Qiagen N.V. ($QGEN)

Thanks for joining us for our next session. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team, and we're excited to be hosting Qiagen. We're joined by Roland Sackers, Chief Financial Officer; and Domenica Martorana. Format will be a fireside chat Q&A as usual. Raise your hand if you've got any questions. Happy to let you jump in.

Roland, had some updates yesterday from you in terms of the Board meeting updates, things like that. Anything specific you want to call out from there? We saw some changes to the Board, a little bit of an update on CEO timing. Just maybe you could talk through some of the key takes from that.

Yes, sure. And first of all, thanks for having us. It's always a pleasure to be here. It's a long trip, but it's, for sure, worthwhile the trip. And again, thanks for having us. 2 days fully booked. But I do think what is important, and you will mention it, that yesterday, we released the proxy for the upcoming AGM. I do think it has a couple of exciting news. And I think let's start with getting certain things out of our way. Probably very important is we are asking for approval of more share buybacks. As you know, Qiagen has this, I would say, setting that we do, 2 different kinds of share buybacks. One is open market share buybacks or on the market. Here, we asked an approval of up to 10% of our total capital. And the second one is, what we call in Europe, synthetic share buyback, which is -- also, here, we are asking for approval of another $200 million of synthetic share buyback. Again, it's for approval. Typically, its approval holds for 12 to 18 months, and then it's up to the Board to execute on them whenever they believe it's a good time for them. But nevertheless, if you see that in combination with the $500 million share buyback, which we did already January this year and also what we did over the last 2 years, you can see that there's a clear commitment also here again on increasing shareholder returns. Second topic was that we continue to, call it in brackets, refresh our Supervisory Board. We have just seen that a new Board member was actually on stage here before, which is Bob, CFO of West Pharma, which I think is a great addition, given his track record, his industry experience. So we are very much looking forward that he gets elected on the AGM in June. And at the same time, our -- one of our founders, Metin Colpan, who was, by definition, of course, for many years on our Supervisory Board, is stepping down and becomes a non-voting Honorary Chairman of the Board. So I think -- which is again, on one side, a great recognition what he did over the last 40 years for Qiagen at the end of the day. Last, but not least, you were also referring to the actual status of the CEO search. What we also said is that Thierry stands for reelection on the upcoming Board AGM to be a Managing Director for Qiagen until we are announcing incoming CEO. I think what we are believing right now it's an H2 event. And I think what you can read into that is that Qiagen is still looking into different directions. You still know that there is an ongoing strategic review. And therefore, again, I think it's also quite clear that the Board, but also any potential candidates want to see how that works out. At the same time, I can guarantee you we don't have any shortage of candidates. So we do believe that is a good timing for the company.

Okay. Okay. All right. And then you mentioned the share buyback. There is also a dividend increase, too, right?

You're absolutely right. I shouldn't have forgotten that. We are also increasing our dividend by 40% to $0.35 EPS, which again shows also our commitment to shareholder returns. For us, it's an important signal that we also feel very confident about cash generation in the company, and we are committed to our net debt-to-EBITDA goal, which we'll virtually launch more or less earlier this year.

Okay. Okay. All right. Maybe let's talk about the other update from the last couple of weeks. The 1Q results, you guys gave a flash, and then the full result last week, had to update the full year guide. There are a couple of different moving pieces. I think the most notable one was QuantiFERON tied to immigration. Maybe just talk through how the quarter played out relative to your expectations, where the surprise came from, just sort of how you're incorporating that into your forward outlook.

Yes. First and foremost, that hasn't changed for the year. As you know, we are focusing on 5 pillars of growth. 4 of the 5 pillars of growth, we just confirmed, full stop. Within the fifth pillar, which is QuantiFERON, we clearly had to identify that the immigration piece of that business is going in a different direction than we initially thought. Just putting things in perspective, QuantiFERON is around about a $500 million business for us. 90% of that business, no change at all. The 10% immigration piece of $50 million is something what we had to revisit and particularly in U.S. and somewhat in the Middle East. So just to break that $50 million down even further, $15 million is in Europe, 1-5, no change at all. We believe that is an ongoing business for us. We haven't seen any change. $30 million is more or less the U.S. part. We took that out fully. Given the political landscape right now, we don't even see any opportunity that it comes back in any reasonable timeframe. Of course, it's going to be in the base as of Q1 next year, but we have to go through that period. And there's another $5 million around about, which is related to the Middle East business, which we have in QuantiFERON, which again is clearly a business, which we believe at least temporary with the ongoing war, is somewhat impacted. Nevertheless, we took it out 100%. I would argue, at some point in time, it comes back because there will be still construction and other workers have to fly into these countries. And -- but again, it's hard to say when that is going to happen. And if we have to reset the guide, we rather than turn every corner and every stone and see that. So Q1, everything was overall as we expected it. We were, at the end of the day, $10 million down, $8 million was what I just mentioned.

