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

Diagnostics here at Baird. We're very excited to have QIAGEN here with us today. From the company, we have the CFO, Roland Sackers; and from IR, John Gilardi. So Roland, John, thanks for being here.

Thanks for having us.

Maybe to kick things off, do you want to just give a quick kind of state of the union on where we are coming out of the second quarter?

Yes. No, happy to do so. Again, as we clearly said before, it was a bit -- QIAGEN had a good start into the year, clearly, 7% growth rate in the first quarter, 6% growth rate in the second quarter. I would argue that's probably twice the growth rate we typically see in the diversified tools sector right now. So given in a macro environment, which clearly has some challenges, we are quite upbeat. We were also able to increase not only our revenue guidance now recently, but also our EPS guidance after the first quarter. So also in terms of profitability, I would argue a good start to the year. Of particular importance to QIAGEN is clearly the performance of our 5 pillars of growth. As you know, we are -- as a midsized company, we really try to stay focused. And whatever we do, we want to be a top 1 to top 3 player in all of our buckets. And I do think we're doing here also quite successful. QuantiFERON, which is our single largest product has now, I don't know, even 20-plus quarters of double-digit growth rate. It continues to be a very successful story. Still nice that 60%, 65% of the market is still more or less a 120-year-old skin test. So it's overall a penetration story and I'm quite sure that will continue for quite some time. But also other areas like our QIAstat test for symptomatic testing is doing good. Again, I'm not going to promising every quarter, 30% growth rate as we had last quarter, but it should continue double-digit growth rate as well. Some of the other areas, I would say, overall are also quite good. Sample prep have seen some improvement. Here, we are rather looking forward to new launches coming up next year. And last but not least, I think it's also important to mention that our digital PCR franchise, which is doing quite well, while on the instrumentation side, particularly in the academic environment, it is not the easiest environment. We still see some growth, particularly on the consumer growth rate as well -- on the consumable side as well. So all in, I think we had a good start to the year, increased our guidance for both revenues and EPS and hopefully continuing like that for the rest of the year as well.

Yes. And maybe diving into that last comment on Academia. Can you just dive in a little more on what you're seeing on the end market, how it differs across different product categories and how you think that unfolds over the balance of the year?

I think, first of all, I want to make sure that people understand and know that I'm in the U.S. here right now, but it's a particular U.S. topic right now because actually the European research budget are actually quite good, right? The EU budgets are even increasing quite significantly. So I would say the overall academic situation, which is more challenging is a U.S. topic. For QIAGEN, the NIH budget is somewhere between 4% and 5% of total revenues, just to frame it. Overall Academia U.S. is probably -- which includes NIH is probably somewhere like 6-plus percent. So it is a sizable part of our overall revenue situation, but not like, I would say, too critical. Nevertheless, we've clearly seen on the one hand side that our consumable business, which is 85% of our revenues, continues also in this kind of a business to perform. We have seen positive growth rates. But it is fair to say that the instrumentation business there is clearly more challenging. While, again, also here in the first 2 quarters, instruments overall was slightly positive for us, where most companies had like minus 20%, minus 30%. It is also more challenging for us. I've heard today and also yesterday that some people got a bit more bullish on the academic situation in the U.S. and hearing that now the NIH proposal on the Congress is more or less for a flattish budget, which is great. Happy to take it. I do still believe that it will take some time before, call it, the confidence and trust is back, which I do think is important to have a sustainable instrumentation business. So again, I would say it's good news, but I wouldn't expect that whatever new budget approves things turn overnight. I think that is probably a bit too aggressive.

Yes. And then maybe on China, I think the business declined double digits to start the year. It seems like you're not baking in a recovery anytime soon. What do you think the catalyst is to improve trends there?

China is a market that obviously is on track to become the biggest diagnostics market in the world. If you just look at the population, it's a market too big to ignore. But the question is, what's the right approach? And how do you address some of the structural issues that you're seeing in that market. And our approach is for this market right now, sales are about 4% to 5% of our total. So we don't have the exposure that some of the other players have in that market. What we're working on is a two-pronged strategy. We go in with the Western QIAGEN brand, especially for Life Sciences for international centers. We got to remember that 8 of the top 10 international universities for research now are in the United States. The other 2 are Harvard and the other is Max Planck in Germany. So we're there with our Western portfolio that they need to be able to do peer-reviewed journal work, especially in terms of what we're offering with sample prep. We also have a what we call China for China, where we have a local brand where we bought one of our copycat competitors back in 2008 or '09 and then being able to serve that market there. But we're not exposed to VBP to this pricing pressure on Diagnostics. QuantiFERON can do okay for us there. We have, I think, 20, 25 different copycat competitors alone in that market. But it's a market we're waiting to see how it develops. But right now, we're not calling a return to growth. And -- but we want to get to the point where it's just not hurting us as much as it is right now. We'll see if that happens in '26.

