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

Okay. Thanks, everyone, for joining us this afternoon. A pleasure to have QIAGEN with us. From the company, we have John Gilardi, Head of Corporate Communications and Investor Relations. And I'm Vijay Kumar, the life science and med tech analyst at Evercore. John, thanks for taking the time to be with us this afternoon.

Thank you, Vijay. It's a pleasure to be here.

So maybe I want to start with like a big picture. When I just look broadly look at life science tools, whether it's biopharma exposure, reagents, instruments, all of your peers have had some or the other issues cite a challenging macro environment. Yet when I look at your business -- I mean, you guys have done remarkable, right? Your Q4 guidance, I think, is for mid-singles top line. [indiscernible] a pretty tough about mid-teens comp. So maybe just talk about why QIAGEN is seeing perhaps different trends versus peers? Is this like a business mix difference, something else that's going on with QIAGEN?

Well, it's not me, it's our salespeople around the world and hats off to them for the performance they've done over the last couple of years, especially getting us through the COVID pandemic and showing the relevance of QIAGEN. And when you look at us 3 years, 4 years on now, what we've gone through in the last couple of years, we're much stronger, operationally stronger in a better position than we were ever before. And I think what comes down to your point is the resilience of our portfolio, and that's what we keep pushing as the QIAGEN story. 85% consumables, 10% instruments. We're a business where we're driving -- we're shipping more than 2.5 million to 3 million kits a year to our customers, starting with sample prep, which is the core of QIAGEN. It's the first step in any lab process. That's what gives us the gross margin we have in the high 60% range, gives us a very -- one of the highest EBITDA rates that you'll see in the industry as well, good strong cash flow generation and some interesting portfolio of products that are driving that.

And when you look at your end markets, is there any -- obviously, you have biopharma, you have government academia exposure, right? Have all segments grown? Or is there any differential across the portfolio?

We're seeing growth across the portfolio at different rates. The thing to remember about QIAGEN is that we are a business that is about 50% in life sciences. These are the customers that we say want to win the Nobel Prize. They want to come up with a new drug. They want to find the criminal. Those are the 3 things we say about that side of the business. And that's why it's so important to see what funding is. Of that 50%, about 20 percentage points is academia. You'll find our products in every lab around the world. Every year, we have about 2 to 3 customers that will win a Nobel Prize. We've had over 35 Nobel Prize winners as customers in the last 10 years. Then about another 15% to 20% of our business is in pharma. This would be spread really into big pharma down to small pharma. We don't have this heavy exposure to emerging biotech or these types of funding issues that you're seeing some people call out. We are not involved at all in bioprocessing. But I would say our products are being used primarily in R&D and classical R&D work in labs around the world. Then you move into the remaining part of that Life Sciences business. This would be what we call applied testing. These would be non-health care applications of our kits. The primary areas here would be human identification and forensics. QIAGEN is one of the top 3 players in this market around the world. Every 10 seconds around the world, there's a crime scene being analyzed with one of our kits. We have a lot of exciting products in that area that we can dig into, including next-generation sequencing, where alone in the last month, we've seen 2 cold cases in the United States. One of them was a 50-year-old murder that we've been able to solve using genetic information to be able to help identify culprits and bring resolution to families. So that's the 1/2 of our business. And we're seeing good -- we're seeing decent growth in that side as well on a non-COVID basis. The other 50% of our business is human health care. If the first side is all about funding and breakthroughs and new technologies and what's the novel breakthroughs, the molecular diagnostics side of the business is clinical health care. It's about reimbursement. It's about profitability. It's about how can I take the products of competitors, A, B and C and look at the total cost of ownership to process a test, whether it's HIV, hepatitis C, TB tests or cancer screening, whatever you're trying to get done as a lab, where can I make the highest margin spread in terms of the reimbursement against that business. This is a business that where you have big customers like [ QIAseq ] LabCorp. You have a lot of regional labs around the world that we're serving. Obviously, our big products here would be QuantiFERON for latent tuberculosis testing. That's approaching $400 million of sales this year. Even though we're barely penetrated only about 35% to 40% penetrated alone in the U.S. on that market. We're also a big player in cancer screening cancer detection, companion diagnostics that help guide treatment decisions for a lot of the big drugs. There we have partnerships with literally 25 top pharma companies around the world. And then the third area would be infectious disease testing that would involve our QIAstat-Dx platform for syndromic testing as well as NeuMoDx for integrated PCR testing.

