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

Great. Thank you, everybody. Thanks for joining us today. Welcome to the JPMorgan Healthcare Conference. I'm Casey Woodring from the Life Science Tools and Diagnostics team here at JPM. I'm pleased to be joined today by QIAGEN. We have CEO, Thierry Bernard, here for a presentation. We'll go through the presentation portion about 20, 25 minutes, then we'll jump to the Q&A session afterwards. So with that, Thierry, take it away.

Thanks, Casey, and good afternoon. For those on the line, I mean, good evening. I hope not too many good night or good morning, but it's a pleasure to be with you once again. And thanks for your interest and attention on QIAGEN. It's my fifth year now presenting together with you on QIAGEN. And today, I'm going to spend time explaining why what I consider to be a unique positioning of our company is helping us delivering for the last years, but especially also in 2023, a very, very solid performance. But let me start with an anecdote. A couple of months ago in September of 2023, I was invited in Cambridge in the U.K. to deliver a keynote on innovation in diagnostic and health care. And the audience was made of roughly 250 PhDs all over the world from emerging countries, developed countries. And at the point of the presentation, I candidly asked a question saying, who among you guys have ever used a QIAGEN product and especially in sample tech? And every -- thank you, sir. Every single hand was raised. And this really, more than ever, showed if necessary to me that our unique positioning, our leadership position in sample tech is helping us taking leadership positions in clinical and life science. For those of you a bit new with QIAGEN, let me remind you about who we are. For the last 40 years, QIAGEN has been developing molecular solutions for life science and clinical laboratories. It is quite fair to say that this company literally democratized access to molecular solution for thousands and thousands of laboratories all over the world. And especially with our so-called spin columns in sample tech, there is definitely in molecular biology a before QIAGEN and an after QIAGEN as well. And for the last year, especially from 2019, we are enhancing this unique position with a clear mindset driven by balance and focus. Balance across a smart continuum positioning between life science and clinical diagnostic, both are 50%, 50% of our activities. So balance in activities, but also balancing geographies with a worldwide presence. And this balance is fundamental, especially in the volatile environment because it always allows you to compensate for any kind of downturn on any market. Second and perhaps more importantly than balance, focus. QIAGEN is a mid-cap. A mid-cap has one fundamental challenge always, its critical mass. Therefore, where you are a mid-cap, roughly $2 billion revenue, 6,000 QIAGENers all over the world, it's fundamental to invest only where you can take leadership position between the #1 and the #3 position in the world. And this is why we came up back in 2019 with that strategy based on pillars of growth. But if you look at those pillars of growth, you also see that themselves are balanced. Two of them between already leaders on their market, and we want to strengthen that leadership, sample tech once again and latent tuberculosis QuantiFERON interferon gamma testing. Three others are made of highly differentiated solution driven by very dynamic market: digital PCR with QIAcuity, syndromic testing with QIAstat, and PCR in infectious diseases with NeuMoDx. I think that COVID-19 proved 2 things, among other things. One is clearly the relevance of diagnostic in the health care value chain. The second is the superiority of molecular diagnostic, either for life science or clinical, in the diagnostic value chain. And I know that given the volatility of the market for the last 2 years, some people are taking a huge swing in the assessment of our market, but I disagree with that. I really believe that we operate first in a very solid market. The key trends in our markets are undebatable, aging population, more testing; many diseases becoming chronic, HIV, for example, but also some cancers, more testing; infectious diseases issues all over the world; constant innovation pushing for more innovation in life science and clinical who was talking 6 years ago about liquid biopsy, about microbiome soil testing, and some others. So it's a very solid market. Two, on this solid market, we operate as a very unique company. And this is fundamental to always keep in mind. You know guys, when the name of your company start to be used as a verb, you understand that you really have a solid brand. And when I hear laboratory saying that they are QIAGEN izing their sample, it helps me again, understanding that thanks to that unique #1 position in sample tech, we can there leverage this position to take leadership positions downstream the molecular workflow. And this is why it's fair to say that as of today, we are probably the only company completely relevant from sample collection to data interpretation, from life science to clinical diagnostic, from laboratory to companion diagnostic with pharma company. And this is across the 3 key technologies in molecular solution: PCR, leadership position; digital PCR, leadership position; next-generation sequencing, leadership position as well. And so this unique profile for me does explain the performance of QIAGEN over the last years and especially in 2023, where it's fair to say that we are in a top, top tier of the growth among our competitors. We don't normally, at JPM, do not disclose the result of the previous year, but it's fair to say that what we have in hand now. Here, you see the numbers of the [9 first] months of 2023 that we are in a good position to deliver in '23 on our guidance, both on the top line and also on the EPS. And it will be another year of achieving results for our company. This good performance doesn't mean that we suddenly became a perfect company and we achieved perfectly everywhere. No, obviously not. In a challenging environment, we can also be proud of thinking that we have systematically delivered across all our portfolios. So a couple of examples. In sample tech, it's now more than 28,000 systems of QIAGEN over the world waiting and calling for more consumable everywhere. In QuantiFERON, it's beyond [ latency bid ], the launch of new application. If you saw our press release in