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

Okay. Welcome back, everybody, to the 2024 Stifel Healthcare Conference. We are on the Life Sciences track, and we are happy to have Thierry Bernard from QIAGEN, CEO from QIAGEN with us. Thierry, I appreciate you spending some time with us today.

Thanks for the time.

Maybe a good place to start. It's been an interesting year in Life Sciences for sure. Topically, there are some things being discussed in the last week or so that have the Life Sciences stocks moving around. And so maybe as a very pointed starting point, can you just talk a little bit about your academic exposure in the market? You serve research labs of varying types. And I think one thing that investors are trying to do in the current moment is just understand how the changes related to the election are influencing the way that you might feel about the businesses in our space.

Yes, that's a fair question. The first point is, first of all, it's far too early after the election to take a definitive stance. But I continue to believe that the fundamentals of the market and both life science, academia research or clinical are still very healthy. Yes, there are some constraints on capital expense in life science labs, but let's not forget that this year, 2024 was a bit exceptional in the sense that more than half of the world population was going through elections and elections create uncertainties, uncertainties on budgets. So people in research, in academia are sometimes reluctant to spend. I don't see that as a long-term trend. This year, for example, in the case of QIAGEN, we budgeted the NIH budget at 0%. Not that we have a big exposure to NIH contracts. But we said, okay, '24 is going to be 0%. Next year, I will probably put 0% as well just because of post elections and the new teams coming together. But I have never seen NIH, for example, in the U.S. in a multiyear flat budget. I mean, it has never happened. I mean, regardless of the administration. So this will come back as well. At the same time, academic research labs, they need to continue to upgrade their equipment and the quality of their research and their research depends on that. And last but not least, in life science, which is, as a reminder, roughly 50% of our sales, let's not forget 2 things. One of our activities, sample tech is fundamentals for life science. Basically, you cannot run a quality run without sample tech and the leader here is QIAGEN. So nobody is immune from market fluctuation, but that protects us a bit. And second, we forcefully invest in a growing market in life science, which is digital PCR. So we have at least 2 boxes that are allowing us to perform what I consider better than the rest of the market. And you have seen that in Q3. Yes, we said that life science was a bit weaker than clinical, but it's still 1% growth in Q3. And if you look at most of our competitors, they were 4% to 5% to 6% growth behind us, negative growth for most of them. We were still positive, slow growth, but still positive.

Okay. So you would say just to sum up what you just said, you would say that your assumption for U.S. -- whatever growth you think you will be capable of next year is underpinned by an assumption that U.S. academic funding is flat, much like it is this year. What would you put as the bumper sticker number as to your exposure to U.S. academic funding?

I mean, we released a number some time ago around exposure to NIH contract, which was around 5% in the U.S. So I mean, we can weather that. But it's not because the budget is flat, once again, that they don't spend anything. Obviously, they continue to work with QIAGEN on enzymes, on oligos, on sample tech, obviously. So I'm just saying it's a transitory situation. I don't believe that it's going to be a long-term situation. And this is how we look at '25, '26 and the following years.

Yes. Okay. And maybe to that point, just thinking broadly, -- when you think about the growth opportunities that you do have, do you see those on the diagnostics side of the house or on the research side of the house as more attainable in the near term? I mean my guess is it's a mix of the 2. But I am curious to see like to understand how you think about '25, '26 and kind of grabbing the fruit that you see as attainable based on the pillars that you're talking about within the portfolio.

Yes. Once again, it's a very fair question. First of all, as you know, the business of QIAGEN is extremely balanced. So it's 50%, as we said, life science, 50% clinical. Those past 2 years, clinical has been a bit more active. But this is not the way I think. I know that it's very easy to try to put QIAGEN in 2 boxes, clinical or life science. It can be relevant. But if you look at our portfolio, it is not really what we are doing. And why we are successful is that because we are able to build what I call sustainable ecosystems across our portfolios that are addressing both needs, either research, academia or clinical labs or pharma labs. And that's the target, and this is how we would like to develop QIAGEN. And a few examples, sample tech. Sample tech is not life science or clinical. Sample tech does answer needs of research labs, academia, clinical labs, even pharma labs, biotechs. Digital PCR, you have seen that in Q3, we got our platform approved by the FDA, QIAcuity. So we started in life science serving, again, academia research, and now we are moving into clinical. And guess what? We have already some companion diagnostic on digital PCR with pharma companies, again, an ecosystem QIAstat, which was very clinical, you have seen in Q3, 3 deals, of which 2 are public with pharma companies. So we moved something which is purely clinical to also we expanded to pharma business. You could say, well, QuantiFERON, in this case, it's just clinical. You're right, but we expand QuantiFERON the reach from latent TB where we are very strong, as you have seen also to Lyme, and we expect our Lyme product with DiaSorin to be. So that's the target that we have. It's obviously answering and being relevant to life science and to -- but rather saying we build products that can go either in life science or in clinical or to pharma, either for infectious diseases or oncology or other diseases. So that's how I see the development of QIAGEN.