Okay. And the $30 million change in immigration outlook, QuantiFERON-tied immigration in the U.S., is that tied to any new specific policies? Is that just sort of an implementation change? Why so sudden, why so drastic now versus fourth quarter, third quarter, second quarter last year? I mean, assuming this is tied to the administration, why now?

It's a very fair question, and you can hopefully believe that we beat ourselves over the last couple of weeks quite significantly, should we have seen it earlier. But I think the matter of the fact is we as well as our customers have not seen that more or less before Q1 happened. Have in mind, the immigration-based testing is not done in any kind of specialized dedicated lab environment. It is done in the very normal lab facilities, whatever you think of, Quest, Labcorp, ARUP, you name them. And so it is happening under a very general setting. And we had very normal order incoming actually all the way into January. So in January, things started to change. When we went to our customers and asked, okay, guys, what's going on, and together with our customers, we looked into the different labs and then we figured out certain regions having no impact and certain regions have a different impact. So again, if you just looked that in Texas, significantly larger impacted. Middle East and some other areas not impacted at all. And then you started again to look at that. In hindsight, you can clearly argue, as you know, certain immigration topics changed legislation-wise in June last year, but didn't have any larger impact. A big step-up in terms of countries was actually mid of January. I'm not sure if that made an impact, but sometimes things slip over. But I think what we also have learned is that there's a lot of, what you call it, libertarian organizations doing healthcare for also illegals. And that is probably also where we have to realize now that they're running in funding situation and others, so things adding up. We took here probably a very cautious view, but it's just saying it's hard to identify for us what exactly stays and whatnot. Take out 100% and if it gets better, fine.

And what about -- you mentioned the 90% that's not immigration, the other $450 million. What's the underlying assumption for growth rate there in 2026 and beyond?

We haven't reset the bar yet right now. So again, we believe right now that -- as you know overall, we had this kind of 5%, 6% growth rate. I think that is probably for the remaining part, still a reasonable assumption. What we still have to figure out how quickly is now the resetting of the inventory level is going to happen. I would assume that it probably takes at least the second quarter, and then it should improve somewhat in the second quarter -- sorry, in the second half of the year, particularly in Q4.

And is it too early to say for 2027 and beyond, especially that U.S. immigration bit, is there an expectation that comes back at some point? Is it just sort of easier to just not even think about it and pretend it's not there? Sort of how are you approaching it?

So one thing we shouldn't forget, and again, it got confirmed today on a different location, everybody is, I think, agreeing that the overall TB testing market is growing. We say 4% to 5%. Others say 5% to 6%. I think our 4% to 5% is still on the conservative side. Still assuming, which I think nobody disputes either, that that skin test market is still 60% of the total market. I think it's fair to believe that we will grow at least that market growth and hopefully better than that with this ongoing penetration.

Okay. I think you're alluding to an Analyst Day that happened earlier today from one of the other...

Competition with [ UMN ].

Yes, yes. From one of the other major diagnostic vendors. Just anything you kind of took from that in terms of updates on their test and their offering?

Again, not much surprise for us, but it looks like probably for some shareholders because share price reacted positively, I think there's a couple of news which further of all, I think, got confirmed what was rumored before that they are missing a couple of parameters in particular, CD4 and CD8, which are very critical for selected groups of patients, again, particularly if you're looking at immunocompromised patients on. So I'm quite sure that that will have an impact. Second, I think the workflow expectations were probably somewhat overestimated. It looks like that there's still quite manual steps, didn't even articulate it, from my knowledge, to an extent that it was clear to the market. No news on U.S. launch, at least what we have seen so far. So I would say, again, for us, no surprise. For probably some shareholders, some incremental news.

Okay. All right. So that's QuantiFERON. We handled that. Let's talk about the other component of the full year guide revision was sort of just the broader life science market and expectations for that. Like you said, didn't really factor in a big way for 1Q because it really did seem to be immigration-specific, but you are taking down your assumptions for the rest of the year. What drove that? How did that play out in the quarter? And why do you think the new outlook is more representative?

