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

Okay. Thank you very much, QIAGEN. We've got here. We have Roland Sackers, the CFO; and we have John Gilardi from Investor Relations joining me on the front here. Perhaps, do you want to say a few quick words of introduction just on the quarter thing and then we'll get started.

Yes. First of all, thanks, Peter, for having us today, and thanks also for joining us. It's quite obvious that we are quite happy to be here. And again, I still recall -- I think it was now 2 years ago when we had to -- after first COVID, we had first physical meeting here.

4 years ago -- 3 years ago.

Time goes quickly. And so it clearly worked out to be a quite significant conference in the meantime. If you have -- if you recall our recent releases, I would say QIAGEN overall had a very solid start in the year, also the third quarter was a good quarter for QIAGEN. We were able actually to be the boss in terms of revenue growth and in terms of EPS growth. We also confirmed our full year guidance in terms of revenues as well in EPS. Clearly, given it a quite significant and probably even more difficult market environment ending this year, then we move into this year. We all deal in an environment where macro changes are happening more or less every day. We have situations like China, but also now, again, in some other Middle East and some other regions, which makes clearly doing business also in healthcare, more difficult. At the same time, of course, particularly we at QIAGEN are quite happy that 85% of our business is a consumable-driven business. That means our consumables are literally must use every day in every lab from the -- all the way from applied testing, pharma, biotech, all the way into clinical and also, of course, academic research. And as long as people do not start and customers do not start laying off people and significantly reduce volume in their labs, it's a very resilient business. I'm now long enough in our business and survived 3 recessions. And the good news is we always had positive growth rates during that period. Scale is slightly different. If you look at our instrumentation part around 10% of our business is instrumentation-driven. Here, I would say we see 2 different trends. On the one hand side, that's probably true for us, particularly on our NeuMoDx instrument, which is a large-scale instrument, instruments north of $100,000 price tickets are clearly more difficult to sell in this environment, particularly also given that we, as many other companies, did a good job over the last 4 years during COVID and selling a lot of instruments to our customers. Here, it's rather a question of keeping under the utilization. On some of the other instruments, plus particular our digital PCR platform and also our QIAstat platform who rather have price ticket somewhere, let's say, between EUR 30,000, EUR 40,000. We actually see quite normal business. Same sometimes are have beneficial trends like our digital PCR platform. Here, we see a trend that a lot of our customers actually starting with digital PCR because that enables them to replace much more expensive sequencing firm in the pharmaceutical environment and a research environment because why should you do something with sequencing, there's a machine cost, again, significant 6-digit dollars, but also each one is in the thousands and takes weeks if you can do it with digital, because you know exactly for what you're looking for. You're not looking for the unknown information. That's the reason why that business was growing 40% more or less in the last quarter. Last but not least, Peter, before I give it back to you. Also other parts of our business are doing quite well. Good example is our Bioinformatics business. Another quarter with a 20% growth rate. Scale of business where we also believe going forward, has a significant future. There's clearly a consolidation going on in that industry, in that part of the industry, and we want to drive that as well. With that, Peter, all yours.

Thank you. I should have said really to the start, if anyone has a question, within the audience, don't be afraid to lift up your hand, happy to take any questions from the audience as well. So we'll come back to, I guess, some of your busy segments and your mix. But just, I guess, you're the CFO, let's just stick with the financials for a minute. Can you just talk a little bit about the margin side in terms of the key levers you can pull to achieve your margin goals and how we should think about sort of the optimum level, particularly of R&D trending over the next few years after you obviously continue to invest in those pillars of growth?

I think, first of all, I think it's fair to say that QIAGEN clearly has one of the industry-leading margins -- margin profile at all. I do think it's something that we also developed nicely this year. And if you look at our guidance for the full year, you can see that we most likely will end the year with an EBIT margin, let's say, 27-plus percent. I also do expect there is margin expansion for next year. But again, it has different driving components, I would say. One more challenging point for us this year and probably also, to a certain degree, next year is clearly on the gross margin side is utilization because we, as many other companies also built out capacity during COVID as we had to. And with more or less COVID testing at least coming to the end of Q1 this year, there's a quite significant underutilization. That will take some time to go into that. Probably something that will happen over the course of '24 for sure and '25. So I would expect gross margin to expand -- gross margin probably for next year being more at a similar level what we have seen this year, expand in next year. This, I would say, much more leverage opportunities for us on the OpEx side. As we said before correctly, we accelerated even a couple of R&D activities. Right now, R&D expenses is around about 10% of revenues. Normally, we are on 9% of revenues. I would expect that also to normalize run rate for us going forward. We even have more leverage opportunity if it comes to SG&A. I do think here a couple of underlying trends continue to be very helpful for us. So overall digitalization of our industry, QIAGEN in the meantime has somewhere between 60% and 70% of revenues coming in via digital channels. We are able to build that out further. If you look on our next-generation level of machines, which we are rolling out as we speak, they're working a bit like in the good old days and always say is the hotel minibus, you take something out, you get reorders to get built which, again, is important for a company like us where 85% of our business are recurring consumable sales. It is a significant benefit for each sales rep if he doesn't have to write recurring orders every month but rather can work, for example, on lead times for instrumentation. So on margin level and margin expansion for next year, we will be higher than this year.