Okay. Helpful. Maybe just talking about some of the growth pillars and starting with latent TB. QuantiFERON is one of your cornerstone franchises. It's been a great growth business for you over the years. Can you talk a little bit about the market and just what -- my understanding based on what you guys have said is that 60% of the market is still unconverted from legacy testing. What has been the barrier to adoption amongst that 60%? What do those customers -- what are they waiting for in order to take upon a solution like...

Yes. So first, very quickly, the market is growing. I mean you have seen recently WHO highlighting the growth of TB all over the world, including in the U.S. Many people have been thinking for many years that TB was a disease of the past or disease of emerging countries. It's back in the U.S. for many reasons, co-infection with other diseases like hepatitis or HIV, but also relevance of the disease in diabetic patients, dialysis patients. So the growth -- the market is growing. Second, latent TB is now fully endorsed by -- as a test by many countries in their fights against TB. So the latent TB market also is growing. And so yes, we believe that more than 50% of this market is still an old antiquated technology called skin test. And your question is about the conversion. How do we do? How can we convert this market quicker. The thing that you have to understand is that the skin test is not a traditional laboratory test. You do not necessarily do your skin test at Quest or LabCorp or a lab in the street. It can be done in a retail pharmacy. It can be done at the GP. So it's very difficult to detect where the skin tests are. And that's why QIAGEN has invested heavily, especially in the U.S. where the analytical tools are a bit more developed than in many parts of the world to understand where skin tests were. And now we can tell you exactly where skin test users are by ZIP code in the U.S. and by ZIP code. And once we have that information, we can see the volume and then we see why are they doing skin test? What kind of population? Immunocompromised patient, HIV patient, hepatitis, diabetic patient, dialysis patient. And so we can tailor our marketing and sales conversion campaign. And this is why we have accelerated conversion in the U.S. We are trying now to replicate that market understanding and knowledge in Europe. The statistical tools are a bit less developed than in the U.S., but we'll get there. For the emerging countries, it will be another story. But this is why we are able to accelerate the conversion now. Sometimes it's not easy to convert because for some of those practitioners, they said practitioner, I perfectly understand the quality of QuantiFERON versus skin test, but you see it's not a big volume of my activity. So it takes time to convince them that a point they have to convert. It takes on average 6 months to convert a skin test customer to QuantiFERON.

The company has worked a lot on automation associated with TB test with latent TB testing in QuantiFERON. When I listen to you comment on the experience in the U.S., though, it sounds like it's about the patient, such an individual is immunocompromised has diabetes. Is it about the process? Or is it about the patient?

Both. Both. It's clear that when a hospital is realizing that they are making more and more latent TB testing for many reasons, co-infection, as I said, or migraine testing, there are many reasons for testing, community testing and so on. At the point, they see a need for automation. And that's why we were very right back in 2015 to strike that deal with DiaSorin. It's an added value deal, and it worked. It really works. So it's both. It's relevant any time the volumes are increasing.

Okay. It's well known at this point that Roche will be entering the market with an IGRA solution. I think you've spent quite a bit of time over the last year talking about that, which is difficult to do for a product that isn't in the market yet. I mean it's always hard to compete against things that don't exist. But would one high-level fair way to think about the situation be to say that to our point here, there is 60% of the market that is untapped. Alexis Systems are in a lot of labs, so they may drive some share. But if the market is growing and it's underpenetrated to the degree that it is, that there is plenty of room for QuantiFERON to grow at a double-digit rate, high singles, double 10% rate and still have Roche seeing some success that you might expect with that.

