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

We're going to kick it off. I'm Tycho Peterson from the Life Science team. It's my pleasure to introduce QIAGEN. With us, we have Roland and John. So welcome to you both.

Thank you.

Thanks.

I think, Roland, maybe I'll just start off with a higher-level question. You've done a lot in terms of reshaping the portfolio. You're buying stock. You've got expanding margins. You're doing all the right things. I think are there areas you think you can be doing more? And what do you think is the most underappreciated right now?

I do think, as you said, it's clearly a quite volatile environment. Nevertheless, I think QIAGEN had a good start, and I do think the testament to the very resilient consumable portfolio we have with 85% of revenues coming from consumables. I do think what is somewhat still underappreciated by the market is also the power we have, and I do also think we are demonstrating as we speak in terms of gaining profitability. We had over the last 3 years a margin improvement of 330 basis points in operating margin. But I think it's also important to understand that we are not even close to the end. We have clearly a couple of impacts there, which were onetime, which is mainly the discontinuation of our NeuMoDx franchise. But even within the 330 basis points, the majority comes from ongoing efficiency measures. And we do believe they are carrying on probably for the next few years. And therefore, as you know, we have a target out of an EBIT margin of 31% by '28. It's quite clear that we hit that much earlier. So we have to update that at a given point in time. Same is true for cash flow generation. I would say, still -- thanks to the COVID days, we were able to make all material investments during that day. And therefore, we still can nicely go into the utilization of that capacity. So one thing what is important to understand that not only in terms of cash flow, but also in terms of margin expansion and gross margin impact is going to kick in, probably not too much in '26, but '27 and beyond, we should see also a nice expansion in terms of gross margin because we are going then in areas like QIAstat, but also in others where we come out of the significant underutilization in a much more regular environment. So I would say that is probably the one thing where most people in these days do not take attention to everybody else. Of course, very detailed in terms of top line, not too much on profitability.

And you mentioned a choppy backdrop. Obviously, academic and government has been challenging for everybody. I think a lot of your peers are guiding down 20%, 25%. You flagged the consumable nature of the portfolio, and I think sample preps helped as well. Maybe just talk a little bit about your relative exposure. What was academic down in the first quarter? And then what are you baking in for the year?

I would say when we have given guidance for the year, I think we took rather conservative approach is probably the right word to take. That's the reason why we also, I think, came in better than expected in the first quarter. We had a 7% actual delivery in the first quarter. We clearly set a tone for the second quarter, it was 5%. Again, it's very clear that so far things are going quite well. And I do think what is important to understand in terms of exposure, U.S. NIH budget is probably for us around 4%, 5% of total. And academia U.S. as a full picture is probably somewhere between 6, 7 percentage points. So I think it's meaningful, but compared to others, clearly a much lower exposure, plus and I think that is important 85%, 90% of this exposure is consumables. And as long as you don't have any significant ramp down in headcount, it keeps quite stable, right, because it is an integrated part of any kind of work you want to do there. And again, as you know, I got in the last couple of events always asked, but it was probably different in Q1. January was better than March. And I said, no, it was always quite fairly allocated. But then in April, it came down. In April, it didn't come down. Now we are in June, I would say there's clearly an underlying volatility in all markets, but we feel still very comfortable with what we said.

I guess assuming we're not one and done with the NIH budget being under pressure for next year, I mean, how are you preparing for an environment where maybe that budget is down for a couple of years in a row?

First of all, again, one step back, having -- you know that, of course, but just to remind that we have 50% of our revenues coming from the clinical environment and clearly, 50% in life science. And within that life science budget, there's only a smaller part really driven by public funding in particular in the U.S., as I just mentioned before. So yes, we are -- we have to look into that. But even if you look on our overall exposure on tech instrumentation, which is probably the single largest part of it, which would be exposed, other than one instrument, all our instruments are below USD 30,000, USD 40,000. So even in that area, we are typically in an environment where an instrument is breakeven 12, 18 months. So it's easy to make that case. Right now, everybody is a bit more careful. But again, as I said before, if you could pick between a minus 10% budget NIH today and a minus 5% in September, you would take the minus 10% today because what is really the killer right now is uncertainty. People can deal with it. And we have seen it before. We all got clearly very positively during the COVID days when NIH budgets were up double digit, pre-COVID, as you know, as well. We were used to flattish environments, and we even had sometimes a negative environment. It hasn't changed too much our numbers in general.