Any comments on how kind of Life Sciences versus Diagnostics have trended within China?

They're both doing pretty well. The Diagnostics business is more geared towards QuantiFERON testing. We have a little bit of HPV testing still there. But Life Sciences, we're trying to really go with the marquee brand that we have for this international level work.

Got it. And then maybe if we can touch on a few different businesses, starting with Sample tech. You have a few new product launches coming up. You have QIAsymphony Connect and slated for a controlled launch at the end of this year. You have a large installed base out there. Do you have a sense for kind of what portion of those are due for replacement? Or any comments on how you expect that upgrade cycle to play out in terms of magnitude and timing?

I think as you said correctly, clearly, sample prep is a very important part of our business. And therefore, we are very much excited to have 3 new instruments coming up quite soon. Symphony is end of this year and QIAsprint and the QIAmini are probably in the second half of next year. Symphony, as you know, is the flagship instrument for QIAGEN since 2008 was the first time when we launched that instrument. And it's clearly due to some updates while we updated the machine in between. Now there's significant improvements coming up in terms of throughput and others. By the way, we will have a deep dive session probably end of -- in the fourth quarter where we give more insight on the launches on sample prep in general. And John, then for sure, is going to launch all these features, which we might offer to our customers. But the good news is we have this instrument now for a couple of -- now in the meantime months with a good number of customers. And I think there's a lot of excitement, right? We have -- as you know, we have customers who have significant numbers of Symphony, and they are really expecting this kind of upgraded instrument. So we feel we are actually quite confident that it will be an important launch for us. I do think it's important to remember that, of course, particularly in the beginning, that has probably a larger impact to our instrumentation revenues, not necessarily in the consumer revenues. Of course, our Symphony customers typically have a fully utilized instrument. So the opportunity for us to upgrade consumable pull-through will probably come over time, not necessarily in the beginning. But of course, it is a nice replacement cycle, quite sure that, that will be very helpful for QIAGEN as well, which is different than, for example, with other launches. So the QIAsprint, which is a high throughput sample prep machine is quite unique to QIAGEN. While I think everybody knows in the meantime that QIAGEN, I'm not sure what your number is, Catherine, but I think has a 60-plus percent market share in sample prep. We don't have any footprint in the high throughput sample prep solution. So every instrument we're going to sell into that market is clearly 100% incremental gain. And of course, the same is true for the consumable side. So we are also looking forward -- very much forward to launch that instrument. We were, for many years, hesitant to go into that market because we always were working under the impression, whatever we're going to launch it, it has to have a kind of a generational shift. We do believe now that over the last 3 years, together with our partner, we developed this kind of instrument, which brings features to the market, which probably nobody else has right now. So again, a nice opportunity for us as well. Last but not least, QIAmini, as the name already says, it's rather a very small instrument. We haven't set an official price tag yet, let's assume $5,000 or so, an instrument where you clearly can automate a manual sample prep solution. So particularly in days where, for example, you do have headcount issues or you don't want to hire new people, but you want to keep your output the same. You can have a very small instrument, which is breakeven in a few months, doing the same work, for sure, being very helpful in penetrating the market for us as well.

Sample prep is an example as well of that QIAGEN serves Life Sciences and Diagnostics. We get that question a lot. Are you Life Sciences? Are you Diagnostics? Pick a lane. And we're an enabler company. And if you think about sample prep, we're selling that to Life Sciences labs. Every year, we have 2 to 3 customers that want to win Nobel Prize. Hopefully, in October, we'll have some more this year. But at the same time, you talk about liquid biopsy, you talk about MRD testing, clinical lab adoption of blood-based testing. That's where a QIAsymphony Connect is such a key enabler of that. That's where we're able to serve this continuum from Life Sciences to pharma research to forensics. Every 10 seconds, there's a crime scene somewhere in the world being analyzed with our kits. That's where we can take more than 80% of the products in our full portfolio at QIAGEN and sell them to both Life Sciences and Diagnostics, especially in sample prep.

And for the QIAsymphony Connect, I guess, does it -- do you think that will be mostly replacement driven? Or are there greenfield opportunities? And can you just remind us the mix of full purchases versus reagent rentals for that business?