Got you. And sorry, just when you look at those 2 parts, life sciences versus diagnostics, are boat tracking at that mid-single level for Q4 or what are you assuming?

When I say for Q4, I would say for the year, you see right now on a non-COVID basis, the molecular diagnostics business doing better than the Life Sciences business. Here, you're seeing the impact of QuantiFERON really taking off. QuantiFERON is, again, the latent tuberculosis test. Remember that there are 2 forms of TB. There's the active form where there's about 10,000 to 12,000 cases a year alone here in the United States and then our test is used for the late detection and latent TB is a disease estimated to affect about 1 in 4 people worldwide. And of those people who have latent TB, about 10% of those will convert to active TB. And that's what's causing the replenishment of the TB population in the world as the efforts to fight TB are increasingly focusing on both latent and active. It's amazing today that a disease written about in the Bible still is the leading cause of infectious disease death in the world. More people die of HIV -- more of TB than of HIV and malaria combined. And this is a disease that's getting renewed attention in this post-COVID environment because the COVID pandemic set back the efforts to eradicate TB by at least a decade. So this is a $1.5 billion market opportunity for us. There's about 70 million to 80 million of these skin tests done a year. Everybody in the room has had one. Even your kids have had them going to school. Think about that as a $20 test, starts to give you a market opportunity and we're at about $400 million of sales. So this is a product this year that we have said before, has traditionally grown about 10% to 12% a year. This year, we're tracking above 20%. So that's really going through a solid growth phase here as we're seeing more and more conversion in the post-COVID environment due to the benefits of our test and also the ease of processing test with our partner DiaSorin.

Absolutely. I do want to touch on [ TB ]. But before we get there, you did mention 15% of your portfolio is instruments. One of your peers, I think, recently mentioned book-to-bill in that part was now turned positive or about one? Like does book-to-bill matter for QIAGEN? Maybe just talk about the macro environment, what you're seeing.

I got to tell you, I wouldn't even know the book-to-bill number for QIAGEN, to be honest. I wouldn't even know where we are in terms of order inventories because the instruments we're selling range and price somewhere from $15,000 for a very -- $15,000 to $20,000 for a very small sample prep instrument or for a one module of QIAstat-Dx system, our top of the line systems run somewhere around $100,000 to $150,000. What we have said though is that the higher ticket items, let's say, 75 and higher. Those -- the market for those has slowed down in terms of capital spending decisions or reagent rentals, whereas the smaller instrument placements have been doing better and also for our digital PCR system. That's due more to the technology upgrade cycle going on that digital PCR is really starting to roll out and gain some traction here.

Got you. And does is you got -- did your Q4 guidance assume any year-end budget flush? Like does it matter for QIAGEN?

Budget flush will help us at times with consumables and some instrument purchases there, but we were not expecting heavy budget flush this year in terms of what we were looking at. we continue to take a more cautious view on the academic spending environment in the United States. Let's see how the discussions come out in terms of where the NIH budgets will land because there's a fairly big delta between what the Senate is expecting versus what the House wants to do in terms of the -- Senate wants to spend more and House has been signaling that they want to see budget reductions, if I'm not wrong.

What happens in a flat NIH budget scenario?

