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

Good morning, everyone. I hope you can hear me okay. Warm welcome to our fireside chat today hosted by the MS Global Healthcare Conference. I'm Aisyah Noor, European Medtech analyst at Morgan Stanley. I'm very pleased to be joined today by Roland Sackers, CFO of QIAGEN. The session will take approximately 35 minutes, and you can actually participate with your questions by just raising your hand. With that, welcome, Roland, and thank you for joining us today.

Thanks for having us.

Yes. So let's start with a big picture question for those in the audience newer to the equity story. You did say at the Capital Markets Day. What are the biggest value drivers for QIAGEN? And how do you see the company's position in the industry?

Yes, you said, I think we had a nice opportunity just a few weeks ago to update the market and what we do expect is going -- what we see over the time all the way to 2028. And I do think there is also on the basis of a very good start into the year. As you recall, we were able, not only in Q1 but also in Q2 to update our guidance, to beat our guidance, actually both in revenues and EPS. We also were able to make strategically quite some progress. We, on the one hand side, we're able to get important launches done like our GI panel for QIAstat. At the same time, we were -- also clearly discontinued one part of the business, where we generated losses over the last couple of quarters. So I do think, quite some progress on the strategic side as well, so that our plan now in the midterm is calling for revenue growth CAGR, '24 to '28 of [indiscernible] and an EBIT margin of at least 31% by 2028. In addition to that, we clearly also communicated, I would say, very straightforward goals on the capital allocation side with a share capital allocation of at least $1 billion over the time period back to shareholders. So I would say, we are quite positive in detail, probably also for this year. As I said, good start of the year. Overall, a 2% growth rate, if you look on our guidance for the second part of the year, we are expecting acceleration to an average 5% growth rate. Also in terms of profitability, we start into the year with a $2.10 EPS guidance. Now we are $2.16. So I would say we feel quite comfortable and clearly still difficult macro environment. We all know that China has some challenges and probably will continue to have that for quite some time. We clearly also, as many other companies, have to realize that instrumentation is not the easiest part of the business. The good news for QIAGEN is 85% of our business is a consumer business being quite resilient, and that is driving the growth.

Very good. If we move on to kind of current market developments, starting with Life Sciences, what's your outlook on funding right now, whether that's big pharma, academic funding and biotech? And how is that impacting QIAGEN today?

Our plan is that we do believe for [indiscernible] probably also moving to '25, not a big change. It is -- as I said, it's clearly not the easiest environment. On the budget discussion, as you know, it was in a good situation, flattish. I don't think that even the election makes too much of a difference here in the U.S. Of course, typically, this a bipartisan approach. So there will be solution found. Europe is actually slightly better. There's underlying competition between Continental Europe and the U.K. is actually helping putting and pushing some money into the R&D environment as well. On the pharma side, very different. I think it's sometimes even company-to-company. We all know that there's still some companies out there which have significant funds available and they are putting them at work. Some others are more, I would say, limited, particularly if it comes to CapEx. But also, again, here for us, we are not seeing situations where they cut back on consumable to others. So there's still -- also, there's no significant layoffs which would change the environment. So I would say it is a, I would say, a stable environment, but there's room for improvement.

Okay. Very good. And then when it comes to China, obviously, a small portion of group sales now, but you have a leading position in China. How are you exposed across China versus -- in your Life Science versus the clinical side of the business? And how is that market tracking versus your expectations at the moment?

Just first of all, to frame it, as you said, China is around about 5% of total revenues. So I would say, as you said, compared to others, probably more on the smaller side. It's also one thing that is special at QIAGEN that we have a true brand strategy in China. On about 60% of our revenues, we do with our well-known QIAGEN global brand. But actually, in 2005, we acquired a company in China, which at that time was actually our largest copycat. And still developing in China, producing in China, Chinese management, which -- where we clearly see is 40% of our revenues. And there, we clearly can see that China has two issues. One is the overall GDP situation affecting our industry, as many other industries. But that's clearly also the underlying notion of buying Chinese. And here, we can clearly see that the Chinese brand has some advantages. And clearly, probably keeping up in terms of growth rate on a single-digit negative side right now compared to other companies who are clearly shrinking. I think the good news is we see sequential improvements. But I don't think that as of today, we believe it becomes flattish [indiscernible] before mid next year.