Just to be very clear, we actually haven't changed too much. The one thing what we changed is particular QuantiFERON immigration-based testing, the $35 million. The second area which we have tested was rather OEM-related. These are literally a handful of customers who do typically high-7-digit deals with. Here, we just took a more conservative view. Even if we sometimes have orders on hand, but the political landscape is sometimes very difficult to read, right? So for example, we have larger contracts with U.S. governmental institutes, where typically, we have an ongoing business. But sometimes, given particularly that environment, you're not sure if they are able to execute on that. Now when we had to revise our guidance for QuantiFERON, in brackets, anyway, we turned every stone and see is there any potential risk just to make sure that things never happen, at least not -- likely not happening again. So we identified more or less 2 of this kind of isolated topics. The overall life science business, as demonstrated with our sample prep business, I think it's moving in the right direction. We anyway always had a quite stable life science business. You remember that sample prep in general last year was good. We were always cautious on the instrumentation side. We do believe it's going to improve somewhat, but that is not the driver for our acceleration this year. The driver for our acceleration from H1 to H2 is, first of all, there's 200 basis points of headwind from discontinuation of business last year, which was NeuMoDx and DIALUNOX as of June 30 last year. That will stop by definition mid of this year. So 200 basis point improvement of that. Another 200 basis points comes particularly out of new product launches, which is, in our case, particular sample prep. You know about QIAsprint, our new high-throughput machine. You know about QIAsymphony, which is also on the market, so there's no launch risk. But of course, it has to accelerate over time. So I would say this incremental 200 bps or $20 million revenues is not unlikely, given the $700 million base we're having. And last but not least, we also do believe that Parse, our recent acquisition in the single-cell business, should accelerate and probably do also better than the expecting $40 million, which we put into our numbers earlier this year. So I would say there's literally no larger impact from a life science acceleration in our numbers. Of course, we like to see that, don't get me wrong. And I think there's also early indication also on the instrumentation side, but I wouldn't call it victory yet.

Okay. Yes. I mean you touched on Parse. Let's go there. It looks like that was a little bit better than expected in the first quarter, at least relative to your $40 million assumption for the full year. It's tough to draw any conclusions from 1Q, but is there anything specifically that you could call out that drew that strength?

I think just the technology, the single-cell technology, that is very much requested. And also, together with the scalability of that part of the business and just the proof points that we have on large datasets, that's just something that makes us very confident to overachieve the about $40 million that we set for 2026. And here also, just the synergies that we see also with our bioinformatics business is an important piece as well. So it's not just about Sample tech and Parse being part of the Sample tech business, but also our bioinformatics business that we have.

One of the benefits we have in clear with our Parse technology is that is instrument-free. So you can use it just by using the product itself, which in that environment is not a bad situation. The same thing where we're seeing right now, we're doing actually quite well in front of pharma customers. I do think Qiagen is, of course, given our global presence, a good acceleration factor for the overall Parse business. So I think the combination of that, plus what you just said, the integration of our -- with our bioinformatics franchise, which will take a bit more time, should be helpful to drive that business going forward.

So you're still assuming $40 million for the year. You just kind of see... That's more upside than downside. Okay. Going back to what you were talking about earlier, Roland, in terms of the new product launches in Sample tech, that's kind of factored into the guide as part of the second half ramp. What are your -- anything you can give in terms of your assumptions for that contribution, confidence in that coming through?

The good thing on instrumentation business, you typically have a pipeline. And I would say the pipeline so far is building quite nicely. So I would say we feel this, particularly with QIAsprint, which is our new high-throughput platform, I think the pipeline build goes quite well, and we should see the first numbers already in the second quarter, but as you said correctly, much more important in the third and fourth quarter. We also expect, given that it's a high-throughput platform, that the consumable pull-through starts quite nicely. Majority in the beginning will be in life science. So I think also there will be, as always, reagent rental business, but there will be clearly at least 50% of straight sales, which should be helpful for us. So again, I think that is something where we have good confidence. symphony, same thing. Here, we are, of course, working with particular customers like the Guardants or Nateras or whatever, who are already existing customers, to roll that out because it has significant advantage for them as well. So again, on the sample prep side, again, at least, you know what, now we have the organic growth rate of 3%. If we're able to keep that and grow that over time, that's a nice thing for us.

Okay. Okay. And you talked about -- earlier in the session, you talked about how outside of QuantiFERON, if you think about the growth pillars, the other 4 were on track. Your assumptions for the other 4 for the rest of the year have not changed. So maybe let's talk a little bit about QIAstat, QIAcuity, QDI, sort of how the quarter played out.