Well, I think that's where you're seeing companies in our industry start to guide for lower sales growth rates in 2024. Part of that is taken into effect the overall macro environment is becoming tougher, but also more cautious spending trends among customers. And we went through that during the sequestration years as well. And we'll have to see how that plays out, but that has a -- that has -- we can sense that in our sample prep business. Sample Prep is about 1/3 of the sales of QIAGEN. It involves the kits that we sell, thousands of different types of kits [indiscernible] to be able to get DNA or RNA of any biological sample, that's the core of the QIAGEN brand. That's where our brand is used, it's inverted by customers to QIAGEN as a sample. That's a business where you don't see really consumable stocking trends because the -- we made a mistake in teaching our customers, conditioning them that we will ship kits to them in 1 to 2 days around the world. Here is an area where we ship probably easily over 2 million boxes a year. And this is a really critical step that customers get the good quality DNA or RNA out of the sample. They're paying usually per sample prep in a kit somewhere between $5 to $15 or $20 a sample. It's not a big ticket item in the lab, if you think about what a sequencer cost, but it's critical, again, that they get the high-quality DNA, and that's why we show up in more than 20,000 academic research papers a year.

Understood. And just -- since you brought up sequestration, what did the business do back? Did the business like grow like. Did you get ...

We were able to gain market share. We can tend to do better relative to others in a down environment because you need to do sample prep. But it's obviously the water is come down for everybody.

Yes. Understood. And the other big picture topic has been pharma. Some of your peers do talk about destocking. But again, like I think when you say 15% to 20% of QIAGEN revenue is pharma, my sense is it's slightly different. Maybe talk about what you've seen in pharma customer base so for year-to-date, how is Q4 tracking.

I can't talk that much about Q4, but I can say that tracking in general has been pretty good with the pharma customers. Remember, again, we're not that big ticket item. But what you're hearing is that, okay, with the Inflation Reduction Act coming, companies are going out and saying they want to save x billion in terms of procurement costs, then the suppliers are the ones we're going to have to face that. It's a question as where can you maximize that. Sample prep, again, is not an area where you see people going penny-wise pound foolish.

Got you. So would you say pharma is actually growing for QIAGEN this year?

Pharma should underlying for us where we should grow because you're seeing underlying QIAGEN, we're expecting around 8% non-COVID growth for the year. Obviously, like everybody else, we're facing massive COVID headwinds. We have rebased that business this year. we expect around $160 million to $165 million of COVID sales. We were among the first to come up with this category. And I have to say we stuck with our definition through thick and thin compared to some of the other companies out there. And that's something that we see as very important to build credibility, but I would say we were the company that actually had COVID sales before COVID. Remember that in 2019, we had $143 million of sales from products that were redeployed for use during the pandemic. QIAGEN was and continues to be the gold standard for the centers for disease control in the U.S. and for other public health agencies around the world for sample prep and these workflows that they have for pandemic outbreaks. You saw that during the Mpox as well. And these products were then redeployed for use during COVID, that number blew up to. I think the highest peak we had was $200 million in the year, well over $200 million. And now that's come back down. That number has come down this year stronger and more forcibly than people expected at the beginning of the year. If you remember last year, this conference was virtual, we were still in a pandemic environment. And then sometime during Q1 '23, COVID testing or respiratory testing kind of fell off a cliff and then we started to see the tougher macro trends come out during Q2 of '23.

Understood. The -- I guess, the other topic that's come up has been China. What is QIAGEN's exposure to China? And how is China grown for QIAGEN.

Well, China for us represents around 6% to 7% of total sales. And we've been in China for many years, and this is a business that also involves Life Sciences and Molecular Diagnostics. The approach we take in China is that we sell the Western brand QIAGEN products into the country. But we also sell through a local brand where we have a China for China strategy, where we produce in China for China, and then we bring in the products. We do not manufacture in China and export out of the country. But obviously, as for every company in our sector and for many companies around the world, China is an important supply chain partner for us as well. And that's why we've built up inventories of certain products and supplies so that we can withstand any supply chain shocks that should emerge in the unstable environment we're seeing these days. For us, we see China in a non-COVID business right now as a low single-digit declining business for us. We've been doing fairly well, again, due to the consumable nature of our business and also that sample prep business. And we tend to take a more cautious view of the midterm growth prospects in China from a macro environment, not necessarily QIAGEN specific, but more from the overall macro picture, we tend to be -- take a more cautious conservative view.

