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

So thanks for joining us today. My name is Aisyah Noor, European Medtech analyst with Morgan Stanley. I have with me on the stage, Mr. Roland Sackers, CFO of QIAGEN. And for the first time in my career with Morgan Stanley, Mr. John Gilardi, IR of QIAGEN. For research disclosures, please check morganstanley.com/researchdisclosures. But, yes, let's start.

Thanks, everyone, for being here today. Roland, for the benefit of investors, could you kind of provide a recap of your recent second quarter earnings?

Happy to do so, and thanks for having us. I would clearly state that QIAGEN overall had a very good start into the year. We had a good growth rate, not only in the first quarter, but also the second quarter came in with a 6% overall growth rate, which I do think, particularly given the days, which are a bit more volatile, if you think on the academic franchise here in U.S. or even on China, shows the strength of our overall business. I do think it's very clearly also attributed to the fact that 85%/90% of our overall business is a consumer-related business. So we are clearly part of daily operations in all different customer groups. Just as a recap, 50% of our revenues go to the clinical settings, lab organizations; 50% go in what we call life science, including pharma and applied testing customers. The area which is probably a bit more volatile in these days is the U.S. academic funded business, which is around [indiscernible], for example, for QIAGEN is around 4% of total revenues. So I would say it has a certain impact. But as I said before, we are still growing quite nicely. Nevertheless, I would also say that the focus areas of QIAGEN are delivering quite nicely. Clearly, our single largest product in this days is our latent TB test, QuantiFERON, very solid track record now, I don't know, 20-plus quarters of double-digit growth rate. So overall, here also a penetration story. We are still converting the 120-year-old skin test, which still accounts for probably 60%, 65% of the total test performed on a yearly basis. So there's, I think, an ongoing opportunity for us to accelerate and to grow that kind of a business going forward as well. Same is true for sample preparation, which is a significant part of our revenues as well. Clearly, most analysts, not sure what your number is here, Aisyah, but I think most analysts have us somewhere like 50%, 60% market share. So it's not as easy for us to outperform the market here, at least in the short term. Midterm, we do believe there is an opportunity for us with the launch of new instruments coming up for '26. But of course, also the other areas, particularly on the clinical side, you think on QIAstat, which is a product which we offer to our clients for symptomatic testing, having a significant run rate, 30% growth rate last quarter has to do with for us offering now a much broader menu than 12, 24 months ago. We had 4 significant FDA approvals just end of last year. So having them rolling in is clearly being helpful for us. Last word on margin expansion because it's clearly also true that revenue is one part of the story, but clearly, profitability is another part. So far, significant progress over the last 2 years, 300 basis points of margin improvement, probably this year getting somewhere between 29% and 30% of an adjusted EBIT margin, clearly one of the highest in the industry. Nevertheless, we still see room to improve going forward while absorbing some other impacts like tariffs and others.

Fantastic. I want to start with QIAstat because that's been a very exciting growth driver for you this year. And we've seen some mixed dynamics in your other peers who are also launching in the multiplex technology space. QIAstat has clearly performed exceeding expectations since the launch of your new panels. What do you think resonates the most with the placements where you are taking share? Is it automation, the size, pharma partnership angle? Because my understanding is even the mini panels are not CLIA waived. So they can't be done in the outpatient setting. So just highlight the share winning KPIs here of this platform.

Let me kick it off, and John for sure, can jump in as well. I do think we -- in the meantime, we have probably a solid #2 position globally on QIAstat for the symptomatic testing. our advantage is clearly the performance of the instrument. I do think it's fair to say when we launched an instrument, we were clearly very limited around respiratory during the COVID days. And therefore, we were focusing also on respiratory as well. But the machine by itself has significant advantages in terms of turnaround time, in terms of that we can give to the customers both quantitative and qualitative results, something what others typically can't offer. And of course, it's really a fully integrated workflow. It doesn't have the issues like other machines having where it's built, where it's allowed, it's an easy walk-away solution. It's literally a cartridge, which you throw in a machine, push a button and after 45, 60 minutes, you get a solution. Now over time, we were able to expand the menu north of respiratory to gastro and to meningitis, and John can probably give you some insight what is happening now in this year and next year. But I do think what we're clearly seeing is that the benefit of the machine in terms also in clarity of results and easy to use helps us to gain momentum and market share. We always said if we are able to place more than 150 machines per quarter, it was a good quarter for us. Clearly, Q1 was nicely above that. Clearly, Q2 was nicely above that. I'm quite sure that Q3 will be a good quarter as well. So we are tracking ahead of the $200 million goal we gave ourselves for '28.