Okay. So you think this market for China for you could grow flat to low single digit?

For next year. It's a bit, again, too early to say, and we probably -- when we will give guidance conservative, but we see improvement.

Okay. When do you think it starts to recover over the midterm to -- what do you think is a reasonable midterm growth expectation for this market?

Again, on the consumables side, I'm quite sure that what is helping us right now, why do we see that there is still underlying work which gets done. I think one of the potential positives is probably right now a negative, which is this expectation of there might be a large public funding available, and governmental money coming into the system. Because what it also means a lot of people just holding up an investment and saying there might be extra grants available in a few months. I'm a bit more skeptical here because for China to make it really impactful, that has to be quite significant extra funding. And so, I would say if that normalizes over time, which most likely is going to happen, we also see a more normalized environment.

Okay. So I'm assuming your guidance at the moment doesn't embed any benefit from any potential stimulus coming in through from China?

No.

Okay.

Anyway, we -- as you know, we are -- also in China, we're actually 85% plus on consumables. And the instruments where we are growing fast, which is QIAstat and QIAcuity, typically have price points around $30,000, $35,000 also in China. So I would say, there's a return on investment case, it's quite easy to present.

Okay. Okay. If we move on then to some of your growth drivers or pillars of growth, starting with QIAcuity. How should we think about the impact of Bio-Rad launching in the high-end digital PCR space in Q4? How sticky is your customer base? And what levers do you have in pricing or technology to defend this 30% growth CAGR target for the midterm?

Yes. So far, it's actually going quite well. And I think our strength is clearly, particularly also around the machines, because we do have three different sizes of machines. And depending on the need of the customer in terms of volume throughput expectations, you can buy the appropriate size machine. And I think that's actually very well accepted. And I do think also in terms of workflow, we clearly have the leading platforms, because it is not droplet into the market. I would say where we clearly had to catch up, and we did that nicely over the last probably 12 months, was also in menu expansion. Because it's quite obvious that another company was a bit early in the market. Therefore, they had a broader menu. But with all this incremental money which we also got from COVID, we were able to double up a bit on the R&D side, and that helped us to close that quite substantially. And you have seen actually for QIAGEN, good growth rates. On the new launches, again, I don't think that it really changed the differentiation between the two brands. We still believe that we have leading automation platforms. And with very good workflow. And with expanding menu, we should be able to catch up that. So I don't think it changed too much.

Okay. Moving on then to QIAstat, a lot of excitement on the back of the launches this year. How are placements of QIAstat trending post the approval of the GI panel? And could you talk about the market opportunity for the mini panels you're looking to launch, i.e., customer segments, revenue contribution?

Clearly, the GI approval for us was an important event for the U.S. We always had it approved ex Europe and there, we clearly could see how important it is. And the reason -- and just to remind everybody why it is important, has to do that not only you can now offer gastro panels to your customers, but quite a number of customers in the U.S., but also in the rest of the world offer that. You offer a combination of different products, typically actually respiratory and gastro. And if you can't offer one of them, we even can -- you cannot participate in that tender process. That door is now opening nicely for us. And we see actually good successes already going into winning the first tender. So it's actually also one of the reasons why we believe that our growth rate from, let's say, 2% in the first half of the year for the group will also move to 5%, because QIAstat is doing actually quite nicely. Placement number is quite stable. As you know, we always expect like 150-plus placements quarter-over-quarter. I think that is still a very healthy run rate. But the pull through is nicely picking up. And clearly also in the U.S., that will be quite helpful.

Okay. You recently signed -- still on QIAstat here. You recently signed a few pharma partnerships for the QIAstat. I believe, it was with Lilly in Alzheimer's and then AstraZeneca for some targeted medicines. Could you just break down very simply how you make money on these partnerships? And is there a path to wider commercialization?

