Qiagen N.V. ($QGEN)

Good morning, everybody. I'm Luke Sergott. I cover life science tools and diagnostics for Barclays. Kicking off the conference here, first meeting with Qiagen, long-time listener, a long time caller or I guess, for me. I have Roland Sackers, CFO; and Daniel Wendorff, IR. I guess just to start off, we talked about this a little bit outside, but kind of go through updates on strategic direction, CEO search, some of the M&A news that's been out there. So just kind of wrap all that up into some early comments.

Yes. First of all, Luke, thanks for having us. And I appreciate that you're now a research analysts and not a search anymore. We still miss you as a customer. But I think it's an important question. And I think probably you're referring to also the comments Thierry made more or less last week where he was, from my perspective, reinforcing what we said before, right? On the one hand side, Qiagen feels quite strong about, I think our overall perspective in the market, I think we delivered also a very strong 25 footprint. And with our focus around our 5 pillars of growth, we feel very comfortable going forward. Nevertheless, we are also going to a CEO transition. As you know, in the company announced that they go a different path. And we're in the middle of the CEO search. We are now down from a long list to a short list. I think we said publicly last week that we probably believe that sometimes in the second quarter, that may result in an announcement. It depends a bit when a new person can start if it is a U.S.-based person, European-based person because, as you know, in Europe, you have a couple of competitive clause and other things, which might take some time. Nevertheless, I think the Board is very straightforward that they are looking for somebody in U.S., you would probably say who has seen the movie, somebody who has experience in the footprint in more or less in all of our industries we are serving on the clinical as well in the life science side, clearly, somebody who worked on Europe and the U.S. So I do think that is the expectation, and we are moving along quite well with -- I would say, a strong group of candidates. Nevertheless, during that time period, and again, we went through a similar situation in 2019, as you know, while we are a much stronger company today. The Board, of course, has to review all alternatives it has, right? And that goes from just driving the organic growth. Also doing, of course, as we did in the past by ourselves bolt on acquisitions. But of course, if there's any opportunity to create additional shareholder value or shareholder value even much faster by being part of an acquisition or any kind of transaction. We are very much open to that. That's also the reason why we hired advisers to help us facilitating that. And again, as you know, we will see what the outcome is. The old rule is nothing changed until the day we announced it, and that's where we are.

Yes. Until you get another press release, yes. All right. That's fair. And then I guess from a CEO perspective and you guys are recruiting and in light of the strategic rationale and maybe I don't want to say shopping yourselves, but just open for more discussions around that. How does that impact the search there? Is that like walk us through who would be coming on? Like would they have protections and -- because like you said in 2019, you went through a similar dynamic.

I think you can take your 2 perspectives, right? And I'm not telling you if I'm leaning to one or no, but just more or less, I think it's probably the range of objectives you can have. On the one hand side, you can, of course, argue okay, is this a limitation to your CEO search because what does it mean for a CEO if there is a company which is reviewing its strategic position. But on the other hand, you can also take a position and a view and saying, okay, it might be helpful for any incoming CEO if that review was properly conducted and reviewed and the board came to the conclusion the best way forward right now is more or less staying stand-alone and moving it forward as the organic plan is quite strong. That doesn't mean that the Board doesn't know about its fiduciary responsibility going forward. It's quite obvious that if the day later, somebody else would come forward and say, hey, we have a different view on that company and that they don't know about their fiduciary responsibility. So I would argue, you can take different views. And nevertheless, the list of candidate is quite strong.

All right. Great. All right. Let's go to the fundamentals. I think the feedback on 1Q across the board from tools is that they took investors kind of by surprise with how conservative or appearing conservative, the guides were and it felt more of the same of the last few years. Walk us through what you guys -- what looked into -- what was baked into your 1Q guide? And coming in a little bit softer there. And why this time is -- why it's different than what we had seen in the last few years in the space?