Yes. So to pick up on that point, we're talking about syndromic testing where you have a patient come in. Respiratory, gastro, meningitis are the big 3 tests. You don't know what's wrong with the patient. So you're going to test that sample against often more than 20 different pathogens. Let's give our competitors absolute credit. They built an outstanding market here. They were there during the pandemic and did an outstanding job of being helped -- we all did our part in the pandemic, but they played a key role, too. So the challenge like rolling the same with the incumbent in the market is that system, the technology, it's getting kind of old. It's a very cumbersome clunky system. It was actually built for military applications. People forget that. If you look on their website, there's a company that sells that machine for military applications. It was meant for use in battlefield conditions. And our system is purpose-built for clinical labs. It's fast, it's quiet. It's cost efficient. It's so easy that IR, even I can use it. That's how simple the system is. And why we're winning is because we have the 3 panels now in the United States, more than half the sales for the system are outside the United States. And that's where we've had all 3 panels for a while. That shows we can win. Last year, we got all the panels in the United States, the big 3 that we need. We're able to compete. So you bring up the mini panel issue. There's 2 different markets. There's an inpatient market for testing in hospitals. That's under what we call DRG reimbursement in the United States. That's where we have a good business and building. The outpatient market is moving towards these mini panels, where you have a maximum of 5 pathogens for reimbursement before you start getting into step checks or specialists to be able to use the larger panel. We're starting to roll out the mini panels to be able to serve both because a lot of the customers we have are serving both markets. We're not going for a CLIA waive system like you discussed. We don't -- we're not going to compete in that with our system. That would be a future step down the road, but we'll see. But the reason we're winning in particular in the U.S. is that our competitor has challenges with their gastrointestinal panel, and we are able to use that as an entry point into a lot of labs and then be able to move left and right.

Okay. And as you think about the mix, I mean, we know today in most of the market, 70% is still respiratory testing, and then there's still an untapped or an underpenetrated market for multiplex in GI and ME and these other indications. Where do you think that mix gets to over the midterm? We've heard from bioMérieux, for example, 60%, 70% are using 2 panels, just respiratory and GI and then 20% is using 3 panels. Walk us through how you see that developing over time?

The respiratory market is seasonal in terms of where flu is. And I know this time of year, we always get the question, what do you think of Australia and the Chile flu seasons? We'll see how the flu season is here. But with COVID, you have a new dimension of respiratory illness in that there is no seasonality to COVID. So that's one thing you're seeing there. But on GI, you also have a season for GI testing through the year. We have what we call the summer panel. This is what we call the barbecue panel because of salmonella poisoning or this type of situation. And then in winter, you have the norovirus panel. And so that's where we have also good spread through the year for both tests that are developing. But to your point, we're starting to see some good uplift of GI, but respiratory is still the dominant player.

I do think we should also add another layer of opportunities for QIAGEN, which is open to us, which is not open to other companies, which has to do with our pharma companion diagnostic business. Of course, you know that we have just recently signed 2 larger agreements around QIAstat with pharma companies. One with AstraZeneca, one with Lilly, where I do think it shows also the opportunities of, again, what I said before, being able to offer to your partner quantitative and qualitative results because it helps you to decide if, for example, a certain treatment should be used or not. And the benefit for us is, of course, they typically pay all our R&D efforts while we retain 100% of the outcome of course the upside for them on the treatment side is, of course, significantly larger than what we can do on the diagnostic side. Nevertheless, it is a significant difference compared to anybody other in the field.

Yes. You've actually stolen my next question from me. So I wanted to double-click on that a little bit. So companion diagnostics opportunity, you signed these few partnerships. Can you talk us through -- and you're actually one of the only few who actually does pharma partnerships with your multiplex instrument. So talk us through how that contract is structured? Are these alongside clinical trials? And what does the cadence of revenue look like for Astra or Lilly partnership?