Q3, the launch of Epstein-Barr virus after the launch of Lyme. In QIAstat, geographic expansion, menu expansions. In QIAcuity, its evolution towards QC testing for pharma companies, cell and gene therapy, and as we will see a bit later, move towards clinical diagnostics. So after a good 2023, we really believe that for 2024 and beyond, we are moving as a much stronger and solid company. But let's not forget that this came after 5 years of really hard work by the 6,000 QIAGENers all over the world. Let me take back some of you to the key milestone over the last 5 years. It's fair to remember that back in 2019, this company had literally its back against the wall. We were coming from significant changes in leadership, being approached by some strategic competitors. And we immediately reacted by proposing to change 2 key fundamentals of the company, the what and the how. The what, it's again that very focused strategy. The how, it's decentralizing QIAGEN and investing into and empower new managers. It's interesting to highlight that over the last 5 years, out of the 150 top managers of this company, between 40% and 50% are completely new. Then came COVID. Are we going to brag because this company stepped up to the challenges of COVID? No, we did the job. But what was very important with COVID for us is that COVID allowed QIAGEN to, one, significantly increase across all instrumentation our installed base. And now, this installed base is ready to take more consumables in the years to come, first. Second, to innovate and develop 10 new products, all of them with application way before COVID. A concrete example is wastewater testing, where QIAGEN imposed to the market digital PCR for wastewater testing. And obviously, wastewater testing is not just useful for COVID but for many other pathogens. This evolution allowed us post COVID to systematically deliver above market growth, our core business growing by more than double digit in many quarters. And now, we are going into '24 and beyond with a renewed focus on continuing that focused investment, keeping a strong eye on R&D -- I believe that a fair R&D level investment for a company like QIAGEN will be always between 9% and 10% of our sales -- continuing efficiency program -- we still have bucket of efficiency -- and obviously, building value for our investors. How we are going to do this? First, because the portfolio that we have built proactively over the years, is answering fundamental demands and needs from the market. Just a couple of examples. Liquid biopsy, minimal residual disease, all this is pushing for more sample tech innovation. We are there. Tuberculosis is still killing more than 1.6 million people all over the world every year. We are there. Digital PCR, more and more pharma companies are looking at this technology for companion diagnostic beyond PCR or next-generation sequencing for QC testing, for cell and gene therapy. We are there. And so on and so on. We are relevant for every key trend of the market. Not only are we relevant, but we continue to invest still with that focused mindset to strengthen those leadership positions. In sample tech once again, further automation, especially towards liquid biopsy. In interferon gamma and QuantiFERON, beyond TB with Lyme or, again, cytomegalovirus or Epstein-Barr virus. In QIAstat with a significant increase of submission for 2024 and in digital PCR that we are bringing now from life science to clinical diagnostic. QIAcuity next year will be FDA and IVDR approved, and we will launch our first assay in oncology with BCR-ABL. Another key investment that you might have seen recently in our press releases. I told you at the beginning of this presentation that QIAGEN was crucial and fundamental at the very first step of any molecular workflow with sample tech. Guess what? We are also extremely dominant and relevant in the last step and fundamental step, which is data interpretation, and this is our bioinformatic business, where QIAGEN is not only #1 in the market with $100 million revenue, growing at double digit per year, but unlike our competition, not only #1, but also a profitable number one. Some of you might be confused because last year, we disclosed to the market that we were open to a financial partnership with a private equity or financial partners to enhance the development of that business. There is no confusion here. We run that process. We discussed with mainly private equity. It allowed us, by the way, to understand even better the power of the knowledge base that we had been building over the last 15 years. But we never reached a satisfactory deal, something that we found or value for our shareholders. So we decided to invest organically into bioinformatics. Because for me, the question is how to accelerate. We could be complacent, $100 million, #1 position, 10% per year at least. This is not enough. I'm very convinced that the bioinformatic business, especially towards pharma company, has a very still significant untapped potential growth. And this is why it's key to invest in sales and marketing, in geographic presence, and in R&D fire power. This performance is also driven by a significant and disciplined capital allocation policy. We have an obsession with creating and returning value to our shareholders. In organic development, I said that before, between 9% to 10% of our revenues to R&D focused, once again, obviously; but also in smart bolt-on acquisition, as we have done for many years, and we will continue; and also in showing the market our trust in the future of our company by, as we communicated yesterday, doing a $300 million share buyback program. So as a conclusion and before the Q&A, if we continue to focus on our R&D investment across the continuum from life science to clinical diagnostics, where we can take leadership position between #1 and #3 in the market without hesitating to constantly streamline our portfolio -- because the main danger for the company like QIAGEN would be to spread the company too thin. Once again, we are a mid-cap. If we continue to do this, growing above market growth with a constant eye on innovation and differentiation, especially around digital, and with disciplined capital allocation, there is no reason why the more than 200 PhDs that I was referring to at the beginning of this presentation would not continue to consider QIAGEN as their preferred partner for molecular solution as well as the more than 500,000 customers that we have all over the world. Thank you.