There's always some doing better, some are doing okay. I think outstanding, as we talked about, and we're going to repeat it with sample prep, clearly a healthy start to the year. I think the same is true for QIAcuity, double-digit consumable growth rate, double-digit instrumentation growth rate. As you know, we have a significant project in enhancing our portfolio in terms of assays and panels. In the last 2 years, we launched every year around about 100 different assays, panels on the machine. This year, we said publicly, it will be several hundreds. So we do believe that end of this year, probably in the second half of the year, we have probably the broadest menu available. We also have GeneGlobe, where people can define their own assays. We produce them and ship them to them, which is a great advantage. Customer loves that. QIAstat, I would say, good start into the year, given that respiratory last year in H1 was a huge business. We also told you ahead that also Q2 will be not the easiest quarter for us because of the respiratory headwind. Placement numbers in Q1 were good. Quite sure that Q2 will be also very healthy, [ gust for ] double-digit growth rate, many guided double-digit growth rate. So I think we are on track to having our $160 million of revenues here as well. QDI, also a solid start, high single digit. It's okay.

Okay. And outside of the growth pillars, PCR, genomics, CDx, that was a little bit more mixed, a little bit spotty in the quarter. Is that more of an end market dynamic, given some of the softness you're seeing in A&G? Is that specific customer issues?

It's somewhat expected -- in all fairness, it's probably a bit weaker than we thought. We do believe -- it was double-digit negative. We believe it should be probably more like mid- to high-single negative. Of course, have in mind that also in that area, we stopped [ exogenous ] and some other products. So there is an impact of that, which has to wash out. At the same time, it's probably also somewhat of a conversion to digital PCR. It's the reason why we expect some negative numbers into that. So I think we will have a bit more focus on that, stabilizing it in the area I indicated, and that should be helpful as well.

Okay. Are you -- from an end market perspective, are you seeing any stability in A&G? Have things sort of resettled at a lower level? And then we'll talk about biotech and pharma as well.

I would think things are moving in the right direction. I think it's still a bit on the level of, let's have some more confidence. But again, you know that we last year -- also last year, we had a quite solid consumable business overall. I don't think that has changed. I think what has changed now over the last couple of weeks is that we get more request for proposal for instruments. Again, we're not calling it victory yet, but at least people are trying to familiarize themselves what's going on.

Okay. Is it -- you mentioned reagent rental. Is that coming up more and more where people are a little bit more...

On the diagnostic side, I think it's typically part of that, on the life science side sometimes, but it's not a big tool.

Okay. Okay. And in terms of specifically U.S. A&G versus Europe or potentially China, anything to call out by region?

China is selling. As you know, for us, it's like a 4% of share. We have seen some improvement, still negative. I hope or we hope that end of this year, we are only slightly negative, maybe flattish. So it's improving, but it's not in positive territory.

Okay. Let's talk about operating margins and leverage. You -- despite some of the top line weakness, you're still able to deliver some impressive numbers on the OpEx side of things. Just walk us through the bridge there. What's allowing you to do that despite the...

Just to repeat what you just said, we reconfirmed the operating income number for this year, 29.5% at constant exchange rates. So with actual rates, it's probably 29-plus percent, which is despite the negative impact we have from the Parse acquisition because we clearly said we are doubling down on R&D investments, so it's 100 basis points dilutive for the year. And so I think -- nevertheless, we still see gross margin stepping up somewhat, not only this year, but also particularly also next year, mix getting more favorable. A big driver for us is still the QIAstat utilization ratio, because as you know, this whole production environment was built during COVID. So there's room for us to go into that and get into better standard costing mix, as I said, in general. But we also have 40 initiatives, we call it, of course, QIAefficiency programs and which are ongoing, and there is certain larger programs in -- like the rollout of our new ERP system. We are going to SAP HANA, which we do in steps. But of course, we are moving on here. It's overall digitization of the company. We have now in the meantime 60% of our orders coming in a digital way, which again, clearly takes quite a significant number of cost out of the system. So there's a lot of detailed projects, which we track quite well. And as you know, they helped us to improve margins over the last 2 years. I don't see any reason why that should change over the next few years. We have, I think, a commitment out by 31% by '28. We clearly said before that we are able to increase that target. Now we will wait for the new CEO to launch it, but I don't think the underlying tonality is not going to change.

Okay. Yes, we'll talk about the mid-term targets in a bit, but on the '26 margins, just to be clear, did you -- are you taking any incremental cost actions post-1Q to sort of reaffirm those numbers? Or is that just still...