Well, we're the only ones who can offer them the pharma companies is because our multiplex technology is based on real-time PCR, which is the windows of our industry. And there is no black box. People know what they're getting and they get like Roland was saying, you get a yes, no answer, but you can also get quantitative results. And that's what's important with these systems to be able to help people get the quantifiable information. What we're doing with the companion diagnostics is they're paying us in a sense to do the clinical development for the companion diagnostic assay that's going to go into the FDA or going -- at the same time, the drug is going to be submitted or it's going to be a retrofit for a drug that's on the market. And so what we're getting is we're getting paid various amounts of money over time as we're doing that R&D development for them. Once the companion diagnostic is approved, we sell the companion diagnostic, they sell the drug and we work together commercially, but that's where the financials stop.

It's pure upside to the $200 million goal we have.

Yes.

Okay. Understood. And you mentioned sales grew for the companion diagnostic piece around 20% in the second quarter. How should we think about that going into the second half in 2026? And are there further partnerships that you're kind of working on at the moment?

It's actually a business which is nicely picking up again. I think I got also a question today a couple of times, how is your overall pharma business going doing right now. And I do think for us, it's probably somewhat different than for other players because it has different parts. Companion diagnostic is clearly one of them. But of course, for example, QIAcuity and dPCR is another one, which is doing quite well. Long story short, we see actually a nice development. It is a bit more lumpy because, as you said, it has to do with signing deals. Sometimes you also have like certain upfront milestone payments on that. So I would say it's a bit more lumpy, but I would -- on the longer time period, is a nicely double-digit grower for us.

Okay.

Remember on companion diagnostics, we -- I think we're now well over 25, approaching 30 FDA-approved companion diagnostics for drugs on the market. We have a day 1 program where we're helping customers like NeoGenomics, Quest, LabCorp, others be ready to offer these right away for use to get the uptake of the drug. The pharma companies want these because they want the right patients getting the drug -- the right drug. They get better efficacy, they get fewer side effects, a cleaner label to go to market. What you're seeing, though, is that QIAGEN is able to offer quantitative PCR, digital PCR, QIAcuity is also an interesting platform for partners, plus we have the multiplex technology. But don't forget that we're getting deals with NGS. We just signed a deal with Incyte for a CALR test for their prostate cancer drug that's in -- no, sorry, bone marrow cancer drug that's in development. So we have more than 25 of these partnerships out there as well.

Okay. Very interesting. One question on sample tech, which has been relatively resilient to funding pressures versus your peers. However, it's also not growing at its historical low single-digit growth rate either. What would need to change in the market for this to accelerate into 2026? And you've got some product launches kind of planned. Talk to us about those and how they can contribute to that?

I think it's a fair observation that clearly sample prep started flattish, slightly negative in Q1, improved then in Q2. And I do think it should probably somewhat advance also in the third quarter, as we said in the call. Nevertheless, it's very clear also that, that is a business where the overall consumer business, particularly the automated consumer business is actually doing quite well, clearly also driven by the clinical environment being a bit easier than the overall life science environment, while the instrumentation part, which also in sample preparation is probably 10%, 15% is a more difficult franchise because, again, also here, in some jurisdictions, people rather want to see how the funding flows is playing out and probably being a bit more cautious than we normally are. Nevertheless, I would say the overall underlying trends are going in our favor, meaning automated probably a bit better than manual. Now we are facing 3 significant instrumentation launches for QIAGEN. End of this year, we will launch our -- replacement for our so far flagship instrument, which is QIAsymphony instrument, which we sold actually since 2008, quite successful. And there's a new version coming up. We have it already since a couple of months now tested with a good number of a customers or we would probably call them. And I would say feedback is very strong. So we believe that launch will go quite straightforward. There's 2 more launches coming up next year, probably more in the second half of the year. One is QIAsprint, one is QIAmini. The QIAsprint is, therefore, important because it's the first time that QIAGEN moves into high throughput sample preparation. While everybody knows and believes that we have an overall market share, as I said before, 50%, 60% of the overall sample preparation market, there are certain pockets where we don't have any presence and high throughput sample prep is one of them. And we were always looking for the one instrumentation solution where we believe it gives the customers a generational shift in terms of improvements. We do believe that we developed that together with our partners over the last 3 years. And I don't think that anybody has doubt that we have the right consumable for that machine. So I do think that machine will make an impact to us. Again, as every instrument, it is not like overnight, but I'm quite sure it will help us to accelerate the growth rate. The third machine is what we call QIAmini. It's rather a low throughput machine, probably only $5,000 in terms of cost. actually particularly interested for solutions if you think an academic environment and you have cost pressure, but you want to keep your volume, you have finally a walkaway solution for a couple of thousand dollars, keeping the same pull-through where you probably typically need a full-time person instead of that with a walkaway solution. So I do think it might come at the right time as well.