For all, I think that helps me also to mention one significant differentiation point between our platform and also probably another platform in the market for the buyer platform, because we were able to do this partnership, because our QIAstat machine can both quantitative and qualitative results, which is what others can't do. So therefore, particularly if you move into these areas like Alzheimer's but also oncology is what you need. Otherwise, you just can't play there. Still can do infectious diseases and others, but that is what we need. The partnership with these companies is what the CFO always like. It's, first of all, fully paid R&D for us. So we're moving into the territory, where the pharma partner helps us to support the R&D work. Nevertheless, everything that comes out is still 100% owned by QIAGEN and controlled by QIAGEN because clearly, the upside for the pharma partners is much larger. EBIT, for example, helps them and the doctors, of course, the patients to have a better risk identification, for example, in Alzheimer, how much CRS to get Alzheimer. And then, of course, move in the next phase, okay, how can you treat that. And is there any specific identification answers? So I would say, a nice opportunity to expand the business left and right. I would say it's too early to give you any market sizes. Right now, I would say it is no downside, because the costs are covered. But of course, it has a significant upside opportunity if it works.

On that point, do you think this creates kind of a new customer segment for you, in that the pharma customers use this...

We will see quite a number of announcements over time. It's clearly a significant interest. It's a nice thing about the QIAstat. What I said, why they're choosing is not only because we, again, qualitative results, but it's also the ease of workflow. Because these kind of machines, you also might use an environment, where you don't have any lab environment. But -- and there you need something that day, you just set to play it, put a sample in your machine, press your button. And after 45, 60 minutes, you have a printer office result that is as easy as that.

Okay. Interesting. Moving on then to QDI or bioinformatics or genomics. Clearly, a strong growth driver for QIAGEN, and you're expecting this business to deliver low teens growth over the midterm. How much of this growth do you expect to come from share gains, market penetration, M&A? Just talk about some of the projects there that could underpin the growth?

We haven't included any larger M&A. So if we would do any M&A, which is clearly also part of the plan. That should be on top. Bioinformatics is clearly one of the areas, where we see this overlying or underlying trend, which is what you all see in different areas of the business as well, that there's through many data points available and QIAGEN and other companies doing a good job in helping the scientist to extracting this information, out of any kind of example, but interpretation is a challenge. And we are the largest tool provider for that. So regardless into the pharma company, if it is a research environment or governmental institute, QIAGEN by far has the largest franchise there. As you said correctly, more than $100 million of revenues with a good growth rate. What we are right now trying to do, which is probably mid and long term, even more beneficial for us, of course, converting significant numbers away from this onetime license contracts like a 3-year license deals, which, by the way, is also this day is a bit more difficult to get. Because easily, such a license could be $250,000, $500,000 and moves them into a SaaS kind of environment. And that is clearly something what even the customers like more and for us is probably over time, also more profitable.

Okay. Finally, with sample tech or [indiscernible] finally. Moving on to sample tech then, you positively surprised the market with growth in sample tech in Q2 following 9 quarters of decline. How is it going more recently? And could we hope to see a sustained acceleration for your second half?

In all fairness, a quarter of decline was because of COVID. So if you adjust for COVID, underlying market was actually always quite good. Which is important because we are clearly, and I think also in your numbers by far the market leader in sample preparation. And therefore, again, if you have -- I don't know what most analysts say, market share of 50%, 60%, it's hard to outperform the overall market growth. Nevertheless, we see opportunities and what we are seeing right now is also benefit from some implementation on, particularly QIAcube Connect. And I think the good news is there's more to come. We have next year an update for our QIAsymphony machine, which is clearly, as you know, one of our leading platforms. And the year after, it's even probably more important, there is a launch of a machine which we call QIAsprint. And I think that's particularly important, because while everybody knows and assumes that we are by far the market leader in sample prep and again, that's true, but we are not playing in certain pockets at all. That is, for example, high throughput sample preparation. And that is a market which we are going to enter with that platform. I don't think there's any doubt that we have anyway, the best chemistry. And we do believe you also have the opportunity to have a new platform in a market which differentiates quite nicely. So that might be also an opportunity in [indiscernible] to spice up a bit the growth rate over time as well.