We clearly, I would say, gave a guidance, which we feel still quite comfortable with for the full year of a goal of 5% growth rate. Nevertheless, I do think it's fair to say that there is clearly quite significant ongoing macro challenges in this world, right? I think the good news is that finally, U.S. has an approved NIH budget, which is also quite helpful on the consumable side. Nevertheless, particularly on the automation side, it's also quite obvious that it will take some time before our customers rebuild the confidence to do mid- and long-term investments, which is buying a new machine. Because we all recall 6 months ago, there was a lot of rumors around NIH budget might be down 20%, 30%. That is not helpful building the confidence in, again, if you want to buy a new instrument. The same time, other things have changed, right? You're now seeing what's going on in the Middle East. We all hope that it's over quite soon, but we all know that every company has business in this area. It is clearly a significant part of a lot of logistic change. I'm quite sure that the freight companies are already reviewing fuel surcharges and other stuff. So a lot of things going on. So I would say, starting on a realistic more balanced base is a good starting point. If it goes better, I'm quite sure that we, as many other companies still taking orders. But again, I wouldn't underestimate the impact of this lack of confidence. We're still seeing, particularly on the academic side. The clinical side overall feels quite strong. We don't have the strongest respiratory season in the world right now. So there's no incremental tailwind. Now QIAGEN specific. Have in mind, of course, we are fighting in the first half also some headwinds from the discontinuation of NeuMoDx and [ QIAcuityDx ] that will fade away just that by itself will give us 200 basis points more growth in the second half compared to the first half. We also made important launches this year. As you know, we are launching 3 new machines on sample prep, 2 already on the market. So there's no launch risk on that. Quite obvious that we will generate more revenue in the second half than the first half. So also that will overall give us a step-up of 150 basis points from new products on the sample prep side, 50 basis points from other launches. So I think there are good reasons to believe that we see an acceleration, Nevertheless, we're not in the easy environment right now.

Yes. And on the academic government environment, you touched a little bit on that. We talked about how last year you had the second half weighting. I mean, last year was like a total freak out, I guess, from everybody when they saw that budget cut 40%. So we don't have that this year. But what we've seen is that the budgets are still slow to release. And like we were at AGBT, and I think that the sentiment there was that at least researchers felt that, okay, at least I'm going to have my job. I'll figure out when I get my money later. That's like the incremental positive that we got. Are you getting that same type of feeling from your customers?

Yes. No, I would say the good news for us is you have seen that last year, we were also not really much affected on the consumable side from all the shutdowns and budget things because our products are typically products which are very resilient. As long as you go to the lab, you need our products because otherwise, you can't do anything. So we have felt it mostly or a significant part, actually on the instrumentation part. But yes, of course, there is this level of uncertainty, which, as I said before, will take some time before it moves away. It's actually also different in the U.S. and I think that is in European research budgets are actually moving quite well along, which is important for us as well. Yes, it could be more stable, but we're still moving in right direction.

And on the U.S. side, are you seeing -- is this kind of just a continuation of existing projects? Or are you starting to get bids for new project starts or new ideas?

What you were really seeing picking up for us is request for quotes for the new instruments. So you see that people at least expecting money. They're doing the due diligence work. They want to have demos. So that helps us also to get, I would say, more optimistic for the second half of the year. because you wouldn't do that if you wouldn't be somewhat optimistic because there's are other things you could focus on.

Yes. And on those launches, I mean, you have the Sprint or the QIAsprint, the QIAmini.And the first update QIAsymphony in a long time. So kind of walk through the genesis of -- and where these new boxes are going to fit within the workflow and...

Clearly, 3 important launches for us. And as I said, Symphony is on the market, Sprint is on the market, Mini will be end of the year, probably not much contributing revenues for this year, but probably more important for '27. Impact to the financials will be different. As you said correctly, Symphony, of course, is a well-known instrument for Qiagen, but now we had a major new release, which has a lot of features, which old machines doesn't have from continuous loading random access, 30% more capacity on a lower footprint. Again, as you know, we have a lot of significant customers who are growing 20%, 30% and they are clearly in desperate need of new sample prep machines. And so if you can more or less offer them now new machines, which are higher throughput and a lower -- or higher throughput on the lower footprint is exactly what they're looking for. So we have, I would say, good order income on that. This will generate particular instrumentation revenues. It will take some time before this generates incremental consumer revenues because these machines, which we are probably replacing other symphonies are very much utilized. Over time, it will generate more throughput, very different than the QIAsprint. QIAsprint is a high thoughput machine. Here, Qiagen doesn't have any footprint at all because we have never been in that subsegment, while we would say, the leading market player if it comes to sample prep is more than 60% footprint in the kit market. We have never been in that subsegment. I would think here, we will see both significant income of revenues from the new instruments. And of course, every kit is also incremental kit to what we're selling. So I think that is something what, for sure, will have large financial impact on the sample prep side, not only for this year, but probably also midterm. Last but not least, the Mini again, a very different instrument, rather an instrument where we are expecting to replace manual work. And the way it should work is, we haven't set a price point yet, but let's assume you can now buy a walkaway instrument for $3,000 to $5,000. And as I said before, most analysts, I think you have a similar number, Luke, expect that we have a 60% market share in sample prep. Typical setup in the lab is that we have 10, 15 different applications. So let's assume we have 10, 6 coming from Qiagen. Now you -- instead of using them manually, you can use an automated walkaway solution breakeven in less than 12 months. Over time, we expect these customers ask themselves why I'm still doing for others manually, if I can have a walkaway solution. Particularly in days where everybody feels a bit squeezed. Money is a bit limited. So I do think that's a nice addition to our full menu. That's also the reason why we expect that our mid- and long-term growth rate for sample prep should be significantly up. Again, this year, it's probably somewhere between 9% and 10% growth rate. But of course, that includes the $40 million from the Parse acquisition. If you take that out, we are still probably somewhere between 4% and 5%, which is a significant step forward from the underlying, let's say, 2-plus percent we had in the past for our single largest product. In addition, being the CFO, is clearly also important and not a surprise that sample prep is probably one of our most profitable products as well. So that also will have a, I would say, a good impact on our overall margin, probably '27 and forward.