And then another key topic for this year has been the OEM business. Can you maybe just talk a little bit about, first of all, explain I guess, to some people who -- what the OEM business is? And how has that impacted this year's sales, particularly? And I guess, what the impact would the underlying growth ex that would have been this year?

Thanks for that question because I do think, Peter, it's an important question, because it's clearly something that is impacting us this year quite negatively. Last year, we had, I think, on about $175 million in revenues. This year, we expect around $90 million. But it's a very untypical business for QIAGEN and why we are at all in that business. When we are talking about OEM business, we're only talking about 2 components, 2 products. One is enzymes and others is oligos. Why we at all in that business because, again, it's not the typical QIAGEN kit business, it is because we use oligos and enzymes for ourselves. And we bought them prior COVID more or less, to be independent from other suppliers because large suppliers in that area are also some of our competitors and negotiations were not always easier ones at. And then during COVID, there was clearly a significant rise on some of these products because they are part of any kind of test. That's the reason why this number moved up to $175 million, because we were selling at the end of the excess capacity. Now with COVID coming to a significant end, at least COVID testing, COVID, I'm not sure. COVID testing towards significant end, that number has to normalize. Just to give you a basis, pre-COVID number was $75 million in revenues. For this year, we expect $90 million, as I said before, so there is a, I would say, a certain number, which it could go down. I'm not guiding that today because it's hard to say. I don't think we also have a fair opportunity to keep it in a level and to grow it again, but that is to frame it a bit.

That's clear. And I guess the other region that comes up a lot in questions with investors as well is China. Can you talk a little bit about QIAGEN's strategy in this region? And what you see as the sort of longer-term outlook for China?

Also here to frame it a bit. China for us is around about 6% of total, just to make it sizable. Second, one thing that is unique to QIAGEN, and particular unique within QIAGEN, and China is the only country where we have a dual brand strategy. That means on the one hand side, we have this very well-known global QIAGEN brand, and roughly 40% of our revenues in China is with a local brand where we develop, produce and sell in China only. While we have that business, very fair to say in 2002 or 2005, we bought our single largest copycat and we developed it nicely. And so that is clearly also why we see today, I would say, the different impact you have as a (local company) and as a global company. Overall, we clearly see that this trend, which is not only to in China, but clearly quite painful in China right now. On the one hand side, having significant macro challenges. But politics, which (clearly favors) local, national brands and so on has an impact and requires companies like us and probably even more the even larger organizations to more or less think about their going and how to work in China strategy. Of course, one thing is also very clear. China right now is the second largest healthcare market. And I think we all believe that China earlier, later will be the single largest healthcare market. And each company by itself has to decide, does it want to play in that market, and does it believe that it can play in that market. And that means you probably have to reset your strategy a bit and just seeing as a sales outlet is not long term, good enough.

And then, I guess, focusing for a minute on capital allocation. I mean, you've -- in the past been opportunistic for acquisitions. They've been relatively modest in recent years, I guess can you just talk a little about what your hurdles are and how you sort of think about this? Is this something we should still see from QIAGEN in the future? Or is it becoming tougher to find deals that you find attractive and accretive?

Yes. I do think we did deals over the last years, but basically, we did it in a way we typically like to do them, meaning bolt-ons, very focused additions, incremental additions to our portfolio, in all fairness we also have been quite busy around COVID over the last few years and getting that more or less solved. It's fair to say that we have a healthy balance sheet. We have net debt-to-EBITDA below 1. So we believe, going forward, we will continue with our capital allocation policy as we did in the past which is a combination of share buybacks and bolt-on acquisition and, of course, investing organically into our business. It's also fair to say that over the last probably 6 to 12 months, particularly for our company, which functional currency is U.S. dollar. The mass really didn't work too much for share buybacks, because if you get interest rates from 5.5%, we'll have a reasonable share price, you even sometimes end up to having a dilution out of that. So again, as interest rates might change into the lower end going forward that might change as well.