Okay. Okay. If we now move on to TB and QuantiFERON. Obviously, the topic of TB competition is a big debate right now for you, and you've guided to a lower kind of growth rate for the midterm in your Capital Markets Day versus history. We've seen some validation studies by Roche's partner in the development of competing IGRA latent TB test. We also know Revvity is in the middle of launching an automation solution for their IGRA test. What is your view of these products? And how are you thinking about potentially defending yourself, maybe a fifth generation QuantiFERON launch to set yourself ahead?

It's clearly something we'll be monitoring all the time because, as you said, it is something which is very close to QIAGEN. Nevertheless, I think we clearly believe that we have a leading franchise and we win also on more or less data points of our test. And as we said, we are already in the fourth generation. And I think it's fair to say we're not standing still. But I do think it's also important to realize that we have by far the best automation platform and partnership with DiaSorin available. And that is not going to change by any other competitors. DiaSorin, LIAISON platforms, clearly seen as the best in the industry, quite new as well. So I would say we are quite happy with that partnership as well. And while we have the opportunity to expand that, we clearly value all the work done by DiaSorin. On the Revvity, I think -- while I think it's important to understand that they are in the market as long as we are, 2012, we probably also believe that we have good growth rates. Nevertheless, we are probably by factor, I don't know, 8 to 10 smaller than we. So it's by we are going every year as much as they have in total revenue. So just to put things in perspective. And their recent automation platform improvements and -- not even close from our perspective, at least. [ Roche ], as you said, for the one, I think it's fair to argue there's no new validation studies, whatever. I think what you're referring to is old validation studies from this Asian company. which we know, of course, quite well because we have seen their product in the Korean market years before, and everybody knows that we are by far the market leader in Korea, and that wasn't really an alternative for the company. So we really are looking forward what should change here. Again, it would be much better for us if it would be more data point available because then we have something to talk about. But it's quite clear it is some time out. The good news is our customers are quite happy with what they have, as you see in our actual growth rates. They like to team up with QIAGEN, and we are not standing still.

Okay. Will QIAGEN consider signing on an additional distribution partner to expand the installed base of QuantiFERON, extend the competitive moat? What would be the benefits and disadvantages of an additional partner in your view?

As I said, right, and we are good partners with DiaSorin and we validate all the offers they're doing. And again, there's clearly, I would say, a lot of improvements done from both sides together, to support and help our customers. Nevertheless, we have a legally the opportunity to add another partner. And there is clearly some opportunity also just for shareholder fiduciary reasons, we have to review. And if there's an opportunity where, for example, could argue you get a much larger reach or whatever. We clearly have seriously to review that.

Okay. Moving on then to NeuMoDx. How is that transition going? And is there any overlap between your NeuMoDx customers with the sample tech or PCR business that could be at risk and could be impacted by having to transition your customers away from NeuMoDx?

I would actually say it's the opposite in the meantime. Of course, we had to work a lot with the customers to furthermore bring the news and also more or less help them to convert to different solutions. But I do think we do that quite successful. It's also a reason, by the way, why we haven't stopped it like sharply with [ June ] service. As you know, one of the reasons why the margin improvement will also only come in over time, particularly on '25, and it's actually up to 100 basis points, is because we still produce and serve our customers and help them transition. And I think that quite nice with the customers. I think it's actually even with a good number of customers, even opportunities that they said, okay, guys, you have to help us with here and sometimes they even go then for different solutions and different contracts with QIAGEN. So I would say, all in, it's not an easy news to bring, but I would say it's very professionally managed. I think it's fair to say we haven't lost any customers, but we actually gained a lot by the way we're handling it right now.

And you're still expecting something like $5 million of sales for NeuMoDx this year and then...

