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

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on how the quarter played out relative to your expectations, but what were the big surprises? What really [indiscernible]?

Again, first of all, thanks for having us. It's always a pleasure to be here. And as you said, Q1 was actually a very strong start for QIAGEN into the year. We clearly came in with 7% growth revenue-wise. We were able not only to beat our EPS guidance for the quarter, we also feel quite comfortable to increase our EPS guidance for the year. We started the year with a guide of $2.28 EPS-wise. We increased it to $2.35, which is even above the Q1 beat. So I would say that is a testament, I think, how we feel with our overall portfolio. I think, it's clearly a strength right now to have a good mix between clinical diagnostics and an overall Life Science business. It's clearly very helpful right now that we have 85-plus percent of our revenues coming from consumables, which gives us a nice stability. But it's also important for us that the launches, which we had last year are all playing out quite well.

And then in terms of the update to the guide, you kept fiscal year sales growth at 4% CER. You raised the EPS. But you said you had a strong first quarter. You're guiding to 5% CER in the second quarter. So it implies a little bit of a slowdown in the second half. Can you talk us through the pacing of that and sort of what rolls up to that guide? What are you contemplating?

Yes, as we said on the call, I'm not sure that we're expecting a slowdown really happening in the second part of the year. I would say most companies actually would say it's a different direction. But from our perspective, I think that it is also realistic to take a conservative, cautious view given all the macro uncertainty we see in this world right now. Again, it can go from China to what even happened to the NIH budget in the U.S., it might or might not happen. So while overall, we believe we are well on track to make and most likely also to increase our guidance on revenues in the second part of the year. I do think to have a certain buffer in between is not a bad thing.

Okay. Maybe let's dive into some of those policy headwinds and challenges that we talked about a lot. One, maybe we'll talk about tariffs. You talked about how you can -- you'll be able to fully offset the impact from tariffs. Can you provide us some more details on sort of where is the gross impact going to be? And what are the mitigation offsets?

Yes. As you said, I think despite the impact on tariffs, which also is clearly something that we're seeing in QIAGEN, we were able to increase our guidance for the full year. And we also believe that also now looking forward in a given environment, we are not concerned about that. I would say we clearly took the situation quite serious last year when the first indications came out what might or might not happen. So we changed a lot from the way we are structured within QIAGEN, the way our supply chains are working. As you know, we always had significant production also in the U.S., so that's helpful. But we're also clearly also working with our customers and trying to get understanding for the tariff situation in general, plus a more favorable tax environment on the corporate tax side, I think that all factors in that we are so far feel quite comfortable that we can mitigate the taxes -- sorry, the tariffs. And therefore, that shouldn't change our EPS environment as well. The good news for us is we don't have literally anything coming from China into the U.S. So that is nothing what really hurts us too much. As you know, we are even in European country. So let's see how it plays out as well. There might be some advantages into that -- into the Asian markets. So again, overall, I think the global setting we're having is helping us quite now to navigate to the current situation.

And so for that mitigation, is it more about supply chain, maybe manufacturing base moving around? Or is it price?

It is a combination of different factors. It is supply chain. It is, again, sharing risk with customers. It is about -- again, there's a lot of different smaller factors adding up, I would say.

Okay. And then the other question we have was you touched on China, but China tariffs were rolled back on Monday pretty significantly. We don't know what's going to happen with European tariffs as those negotiations are ongoing. If the tariffs are rolled back or if the situation deescalates further, would that be upside to your guide? Would you continue using the...

By definition, we kept next, I would say, buffer into what we guided for and what our internal planning is right now so that we can work with that. If things getting easier, that is, of course, being helpful by definition.

Okay. Okay. All right. Let's dive into some of the customer segments. I want to touch on NIH, academic and government. John, maybe you want to comment on that. Just what have you seen? How has the quarter played out? How is more recent trends? And just sort of what are those conversations like?

So if you think about what QIAGEN is selling into the U.S. academic market, it's probably around 4% to 5% of sales has this NIH exposure. Remember that about 85% of the NIH budget is extramural grants across the United States, the academic centers. So you're seeing the full gamut, people who just continue steady as they go, and you're seeing other ones that are really curtailing and cutting back. But remember, what we're selling to academia is sample prep. That's the first step in lab workflows. This is a volume-driven business in terms of the kits that we're selling that are being used to get purified DNA and RNA out of a sample and be able to work downstream, whether it's PCR, NGS, other applications. So if labs are still working, they still got to start with sample prep. We're not a big price ticket item in the lab. So that's where we're starting to see business continuing to go. But remember, this is a global business for us in terms of sample prep. The U.S. is around 45% to 50% of sales. Europe is about 1/3. And then Asia Pacific, China is the remaining 20%. China is only about 3% to 4% of our sales. China is a weak area right now in general for the industry and for us. But sample prep in the U.S., we're able to mitigate it right now.