I would say we still have cost action, but the plan of underlying -- long-term plan.

Okay. Okay. So on that mid-term framework, you previously outlined so that 7% core sales CAGR, the 31% operating margin, which seems to be coming on the higher end of that, $2 billion of growth pillar revenue. You've had some tweaks here and there, but how comfortable are you with those mid-term targets?

I think we're comfortable with the $2 billion. I think it's fair enough to say that the mix will change, but we're probably a bit short on QuantiFERON, most likely, but that we will overshoot on sample prep and probably some others, the QIAcuity, and for sure, QIAstat. So again, the mix will change. The $2 billion should probably stay. We are done already with the share buyback, which was $1 billion. We will clearly overshoot that, but we announced not only this year, but also more or less -- hopefully, the shareholders are going to approve in June. The margin committed 6%, 7%, we'll see a bit, right? It might be -- 7% might be a stretch. Let's see how we go.

Okay. And you talked about share buybacks at the beginning with the AGM, just kind of touched on now. Can you talk about new capital deployment priorities going forward? Just between the dividend increase and the share buybacks, is there room left for M&A? Sort of how do you prioritize that?

I think our commitment to all 3 areas has not changed, and I wouldn't put any kind of either/or into that. So we -- first and foremost, we clearly want to invest in the organic growth of the company because it still has the biggest return opportunities for us, and therefore, for all our stakeholders. Second is we like to do bolt-on acquisitions, like we did with Parse. I think it was a great fit to the company. We don't need something transformational, but if something fits to our portfolio and accelerating the portfolio growth, happy to do so. The likelihood, of course, that these deals happen quite regular is somewhat remote. So while we're doing quite busy, so I think there's enough opportunity, given also the underlying cash flow and the leverage we're having that we can continue in doing share buybacks, increasing dividends over time as well. So I don't think it's an either/or. It's really and.

Okay. And on the flip side of that, you've not been shy about divesting or discontinuing or one way or another trimming things that either are noncore or underperforming. Do you feel like the portfolio is pretty well cleaned up at this point? Or is there more room to fine-tune?

I would say so far, we feel quite comfortable. Again, let's see if -- I don't think there's any larger strategies change, if there's a new leadership team or so, but you never know. So I would say that's something that we have to demonstrate. But in general, the growth drivers deliver right now somewhere between 6% and 7% growth rate. I don't think that is questioning anything. And I do think the leverage probably right now comes out of operational efficiency, and that should give us also enough room to grow margins going forward.

Okay. And on the -- going back to the topic of the CEO change, could you give us any insight in terms of the criteria the Board is using or sort of what are the priorities? Is -- you've outlined certain strategic initiatives and moves. Is the goal to find a CEO that fits within that framework? Or is there a view where you might have a new CEO and some of that framework could change?

I probably think the way the searches I've done in this world is that I would not expect any larger surprises, at least for the Board, because typically, as you know, these candidates go in the meantime through quite a dedicated search process, have to present their cases and so on. So I think everybody knows quite well, from both perspectives, what to expect and that there is no larger surprise, right? At the same time, I do think what the Board expectation is. Yes, we'd probably call it looking for somebody, in brackets, who has seen the movie. So somebody who worked in life science, who worked on the clinical side as well, some -- because we clearly have a business in both parts of the industry. We clearly would love to have somebody who has experience with Europe and the U.S. because we have an operational setup, which is actually very global as well. So there is a good set of candidates out there. And so I'm quite comfortable that we have the right candidates.

Okay. Last couple of minutes left. Any questions from the audience? If not, Roland, maybe our standard closing question, or remark, sort of what do you think is most underappreciated? What are some of the bigger debate points you're hearing? Anything you want to clarify to investors or make sure people take with them as they walk away?

I'm not sure there's something underappreciated. I think there's a lot of things overappreciated, which was the fear about QuantiFERON, and the world is falling apart. And so I really hope that with some of the news coming out probably today and then hopefully get more interpretation over the next couple of days, and hopefully, the products finally make it to the money -- to the market that people will figure out that there is still the leader in QuantiFERON in TB market and that's Qiagen and that we continue to grow with QuantiFERON, but also in particular outside QuantiFERON. That is all what we want to demonstrate because nobody questioned, I think, that we delivered quite, I would say, a series of 26 quarters in a row in terms of revenue and EPS performance. That is what we want to do going forward as well.

Okay. All right. Well, on that note, we'll wrap it up there. Thank you so much. Thanks, everyone.

Thank you.

Thank you.