Maybe shifting to some of the pockets of strength. So QDI, you had a good quarter there. Talk a little bit about -- I think you said pharma, in particular, is doing well. Was that a couple of big wins? Is it a broader recovery in pharma?

QDI is our bioinformatics business where we're using -- helping customers who are taking what are universal data files coming out of any sequencer and being able to make sense of the data. And we have both the discovery side of the business and the clinical side, and the clinical side is obviously growing faster than the discovery side. Discovery side is also meaningfully bigger than where we are on the clinical side. But to your point, yes, we're seeing good wins in pharma. We're the largest player out there in this industry. We're doing about $100 million of business in this sector right now. What we're going through is a transition from licensing agreements and moving that towards SaaS contracts. Software-as-a-service, that's a bit of a drag right now on the overall growth. As we go through that transition, we see that continuing for probably another 12 to 18 months, but we feel good about the uptake in that business.

And then you alluded to a deal on the last earnings call, and then you did Genoox. Maybe just talk a little bit about that, the strategic fit, what that brings to the portfolio?

Sure. So that was talking about something that we saw coming down the pipe. Genoox is a company based in Israel that we picked up. What you're doing is being able to help people make sense of their own data, especially labs that want to be able to work on their own sequencing file. You see people who take a hybrid approach that they will maybe send out the samples to be sequenced to larger labs or they'll do it in-house, but they want to be able to do the analysis work, the interpretation work internally. And so our QDI product, which is called QIAGEN Clinical Interpret, QCI, is very good with big data sets. And for larger customers, Genoox had a very good solution for small and medium-sized customers where you have a bit more of a pay-as-you-go approach, and that's where they are a good fit. What made them also very good is that the part of the founder group are people who had worked at Google and these types of companies, so they have very good UI/UX design in terms of what's the interface for the online platform that we'll be able to flex that within our workflows. So it's a good addition. It's adding $5 million of sales this year. Obviously, it's going to grow in the future, but it's neutral on EPS.

Yes. Maybe talk about the margin profile of that business. I mean longer term, how accretive could that be?

As John just said, it's really a very nice gross margin business right now. Nevertheless, we overproportionately invest into R&D. So therefore, I would say, the EBIT level is probably somewhat where it is in group average. I would say that it's going to normalize over time, given also the overall profile we're seeing there. So it should be accretive to the overall company and going forward as well.

And that's still a pretty fragmented industry on the software side. I mean how much of a priority is it to consolidate and really scale up there?

It's customer driven at the end of the day, right? Nobody really wants to have too many different platforms or tools. And again, therefore, also contracts with too many different service and salespeople. So I would say that the consolidation is rather driven by customer demand. I think as John said before, the problem is rather that while there's quite a number of interesting technologies out there, there's not too many who are also fulfilling the profitability demands we're having. So we have to find the right balance here on finding opportunities which not only deliver revenue growth, but also with a clear track record to a reasonable profitability.

Maybe just to shift over to QIAcuity. You've continued to place a lot of instruments there. I think you've talked about anywhere from 600 to 1,000 in a good year. Where are you kind of on that range right now? And is that still 50-50 equipment versus consumables in terms of the mix?