Okay. And what about -- I mean, just on the topic of sample prep, what about pharma. What about other customers within sample prep?

In Pharma, that continues to run pretty well. When you hear QIAGEN and you hear us talk about sample prep, the instrument part of the business is the one that's having the trouble right now, but we're getting ready to launch 3 new instruments starting at the end of this year into '26. That is going to be an important upgrade of our flagship QIAsymphony system. These systems usually have a lifespan of about 10 to 15 years before you come out with the next big change. Then we have 2 new instruments coming. One is to go into a high throughput segment where we haven't been before. That's called the QIAsprint. And then we have a new system called the QIAmini, which is designed for these smaller labs. It's about $5,000 or less to be able to do desktop sample prep and be able to automate what people find as cumbersome work. And so we're moving into new areas on sample prep. Pharma will be part of that push as well. But remember, sample prep is also a clinical business for us. If you hear the Guardants, Nateras NeoGenomics, Exact, these types of people, you hear the buzzwords of liquid biopsy, microbiome, MRD, QIAGEN is selling the picks and shovels to do that kind of work.

Can you break down how much of your sample prep business is instruments versus consumables?

It kind of matches the overall group split.

Yes. Okay. And instruments is where you've seen the declines in the consumables?

Again, here, we see a combination of overall in life sciences is clearly not the easiest environment for capital expenditures. On top of that, if you announce the market, you're bringing up some new machines similar to the car industry, right? You're not selling the new -- the old S-Class, if you tell the new S-Class comes down 6 months.

Yes. Okay. You touched on China a couple of times. Maybe we'll just continue there. What's that end market been for you? What's that geography been for you? Is there -- I mean, this isn't something we really think of as being stimulus benefit. This should just sort of be underlying activity.

We were clearly off like many others to a soft start into the year. I think we were like down double digit in the first quarter. We do expect a slight improvement over the course of the year. What is helping us into that, of course, is that we do have a second brand strategy since years within China, within QIAGEN. And we clearly see also here that, I would say, with the Chinese branding, it is somewhat easier to sell right now into China. So we're clearly looking into different ways to accelerate that a bit. So I would say we do believe China is an important long-term market opportunity for a company like QIAGEN. So we like to stay in that market, and we expect a certain acceleration. To be honest, we see, I would say, a certain stimulus request coming up. So let's see if that turns into real underlying revenue growth. Again, we're not believing that the full year returns now to the positive momentum, but hopefully, it gets much better than double-digit negative.

What is -- what needs to happen for China as an end market to recover for life science tools?

I think there's a couple of things right now. I think, first of all, the whole macro debate between the -- I don't know, is it the Western world in China or the U.S. in China, but that has to be settled. And I think having here a level playing field is helpful for everybody. I think we all like to live in a global world. Second, of course, I would assume that the stimulus impact in China will have some impact. There's always a question how long it will take to hit. And I think if that is going to happen, we at least are not seeing a decline in market.

Does that answer your first point on deescalation of trade war. Do you think that events like Monday this week with the reduction of the tariff rates. Is that a step in the right direction? Is that enough?

The good news for me is I'm not a politician, so I don't have to answer that. Again, I think what companies always need is certainty, right? And we can deal with everything as long as it's quite stable and predictable. And I think the predictability is -- I just heard this morning in TV, it's a nice thing if you're flying from Europe, you are up early, like that the tariffs between U.S. and China have now in the last 12 months changed 50x. I just feel bad for the pure customs officer.

Yes. Okay. Maybe we'll dig into a couple of product-specific product lines. Maybe QuantiFERON, a lot of debate there with new competitive entrants, both ongoing and future. Can you just remind us about your go-to-market strategy, how you feel like you're positioned in light of the changing competitive landscape?