Okay. Very interesting. One on QuantiFERON. So what, in your view, drives the next leg of growth acceleration for this business? Will it be Lyme? Will it be other kind of QuantiFERON iterations planned for the future? Just talk through that.

First and foremost, QuantiFERON is a conversion story, right? At the end of the day, there are literally 120-year-old skin test is still 60%, 65% of the market share. We are still -- just again, while we are growing, let's say, 10-plus percent year-over-year, the underlying market is also growing 4%, right, because global population is growing. We have more and more mandatory testing for legal work and things like that, health care workers. So we are barely penetrating the market. And therefore, I would say it is a long-term penetration story for us. What is clearly being helpful for us is that more and more papers coming out, more and more KOLs see that also in guidelines, see that as a new standard test. We've seen new jurisdiction in Middle East, other countries implementing that as a mandatory test. So I do think there's a lot of factors which should allow us to grow. As you know, our midterm goal is a CAGR of 7%. Right now, we're doing better. We feel quite comfortable around that we're keeping that. Nevertheless, we are not standing still. We are improving the test in terms of workflow of automation. I'm not going to say too much today about that because there is another deep dive session coming up probably sometime next year when we give a bit more insight what we're doing there. But I would say, again, it is particular out of the use, make it easier to use for the customers. Our focus right now is clearly on the B2B side because as I said, it is a nice opportunity, not only short term, but also mid and long term.

Okay. Very interesting. Moving on then to PCR. So if you look at the second quarter, the sales ex QIAcuity was a touch light versus consensus in the quarter, and you called out some cautious spending trends. Could you give some color as to what's driving that between kind of pharma, academia pressures, OEM trends, et cetera?

Well, our PCR product bucket is all of our PCR products that are not regulatory approved. And these are products that are sold to academic labs, pharma customers, also includes our human ID forensics portfolio, which is doing pretty good. And then also some products that are sold to clinical labs that are not requiring an FDA or an IVDR approval here. That business has been a bit on the softer side, the non-digital PCR business as we're seeing the macro trends that are in the market right now. But I would say at the same time, it's not like we're playing one side off the other. The focus on that portfolio is clearly on digital PCR. This is a next huge relay of growth for QIAGEN over the next decade.

Talk to us about the competitive landscape for QIAcuity. Has the market dynamics changed since the Stilla Bio-Rad transaction? And are customers potentially holding back ahead of new launches from this competitor?

I can kick it off. And I would argue that we actually probably had a good start into the year. We clearly, I think, probably also won some ground compared to some other companies. As you just said, some others reported about more difficulties while we were still growing, particularly on the pull-through side. I think it's fair to say that clearly the academic instrumentation business, as we said before, is not the easiest one, and that clearly is also reflected somewhat in the instrumentation placement in that area. At the same time, areas like biopharma are doing quite well. So we're still seeing some momentum, also positive growth rate, for example, in the second quarter there as well. In terms of the Stilla acquisition, which was done a couple of weeks ago, I don't think that influenced a lot, if something at all. It's clearly a company which we, as many other companies in the industry know quite well. It was available for quite some time, and I would say a lot of people took a look. We know that the product got now, I would say, relaunched. I'm not sure that there was any change to that. So I don't think that changed anything in any way the competitive landscape. We feel rather that the overall situation is still quite the same, while the other company did a really good job in launching early into the market. We do believe that we have the better instruments. So we have dedicated instruments with what we believe a much better workflow they had an advantage to having a larger menu at the beginning with our launch activities, now also end of this year, we believe we probably end up at par. So I would say also that advantage is disappearing. So we feel quite well positioned going forward.