I would say the type of sale is very much driven by the segment you're going into. So the academic environment is typically budget driven. Therefore, it's a straight sale. But on the clinical side, you typically -- as you know, you get paid by the test, by the insurance. So they like to have this kind of reagent rental model. We sell Symphony in both areas. So I would assume there is a fair split between both. In terms of impact, I would believe in the beginning, you will have probably a lot of replacement because, again, we have a significant number of customers who are maxed out and they were just waiting for the instrument. And you see that also, I would say, in normalized years, we had always like 200-plus Symphony sales. Right now, everybody knows that the Symphony is coming up. So they're holding back right now. It's like, again, if whatever car company launches a new car, nobody buys the old one anymore. We see a similar pattern right now. So I would say there's probably some replacement, but I'm quite sure that we are able to convince new customers as well.

And with QIAmini and QIAsprint, I guess, going into those new throughput offerings, by how much does that expand the market opportunity within Sample tech? And just given these new launches, how should we think about Sample tech kind of growth acceleration into '26?

As you know, we were -- we had kind of a slightly negative growth in Q1. We were slightly positive in Q2. I do expect that we probably improve a bit in the rest of the year. Let's see how it goes. But we clearly want to move that rather into the whatever, 3, 4-plus environment over time. Again, it will not come overnight. If you have this kind of a market share as we have, it is hard to outperform the overall market growth rate. But nevertheless, particularly on the sprint, moving into a market which is not only a market where we don't have any footprint in, but we do have the consumables. I'm quite sure that everybody on the customer side believes that QIAGEN has outstanding sample prep solutions, we will gain some traction there. I'm quite sure and the pull-through on these machines, of course, is also quite remarkable. Have in mind that as a rule of thumb in our industry, typically, an instrument should generate somewhere between, I would say, 50-plus percent of the purchase price for the instrument as a consumable pull-through per year. So you can see it can ramp up quite nicely.

Yes. Okay. And then if we move on to QuantiFERON, another strong quarter growing double digits in the second quarter. You mentioned skin test still makes up over 60% of that market. So where do you think that mix goes over time? And are there any subsegments of the market that you view as near-term opportunities? Or conversely, any that you think will be more challenging to convert?

Let me kick it off and then John can add to that. I think it's important to understand what you just said, and I want to reemphasize it that 60%, 65% of the overall market is literally the 120-year-old skin test, right? And so we have to change medical practice. At the same time, the skin test is growing by 4% as the overall market is growing. It's clearly world population is growing. You have more and more countries, states starting with mandatory testing for health care worker, for legal immigration. If you go into the U.S. or if you're going into the Middle East, if you want to have a working visa, you get tested, right? If you are back-to-school testing, it's quite a significant part of that as well. So again, it's a latent TB testing. There is nice opportunities for us over time. But of course, even if you're growing double digit as we do, if the underlying market, which is 60-plus percent is growing 4%, it's actually quite hard for us to -- again, to gain significant market share, right? We're quite happy as we are. Q3, again, will be a good quarter. It's probably not the easiest one for us because particularly also last year, the third quarter was a quite strong quarter. So we have not easy comps, but overall, we do have the leading product in the market, and we have more opportunities to come.

So let's tackle some of the hot topics around QuantiFERON. You're talking about testing. This is a very heterogeneous market of people you have to test from health care workers, firefighters, paramedics, nurses, doctors. They have to have routine tests that are done on a periodic basis, recession or good times, bad times in the economy. It's just required by law. You have another section that we call congregated living. This would be nursing homes, prisons, military. The third bucket would be back-to-school testing. That's why Q3 tends to have the higher sales for us. Kids require to have a latent TB test done as part of their school physicals at different ages. And then there's really this market that's driven a lot of growth over the last couple of years in terms of the underlying market expansion opportunity, and that's been biological drugs. If you listen to the commercials, which Trump wants to get rid of, then you'll hear them often say, you have to be tested for tuberculosis before prescribing -- taking the drug. You have patient opportunities that are expanding now in type 2 diabetes, renal cell patients, chemotherapy, anywhere that the immune system is modulated or suppressed. That's when the latent TB, which affects 1 of 4 people worldwide can convert to active, and that is about 10% of that pool. And that's why it's critical that we identify people with latent TB. They're monitored, they're treated with antibiotics for about 6 months to kill the bacteria. But that's why TB is a leading cause of death worldwide right now. More people die of TB than HIV and malaria combined. What you're hearing about is the last point, we were getting some questions in terms of changes from the U.S. government funding for U.S. AID or for CDC, these are not having an impact on our performance.