But when you say a cautious conservative view China, does it mean China growth is in line with corporate below corporate.

We haven't made a prediction about where the future is going, but you got to remember that China for us in the past used to be a double-digit growing business. And all of a sudden, that's gone worse than flat. And that's the question is what's that midterm trend going to be and we'll start to talk more about what we see in '24.

Understood. RB, I guess, for China, should it grow in '24?

We're not ready to make predictions there. I would say, overall, we feel comfortable where consensus is right now of '24. We stood that publicly. And that would still position QIAGEN as delivering bottom line -- the top line and bottom line growth next year and some margin improvement.

Got you. And sorry, when you say consensus, that's for overall QIAGEN.

That's for overall QIAGEN. And we're going to get rid of this COVID, non-COVID.

And sticking on maybe one last one, John, because you did bring up QuantiFERON, I think China is a pretty big market. How big is QuantiFERON in China for you guys?

China is actually a marginal market for us on QuantiFERON. The sales for QuantiFERON largely track what we're seeing in terms of geographic split among the regions with around half the sales in the United States, another good 1/3 in Europe, maybe a little bit more and then less than 20% in Asia Pacific, Japan, including China. The QuantiFERON test is really an industrialized test market test. You're dealing with very specific groups of people that have to be tested on a routine basis for latent tuberculosis. The first group would be health care workers, doctors, firefighters, nurses, paramedics, depending on which they're working in the United States or the country regulations are going to be tested on every 1 to 3 years in terms of TB exposure as part of their OSHA workflow or infectious disease testing for employees. The second biggest group of people that are tested are what we call congregated living. These will be people who are in nursing homes, universities, prisons, any intake into a U.S. prison, you're going to get TB tested. You're also going to see military in that group. The third biggest -- a third area, which is also a very big is back-to-school testing. That's why our business with QuantiFERON Q3 tends to be kind of a high point in terms of high watermark. That kids are routinely tested during different ages in terms of getting their school physicals. And if you ask any parent who has the choice between would you rather do one visit in a quick blood draw and get the results done? Or would you rather have to bring your kit back to the doctor a second time. It's a pretty clear answer in favor of QuantiFERON. The fourth group is what we call clinical testing, and this is actually probably maybe half the market overall where we are today. There are a lot of drugs if you're watching the DTC ads on TV where you'll hear them talk about TB testing required before the test is done because the QuantiFERON test, what you're looking for, such as anti-TNF alphas chemotherapy, type 2 diabetes, renal impairment, these types of people. If they have latent TB infection, they have a much higher risk of converting to active TB because the body's immune system with latent TB has the bacteria in a headlock and is waiting for some kind of immune system modulation or suppression to be able to spring into active form and then spread. And so that's where a lot of those drugs require TB testing or monitoring patients before they go on to a certain type of therapy, and that's where we also have a market. But again, good half, if not the majority of testing, is not reimbursed. So that's -- recession-proof business is required by law. And I would say, sorry, the 1 group I forgot to add into there is immigration and immigration in terms of formal immigration into countries such as in Europe or in the United States requires TB testing to be able to get a green card or to be able to get citizenship. And then obviously, right now, we're in a situation where, unfortunately, we have a refugee crisis in the United States. And fortunately, we're having the same issue in Europe that's causing active TB outbreaks and is causing more need for testing, especially with the Ukrainian crisis that we have in Europe since the former Soviet Union is one of the hot beds or pockets of active TB. TB eradication is so critical from a public health perspective, because we're now at the point where we're getting what are called multidrug-resistant extreme drug resistance and even totally drug-resistant bacterial strains of TB that are circulating around the world. And again, as I mentioned, this is the leading cause of infectious disease death in the world and is a major target from the WHO and from the UN.

You mentioned historically, this business, QuantiFERON has grown double digits this year, well north of 20%. Was there any inflection point that drove the acceleration?