So as you said, we had a strong start into the year as well. As you know, our overall CAGR for QuantiFERON going forward is 7% until '28. We had 15-plus percent in the first quarter. I think we are well on track for another year of double-digit growth rate. So we're tracking ahead of what we guided for. We always have to remind ourselves is that the majority of the market, meaning more than 60% is literally 120-year skin test. And that underlying market is growing 3%, 4% year-over-year. We see more and more mandatory testing coming up for health care workers globally, for immigration-related testing. There's a lot of reasons. And by the way, I'm always talking -- when we talk immigration, we talk about legal immigration. Illegal immigrants typically never get tested. So it is also a quite stable market. There's back-to-school testing in more and more states, but outside the U.S. starting with that. So it's a global product, which converts a test which has very low specificity into a very typical clinical test. We also have to understand it was always competitive if it comes to commercially available product. There's companies in the market which state by themselves. They haven't grown their business for a couple of years. And I don't think that is going to change. Some people who are in the market had to pull the product. It's very difficult for them to come back. And I know that there is still rumors out that Russians will enter the market. We still work under the assumption that they might enter the European market somewhere in '26, '27. Nevertheless, we haven't seen any case of indication that they started any clinical trials. So timing gets a bit more difficult for them. I know a lot of investors are now waiting for the Clinical Market Day, which we're having, I think, end of May or so. Let's see what comes out of that. I'm not too positive for that.

Given the use case here and the customer base here, is pricing a concern? Or how important is price for determining.

We are clearly working with our customers, I would say, since the last 12, 18 months to make them very loyal long-term customers. And combined there, we were able to increase price, right. And I think that is true for small customers. That's true to large customers because the benefit of the product in combination with the DiaSorin automated solution is clearly state-of-the-art and particularly compared to the traditional skin test. So pricing so far is very stable and is actually increasing.

We can do the testing for QuantiFERON against the competition in a matter of hours, very cost efficiently with a very nice reimbursement spread whereas the competition gets it done in days. And that's the big benefit that we're offering people. And you saw that especially with Quest in the recent Capital Markets Day, where they highlighted the automation work that they've done with QIAGEN and the ability to automate that test and the millions of tests that they're doing. And that's a good, very loyal customer to us, and we like working with them.

John, maybe on that point, could you sort of like rank order the decision criteria between the various tests?

Automation, time to result, total cost of ownership to get the price done. And the third one is in terms of the clinical profile. All these tests are FDA approved. They're all plus or minus doing the same. We've seen that before with other tests. FDA approved is FDA approved, but it's ability to automate the test, are you clinically relevant in terms of -- we're now on the fourth generation moving towards the fifth. And can you get it done cost efficiently for the lab?

So with that being said, why has conversion from the skin test taken so -- like why -- why aren't you further along in conversion?

It's been a steady conversion, but it takes time. It's like why are there physicians that still prescribe ACE inhibitors today for high blood pressure, even though 1 in 4 patients is going to get a bad cough? People learn certain medical practice and they stick with it. That's why you see the billions of dollars being spent on these direct-to-consumer advertisements on TV. It takes time and money to drive conversion. But again, when you watch those TV commercials that are -- listen to the track that they're saying, they'll often say, you must be tested for tuberculosis. That's another key driver of that conversion, targeting the physicians who are high prescribers of immune modulating drugs. These are the people that were going on. We're getting more sophisticated in targeting. But if you take a step back on TB, remember, we're targeting latent TB. 1 in 4 people worldwide is infected with latent TB. We have to find these people because about 10% will convert from latent to active disease. And that's the only way that we're going to be able to eradicate TB, which is still the leading cause of infectious disease death in the world. Let's not forget that more people die every day at TB than HIV and malaria combined.

In that 3% to 4% underlying market growth, can you, again, just sort of remind us like what underpins that? What's the composition of it.

Population growth, migration, new applications. For example, the more studies they get done these days, they're noticing that people with type 2 diabetes have a much higher risk of converting from latent to active disease. You're starting to see new procedures and protocols in place for the biologics, more and more biologics that modulate the immune system. That's what -- when you weaken the immune system somehow with the drug, that's when a latent can convert to active. You're also seeing in terms of new applications in countries like the Middle East, in areas like Oman, which we cite publicly, where you're moving towards large global screening programs for the people in the country.

Okay. Let's move on to maybe a QIAcuity, digital PCR. Give us an update on how this market is developing. And just sort of what do you see as the conversion drivers from some of the older technologies out there?

I think for us, clearly, one of the products which is doing quite well, clearly admitting that also here, the instrumentation business is a bit more difficult, but still growing quite nicely. Strength, the overall double-digit growth rate is driven by the consumable growth rate. We -- I think we are quite successful in launching 100 new panelists last year. We're going to add another new 100 panels this year. So we see the pull-through machine is a significant growth opportunity. I think it's also good for QIAGEN compared to some of the competitors. But as you know, we have 3 different sizes of machines. So you can really pick the machine where you -- which fits your throughput expectation, then you can start with around $30,000, $35,000 on capital investments in going into digital PCR, which, as you know, is a nice conversion story. Sequencing is a nice outstanding tool. If you're looking for the unknown information with digital PCR, of course, you can target it like for 6, 8 different kind of markers in a much faster time period than sequencing to a much lower couple of hundred dollars expense. I think that's driving conversion over time.