Yes. Okay. Very helpful. And then earlier this year, you called out early '26 as a potential launch time line for a fifth-generation QuantiFERON. Is that still in the works? And how meaningful could that upgrade be? And maybe take the opportunity to talk about how you think about the competitive landscape?

Again, I'm happy to kick it off here. I would say the competitive landscape hasn't really changed over time. And there was clearly some other companies having their Capital Market Day, I think, in May. And to the surprise of a lot of people, we're clearly not talking about any U.S. launch, at least up to 2027. And we're still working with assumptions that they come to the market by 2026. Let's see how close that is really the question is again, if there's a clinical trial ongoing or not. Nevertheless, we clearly had enough prewarning over the last more or less now 3 years. And so we're working with our customers quite closely, but also on our products where you were referring to. I do think if it comes to the chemistry, we are in the fourth generation. It's an outstanding product, and you see the publications, papers around. It's hard to improve. And you see also what John was saying before, a lot of other companies are actually failing to bring a product to the market while they are very strong clinical players. So our focus is clearly also on making the life of our customers easier, think about workflow improvement, think about throughput improvements. So it is a significant volume test for a significant number of our customers. Any kind of improvement in that environment saves them clearly money, which is an important factor.

This technology has been around for 30 years. This is nothing new. These competitors that talk about wanting to come into the market, they should have been over a decade ago. But this is a really hard test to make work. It is not a standard diagnostic where you're looking for a target, you find it and then you illuminate and then it registers that it's there. You're sending a sonar signal into the blood sample and measuring the response of the immune system back. Each of us in this room or on this call have a different immune system and getting that calibrated to call a positive -- to find a positive or a negative case is really challenging. And that took us years, and that's why we continue to do so well here.

Yes. Okay. Maybe moving on to QIAstat, really strong placement growth to start the year, particularly in North America. Can you just talk to what's driving that strength and how much your recent menu expansion has helped there?

You said. I do think we had clearly an important event end of last year by getting for FDA approvals done on the QIAstat in particular, gastro is an important topic because you might recall that in the U.S. in the symptomatic testing, a significant part of that business is a tender-related business. That means you have to offer a set of different panels. And typically, respiratory and gastro are a mandatory part of that. And therefore, now we are finally able to more or less also address this kind of market opportunities. And while only probably 1/3 of the market gets addressable every year, we see already quite some successes being participating in these tenders and more importantly, winning the tenders. So I would say there's quite some time to go before we really have penetrated that market significantly. But overall, I think it's also fair to say, I always believe that some investors believe like post-COVID, every doctor or every hospital has this kind of symptomatic testing environment. We all know that it's not true. That's, of course, true in the larger cities. But even if you go into hospitals, they typically have centralized labs, but they don't have it like, for example, in the nursery, in the ER room and more and more hospitals want to have that. We see now quite a number of clients who want to have not only 2, 3, but also 4, 5, 6 different units. That's the reason why we just launched Rise where the customer can more or less bundle 4 to 8 stats into an integrated workflow, which again shows that there is quite a significant demand for that. Nevertheless, stat is a global product for us. Pre -- more or less this year, we were growing faster outside the U.S. than in the U.S. Now as I said, it's more balanced, which is good. But the growth outside the U.S. is continuing. We are going to expand the menu. I think it's fair to say also compared to others, we are well prepared for the next wave because have in mind, for us, it's a real-time PCI instrument, so we can deliver both quantitative and qualitative information. Think on the pharma cooperations we have with AstraZeneca and we have with Lilly. This is what other companies not even can do because the technology doesn't allow them. So also for the next wave in other areas outside infections, I think we are well positioned.

And you mentioned Rise, which you recently got FDA approval for to your higher throughput system. Can you just talk to the importance of that platform? And how should we kind of think about the launch trajectory?

So when you look at our QIAstat-Dx system for syndromic testing, again, where you're testing for more than 20 different pathogens at a time, you can buy it in modules. These are like -- they look like a gaming computer tower. So you can put either 1 to 4 together with a module to be able to read the results. It's so easy, even I can use it. It's IR proof. But if you go to the Rise, you can put 18 of these modules up to 18 together. That enables you to work overnight or during the day and to free up the lab tech to do something else. You just load the cartridges into the bay. They're already scanned. The machine takes care of the rest. You never touch it again. And that's what labs, especially in Europe, like about this who are higher throughput customers because it frees up time. The hardest thing to find right now are people to do this kind of clinical lab work.