I've been watching this product for over a decade since it's been part of QIAGEN. I remember when we bought it in and it had about $15 million, $20 million of sales, and we paid $300 million for this business that has since generated over $2 billion of cumulative sales. So I remember some of the sell-side reports, you were always nice [indiscernible] VJ, but there are certain sell-side guys that I have the -- their reports stuck away in a file to remind them of this acquisition. But I would say it's been a product that we're still, honestly, in the early innings in terms of what this can mean for QIAGEN in terms of the growth. What we tell people in terms of modeling that going forward, is probably a 10% growth rate and you can beat us if we deliver 20% again. But to your point about inflection, you see at certain points in the past, it was rather linear and you get into these, what we call elevator shafts where you start to see conversion in certain pockets where a market will start to convert itself, and that's what we're seeing in this post COVID environment. We are way beyond COVID testing catch-up. What we're at a point now is where the price for the skin test, which is the competitor, which is the 120-year-old skin test, the price for the material that you inject into the arm for the test has gone up considerably in price. There are very few suppliers of that. And so the price differential is not there as an argument not to use QuantiFERON. And then the ease of use has really come to the forefront because you have a lot of doctors who -- and nurses who don't have to see the patient anymore to get the test requirements done. It's just a simple blood draw, and I had the results in 24 hours. It's no longer a flip of the coin and the visual inspection of a skin test to be able to get the results.

And did you say like half the tests are still not being reimbursed? Are there any reimbursement?

No, it's not a reimbursement issue. It's because it's a cost. If I'm a hospital or a university medical center or I am the county fire department. I have to pay to take care of worker screening, to be able to tick the box on workers that have to have certain health care worker screening done. And that's where I remember I was at the Ellis County Public Health Department in 2013 and I asked her, what do you think are the benefits of this QuantiFERON over the skin test and she looked at me, she said, "are you dump or stupid?" And I said, "What do you mean". She said, "do you know how hard it is to get a fire station shift to come back 48 hours later to do the skin test read or paramedics or firefighters or to get homeless people to come back for the second visit on these tests." That's what drives the QuantiFERON. But those are not being clinically reimbursed. Those are costs, and that's where we provide a cost-efficient way for these organizations, the U.S. military, Federal Bureau of Prisons to be able to take care of these testing requirements and get it done, and it's a very sticky business.

Got you. And maybe another related sort of diagnostic question on Lyme disease test. Where are we? Any updates on this test? How should we think of adoption?

So QuantiFERON is a technology you used to detect latent diseases in the body that means the disease is present in your body. The bacteria that's causing the disease is in your body, but it's stuck in a headlock, it's not replicating DNA. So you cannot use a PCR testifying the pathogen, but you can ask the immune system, have you been exposed to this pathogen before, and we're going to measure T cell response to be able to determine if the pathogen is in latent stage in your body, Lyme disease is another disease beyond TB where we have an application in development. We have the approval in Europe. We're now working on reimbursement. We are -- our partner DiaSorin, with whom we work to do the automation work on their liaison platforms, they have more than 10,000 liaison platforms worldwide that can run QuantiFERON. They are taking care of the submission. That hopefully will get done, and we'll have an approval by the end of 2024. So the problem with Lyme disease is that -- I think some of you have probably known someone has lyme disease, it's not necessarily going to kill you, but it can cause very severe neurological problems for someone. The problem with this disease is that somebody gets the tick bite, they go to the doctor, the doctor says we're not sure what it is. And you're supposed to come back later for some testing, some diagnostic testing in a couple of weeks. But often people forget or they come back too late. So what Diasorin offers those types of tests. And they are also not very specific in terms of finding the disease. With QuantiFERON, we've been able to show that we can do an earlier detection of the disease in the Borealis pathogen in the person at a much earlier stage and allow for treatment decisions to be made much earlier and hopefully get better patient outcomes. This is about a $300 million market in terms of testing for Lyme disease around the world. And this is a expansion of the QuantiFERON technology. We do offer other types of tests for QuantiFERON for like cytomegalovirus testing, especially in pregnant women. We just announced a new version of the test being launched for Epstein-Barr virus or mononucleosis, which can lead to some health complications in certain people. So we're adding some different tests, but let's be clear. TB testing is a $1.5 billion market opportunity and growing, and that's the big shot on goal. And that's where we make the biggest public health contribution as well.