Great. Thank you, Thierry. Now we'll move to the Q&A session. If anybody has a question, we have a mic runner in the room. And if anybody is watching the webcast and has a question, please feel free to ask it on the webcast site. But Thierry, maybe first, so you talked about some of the positive trends you've seen in some of the markets you play in into 2024 and also mentioned that you expect to grow above the market this year. But how should we interpret that just given some of the headwinds the market has seen over the last few quarters? What are you expecting from an end market growth rate in total this year? And maybe parse that out between your pharma, academic, and government and then clinical customers. Yes, maybe we'll start there.

It's the large question. I will continue to say what I said in 2023. I invite you to keep a cool head and look at trends. In other words, I heard many bullish comments on the market back in Q1 of 2023, a year ago. Sometime after in Q3 of 2023, I heard a very pessimistic comment on the market. We need to keep a cool head once again. The trends that I tried to describe out there, the market is solid. Obviously, no industry is immune to international environment or to the economic, financial, geopolitical environment. So overall, I believe that this market is still geared to have mid-single-digit growth. We will see what the other players will see -- will say in their disclosure in the coming weeks, but mid-single digit is fair. I believe for the coming months that sequentially, the market will normalize. I don't see an acceleration of capital sales quickly, but I believe that labs will probably reinvest in capital sales starting second half of 2024 or quarter 4, but that's not an issue. First of all, because in clinical diagnostics, if you cannot say you can place a system -- and we have been used to do that for many years, and we can do it in a profitable way. And in Life Science, where you don't place -- if you have differentiated instruments like our sample tech or digital PCR, you can still grow your installed base. I do not believe that public funding and public research funding will significantly increase in 2024. Let's not forget that it's probably one of the first time in many years that at least 10 to 15 major countries will go through election in 2024. So it's always creating a bit of -- but I don't see those investments in research, whether it's NIH or China or Europe going down. Let's assume flattish. Flattish is already okay, especially when you are so fundamentally well positioned like QIAGEN. Geographically, I don't see any alert for the growth of the American market. I haven't seen major changes of reimbursement either in the U.S. or in Europe. China is a specific question. I have -- I've always been quite moderate on China, but it's a large market. I don't see it bouncing back before the end of 2024. The market is going through significant adjustment, price and organization, but it's a large market. It's a big market. It's already the #2 market in the world for life science and clinical. We cannot ignore it. We need to adjust to it and its specificities. But overall, that's what I would say.

That's helpful. And then maybe taking a longer-term lens or a longer-term view, what do you think the normalized QIAGEN top line growth rate looks like? You're coming off of a year where you grew non-COVID revenue at a high single-digit rate in '23. Historically, QIAGEN had been a mid-singles to high singles grower pre-COVID. You mentioned the market's around mid-singles. So just given some of the tailwinds with new product launches and some of the longer-term market dynamics you've talked about here, where do you see the long-term growth rate for QIAGEN moving forward?

So first of all, let's not forget that, especially when I'm going back to 2019, where, as I said, this company had its back against the wall, who could have imagined at that time that this company would grow its core business above double-digit growth for so many quarters that we would be growing at above 8% in 2023 compared especially to other competitors? First, I strongly believe that we have now the team and the product portfolio to grow systematically above market growth, regardless of where that market growth is. And if I go into details, we continue to tick the boxes of what we said in our last QIAGEN Virtual Day back in 2020. Sample tech is a mature market. It's a low to single-digit growth market, but it's a large market. It's a long-tail customer market, and it's a high-margin market. There's a lot of stickiness here. QuantiFERON, I still see it with at least low double-digit growth potential. Syndromic testing, there is no reason, especially now that we are cleaning the impact of past COVID, to see QIAstat growing at less than double digit. Digital PCR in our portfolio should continue to grow at double digit, especially now that we are moving it also to clinical while adding new solution for life science. So overall, the company growing above market growth with increased profitability. We said some years ago, and we ticked that box again, that, for example, from an EBIT margin standpoint, we would deliver a better result than pre-COVID. This is what we have done. So this is what we want to do. And I also always try to make sure that this company will be able to grow its EPS at the same level as the top line growth. So those are the KPIs that we have in mind for the coming months and years.