I think, first of all, you say it's well known. I mean, we worked on facts at QIAGEN. Facts like it's been more than 20 years that we are in this market. It's thousands of publications. It's real data acknowledged by WHO, by labs all over the world about the quality of the test. And against that, as far as this competitor, what we hear is rumors. So I think we have prepared the arrival of new competitors, let's not say, competitors because we have been faced with competition on QuantiFERON for many years. [indiscernible] skin test, as we just said, before there was a British-based company called Oxford Immunotec that has been acquired by PerkinElmer. And despite being acquired by PerkinElmer, it never changed the paradigm of our growth or the differences of revenues between the 2 companies. BioMérieux has said 3 years ago that they would launch a test only to withdraw it a couple of months after because it's a very complex test to develop. And now we are talking about this new one. We'll see, we are prepared. We are prepared, and we said there is room to grow. If you look also at our projection that we presented in New York, -- we put a CAGR for QuantiFERON of 7% for the coming years, up to $600 million of revenues by 2028. We will finish the year at $450 million. That means that if we are coming from 10% growth or more, we are factoring that the market is going to evolve clearly.

Yes. So the rate that you gave at your Analyst Day, which I thought was kind of a prudent way to look at things, factors in some of these things that we're saying exactly to your point that there will be an evolution of the market. There might be more players. There could be different contract negotiations or just setups. And so therefore, a 7% to 9% growth rate is reflective of those ideas, particularly when you compare it to what historical.

So we put a 7% CAGR -- for QuantiFERON, we put a CAGR of 6% to 7%. That shows that we are realistically ambitious once again. And again, I mean, I understand the concern. Obviously, it's $450 million. But at the same time, I want to highlight that way before we were talking about potential new competitors, we have never been complacent. We prepared that. We protected -- we decided to raise the barrier to entry on that market, automation with DiaSorin, front-end automation with Hamilton and with Tecan, development of new assays like Lyme. So I know that sometimes some of your colleagues are saying, but is this a new HPV for QIAGEN? Because it's absolutely not the same situation. Here, we have invested to really protect that franchise, and we still invest in it. And so yes, saying 6% to 7% is completely realistic for me, achievable. And the second thing, what I try to insist on is that even if it would be lower than this, I think it's well already factored in the current valuation of the stock price. So that's...

Yes, totally fair. Okay. Lots of different parts of the business that I want to hit on and make sure I give due time to each. So I may come back to TB in a minute because it is sort of the central debate point on the stock, I would argue. But just thinking about QIAstat, which is another growth driver for you. You've had new menu approvals in the U.S. I'd love to just hear what you think the adoption might be there? And can you talk a little bit about panel versus mini panel usage? How might that evolve? And should investors care about use of one more than the other? Is there an advantage from a profitability or revenue standpoint?

It's difficult to take a definitive stance on that. But first, the market. Market is still growing, market for syndromic testing, so the QIAstat market is still growing by probably 15% per year overall. Second, why were those approvals so important? -- by the FDA. It's because the U.S. market is still the main market in the world for those applications. It's probably still 60% to 65% of the world market. So this is where the fight is happening. And if you take the situation in January 2025 compared to January 2024 for QIAstat in the U.S., it's a complete change of game. In January '25, we had one assay, which was EUA, which was respiratory. In January '25, we will have respiratory 510(k), which is already done, a mini respiratory, GI, a mini GI, meningitis. And we will have the QIAstat Rise, which is the higher throughput system approved by -- so we are now completely able to compete on every customer on QIAstat, which was not the case before during '24 because we could only bring 1 or maximum 2 assays to the customers. And so we believe that it will confirm and strengthen the current growth of QIAstat. Look at the growth in Q3, 40% growth in the quarter. I confirm with those developments that we will be a solid #2 on that market. I never said #1 because that would have been completely aspirational. But #2, clearly, and the objective of $200 million by 2028 is within reach.

How would a pie chart look if you were to sort of project out 2 years with those 3 assays in mind. I mean, obviously, respiratory depends on what time of year you're asking to draw off that pie chart. But if you sort of normalize for that, I mean, what are the drivers and how much usage is depending on now having GI, for example, and what that might bring to the growth equation?