I think so I would say actually, customers are ordering a bit more, but I think it's still a fair run rate.

Okay. Then moving on profitability. So QIAGEN just raised its 2024 margin expectations following the discontinuation of NeuMoDx. By our estimates, you could exit the year close to 30% EBIT margin, which would take you some way towards your midterm target. What will be kind of the upside and downside drivers to that margin target?

Yes, as you said, the second half of the year is probably around in average for the two quarters, probably at 29%. So I think it's clearly a good exit rate for the year. And as I said, NeuMoDx is still not fully phased in, it's going on. But on top of that, there's a couple of other drivers which will allow us to expand margin clearly towards the 31%. And I would say it doesn't need too much confidence to believe that it disappeared to 28. We should have probably a couple of opportunities to upgrade that as well. One is, clearly, we, as many other companies built quite a lot of production capacity during COVID, which was still ramping up. Yes, incremental revenue growth has been quite helpful, but of course, it doesn't come in 1 or 2 years. So you have to build into that. So the overall standard costing will get better. Second, I think that's also as important. We clearly still see opportunities on the operational expense side. Typically, we feel quite comfortable with R&D costs somewhere between 9% and 10%. Right now, we are well on the higher end. I think that we'll probably settle in a bit more. Third, very important in our industry. COVID had a lot of positive stuff and a lot of negative stuff. One of the few positive stuff is it actually forced our customers into B2B connections, which is a nice thing for companies like QIAGEN, where 85% of the revenues are recurring revenues. Once you have an instrument, you place your order actually weekly, monthly, sometimes quarterly. And in the past, pre-COVID, it was done manually with the sales rep visiting the customer once a month. Now you have B2B connections. The new machines work a bit like hotel, mini bars, you take it out, you reorder, you get the bill. There was a day where there was something in the minibar. Today, you just have an empty fridge in a hotel. But -- so things change sometimes to the bad. But I would say there's opportunities for us to even grow because we are right now around 60% that will grow further as well. There's some ample room for us on margin opportunities. We also have an ongoing program, continuous improvement program in the company. There might be still smaller things where we review, does it still make sense on QIAGEN. Not even close to what we did in NeuMoDx, but there might be also small opportunities and we have -- from older acquisitions, you still have a number of smaller sites where you can argue over time, should we integrate that? For example, we did it or was just in the middle of doing that with the acquisition of [indiscernible] in San Diego, we integrated in that in our Maryland headquarter. So there's opportunities to one side.

Okay. Maybe just one more on margin. Then you talked a lot about the OpEx side. But if you talk about the gross margin, what's going to be the biggest driver of the improvement towards the kind of historical 70% type of gross margin level?

True information. Further all, it's very clear, as we said, it's a negative margin impact from NeuMoDx going away. But there's a second one. And I think that it's important that you ask that question because it helps also to explain what sometimes is totally underestimated. Because one important step what we do was still quite early is in 2019, 2020, as you know, we launched 4 new platforms. And these new instruments, there's always two things. Further about the instrument by itself in our industry typically has a lower gross margin than the consumables. So it dilutes the gross margin. And of course, if you have a new instrument, you also don't have the typical setup on mix between instruments and consumables and the pull-through is there. You also have an impact on gross margin. So if I take out these 4 platforms, which we launched in that period, including, by the way, also the consumers to that, our gross margin would be 70-plus percent. So we will grow into that. I'm not telling you today and guiding today that we will go north of 70%. But I think with a normalization like we have seen in Symphony for quite some time now on a fair ratio between consumable revenues and instrumentation revenues, you will see that the gross margin goes up.

Okay. Very good. Moving on to capital optionality. So you recently proposed a share buyback of up to $300 million, which was recently approved at the AGM. Do you have a line of sight to timing on the execution of a potential buyback?