And then thinking about -- could be moving to some of your product portfolios. Let's start with probably is obviously the biggest and the bread and butter of your business, sample tech. Can you just talk a little bit about what the main drivers of the growth are of the sort of low to mid-single digits aim you've talked about over the sort of mid- to long term? And I guess particularly as well, can you within that, talk about QIAsymphony, where I think you've got a sort of second gen coming to market potentially next year?

Yes. As you said, sample preparation is clearly a business where we, as QIAGEN, are quite proud of. And I think you and other analysts and also investors believe that we have, I don't know, let's say, a 60-plus percent market share, and clearly, COVID overall was helpful for us expanding that market share. So one thing which also fundamentally has changed within QIAGEN, it actually goes back to 2019 because, as you know, from 2016 to 2019, we were significantly focusing on developing our own sequencer, which unfortunately then hits the wall. But also that time frame, took a lot of our R&D focus away into that. With 2019, we were refocusing also, again, a lot of our R&D efforts on -- particular also on sample prep, QIAcuity digital PCR and others. And that is quite beneficiary also right now in the way we can address the overall sample preparation market. So as you said, we were able to launch in the last couple of years also new sample prep machines. People always think sample prep for us is just a consumable. It clearly also has an automated component. While still the majority of our sample prep revenues are consumables and clearly also manual consumables, there is an ongoing conversion. And here, of course, the updating of automation is being very helpful for us. I'll give you one example. A typical lab has sample routine, let's say, 10 or 20 different sample prep application. That means, depending on which kind of biological sample you have sputum, saliva, blood, and for which kind of information you're looking, you need a slightly different product. As I said, QIAGEN has by far the most comprehensive portfolio here. Now you -- in the past, you did all your manually, now you buy a machine. You have a 6% market share. Let's say, you do 10% of -- now you do all your 10 different samples things on a machine. 6, you can do in a QIAGEN machine. Over time, you're going to ask yourself, why has to do this for manually if I can buy them from QIAGEN as well? So while we are still growing that business, there's also a lot of even penetrating more of the market because we are clearly the one company with by far has the largest portfolio.

That's clear. And then let's move on to QuantiFERON, which obviously is, I think, surprised everyone with the growth so far year-to-date, maybe even yourselves. Can you just talk a little bit about, I mean, how sustainable is this growth rate? And sort of what is the key drivers of this growth? Has this really seen the acceleration, particularly over the last few quarters?

The QuantiFERON is our latent TB test, and clearly, a great franchise, as you said, and crossing $400 million in revenues this year with a growth rate probably north of 20%. For the last 4 years, we've over -- 3 years, we're always guiding 10%. We always reached 20-plus percent. So I'm probably most likely guiding to 10% next year as well. Let's see how that works. But what is driving it? First of all, what people forget TB is still one of the single largest health spreads in this world. There's more people dying from TB than from HIV and hepatitis combined. We sometimes forget about that. Second, 65% of the market is still a 120-year-old skin test. So we do not have to create a new market. We have to convert a literally 120-year-old skin test to a newer technology. The skin test is quite ineffective if you live in a Western world because most of us in this room has young, younger kids got this BCG vaccine, and the skin test, we all know is you get an injection on your skin and you either develop a bubble or not. So specifically around that is 50-plus percent where typical test we sell is like the typical 99-plus percent. So conversion is going on. And as we all know, diagnostics is a very sticky industry. If you introduce a new technology, it takes you a long time to convince people that the newer technology is a better technology to us also since 2012. Now where you have a market share, let's say, of 20-plus percent, you become the new standard. So big guys are using your products and everybody else wants to offer it as well because you want to be competitive. And this is exactly what we're seeing more and more customers starting with it because it is something that customers demand. What we're also seeing is that the world is clearly asking for it. Big market for us is clearly mandatory testing, back-to-school testing, back-to-work testing in a lot of areas, like if you go to the Middle East, it's a mandatory testing, immigration-based testing. If you want to have a worker's visa in U.S., you get tested. So there's a lot of refugee crisis in the world, most likely they are not going down, unfortunately. There's clearly market opportunities around that as well. That's the reason why I do think it's a healthy market for us.

And then can you talk a little bit about automation. Obviously, that's been a driver, too. And I think, obviously, the key question for many people's minds is the relationship with DiaSorin and the future of that. But that's also, I guess, related to that, can you talk about as well, Lyme disease, which I think is the new areas where you could potentially go into with this platform and partnership.