Understood. And what is your exposure to genomics and NGS, how big is that for QIAGEN?

So we report results in sales in 4 categories. The first bucket is sample prep and that, again, is about 1/3 of the business. The second bucket, which is also about 1/3 of the business is called diagnostics. That's where our QuantiFERON, our QIAstat, our NeuMoDx and also our precision medicine companion diagnostics are all located. Those involve regulatory approved products. The third bucket is called Nucleic acid PCR products. That's where our QIAcuity sales are booked and other products that are used in the life science research labs downstream of sample prep. The fourth bucket is genomics. This involves our business with products that are used around next-generation sequencing. So in that business, we have 2 parts of the business. We talk about what's called before the sequencer or the widget maker and what comes afterwards. In the -- before the sequencer area, we sell what are called library prep. These are panels used to extract genes of interest out of the sample and be able to get them prepared to go into the sequencer. We work in that area, we have the QIAcuity portfolio of products. This is going pretty well for us. Our products are known in terms of LOD, or limit of detection, that if there is something in a sample that you're looking for as a target, we have a much more -- much greater likelihood of finding it based on the sample size than competitor products. That's the way we sell our products. Then the products go into the sequencer, then out of that, you're going to get a bioinformatics file. It's just, to be honest, in certain ways, a glorified TXT file of Cs, Ts, As and Gs. Then you need software to be able to make sense of this genomic data that's honestly behind human comprehension. If you think about the gigabytes, the amount of data coming out of these sequencers it starts to become in terms of the exponential growth at staggering in terms of the amount of information being generated. We sell here software products that can be used with data coming out of any sequencer under the QDI brand. It's called QIAGEN Digital Insights. This is a business where we now have about $100 million of sales. We're clearly the largest player in this market, and we are also probably one of the only profitable ones, if not the only profitable one in this business, running a bioinformatics business with profit margins in line, if not better, than the group averages you're seeing, especially on gross margin. So we have some competitors in that area that they may have $20 million, $30 million of sales, but they have $20 million, $30 million of cash flow burn for the quarter. Yes. We're profitable, cash flow positive in that business. And we build up a portfolio where we are going to invest more into this business, we've said, we may even actually accept some dilution on it because somebody has to come in and consolidate and create scalable strong leader in this industry for bioinformatics. We're in a stage similar to when companies used to do their own in-house accounting software. And the question is, who is going to come up with the SAP, the Oracles, these types of systems to run to standardize scale and commercialize bioinformatic solutions. So we have 2 different types of products in that area. The first involves what's called secondary analysis, that's to be able to make sense of the data in terms of what is wrong in the sample or what's a variant of interest. And then you move into what's called tertiary analysis, and that's where you make sense of what is wrong that's clinically relevant and what is this noise? And then based on what you see in terms of the molecular fingerprint of that patient? What were the treatment regimens for other patients, what were the outcomes for those patients based on what they were treated with and what are the recommendations to drive treatment. That's the future of medicine. That's the future of sequencing. The future of sequencing is about the data, the applications, making sense of that and creating value there. And that's what we always wanted to get to, was to be able to make sense of the genomics data and help people before and after [ signature ]. That's why you see us working with Illumina, but also with Element, all the other -- Ultimate and all the other companies we have partnerships with all these companies in terms of sequencing hardware.

And's when I look at the genomics business that grew in 3Q, most of your peers are talking about challenges in genome X-ray. Was that growth mainly being driven by the software? Or do you see growth in sample prep as well?

Library prep. The library business, I think, saw some modest growth there, but bioinformatics, had a very strong double-digit growth quarter. And that's where we honestly wish there were more players in this industry that understood the value in the future of bioinformatics and the value of being able to help to unlock that genomic information.