On digital PCR, the competition of the game really isn't us against the other guys. It's really about how are we going to go out and convert 2 markets to using digital PCR as a new powerful. We look at digital PCR, and we kind of sell it to customers is going from the Nokia handheld phone to a iPhone. It does the same thing. It makes a call. But the digital PCR can just do so much more. There are so many applications. In terms of MRD, minimal residual disease testing, liquid biopsy, cell and gene therapy, QC checks in terms of biological drug development, drug discovery efforts in academic labs that digital PCR is enabling that the other qPCR could not enable and NGS is just overkill and far too costly. So that's where the game is on is how can you move customers from qPCR. There's a modest upcharge for digital PCR, but it justifies the price premium because you're giving better precision and you're giving the results fast, whereas with NGS, you're able to get results much more cost efficiently. Our system can look at up to 12 targets simultaneously to get the results. And NGS is great when you don't know what you're looking for and you want to look at like 500 gene panel or these types of things. If you think about like non-small cell lung cancer, it comes down to 4, 5 genes that really make the decision as to how to make a treatment decision. And that's where digital PCR with time as we start out in academia, moved into pharma, we're moving into forensics now right now with the FBI partnership, and then we're going to start the clinical. This is going to take years to play out, but this is a technology, a platform that's going to define QIAGEN and its potential to really define QIAGEN over the next decade.

Interesting. Moving on then to genomics. So also a bit of a pressure here. You called out sales headwinds from the SaaS transition for a few quarters now. Do you have a kind of time line as to when this transition completes? And could genomics return to, say, high single-digit growth in the...

We had a couple of good quarters, right? So while we had the SaaS transition, we're probably halfway through in all fairness. Nevertheless, the order inflow is quite good. I do think there's an opportunity for us that we're also moving now next year, probably grow that business, high single, maybe even low double-digit business while the transition is probably in the larger and later stage. Again, there's still a significant demand for our solutions for all the information coming out of the sequencers to get interpretated. So I would say we like that business quite a lot. As you know, we did a small acquisition into that area as well to access a different probably smaller group of customers here with a better front end. So I think there's leverage opportunities for that as well.

Okay.

Just to put a plug in for our deep dive series that's hosted by my colleague, Domenica Martorana and IR. We have one on QDI that will give you a really good deep insights into the business and then also one on QuantiFERON they're on our website. And then there's one coming up on sample prep before the end of the year.

The QDI is done, right? So that's -- so it's QuantiFERON that's coming next, okay.

Sample prep...

Okay. One on instrument sales. The sales for sample tech was stable in the second quarter. And that's despite your peers seeing a lot more worsening double-digit declines in the life science peer group. What's driving this demand for your instrumentation? And are there any kind of regional dynamics here to note?

First of all, I would say it's important to understand that I would say, I don't know, 80% of our instruments have price points somewhere between $5,000 and $25,000, $30,000. So they're still in a reasonable level of you get it done without collecting 25 different signatures from any kind of superior, right? So typically, if you plan to do it also in terms of return factors, it's reasonable. We have clearly also instruments, particularly in the fully loaded Symphony, which is a bit more expensive. But again, we are far away from this sequencer and every kind of other instruments prices, which, of course, are more difficult. So I think that's one benefit. The second benefit, I would argue that we are still not only with our consumables, but of course, also with the majority of instruments are an integrated part of day-to-day operations. In a way, I think I always like to describe that it's a bit like even in a banking office, right, there is a certain number of costs you can take out easily, right? If you say, my goal is to have 5%, 10% out, you do the typical things, right? You take trainings away, you take travel away, you cut back a bit on your parties, but you don't go on your day-to-day ingredients that you need. You don't cut down your Bloomberg, whatever panels and so on. And the same is true for our kind of environment sample prep and others, you have -- it's a very, very first step in any lab from academia to pharma to clinical. If you have a biological sample, you want to extract the information out of that. Therefore, you need our products. The only way to impact us significantly is if you lay off 30%, 40%, 50% of people because then you cut down the volume dramatically. That is not what we're hearing right now. We clearly see the uncertainty into certain areas as we talked about that. But overall, the market, in particular, also outside the U.S., it is quite stable. You see I'm not sure how much you're following that here in the U.S. I know that you follow that Aisyah, in Europe quite detailed. The European Commission community R&D budget are actually nicely increasing, right? So we're doing actually the opposite. So again, so we will see how that plays out.