That's helpful. I wanted to touch on one of the new announcements you made ahead of the presentation, and you talked about it a little here today, on the QDI investment disclosure. You noted a step-up in investment here over the next 5 years. Any way to quantify that? What do you expect to spend on this business over that 5-year time horizon? And then stepping back, why does QDI merit this investment versus some of the other growth pillars you highlighted today? What about this market in QIAGEN's positioning within that make it an attractive one to add some scale to?

Already for a company, which is roughly $2 billion revenues, a bucket of activities of EUR 100 million starts to be significant. I like to create in QIAGEN different buckets of activities, QDI, but also our HID forensic activities around $100 million. This is visible and then obviously, with potential of going double digit. This is exactly the profile of QDI. In addition to that, there is no doubt that the development of next-generation sequencing, the development of innovation around oncology -- once again, for example, minimal residual disease and others -- will favor the need for more and more accurate data interpretation. What is important is not to generate a lot of data through next generation sequencing. What is fundamental is what QIAGEN is doing, which is the ability to transform those data into clinically actionable results for clinicians. That's the beauty of that knowledge base. And again, I say and I really believe that we should be growing that market much more. If you take at the #1, QIAGEN, the #2, a European company, is around 50 million revenues -- 50 million to 60 million in revenues. The #3 company on the market of bioinformatics is an American company. It's between 15 million to 20 million, which means that the 3 leaders are invoicing altogether less than 200 million. We could monetize this activity and that know how much more. And this is why it is justified to invest. In addition to that, it is fully accretive to QIAGEN P&L, once again, unlike our competitors. So you have a lot of criteria justifying the investment.

Yes, that's helpful. Maybe just shifting gears a little bit. You mentioned China. I know it's a smaller portion of revenue versus some of your peers, but can you just talk about the state of the market right now? How is QIAGEN performing in the region? And maybe touch on some of the factors that could impact the model next year, like VBP, anticorruption, and touch on maybe whether QIAGEN is insulated from some of these dynamics given your localization in the region.

So it's another topic where I would invite you all to keep a cool head and look at trends. I mean what is always surprising me, with all due respect, is let's say, 6, 7 years ago, if a company was not in China, it was a stupid company. Now if you are too much in China, you are equally stupid. So we need to pick our poison sometime. I mean, none of what is happening in China, which is preference to local players -- imposition of localization policy on international players, VBP, none of this is new. It was officially documented in many Chinese official document back in 2010. It's not new. It is not new. What is a bit new now is the anticorruption campaign. But when I was myself living and working in China, we had 3 anticorruption campaigns. It happens. It comes and goes. But fundamentally, as I said before, it's a big market. It's an important market, second market in the world in life science and clinical diagnostics. But it's a specific market. Our exposure there as QIAGEN is limited, 6% of our revenues. Like many of our competitors, we are obviously localizing activities in China, not every kind of activity. We are obviously cautious with IP, but we have a manufacturing and R&D site in Shenzhen, where we are localizing. Perhaps more differentiated than competition, we have something rather unique in China. We have a second brand as well in China that belongs 100% to QIAGEN, fully consolidated in our results, but managed completely separately, different management, different sales and marketing. QIAGEN is headquartered in Shanghai. They are headquartered in Beijing. That helps as well. So this is what we are going to continue to do for the coming years, localize in a cautious way and invest wherever it makes sense. Now the market itself. The Chinese market will continue to give preference to local players. It will be naive to think that just by localizing activities, we will basically solve that issue. There is a political vision in China to make the Chinese health care market more Chinese. VBP will continue. VBP was designed, first and foremost, for the pharma activities, but it was clear that it will go into diagnostics. It started into easier technologies in diagnostics, clinical chemistry, immunoassay. It's coming to molecular. But at the same time, there is still a significant segment of customer in China called the Grade 3 hospitals that are continuing to invest into foreign products. So once again, the market will continue to adjust post-COVID. And as I said last year, if pre-COVID, I would have expected this market to bring a 10% growth to QIAGEN. For the coming years, I will expect it to give mid to slightly higher than mid-single-digit growth, 5%, 6% every year.