How do you size that market, that software opportunity?

We think that's a market right now with probably over $1 billion of total market opportunity in terms of where you're seeing, there's a lot of small unprofitable players there with very high cash flow burn rates. The top 3 players still are probably below $200 million of combined revenues. And that's where we want to figure out how do you really grow and scale that business to create some critical mass?

How do you get paid in that business, John, is that like a licensing model or a per sample basis?

We look at both, but it's really a SaaS model.

Sure. And just maybe a big picture as price of sequencing comes down, do you see more dollars being shifted from actual sequencing to library prep and analytics?

Well, I would say the prices there are not dropping per se that much as they are in that area. So relative they stay high. But obviously, that's a business where, especially on bioinformatics it's really about the value of what we can offer and how we can support pharma companies. That's an area where we have, I think, 30 of the top 30 pharma companies, again, are our customers in bioinformatics, you have plant genomics that we're selling there. We're selling into human identification forensics, even genomic solutions there, where again, the value is for our customers and how do you make sense of the data, not necessarily always how you generate the data.

Maybe switching gears to margins. The gross margins are down, I think, close to 90 basis points year-on-year.

Till in the year.

Why our gross margins down? Because I mean, revenues have been pretty -- is this like FX or...?

No, no, no. I think what you're in a phase right now is where we are in the process of launching 3 new platforms at QIAGEN. QIAstat Dx, which is our play in the syndromic testing. That's again where you have a patient where they come in to the doctor -- a doctor into a hospital, they're in a pretty difficult situation, neither have traditionally a respiratory gastrointestinal or maybe a meningitis care and you want to take a sample and test that against 20 different pathogens and determine what's happening with the patient. That's going to be about a $80 million to $85 million business for us growing at a good 20% clip. We're trying to solidify our position as #2 in this market. We're approaching 4,000 cumulative placements of our systems. And then the second one we're launching right now is QIAcuity, that's our play into digital PCR. That's really been into life sciences, academia, biopharma customers right now. 2024, we're going to make the transition into the clinic into -- that's going to be really for oncology hematology testing. That's the first area you go after. That's a business that we have said should do about $70 million of sales this year, and that's the 1 that you're seeing some of our competitors call out as being a pressure point area for them. And that's, I think, if you're going to ask me what's the 1 business that people don't understand yet what it can mean for QIAGEN is digital PCR and in 4 to 5 years, the size of that business for QIAGEN in terms of the ramping because you're penetrating the $2.5 billion market opportunity of Q PCR testing and life sciences alone. This is moving from Nokia phones to smartphones. It does the same thing at the base, but you can get so much more out of digital PCR. If you want to move into areas of MRD or minimal residual disease, you want to start moving into oncology testing. These types of topics right away digital PCR to play there. The third area platform we're launching is NeuMoDx that is our integrated clinical PCR testing platform. Does it compete like with Hologic Panther or the Abbott M2000 or the Cobas systems from Roche. This is where you're having a system that's kind of like an iPad. You're running 20, 30, 40 different types of tests where you know what you're looking for one target at a time from the panel. This would be like for HIV, hepatitis C, hepatitis B testing, these types of tests that have to be done. That's a platform where we've honestly had challenges. The market changed significantly during COVID. This year, we're expecting around $40 million of sales. And we have said we are in a position now where we're going to look at the options for this platform going forward and different opportunities there because that is clearly not living up to our expectations.

Got you. So you would say the gross margin impact as mainly been driven by these 3 new product launch?