Okay. Moving on now to the P&L. So first one on tariffs. CFO is starting to come in. You guided to 90 bps headwind on margin from tariffs this year. Is this kind of the right way to think about the impact for 2026 as well? And kind of what are the mitigation factors?

Thanks for the question because it's important to understand. It is 90 basis points impact for this year, but it's also 90% -- 90 points for next year, while it's a 12-month period. So the reason for that is, of course, the mitigation continues to accelerate. A good example -- for example, is right now, we ship certain products to Canada via the U.S. Of course, we're going to stop that. And there's other things, of course, we are going in supply chain, we're going to improve. There's clearly also a part of that where we share some of the incremental costs with our customers where we can. So I would say, overall, while there is a relative impact to margin, we do not expect any larger absolute dollar impact to EPS. So I think it's important to understand. So of course, if you share something, you go relatively necessarily down, but you're not necessarily go absolute dollar-wise down. So we feel with the consensus for next year, which we see right now, I think 252 or whatever, I think that is -- we feel quite good about that as well. So there is still areas for us in terms of margin improvement, particular leverage in terms of production capacity is an important driver for us. QIAstat's underlying growth rate is being very helpful for us. Have in mind that we, with the help of some governments built up our production capacity quite nicely during COVID. So we still have to grow into that standard costing gets better as we talk. So that's just one factor being very helpful. On the R&D side, 9%, 10% of revenues going into R&D is probably kind of a good way to think about it, while we have somewhere around 35-40 efficiency programs in SG&A on digitalization, on rolling out our new ERP system, but also on footprint and others, which will help us to also net improve margins going forward if you look on a constant exchange rate basis.

Okay. So I guess to wrap that comment around margin and profitability, your target is for more than 31% by 2028. You're probably going to land this year at close to 30% already. Are you going to keep it kind of realistic with tariffs dampening that? Or could we assume now this is more of a conservative assumption?

Yes. I think it's still an assumption which we have to update early next year. I think there's no doubt. As we said, we will end this year somewhere between 29% and 30%. And as I said, while we have some onetime impact on the tariff side, despite that we are going to improve the margin. Also next year, there's no question about that on a constant exchange rate basis. And therefore, I would think that we have to increase our target probably with the guidance for next year also for the midterm.

A couple on capital allocation. So you've done a share buyback or you've announced kind of a synthetic share buyback, I guess for the uniniated what motivates the decision to do it synthetically as a repurchase rather than a traditional buyback? And some would see this as more of a dividend rather than a buyback and your thoughts there?

Yes. I think we -- all we do both, right? We just also this year initiated a regular dividend. And I would say that clearly, as we all know, once you start a dividend, your successor still pays a dividend, and we feel quite comfortable around that. But on top of that, with a synthetic share buyback, we have a tool in the Netherlands, which I think is actually the best of both because on the one hand side, you still reduce the outstanding number of shares. At the same time, you pay more or less a cash straight to your shareholders. And in some legal jurisdictions, even a tax-free distribution. So I think it's a benefit of both. Also, the regular share buybacks has some limitations driven by the double taxation treatment between the U.S. and the Netherlands. So I think it's a good combination helping us here.

Okay. And I guess last one on M&A. So you've made kind of 3 -- your last 3 acquisitions, Genoox, Verogen, BLIRT have all been of a bolt-on nature. Is there a desire here for a more transformative move given the cost pressures we're seeing today and the many synergies your business could have with your life science peers?

I think we're comfortable -- we feel quite comfortable about the acquisitions we did in the past, and I do think they're also playing out quite nicely. I do think in terms of size, we're happy to look on any kind of deal as long as it creates value and also delivers a very reasonable accretion. Nevertheless, our focus is clearly on this kind of sizes and bolt-ons. I think we built a good track record here over time. And so the likelihood for that to continue is clearly there.

Okay. Well, thank you very much. Roland and John. Thank you, everybody, for joining us today. And, yes, enjoy the conference.

Thank you. Thanks for having us.

Thank you.