We even said $1 billion over time until 2028. So I think there's even more opportunities for us. I think is also important to realize the way we did it, like, for example, earlier this year, to weigh on a synthetic share buyback. It is somewhat unique in the U.S. And as a Dutch company, it's something what you see quite regular, which is a combination of reducing the share count, but also have a cash out to shareholders. And actually, in a lot of countries, the cash part because of the payback of equity technically is even tax-free. So I think that's what shareholders sometimes also quite interesting. So as you said, we have another $300 million approved. Typically, there is an opportunity for us within 12, 18 months to execute on that. So let's see when we feel comfortable, particularly also the Board feels comfortable in doing and executing on that. But it's clearly -- it's on the list.

Okay. And sticking to capital optionality, would QIAGEN consider M&A? Or are you more conservative on cash now given the guided debt payables? I noticed you -- convert...

Yes. Again, if you compare what we said on capital allocation compared to the expected cash flow over the period of 2028, I think there's clearly flexibility for us and probably also in that priority -- or to do so, meaning we still like to invest into our business, right? And as I said before, with an R&D ratio somewhere between 9% and 10%, we feel quite comfortable. We also like to do bolt-on acquisitions to add content to our existing platforms, to add menu to our bioinformatics solutions. Of course, if there's another QuantiFERON test presenting itself, we are believing to that -- you want us to do that acquisition even if it's a bit more expensive. So I would say I'm not going to exclude larger transactions, but I would say the focus -- the likelihood is probably on the smaller ones. And last but not least, if there is excess cash -- and we have proven since 2012 that we are doing quite regular share buybacks. Recently, we stepped up in size, before that we were rather doing it $100 million incrementals. Now we did it with a $300 million ticket item. So I would say there's also a nice step-up.

Okay. Then on 2025, so the setup...

Way too early.

So the set up looks promising. You could end the year at 5% sales growth. You have some easy comps in the first half. 2025, QuantiFERON competition probably doesn't start yet. QIAstat should see its first year of benefit from these GI-driven placement wins you've talked about. The life science market should continue to kind of normalize. Could we possibly see mid- to high- single digit CER growth for next year?

Yes, I think you put a good summary for me to end on. So you will not see a larger disagreement. But I would say to put some perspective around it, I would say it's fair to assume that a 5% second half growth rate is a good starting point also moving into next year, particularly given that the macro environment right now is clearly not the easiest one, we talked about that. I don't think that we want to put something into a number, which would be under assumptions, things have to improve as of March 1 or June 1, because we also have seen this year in other parts of the business where we are luckily not in, that there was always delays, delays, delays, and we don't want to be dependent on that. So obviously we will put some things expectation guidance, where we believe there is a significant likelihood that is going to happen. And nevertheless, we do believe we had important events this year, which should be very happy for us and you named them all, from some new launches, plus on instruments on the QIAstat side. So I think that's all good. But again, let us -- getting there for us and then will give you an update on -- probably end of January.

Okay. Fair enough. I want to close the session with another big picture question. So you've been CFO of QIAGEN for well over -- well, coming up to 20 years now. The industry has seen a lot of change, a lot of cycles. And I think you have a much broader vantage point to QIAGEN's positioning than most people. What do you think investors really underappreciate about this business?

I think it's -- what I always find interesting is that some investors are always focusing on very few things. While I do think actually our strength is that we are a very well-balanced company. If it is life science or our clinical, which is roughly 50-50. Because it's one of these businesses which actually typically they're balancing out quite nicely. But even within our growth drivers, we are actually doing overall quite well. There's always something that does some better and has a bit more with. Sometimes -- but the other is still being offsetting that. While we are a midsized company, we are damn good on what we're doing when by far, #1 in sample prep. We are with no questions, leader in latent TB testing. We are in bioinformatics, by far the #1 player. On QIAcuity, I would say we are probably already today, #2 player and catching up. And last but at least in QIAstat, we are probably right now the [indiscernible], but also we are on our way to number two. So we have a leading franchise with a great brand recognition and one of the highest profitability and cash generation in the industry.

Okay. I think that takes us to the end of the session. Thank you, Roland, for your time. And thank you, audience, for being here.

Thank you. Thanks for having me.