When you think about digital PCR, when you heard the buzzwords of cell and gene therapy, minimal residual disease testing, these types of applications, that's where we're moving digital PCR. We're getting very nice uptake right now with the pharma customers, QC for biological drug production. These are the kind of areas where digital PCR is a very cost-effective solution.

All right. Maybe let's touch on QIAstat-Dx. You've got -- you recently announced collaborations with a few major pharma companies. Can you talk about to develop companion diagnostics. Can you talk about how that fits into your strategy for the platform, how that came about?

Yes. I think overall, I think QIAGEN clearly has the opportunity compared to other solutions in the market that we can do both quantitative and qualitative results, which again gives us the opportunities to move in areas like oncology or any other companion diagnostic areas. And I think that is what we're doing with these cooperations. So what we're seeing right now driving the growth is a combination of, of course, cost launching new panels. You know that we had just end of last year, 4 new FDA-approved panels, particularly gastro and meningitis approved in time before things changed a bit on the FDA. And that is, of course, being quite helpful. We have also now a machine in the market, which can handle larger throughputs. So also the pull-through per machine is growing nicely double digit in combination with this pharma-related deals, which, from my perspective, of course, are a clear win-win because they're paying all our R&D efforts and everything that comes out is 100% still revenues for QIAGEN at the same time, opening up markets for these partners.

So in terms of those partnerships, we signed 3, 2 of them are public. The first one, we're working with Eli Lilly to be able to do an APOE marker test for their Alzheimer's drug so that you can determine which gene came from mom, which gene came from dad, how do they match up in terms of your risk for suitability for the drug. The other one we're working on is with AstraZeneca, where we're looking for markers for various chronic diseases. These would be like ulcerative colitis or Crohn's disease, irritable bowel syndrome, these types of diseases where -- we're moving beyond oncology and precision medicine, and that's the key message here. But our system is differentiated against the competition. Our system is based on real-time PCR. It's not a black box system. That's why we've become the clear #2 player in this market. Second thing is sample prep, it's IR proof, idiot-proof. Even I can use it. It can get the sample ready in less than a minute. The other thing that's important here is that we give quantitative results, not just a yes, no answer, so the doctor is able to make decisions on what kind of therapy can be used.

Roland, you talked -- you mentioned menu expansion earlier in your answer. Can you provide a little bit more color on that in terms of what the incremental contribution from that could be, how we should think about uplift from menu expansion on QIAstat?

Short term, what we're seeing right now, clearly, as I said before, that gastro meningitis are being very helpful. What we have seen pre-COVID is that in some markets, that was even like combined 30%, 40% of the total revenues. I think over time, that can go there again. Clearly respiratory in some quarters is a big opportunity. But what we're seeing right now is also that more or less the majority of our customers doing respiratory testing now adding one or even both of the other tests being available. We are -- we'll have more tests coming out of the pipeline as we laid out on the Capital Market Day as well on urine infections and others. So I would say we will drive a portfolio, which on the one hand side has tests which you have to have for respiratory gastro meningitis, but we will also have a couple of unique tests, which are unique to our solutions.

And I want to make sure we get a chance to touch on QDI. You recently been hosting these really helpful webinar sessions and one of them was on QDI. I find that really helpful. Can you talk about how -- what sets that business apart and why that's been able to do so well for you in recent quarters?

So our bioinformatics business is called QIAGEN Digital Insights. And what you're doing is trying to make sense of the data file that's coming out of these sequencers. And these files are so big and large in terms of the amount of data being generated that it's beyond human comprehension to do 2 steps. The first is what you call the secondary analysis where you're going to kind of mark what's wrong in the file. And the third one is interpretation where you're going to figure out what's the constellation of the mistakes or the issues that I find in the DNA sample and what are the clinical implications. So that's where we're offering products for both discovery work for science researchers working on drug discovery and trying to understand molecular pathways, what's wrong in the sample and what could become new drug targets all the way through to clinical applications in terms of how would you treat someone with cancer because everybody's cancer is like a unique molecular fingerprint and then also for hereditary and genetic diseases. So what we bought this week is we announced the acquisition of a company called Genoox out of Tel Aviv that is very good in terms of an online application to be able to analyze and interpret data related to hereditary and genetic diseases. That's a platform that we want to be able to use and push that into -- expand it to be able to use for oncology. These are designed for people who have experience with dealing with these files, but they don't necessarily have a PhD postdoc in bioinformatics. And that's where we're democratizing and increasing access to the power of data interpretation because a next-gen sequencing file without powerful bioinformatics is useless.