On the Sprint with the high throughput, right, when you think about and this is -- I'm thinking more about diagnostic labs and liquid biopsy applications. How scalable is this to get into if there's like large-scale genomics population studies to single cell, again, because you're the first layer of that whole biology stack, you need to unlock that part of the market?

So the QIAsprint is mainly targeting our research customers. So high throughput sample preparation for our research customers. But you're right, the QIAsymphony Connect, we have, in particular, developed for our liquid biopsy customers, full sample traceability, very important in clinical applications. It has a superior extraction performance due to a slight technology switch. So even in samples where you do not have -- where you do not have a lot of material, you can purify that very easily with the QIAsymphony Connect. And we particularly follow the strong growth of our liquid biopsy customers with the QIAsymphony Connect development. But the QIAsprint, this is really the high throughput for the reason mainly for research applications.

Okay. That's helpful. And then back to what you were talking about the profitability on the incremental. With the new instruments, typically, from a mix perspective, that was always a headwind, obviously, versus your much higher margin consumables and that obviously hasn't changed. But it's more of a question of from the new instruments coming out versus what we had seen in the past, can we assume a better drop-through from that higher instrument mix? Or is this going to be something like we've seen in past launches?

As you know, we do have a midterm target out of 31% adjusted EBIT margin for 2028. And I think we've been quite vocal about that we are going to increase that target going forward. In brackets, I only have to wait for a new CEO. He should review what he has to deliver. But of course, we internally develop the numbers signed it up. So we're happy to release. It's just fair that whoever comes in has a chance to review that and might even up, I don't know. We will see that. But we feel comfortable that we have potential to increase that. A significant part of that, I would say, expansion of profitability, again, from more or less a 29.5% we had last year is clearly also that we do expect gross margin improvement. And that is driven by a couple of factors. One factor is that we expect also the consumer number in sample prep to grow. As you said correctly, overall, we have a healthy instrumentation gross margin better than most other companies. But of course, it is not to the same level than our consumables. It's probably also the reason why this year, that's more or less a bit flattish, it goes up a bit but not a large change and that comes in next year. But there's, of course, other initiatives as well, in particular, also QIAstat will drive gross margin improvement because right now, we are underutilization. But of course, if that product continues what we strongly believe 10-plus percent, that should help us to grow into that and therefore, reducing our standard cost gain. But on top of that, we have for the -- what we call QIAefficiency initiatives where we tackle a lot of different areas in terms of margin improvement has to do with, on the one hand side, rolling out our new ERP system. As you know, historically, we had 2 separate SAP systems, one for Europe and Asia, one for the U.S. Now we bring it to the new SAP HANA system on a global basis. So there's a lot of end-to-end work integration, which, of course, made a significant difference for any larger organization. But we also still have opportunities to shut down smaller sites and locations to integrate them into our larger hubs, which again will drive efficiencies quite significantly going forward.

Okay. And on that LRP, you talked a little bit on that. But on the growth perspective, you guys talk about some share dynamics there on QuantiFERON. This is one of your key pillars of growth. I think that your position in that market is well understood. But there's always the bogey of competitive dynamics coming from the bigger customers and diagnostics world. So give us an update on like how you guys are planning for that? And anything you want to walk through about the different -- it's a very niche market set, right? It's very fragmented. So where do you think that you'll be able to get?

