin, and we expect to have our Lyme assay approved by the FDA by next year. And if we can have -- having during the summer, obviously, that would be quite significant. So those are proactive actions without even waiting for competition to say, first of all, we protect and we allow it to grow even faster. Second, with QuantiFERON, it's 20 years of medical education on the market of publication, clinical data, it's more than 100 million of patients being tested by QIAGEN here. So obviously, no company is immune completely to the entrance of competitors. But I think on this one, we are very prepared, and it's going to be a tough challenge for any kind of newcomers. Let's not forget that it's not an easy test to develop. It's not a traditional immuno assay test. One of our competitors or would-be competitors launched a test 2 years ago -- a year ago, I'm sorry. Only to withdraw it from the market 2 months after because the test was not at the quality expected standard. It's not an easy test to develop.

And you talked about if you execute perfectly on new product launches and it could help take you to outgrow the market by 50 to 100 basis points I guess as you think about the next 12 to 18 months, what are 2 of the kind of biggest product launches that you see for QIAGEN?

It's not necessarily product launches, but we believe that for growth drivers, definitely digital PCR will be significant for QIAGEN. Why? Because we have a very differentiated solution and also because after launching it 2.5 years ago for Life Science, we are doubling down starting 2024 by launching it for the clinical application, which means that our digital PCR solution would be FDA and IVDR approved by end of Q1, and we will launch our first regulated assays on that platform for clinical use, oncology by end of Q2 of 2024. So this will help. And when you see the current performance in less than 2.5 years, we were able to place more than 1,500 systems on the market in the middle of COVID, quite a performance. So this one clearly -- second, syndromic testing by QIAGEN is really taking market shares and when we claim that we would be #2 in that market, it's not aspirational at all. When I see the growth of our GI panel, meningitis panel in Europe, it's very encouraging. Of course, now we need to complete the menu in the U.S. But if we have it, is going to help. Last but not least, let's not forget that even if the sample prep growth rate of the market are much more limited, it's a very recurring and solid business for QIAGEN. It's sticky customers with significantly high margin. So we have a strategy, which is basically focusing on 5 pillars of growth. What is important for this company is to continue to focus. We are a mid-cap which means that any time we invest in R&D, the objective should be to take between the #1 and the #3 position on the market we target. And this is what we need to continue.

And for Sample technologies, could you maybe talk about the opportunity for some emerging applications like liquid biopsy or microbiome?

So this is one of the strengths of QIAGEN because, first of all, I think we are the only company on the market still insisting so much on Sample tech. Second, because the breadth of our offer instrumentation-wise or application-wise, has no equivalent. I mean everything including QIAsymphony, EZ2, QIAcube, it's more than 20,000 systems on the market. Second, we continue to develop applications for -- you said microbiome, for example, but soil analysis, plant analysis, very, very specific once again, small volume, high margin. In a couple of weeks, once again, there will be the disclosure of the Nobel Prize winners in medicine and chemistry and so on. It's always a race that day at QIAGEN because it's, who is going to find the first picture of the noble prize winner with the picture of the QIAGEN box behind her or behind him, and it's systematic. It's systematic. So hot topics where we are going to obviously play something significant, liquid biopsy, you said that. Natera, for example, is one of our biggest partner for Sample tech. But for example, minimal residual diseases in oncology. This is obviously the new growth factors for sample prep. Continuing to invest into also what I call the kind of universal sample prep for next-generation sequencing, for CRISPR and for also digital PCR as well. So I think not only is the DNA of the company, not only it's the history of the company, but I also believe it's part of the future of the company, clearly.

And then maybe on capital allocation, how should we think about your M&A strategy going forward from here?

So the simple analysis shows that we have a very solid balance sheet, extremely solid balance sheet. Very small leverage at the moment. So we have significant firepower. QIAGEN has always been doing a lot of bolt-on acquisition, and we should continue to do so. Never acquisition for the sake of doing acquisition, it has to fit the strategy. It has to complete and help one of our portfolio to grow faster. But it's also fair to say that the due diligence that you have to do for the bolt-on acquisition is the same that the one you have to do for a bigger acquisition. The post-merger integration work that you have to do for a bolt-on acquisition is exactly the same. So it takes a significant time without always moving clearly the needle for the company, you see. So what does it mean? That with our balance sheet, we should look as well at potentially bigger opportunities. But with 3 key criteria. Once again, it has to make sense with our strategy, it's not to spread the company thin again. It could be to basically make Life Science even more relevant or the specialty Diagnostic position in QIAGEN, even more relevant. It doesn't have to be necessarily molecular, but it has to be very close to molecular, creating synergies in customers that we are visiting, number one. Number two, it has to be adding growth potential to our CAGR, as I said before; and number two -- number three, obviously, we can always spend a bit of dilution for some time, but it has to be quickly accretive to our P&L, obviously, clearly.

A couple of minutes left. We're going to close with 3 questions we've been asking each company that we've had here. First one, you might have answered it to some extent earlier when we talked about new product launches. But as you think about the next 12 to 18 months, what are the 2 biggest opportunities that you see for QIAGEN?

I think we covered that slightly before. I think digital PCR clearly and syndromic testing, especially if we get the approval of -- there in the U.S. those are definitely 2 key growth drivers. Yes.

And then on the flip side, the next 12 to 18 months, what are the 2 biggest potential challenges that you see for the business?

I mean one, which is basically a common to many companies. I think no company is immune to the environment. I think we are a bit protected because we are in health care, but obviously, there is a significant economic, financial, geopolitical volatility. Just to give you an example, last year, in 1 day, and we are proud to have done this, I mean, we suspended our activities in Russia immediately. I mean was not a big exposure, but it's still $17 million or $16 million of business disappearing from 1 day to the other. So this instability, obviously, is something that we try to factor and navigate and weather. And the second, I think as I said before, there are some markets where I think we should have a clear attention because I don't see significant improvement. China is one of them.

Yes. And then last one, what is something that investors and/or analysts don't ask you about very often, but you wish that they would.

I would say you're not going to be happy with that. I would prefer to add some time more questions on the long-term strength of the company. You see some time. And I understand the environment is complex, but it's very sometimes short-term driven. We have proven the market with that we are able to weather the environment. When we had the hyperinflation context last year, we passed 2 price increases. We are going to pass another one now. So we know how to deal with the environment, however complex. Sometimes longer-term strategy and the fundamental, this company is a solid company, and we have proven it systematically for the last 4 years. The fundamentals are there, and we are in molecular biology, where a diagnostic company needs to be, it's the place to be. It's the market to be. It's the growing market to be.

All right. Great. Well, with that, we're out of time, Thierry. Thank you so much, and thanks, everyone, for joining.