I think it's more or less a ballpark we're in. It's like -- so again, it's 50-50, sometimes 60-40 in a quarter, but in that kind of a ballpark. I would -- if you review now the last, I would say, probably 2, 3 quarters, I would argue that we are probably somewhat ahead of our midterm plan in terms of consumable and consumable pull-through per machine, for sure, driven by, I would say, the quite aggressive expansion in menu, which we did. As you know, we launched 100 panels last year on our QIAcuity platform. We're going to add this year at least another 100 panels as well. So we will have a very comfortable portfolio, I would say, end of this year. We're still selling probably a platform in the range we said before. It is fair to say that it is clearly a bit more challenging in these days in the academic environment, while the biopharma area, we actually see nice opportunities and probably more or less going as planned. I would say there's even case to make if pharma, which can or cannot happen, gets into a more difficult environment that, that should get an acceleration. Why? Because there's clearly an opportunity with digital PCR to be faster and clearly more cost effective than, for example, sequencing solutions. While sequencing is an outstanding solution, if you're looking for the unknown information, typically in the biopharma area, people know these are the 5, 6, 8 markers who either should change or should not change. You can do that with a digital PCR solution in 1 day instead of weeks with sequencing and you can do it for a couple of hundred dollars compared to in the thousands. So I would say there's even an opportunity for us, which might accelerate.

Related to that after what happened at ASCO, just to jump in here real quick, you saw that we had the announcement with Tracer biosciences for MRD testing where we're opening up QIAcuity as a platform to our partners. You're going to see more of these types of partner agreements come where we're willing to work with companies that want to create content, put that on our systems, and then we'll be able to reach an agreement to work together. Not everything has to be made by us.

I mean it's a good question because we get that a lot in terms of digital PCR versus sequencing, right? And I know you're talking pharma, but how do you think about the clinical side of that? Obviously, companies like Exact are commercializing on PCR. You've got others, Guardant heavily using sequencing. How do you think about the pipeline clinically going forward?

We're going to be agnostic in terms of technology platform. If you want to -- and that's what you'll see in terms of the news flow coming. If you want to work on digital PCR, we'll work with digital PCR in terms of companion diagnostics or what kind of clinical applications you want to work on. There, you see the announcement with -- or we'll also use qPCR, where we use QIAstat-Dx. We're technology neutral. We will work with you what best fits your approach. Then you see with NGS, what we announced with Foresight Diagnostics, you'll see more of those types of agreements coming. There are certain scientific needs where NGS is better clinical fit for a companion diagnostic. There are others where digital PCR works very well. And then you see with QIAcuity, what we announced with Lilly for an Alzheimer's test, AstraZeneca for chronic conditions. So we're neutral that way.

But I guess just to hone in on that a little bit, you're saying in pharma, there's a clear trend more digital PCR over sequencing. You're not calling that on the clinical side. Is that...

I would say right now, we're seeing interesting deal flow on both sides, clinical in terms of companion diagnostics with next-gen sequencing and also with digital PCR. It's more driven by what are you looking for, what's the magnitude of the data, what's the best way to skin the cat.

And how is pricing in digital PCR? I mean we've kind of flagged at your big competitor there, Bio-Rad has gotten fairly aggressive, 70% discounts and the like. I mean they're the incumbent. How do you feel about pricing in digital PCR?

Our pricing is quite stable. Actually, we increased it quite a bit this year as well. So no discounts at us.

And maybe do you mind just touch on the Foresight deal? I mean I know this is a strategy to kit up more for international markets but talk a little bit about that.

This is our approach to help improve access to technologies and platforms that you have an LDT-type test that's available. And then we're working with Foresight to be able to, like you say, kit it up and make it available to other labs that want to be able to do it in-house in their own places. We've taken this approach before in the past, and it's part of our wheelhouse of being able to improve access to tests.

And you put out a target for $250 million by 2028. Maybe just talk a little bit about how much of that will be clinical, how much is pharma? What are the steps to get there?

Majority will be clearly life science. I would say clinical is probably something, as John just laid out, probably more kicking in '27, '28. So again, it might be 80-20, we'll see. But I would say it's probably in that kind of a ballpark. Right now, the growth clearly comes from biopharma. I would say academic has, as I said, an underlying double-digit consumable growth rate. I would expect at some point in time, if there's more visibility on academic spending in general, we would also expect that the instrumentation growth returns to double-digit growth rate. So I think it's different drivers getting us there.

And are there any catalysts that could really jump start that S curve for QIAcuity specifically?