Yes. If we were going to take this out, we would be 70% plus. We had built up production capacity for kits and consumables. Obviously, we're at a point where these are in ramping stage, and we don't want to start the business. But if you take those away or even if you just take new [ marks ] away, that's a considerable pressure on gross margin. R&D is running right now around 10% of sales. That's on the rich side, that should move more towards 9% in '24 and then we're looking for SG&A savings as well going into '24 so that we can get some margin improvement. I'd say modeling for -- or thinking ahead to '24, we will have less interest income benefits because we're just going to have less cash in the bank because we're paying the process of paying back some converts. I'd also say that the tax rate, we've been public that the tax rate moves more towards 20% from the current level at about 18%. And I think one of the topics that's not being addressed enough across our sector, but in general, on the street right now is the impact of [ pillar 2 ] and what the OECD measures to create more -- minimum tax rate levels around the world is not getting enough treatment these days in terms of people fessing up is, honestly, the word say, is starting to think about what those tax rates are going to be on a go-forward basis.

Got you. And just maybe on fiscal '24. Given Q4 is mid-singles, exit rate, is that the starting point for next year? How we -- what are the plus and minuses for next year?

We say -- I mean The Street right now is consensus is around 4% growth, 4% to 5% growth. That implies taking that 8% non-COVID rate where we are today, and we're going to have to eat some COVID sales in '24 that we didn't have this year. Also, as part of our OEM business, which we didn't really get into, we've had some volatility there. That's a business where we cell chemicals only goes in enzymes to other diagnostic manufacturers and pharma companies for use in their own products and that's running some volatility this year and cost us easily 2 points of sales growth but -- and then taking into those together probably at least a good 2 points, and then you start the overall slower macro demand trends out there and that's where you see the street starting to come into a number around 4%. And we'll see what happens when we give a formal guide in early '24.

What's -- sorry, how much is COVID a headwind for next year? Is that still ...

Easily a good $10 million to $15 million. Incrementally, maybe [ 15 ] to [ 18 ], we'll have to see how the year goes, but there's clearly a COVID headwind -- from Q1 '24 to -- from Q1 '23. We saw like COVID testing and the COVID was still an issue, COVID still existed.

It still seems like we should expect margin expansion off of those.

We're looking for some modest margin expansion even off a lower base. But again, non below EBIT is where you start to see some real incremental pressure on the interest income line and on the tax rate.

How much does a convert payoff with the...

We already paid off this year $500 million of debt out of our cash reserves. And we have another $500 million minimum coming due in '24. And our leverage right now is still maybe 0.7x net debt to EBITDA. So we're still very under leveraged compared to our usual levels around 1.5 to 2.5x, given our strong cash flow and cash flow conversion, we can support the business that way. So we are looking at targeted M&A opportunities and to put the balance sheet to work also continue to look at buyback opportunities as well. We have authorization to do $300 million of buybacks through a reverse stock split and we continue to look at those options, continue to view the stock is clearly undervalued at these levels and frustrated, but we understand the overall macro trends.

And just -- sorry, below the line, what is the interest expense headwind because of the convert paydown.

Because we just have less cash generating interest income. That's what we're going to have there is the issue.

Okay. And maybe the last minute here, you did bring up valuation rate. I look at versus prepandemic. You have a higher revenue base. It looks like you're seeing a different trend versus rest of peers. Gross margin seem [indiscernible] that should be solvable. You're still promising margin expansion. What is the street missing? Like why is QIAGEN being lumped with rest of life science tools when other companies have cited macro pressures.

I think you got to realize that over the last 3 years after a busted deal, we've been out having to rebuild credibility and that means quarter-by-quarter, putting up numbers against the expectation. That's where we want to continue to do that. And then we think it's an execution point. I think the people want to see more durability in the overall growth and continue quarter-by-quarter building that confidence. What I would say, though, is that people need to really understand how digital PCR has the potential to really transform this industry if you're thinking about the next 5 to 10 years out and with the next company coming up with their play in that space as well for digital PCR, there's a very big opportunity between qPCR and next-gen sequencing. There was the point where we all thought next-gen sequencers could change our car tires. So the market was so hyped there. We're at a point with digital PCR, whereas in 5 years, I think that's going to be a very important technology that we're talking about at these kinds of meetings, but I'll be retired by then, hopefully. Fantastic. Well, on that fast endnote, John, thanks for spending the time with us this afternoon.

Thank you.