Historically, a lot of the work that you described that was done by sort of do-it-yourself, a lot of patchwork. Really, there's hundreds of solutions out there for some of that back-end informatics for sequencing. How much traction are you getting in getting customers homogenized onto your platform?

Well, it's a $100 million business for us growing -- we wanted to grow to $200 million by 2028. You're exactly explaining where we are. We're trying to develop the next Oracle or SAP kind of like in the old days when every company had their own in-house accounting software systems. And we're trying to create scalable, industrial, bulletproof AI-enabled platforms that can help these people make sense of NGS data.

Okay. We've got a couple of minutes left. I want to throw in some financial questions for Roland. One is on sort of the margin profile and the operating leverage in the model. Can you walk us through sort of the underlying model for the company sort of like x revenue growth is going to translate to this much in margins and sort of how much of it is coming from volume, how much of this shift pricing?

Yes. Couple of indications here. I think it's fair to say that QIAGEN is able to increase price every year. We do that typically quite, I would say, reasonable in terms of comparison to inflation where local inflation rates. Clearly, in the last couple of years, that was rather a bit higher. For this year, it's probably more like 100, 150 basis points. Nevertheless, given our overall gross margin profile, that gives us the ability more or less to cover all inflation-driven costs quite nicely. So I think that is primarily a goal for us. In general, we do expect gross margin improvements over time, driven by 2 simple factors. One is utilization. During the COVID pandemic situation, we clearly expanded our capacity quite significantly, and we're still underutilized in larger parts of our production. So over time, by growing into this capacity, we should see a better gross margin. Second is clearly also the portfolio. In general, we are growing faster in areas where we do expect -- where we do have a larger overall gross margin contribution factor. So I think gross margin should be helpful. On R&D, we feel helpful with 9% to 10% of revenues going into R&D. We still see significant leverage opportunity in sales and marketing, digitization in our industry. It's still quite early. While we have a larger share now of revenues coming to the digital channels, we do believe that is something that we can expand even more. So I would say there is enough opportunity for us to increase the EBIT margin, which we're having right now. I know that we said at the Capital Market Day, by 2028, we are aiming for a 31% adjusted EBIT margin. I think as of today, it's quite obvious that we're reaching that much earlier. At a given point, we are going to up that number.

Yes. So I guess where I'm going with that is also sort of what's the peak? What's the ceiling? Because you've got pretty -- you're already at a really sort of industry-leading margin. You've got more expansion. These drivers are still there.

As long as the revenue growth is in this -- what we believe is very well a heel for us, it's like 7% CAGR environment, we should be able to have a double-digit profitability growth rate. And if you do the math on that, that probably brings us at some point into significantly higher margin opportunities, particularly if the contribution factors are changing. As I said before, right now, probably the majority of the EBIT margin improvement comes out of the operational expense environment, where I do believe over time, the gross margin factor plays a larger role.

Okay. All right. That's helpful. Maybe let's touch on capital deployment. You provided an update, again, I think, very recently in terms of looking to initiate a dividend, some buybacks. Can you just walk us through -- and you also did a deal this week. So you've been busy on all fronts.

Yes, we try to do our best. But I think it goes back to the capital allocation policy, which we're actually doing quite successful as we believe since 2012, which is a fair mix on investing into our own organic development, meaning R&D, clearly also doing M&A transaction, as you just said and John was alluding to, we just announced a Genoox transaction this week. But we also see, of course, that our cash flow generation stabilized a lot over the last 2, 3 years, and we feel quite comfortable looking forward. So that's the reason why we stepped up also our share buyback program quite significantly. We did the last 2 years, every year $300 million share buyback. We are not going to ask on our next AGM more or less next month to step that up to $500 million. On top of that, we launched for the first time ever that we want to pay an annual dividend. And the share buyback, as you know at QIAGEN is somewhat special is a so-called synthetic share buyback, which means that on one hand side, you reduce your share count, at the same time, you have a cash payment to the shareholders holding the shares, which in most jurisdictions is actually tax free. So I would say it's a nice mix and still our net debt to EBITDA is most likely below 1. So I would say we have all opportunities we can play in.

Okay. With that, we're out of time. Roland, John, thanks so much for joining us. We appreciate it. Thanks, everyone.

Good to see you.