Well, you need to understand that, first of all, it depends geographically. But in the U.S., massively in the U.S. it's -- if you can come to a customers with respiratory GI and meningitis, the ratio of demand in the demand from the customer is at least 70% respiratory needs, 10% to 20% GI and the rest is meningitis. But that's not -- it's not because meningitis is a very small ratio of their actual demand is that having meningitis makes you credible to compete in that customer because it justifies the investment into the solution, first point. The second point is that -- and it answers your previous question, I apologize because if you have the ability on the same platform to offer large panels, but also smaller panels, then basically you can really compete any time of the year. To your question on small or large panels, in a very tough winter time, you might have some hospitals saying a large panel is too much because I have too many patients. So I need to go to the simplest, Flu A-B, RSV and COVID. This is what I mean. By the way, to that point, many key opinion leaders in the U.S. are disagreeing and saying, no, if you can give 20 answers, give 20 answers because then your patient is clearly. But okay, there is a relevance for mini panel depending on the time of the year, depending on the configuration in the hospital. And the ability of QIAstat in the U.S. to offer both because if you have mini panels, you also -- you can also go to not only inpatient, but outpatient and having mini panels allows you to get reimbursed as well. So this is why we develop those for the U.S. We don't feel the need to do that for Europe. So that's how we are seeing it. Now, the last thing that I would like to insist on is that QIAstat is developing, QIAGEN is developing on QIAstat, a unique also panel, which should come in 2026, which is what we call the complicated UTI, urinary tract infection. This will be a key differentiator because no other competitors at the moment is developing such a panel, and there will be a significant demand. If we have that panel on time, we can have a hook also to convince some customers to pick QIAstat first for that reason, and then they will extend it to respiratory GI and so on. So this is why it's an important development for us.

Yes. Okay. Just sticking with some of the other growth pillars. QDI is one. There was a point earlier this year when you thought that, that would be a double-digit growth business. I think that's changed just because the business model has changed a bit. What essentially is the key to driving a growth rate that's accretive to your overall goals there?

So it's not at a point we thought that it would be -- we systematically delivered for the last years at double digit on QDI, on bioinformatics. And as a result, QIAGEN is #1 in the world, $100 million revenues. But the difference with most of the players, not to say all of the players in the market, our competitors, is that it's accretive. It's accretive to our gross margin. It's accretive to our EBIT margin. It's accretive to our EPS. What is happening in 2024 is that we have a change of business model. Before, you had many customers accepting to pay one shot at the start of a contract for 1, 2 or more years, but they were paying immediately. Now, they prefer to have a kind of SaaS model where they pay a subscription. So it's just the kind of revenue recognition that you have to go through. You do not lose customer, you do not lose magnitude of deals. It's just the way you recognize that. So I believe it's going to take us probably until the second half of '25 to weather that, but we have the same ambition. This is an activity because it's NGS driven, because it's oncology mostly driven. So the drivers of the market are very strong. This is an activity that should be at double-digit growth.

Yes. Bioinformatics is an area that is tough to diligence, tough to get your hands around as an analyst or as an investor. It's easy to be a mile wide. It's hard to be more than an inch deep. Where do you see the big gaps in the market? Where do you think your solution rises above and where might the areas for improvement going forward be?

So to make sure that we can have the appropriate time, I invite you to a deep dive call on December 16. We have decided to do that because we acknowledge that it's complex. If you remember our Capital Market Day in June, we tried to simplify. We said, I mean, basically, what we are doing, one, we are selling softwares. Many people did not understand that for many years that for this activity, we are selling software. And second, what we are doing basically is making interpretation of next-generation sequencing analysis easy and relevant from a medical standpoint. Where we can still invest and continue the differentiation is our knowledge, our strength is based on 20 years of creation of what we call a knowledge base. At QIAGEN, you have many PhDs all over the world that are constantly curating data from clinical trials, from drugs and so on to create that knowledge base. We automate that in our softwares, and now we are putting more and more AI to those solutions. And that's how we are going to increase the growth or to boost the growth of this activity. It's this mix of manual data curation and artificial intelligence. And once again, ecosystem, as we said at the beginning, we sell it to discovery, what we call discovery customers, which is research and academia for bioinformatics, and we sell it also to clinical customers.

Yes. That actually was my follow-up question. Is this AI that will be deployed in a way that says, here is a better call on a variant and sequencing run? Or is it sort of higher order here is an answer to a clinician that allows you to do something with a patient that you might not be able to do if you didn't have machine learning or AI working for you?

AI will allow you to go faster and deeper and therefore, allow a clinician to trigger a treatment or an answer much quicker. And this is where we are investing.

Okay. My guess is if I wait a couple of weeks, I'll give the full answer to all these questions. Okay. But we did -- we ran a survey and we looked at the percentage of labs that were using your sample prep solutions, and that was about 1/3 and then the percentage of labs that were using your QDI solutions, that was about 1/4. But the overlap of those 2 was not necessarily as high as you might think. Do you -- from a commercial perspective, do you see sample prep and QDI as a way of better reaching the genomics labs that are clearly looking to do more advanced things?

So first thing, it's a very good question. First thing, the numbers are good. I mean, given the competition or competitive intensity, having 30% of NGS users using sample tech from QIAGEN or 26% if your data are using bioinformatics from QIAGEN, it's pretty good. The second thing, as I always say, we are far from being a perfect company. This is clearly something that we need to improve, which I call the share of wallet. So far, we have not been selling enough bundle between sample tech and our bioinformatics. We could add also our NGS chemistry, our panels for NGS to become more efficient. This is clearly a field for improvement.