Again, in terms of instrumentation placement, it's just the same what we see in the general industry. We need clear targets or rather our customers need clear targets. And again, if that is a minus 5%, minus 10%, minus 15%, I think it doesn't matter too much, just a clear number to work with because, again, most of our instruments, as I said, are $20,000, $30,000, also the differentiation factor to some of our competitors. So I think the customers can deal with that, but you want to know where you are.

How about the companion diagnostic opportunity for QIAcuity? Can you just talk a little bit about that? And you hit pause in the IBD program, but...

We have paused there because we see LDTs as a better way to go right now. As the technology is still in some early days in terms of development, you're going to see more deals coming on QIAcuity in the next 12 to 18 months that we have in the pipeline in terms here. And then also, you're going to see them coming on NGS as well. But it's going to take some time. We're not allowed right now to talk about the 3 partnerships that we've already signed for QIAcuity in terms of companion diagnostics. Those are unfortunately confidential.

Can you maybe just talk about pipeline and what that funnel for similar deals looks like?

The area for -- this area is clearly on oncology, whereas with QIAstat-Dx right now, it's non-oncology applications. It's interestingly that way. And then in NGS, it's clearly going to be on oncology topics.

Maybe QuantiFERON, you did a deep dive on that, kind of spotlighting the platform. Obviously, Roche did their Analyst Day. Talk a little bit about what you're seeing in the market out there and any feedback you had from the Roche presentation.

I think fundamentals haven't changed with any of these events. I would say it's very clear that the most important message to understand is that 60% of the market is a literally 120-year-old skin test and that even this underlying 60% market is growing roughly by 4% every year just by the overall population growth, but also by more and more mandatory testing started around the world. I think the IGRA testing where QIAGEN is participating in is, of course, doing quite well. We had another strong first quarter, significant double-digit growth rate. Midterm target is a 7% CAGR. So we are doing clearly much better than we expected for our midterm target. So I think that's good news. Competitive-wise, we are by far the market leader in that environment, but we are not the only company. There is Revvity in the market, there is bioMérieux in the market. There are a couple of Asian players in the market that is expected that Roche comes at some point in the market. I think the update was more or less what was as expected. We believe that they are in the U.S. -- in Europe in the market sometime in '26. They haven't -- interesting enough, they haven't called out any launch for the U.S., which was different than before. So let's see what that means. So overall, we feel quite comfortable in our situation.

And maybe just can you talk geographically, I think you've called out some kind of newer countries that are opening up, Oman, places like that. I mean where are you kind of seeing the newer growth?

It's actually a global business for us. The growth rate doesn't differentiate too much. So U.S. is on about half of our revenues. The rest of the world is splitted as usually as well. So I would say, particularly the Western world is driving the growth rate. And I would say Asia outside China is participating there quite as well. Of course, we have areas like the Middle East, you just called and other areas, we are trying to participate as well. But again, clearly, incremental volume, but the big growth comes from the Western world.

And you put out longer-term targets for that business, 7%. You're growing double digits now. So maybe kind of talk about what's embedded in that longer-term target.

7% is out because you wouldn't have believed us 10% anyway if we have told you that last year. Again, right now, we feel quite comfortable with the double-digit growth rate.

And if Roche is delayed further, is that upside?

The market is 60% unconverted. I don't think I have to convince anybody about that IGAR is a better test. Nevertheless, we're in a sticky environment, right? It is quite obvious that converting a clinical customer to a new technology takes some time. That's what we're doing every day. It's clearly also a quite diverse market. As you know, we have everything from health care worker testing to armies of this world to legal immigration-related work. So it's also, again, a different set of customers we have to deal with every day.

And I think you've talked about how this is very different than the HPV dynamic, right, where everybody share the same IP, you didn't necessarily have a lot of automation differences. I mean how do you feel about pricing having Roche when they do enter that market? And how do you protect your share?

I think the best answer is probably stating some facts, right? I think we closed with, I would probably say, 60-plus percent of our customers in the last 12, 18 months, new agreements typically going somewhere between 3 and 5 years. I'm not recalling anything major with the price discount.

And the automation advantage with the DiaSorin partnership?