As I said before, we are very happy with overall partnership with DiaSorin because they clearly have a leading platform. It's a LIAISON platform where our customers could run the QuantiFERON test on. And yes, there's reviewing period, now end of this year, where we can see if you more or less go forward with exclusivity, add somebody else, talk about financial terms. Nevertheless, they are really great partners, and we are pleased with them. I do think there's other areas where we can work with them together. We just were referring to Lyme, which is clearly a nice opportunity as well because we'll have it approved in Europe, but the single biggest market is clearly the U.S. as well. The way we are going to sell that is slightly different because we have an existing Lyme product on the market. What we're going to do is to combine both products. And so they have to drive the FDA approval, we expect that hopefully sometime next year.

And then let's move on to another one of your platforms recently the syndromic testing of QIAstat-Dx. Can you talk a little bit about your ambitions, I guess, for that portfolio, obviously, how differentiated is it versus your competitors? And what are you doing sort of to build a longer-term market share within the syndromic testing market?

Yes. So first of all, I think it's important to say that we are very happy with the overall performance from QIAstat-Dx because it wouldn't be difficult to argue that post-COVID platform where respiratory was clearly a big driver should have significant negative growth rate. But the matter of the fact is that we were able to even to compensate the COVID revenues quite quickly with other tests. We're selling more or less the same number of placements every quarter, 150 to 200 instruments quarter-by-quarter, and also with an increasing volume on testing. Nevertheless, I think it's also fair to say, to argue, we have to expand our menu. That will be also a focus of our R&D strategy, not only this year and next year. The next big launch is the GI Panel for the U.S., which has to come up soon. But we're in the meantime, I would say, a solid #2 area, clearly ahead of everybody else. There's also a very good #1 player, but our instrument has clear advantages. It has picked on time, 45 to 60 minutes. And probably most important, it's a cartridge system, it's not a pouch system. And no dry eyes, no spilling, easy to exchange, also very different cost of goods sold. So we feel quite comfortable.

And then, I guess, moving on to digital PCR, where obviously, you've entered this market as well against a very entrenched sort of competitor, so to speak. Can you talk a little bit about the opportunities here and how particularly -- which figures of segments of the market is QIAGEN focusing on within digital PCR to maximize the value you can bring there?

Bear in mind that we more or less barely 2 years in that market and reaching $70 million in revenue. So I think also here a good start, good placement numbers, but it's fair to say that we start in the market only focused in the academic environment, which by definition is rather in terms of pull-through smaller accounts. And just recently, we added biopharma panels to our portfolio. We're still going to increase that going forward. And we will probably even give more insight on our Capital Market Day next year on what exactly the pipeline looks like. But what that means is that we are now able to address also larger pharma clients, as I said before. And that actually accelerated growth. We had 40% growth in last quarter, placement numbers, but also one rate on the platforms. And we do believe that also here with the expansion of menu, we have a fair chance to be -- become a good player and probably quite soon place as many instruments per quarter as existing #1.

And then I guess, finally, I think we've got a minute ago, we got to touch on the last one, NeuMoDx. Can you talk a little bit about -- I think you said that there might be a review of this business you're considering it, obviously benefited a lot during COVID. How do you think about the NeuMoDx platform and what that could bring to QIAGEN longer term?

As I said, NeuMoDx is clearly a platform which has a significant benefit from COVID. Last year, 2/3 of the revenues were COVID-related, 1/3 were non-COVID related. With the world deciding in Q1, there's no COVID testing anymore or significantly lower COVID testing. There is no platform in this world who can compensate that in a 12-month period, if 2/3 of your revenue is going up in smoke. The non-COVID business is growing sequentially quarter-over-quarter. And I think you will not find any customers saying that the NeuMoDx platform is not an outstanding platform. Turnaround time, one, however, everybody is at 4 hours, significantly lower consumable pull through, all the features we have to have continuous load in a random access, a great platform. But I think that is a disadvantage we're having. We have a full menu ex U.S., but we have a very limited respiratory-only menu in the U.S. And that is clearly a disadvantage we're having. We have to decide in the next few months how we deal with that, if that is something what we develop ourselves, partner with somebody, selling it, just focusing on Europe, everything is on the table. We have to see what it comes up. It is an important decision for QIAGEN as well.

That's very clear. With that, we've run out of time and is there anyone who has a dying question they really like to ask Roland? No, I think I'm afraid we've hit the clock. Thank you all very much for attending. Thank you very much, Roland and John. Thank you.

Thank you very much.