Okay. If I just sort of think big picture as we close in on a few minutes left here about the growth algorithm that exists for QIAGEN, 3% to 4% growth for sample prep is the way that you've aligned the outlook going forward at your Analyst Day, 6% to 7% for QIAstat. QDI can be a mid-teens grower, I believe, as you said, longer term. And then QIAcuity grows above 25% and then you have the QuantiFERON outlook that you mentioned earlier. Obviously, there are varying degrees of confidence in any business case, and I'm not asking you to say where you don't have confidence, but I would love to hear where the relative confidence lies when you think about all the businesses and the things that need to be accomplished in order to reach that goal.

So just a slide -- QIAstat is double digit. sorry it's clearly double digit. So just to make it -- to make it simple, we want to have 3% growth for sample tech. We have 3 new instruments that we are going to launch between end of '25 and '26. This is unprecedented. And if you look at our results in Q3, sample tech is growing again at 1%, and it's mainly driven by automation. This is why we say if we launch 3 new system, we should be able to boost a bit that growth on a very mature market, but highly also profitable market. QIAstat, 40% in Q3 coming from very good growth in Q2, good level of approval at the FDA. You mentioned that. And we still have our plan of launching new menus, direct identification of positive blood culture, the complicated UTI, pneumonia. So it's just a matter of execution, but the market is still growing. We will finish the year slightly above $100 million being at $200 million by '28 is perfectly reasonable. Digital PCR from an R&D and sales and marketing standpoint is probably where we are going to invest the most. So we are putting more feet on the ground, more money in R&D. And therefore, we want to triple our revenue. We will probably finish the year around $90 million for digital PCR. That means that we will be at around $250 million by '28. But it's purely execution because we put the investments to do that. We have the menu in life science. We are now launching into the clinical diagnostic world. QuantiFERON, we talked about it. QDI, we talked about it. Let's not forget that we have other activities in our portfolio that are growing reasonably well. Forensic activities, it's close to $100 million of revenues. It's between high single-digit and double-digit growth. You see we have OEM activities that are remarkably also stable. So this is showing why what we presented to the market in June is very realistic. What could derail? We could basically be delayed in some execution if capital expense doesn't come back as we plan on the market. For me, capital expense, even in life science labs will come back in the second half of 2025. And this is one of my bet or our bet and assumption. If this is delayed, is it the end of the world? No, but we might lose 6 months on execution. But once again, we have the portfolio. We have the market fundamentals that are very healthy. We have the people. It's a matter of execution. It's a matter of execution.

Okay. I'm not going to get to all of these, unfortunately, but I'm going to ask you to finish just sort of on the long-term CAGR that goes to your idea here or what you're talking about. A 7% growth CAGR through '28 basically means that there is -- there are 3 years that average 8 given where we're going to be for 2024. So is there a fundamental underpinning that you need when it comes to some of these big picture items. For instance, does the NIH have to not be down in any one of those years? Does there have to not be a slower biopharma recovery than what we're contemplating? I mean I know you talked to a few of those things because you're making some bets on what's going to happen in 2025. But is there any sort of big picture issue that makes it more difficult to reach that CAGR over the next couple of years?

I talked about, obviously, capital expense in labs, especially life science coming back in the second half of next year. Obviously, no company is immune to international volatility. So -- but so far, we have weathered it, including when it comes to logistic issues because of some crisis in the Middle East or elsewhere. I'm not afraid or concerned by the budget of the NIH. This is, for me, a very short-term transition. Once again, I've never seen a [ pre-rennewal ] flattish NIH budget or even decreasing. China recovery or not recovery, we have long -- given our stance here, China is not going to recover before '26, and our exposure there is very limited. It's 5% of our revenue. So again, this company today is stronger, much more coherent than 5 years ago. The portfolio to grow is there. The people are there. We demonstrate that systematically quarter after quarter. Look at the growth again in Q3 compared to competitors. Some of the risks are already for me, factored in our share price, but management needs to continue to focus on what we are doing for the last 5 years, which is execution, execution, execution, top line, EBIT margin and EPS.

Okay. Great place to leave it. Thierry, I appreciate you spending some time.

Thanks a lot.

Happy Thanksgiving holiday to you if I don't talk to you.

To you too. Thank you for your time. Have a good day, guys. Thanks.