I think it's very well known that the LIAISON platforms are the best platforms in the market, particularly if you go into mid and higher throughput areas. If you will -- again, I would argue every competitor has a fair chance if it comes to greenfield opportunity, meaning you don't have any automated solution and you want -- you have an existing instrument, you want to test it. I think you might use that. At the same time, I think it's important to understand that if you really want to go serious into larger volume, you go for the best platform available. And I do think the DiaSorin platforms are clearly absolutely state-of-the-art, and we see it quite successful. Some of you might also follow just a different example, Quest right, if you go back to their Capital Market Day just a few days away, they fully featured the automated solution they had, right, and it's all on a QIAGEN test. So I would say you can't get much more endorsement.

You can see our deep dive. We started a series of TV shows that you can find on our website. The first one was on QDI. The second one was on QuantiFERON. And you hear -- like Roland was talking about, you hear directly from Quest about what they're doing, how they're automating that test. They're doing 3 million to 4 million -- at least 3 million QuantiFERON tests a year. They are not a Roche customer, just to point that out. But to your point, 3 things that matter to customers, automation, clinical profile, but also total cost of ownership against what they're going to get reimbursed for, can it make the biggest profit spread. And we've really addressed all 3 of those key issues with QuantiFERON as opposed to what we went through with HPV, which was one test, one machine, targeting one type of group, heavily pushed into the United States, like Roland was saying, QuantiFERON sales, very complex customer group you have to address very global test. We have top automation. We have a great clinical profile, and we offer customers a very attractive cost-efficient test.

And is picking the second automation partner an important part of that strategy or no?

It's an additional angle we can take. And once we have done so, we might inform you about that. But now, it's an option.

And then I guess last one there, just the pipeline, like you've got Lyme, you've got some other stuff in development. I mean, how important is that to the long-term QuantiFERON strategy?

QuantiFERON for sure is the leading franchise there. And as I said, with 60% market, existing market, not penetrated, is probably also a prime target. Lyme is a nice opportunity. It's also a $300 million, $400 million market opportunity, where I would say the current solution clearly are looking -- waiting for enhancements. So we do expect that the good news is also it is filed with the FDA. As you know it's going with our partner, DiaSorin. So we're waiting for some feedback here. So it is on top.

Just to remind you, TB, we talk about MRD, all these kinds of markets and big sky numbers. TB today is a $1.5 billion to $1.7 billion market opportunity to convert. And we're only at $500 million right now. And this is already the biggest diagnostic out there in the world. This is also not a new technology. It's been around for at least 2 decades. It's just as old as the HPV test, but we're constantly innovating. We're working now on the fifth generation of the test, building on what we did with the fourth. So there's still opportunities. But again, this is the market we're going after.

I want to Roland go back to your pricing comment. You talked about it for digital PCR. A, are you able to quantify how meaningful that price increase was? And then b, what's baked into the guide for this year around pricing overall? And where is your greatest ability to push pricing in the portfolio?

I would say, in general, as you know, we all -- during COVID, there was clearly also different inflation scenario. So I would say most companies, including us, were clearly a bit more aggressive in price increases during COVID, more or less to keep the balance that we don't have to carry too much cost by ourselves, but share it fairly with our customers. I think that we did quite well. Therefore, I would argue that this year, we probably did it more or less with local inflation rates, somewhere between 100, 150 bps. Again, tariffs and again change the picture a bit as well. And you try to -- again, you're also finding the balance on what you can carry and what you can't carry. So I would say, I would expect a normalization that we think around inflation rates over time.

Typically, people don't associate you with the replacement cycle, but you started to talk about that a little bit more, I think, in particular around sample prep, you mentioned at the BofA conference. How big is that opportunity? Is it starting to pick up?