I think first and foremost, everybody has to understand that still 60% of the market is still a 120-year-old skin test, right? And even 120-year-old skin test market is growing 4% as global population is growing as more mandatory testing getting required, back-to-school testing, health care worker testing. So the market is growing. Second is that market was always competitive. People for good or bad reason, obviously, there's only Qiagen in the market. There's other companies in the market, very serious clinical companies as well, right? So I'm not sure why somebody might believe one is better competitors than others. And I would say, we fighted them all quite significantly over the last couple of years. Yes, we clearly have the leading market share. But what probably also has to do is that we never stand still. We improved the product. We have now launched a fourth generation. As we all know, the fifth generation is coming at some point. We made particular this year, a significant step forward in terms of automation, we just released weeks ago, new automation steps, which increased 75% of throughput that is hard to catch for anybody going out. And most important, we work with our customers over the last 2 years to embed them into like 3, 4 years contract, which I think is a win-win situation because at the end of day, we shouldn't forget also QuantiFERON is not only for us, but also for a lot of our customers, it's not for most of our customers, a significant product with significant profitability. So the question is, why should you change it? Particular -- and you know, Luke, you know that, have you ever heard in the last 15 years any issue with QuantiFERON kit? Is QuantiFERON automated system? No. It has worked seamlessly. So changing a product on the clinical side, which is working perfectly, is a risk and the one learning we all have in our industry. That's true for our supplier. That's true for a lab as well is once you can't deliver, you are in deep trouble, right? So putting that in a risk, we'll see how it works. We feel well prepared. There's also not a large update on that. As you know, some of the competitors pushed even launches out in the U.S. for time going forward. Let's see what happens. For us, I think it's even better if the launch happens soon because that's the only way that we can prove that we're still around once they're on the market.

Yes. All right. And then I guess from here the last couple of minutes, I want to talk about the recent Parse acquisition. You guys talked about the coming in above the $40 million target that you're having. So how much of that is due to just benefiting from your commercial organization and overall, just being able to scale the business versus anything that you guys have done internally from an ease of use or workflow simplification perspective?

So I think the key contribution really comes from the past technology itself, first of all, so we closed the deal in December last year. And one of the key reasons why we acquired Parse is the ease and the rapid adoption of the technology. It does not require an instrument if you don't want to. And that's virtually exponentially scalable. And the most attractive part of the single cell research market is currently the part where you can generate large data sets of millions of cells. This is where the trend is going and where we believe Parse has the best solution on the market. So this is really that part of the single cell market we thought it's most attractive. Of course, over time, you're right. We expect with our commercial reach to generate revenue synergies in that regard. And we're also doubling down on R&D which is one of the reasons why we guide for a flat adjusted operating income margin in 2026 because we really doubled down on R&D for Parse. This is currently the market segment, which is growing the strongest.

Yes. Okay. And that would be, as we think about where Sprint kind of fits in within that research market, would that be one of those applications where it's an easy fit for you or no?

I wouldn't see it this way. If you think of Parse and where the money is coming from. So pharma companies are currently really exploring that field which is driven by a few factors. You can generate large data sets. You can store and interpret the data also with AI-enabled solutions and you can gain biological insights. And if you think of a virtual cell modeling structure, this is currently where the money goes into it. If you think of the Parse technology itself, you basically use the cells as the incubation areas and you do the transcription, the reverse transcription in the cells. So the QIAsprint is really for sample preparation.

Yes. Okay. It makes sense. And then I guess from here, when we're thinking about the -- you're talking about guiding to the flat margins. But there's still a pretty healthy step up from your 1Q all the way up to 4Q. Can you just walk through quickly on the buckets there?

In terms of revenues or in terms of profitability?

Profitability side.

Again, profitability, as I said, of course, once it comes to the scale of revenues, there's an underlying impact. Second, which is, I think it's very clear that Parse right now is dilutive to our transaction just in Q1, it's $0.02 dilution coming from cost -- gross margin for Parse is actually quite healthy. We are doubling down in R&D because we do believe we do have the leading franchise. And again, we have probably this year at least $40 million. I think our probably only competitor in the market, probably around $4 million in that kind of a field. So there is a nice opportunity for us to set the standard for the future, and this is exactly what we want to do. More important is that we are clearly ramping forward some of our efficiency projects as well. So that is a significant driver for profitability as well, not helpful right now in the first half of it is, of course, the whole tariff implementation. It's going to annualize mid of this year, so that should be also being quite helpful at the end of the day. You might all get a big check. I'm not sure how that ends. But again, that's probably a discussion for another day. Margin improvement, I'm quite sure that we have better margin this year than we have guided yet.

Okay. Great. Thank you.

Thank you.

Thank you.