And if -- we touch on QIAcuity, you started out with the system in Academia and then made more of a push into pharma and more recently into clinical. Can you just talk to what you're seeing in each of those 3 markets from a growth perspective and kind of the overall remaining opportunity there?

Sure. So QIAcuity is our entry into digital PCR. Digital PCR is the next generation of PCR, which is the Microsoft Windows of our industry. This is kind of like going from Nokia handheld phones to iPhones, where you think it does the same thing, make a phone call, but it can do just so much more. Like I said earlier, QIAGEN is able to take technologies, and we're able to enable our customers from basic research all the way through to clinical health care to use these products. QIAcuity is another example. We started off in Academia. You're seeing a surge in the number of papers that are being done with digital PCR as a technology platform. We moved into the pharma industry, cell and gene therapy, QA/QC for biological drug development done now with digital PCR, applied testing, 47 of the 50 states in the United States, plus 2 territories are using QIAcuity systems for wastewater testing for infectious disease monitoring. Plus we're working with the FBI on digital PCR applications for crime scene analysis. Now we're just at the point now where we're starting to work in clinical areas, mainly in oncology and infectious diseases. Here, we're working with partners on MRD testing like we're doing with Tracer Biosciences. We're going to be able to drive this technology into these areas and use these channels. And this is a really important relay of growth for QIAGEN over the next decade or so.

Okay. And then on margins, you've shown very impressive progress towards hitting your medium-term target of 31% -- at least 31% adjusted op margin. Any update in terms of time lines on when you think that target is achievable?

I think it's very fair to say that we have to update the target earlier than '28 because probably most -- if you look on the guidance right now, it means we're ending this year probably somewhere between 29% and 30% given the consensus for next year being, let's say, EPS-wise around $2.50, you can see that there is a significant margin improvement also expected for next year, bringing us very close to the 31% instead of 28% already in '26. So I would assume that latest on more or less when we give guidance in January next year. For next year, we're also going to update our midterm target. For me, it's very clear that we continue to see margin expansion also beyond '26. We have opportunities on the gross margin side. We still have an underutilization, particularly on QIAstat. So better utilization, you see the current growth rates are being very helpful for our standard costing. We feel quite comfortable with overall R&D investments of 9% to 10% of revenues. I think it's kind of a sweet spot for us in terms of input versus output. But we also have a significant box of efficiency projects, 35-plus different projects within SG&A goes all the way from centralization of certain locations into digitalization efforts. We're in the middle of rolling out our new SAP system. So there's quite some initiatives where we do believe they should have a very positive impact to profitability. So I would say you should expect QIAGEN to have also a very solid profitable growth, not only in '26, but also beyond. Currency, of course, right now is not too helpful for us. Nevertheless, I would say that we can deal with it is probably, I don't know -- right now, if you look at dollar-euro, it's probably like a 2% impact. Nevertheless, that should be okay. Tariffs, I would say, as one of the few companies, we were able to deal on that quite well. As you know, we share the pain with all different participants. We see at the same time that corporate tax are a bit lower than we anticipated in our midterm plan. So there are some opportunities there as well. We will change some of our supply change rates, EG, for example, in the past, we delivered Canada through the U.S. Most likely, we're not going to do that going forward. So I think there's also opportunity for us here that, again, the consensus as it is right now is probably reasonable.

Yes. And then maybe lastly on capital allocation. You recently initiated a dividend. You've been active on share repurchases. How should we think about balancing those versus the potential for M&A going forward?

I think since 2012, we have a good mix of investing into our own business, organic growth, some acquisitions. Typically in the past, we did bolt-on acquisitions, but increasing our share buyback capabilities. I would say we always had $100 million incrementals. Now in the last 2 years, we did $300 million incrementals. On the AGM, for this year, we got an approval for a $500 million share buyback. On top of that, we started to pay a regular dividend. European companies do that typically once a year. So we did that in June this year. So I would say we will most likely play all 3 areas. Our cash flow is quite stable. We just issued another convert that was mainly for refinancing purposes because we have a $500 million convert coming up. Also important to understand, it's a net cash sales convert. That means the first $750 million always get paid in cash, not in shares. So it's also a very reasonable and very cheap financing instrument for us.

All right. Great. Well, with that, we're out of time. Thanks, everyone, for joining. And Roland, John, thanks for being here.

Thank you.