I think it's much more than a replacement cycle. I do think what you're referring to is that QIAGEN is going to launch starting end of this year, probably more important for '26, 3 new instrumentation platforms. I think all 3 instrumentation platforms address different segments of the market. While I would say, you, as many analysts expect that QIAGEN overall has a 60% market share, Tycho, is probably also your number in sample prep, we are clearly, for example, not part in all of the segments. In particular, we're not part of the high throughput segment. And with the QIAsprint, which is a new instrument we're going to launch, we will be the first time move into that segment. So that should be a nice opportunity for us to gain actually both instrumentation revenues, but clearly also a nice consumable pull-through because I would expect that everybody expect that the QIAGEN solution into that market should be state-of-the-art. We were waiting for quite some time to move into the market because we clearly wanted to have an instrument, which is kind of a generational shift. We believe that, that is going to come with QIAGEN next year. So I would say we will update the market more or less moving into that time frame. The second instrument is for the mid-throughput solution. That's our QIAsymphony. It's an instrument which we have for many years in the market, a couple of thousands. Here, a very new QIAsymphony gets launched, much more than a facelift, a lot of incremental features. Here, I would expect that while we will gain significant instrumentation tailwind, I don't think it will give us at least at the beginning much more consumable runway because most of the Symphonys are clearly utilized today as well. So I would expect there is more an instrumentation plan and over time, probably gaining more consumables. The last one is an instrument, which I think we are very excited about is QIAmini. It's low throughput. As you might know, sample preps, still the majority of the market is actually a manual test. If you go in a typical lab, and it doesn't matter if that is academic, pharma or any kind of clinical environment, they use somewhere between 6, 10, 15 different sample prep solution. Let's take QIAGEN typical market share of 60%. So let's say, 6 out of 10, you now suddenly can use -- can automate with a machine, a couple of thousand dollars, so breakeven in a few months, and you can walk away. Quite sure over time, you ask yourself, why I'm not buying all my 10 solutions from QIAGEN. I would assume that we have the portfolio. So it should help us to gain penetration into that market and therefore, actually drive both consumer growth rate as well as instrumentation growth. So it is an important step forward for us. It was clearly a couple of years in the making because developing new instruments take some time. We are quite excited that next year, actually 3 of them are coming to the market.

I know we're close to time. I guess two quick ones to close with M&A. You just did the recent bolt-on. You did get mentioned in the Financial Times article about a bigger transaction. Talk about how you're thinking about M&A, your bandwidth to do bigger deals and anything you're willing to say on that situation?

I think nothing really has changed. Since 2012, we have a very detailed capital allocation policy, which is a combination of investing into our business. We feel quite comfortable with 9% to 10% going into our own R&D. I think we have a track record of doing acquisition on everything but enhance value. We're happy to look at it. I think it's fair to say that in the past, we had a mixed set of deals, smaller, midsized deal. QuantiFERON is also a good example. When we acquired that in 2012, it was clearly a rather tiny company, and you gave us a hard time on that. I still recall that, but I think it worked out quite nice. And last but not least, we continue to do share buybacks. We started with $100 million installments. We then over the last 2 years did $300 installments. And we are now going to ask, I think, week after next week on the AGM to size that up again to a $500 million share buyback. We will continue to drive all 3 parameters.

And then just last one, margins, you talked about pulling forward that target. Is there any natural kind of ceiling as you think about operating margins? And should we think about 70%-ish gross margins?

I think the nice thing is offering you a different way to look at it. I would say this year and next year, majority, as I said before, of the growth margin expansion comes from operational leverage. We will see more leverage going forward. But on top of that, we will see gross margin expansion. Give you one number, which I think is important to realize. As you know, we launched a couple of instruments, QIAstat and others a couple of years ago, QIAcuity, NeuMoDx. If I take out these instruments and the related consumables, our gross margin is nicely in the 70s. What does it mean? If you launch a new instrument, typically, you don't have the utilization on the consumable instrumentation, which again gives you the overall margin impact because typically, the instruments at QIAGEN have a 40% to 60% gross margin, where the consumables are nicely above that. So you need a different mix and that, of course, you go in over time. And second, of course, some of our -- I said that before, production equipment is right now underutilized. So having also here better utilization is going to help us. So I would say you will see both drivers helping us quite some time. Is there any -- I see companies with a 35% margin in some industries and why not over time?

Great. We'll leave it at that. Thanks.

Thanks.