Qiagen N.V. ($QGEN)

Okay. We're going to kick it off. I'm Tycho Peterson from the life science team. It's my pleasure to introduce QIAGEN. We've got Roland with us today. Let's jump into it. And maybe setting the stage here, just talking a little bit about trends coming out of 1Q. You had the guidance reset just started at a high level, how should we be thinking about what was kind of idiosyncratic in the quarter? And broader demand trends as you feel about the rest of the year?

Well, [indiscernible] Holland, you also have the Medicare. So it is probably 1 point. But no, I think you're absolutely right. I think overall in Q1 started the year, I would say, a quarter with mix without on the 1 side, our 5 growth drivers actually performed quite well. At the same time, QuantiFERON clearly had a difficult start. That was due to the immigration-based testing, particularly in the U.S. Just to remind you, QuantiFERON for us is on about a $500 million business for us. 10% of that is integration based testing. By far, the majority is legal immigration. And one thing that we clearly had to experience is that there were changes coming up in the legislation in the U.S. It took some time, let's say, got effective. We are really not seeing any larger changes more or less all the way through February of this year. But then digging into that, it came quite obvious that some of our larger clients have seen that impact. Have in mind that kind of testing is not done in any kind of dedicated lab environment. It is done with a very regular centralized labs and probably also took them sometimes to figure that out and to rebalancing. Nevertheless, what we did is we took literally 100% of the exposure in U.S. out, which is around USD 30 million. At the same time, of course, we see similar trends for very different reasons in the Middle East. We might go back a couple of years when we clearly talked about that, that we want the TB testing in areas like Qatar, Dubai, Abu Dhabi and so on. Given for the war, we also took out $5 million for that. We haven't seen any change in Europe for immigration-based testing nor have we seen any change in 90% of the TB business. And therefore, I think that is quite stellar. Now being in Q2, I would say what we did was the right thing. I think trends got confirmed. So if you go back to the call, what we said, we said QuantiFERON minus 5% in Q1. Probably Q2 is flattish, slightly negative. Q3 is slightly positive and Q4 more or less a normalized growth rate. I do think that is what we also see today and, therefore, no change. Of course, as we had to go also to your second part, given the changes we have seen then and realized on QuantiFERON, of course, we turned a lot of other stores within the company. That's also the reason why we took a couple of larger OEM deals out of the guidance because one thing is very clear, we delivered until Q1 '26 quarters in a row in terms of revenues and in terms of once you realize you have to with set guidance for a specific reason, we turn every other store.

And we'll jump into the businesses in a minute. I guess before I do, I just want to hit on the CEO search. You kicked it off in November. Originally, we're targeting June, now kind of back half of the year. Just walk us through where we are in the process, how you're thinking about the candidates, how the Board is thinking about what the business needs at this stage?

Yes. I think it's fair to say in the last call, we updated it that it is probably no more on H2 event. I don't think it will be all the way down to December, but it's clearly an H2 event. Couple of reasons for that. Further all the Board is looking for what you probably would call in U.S. like somebody who has seen the movie, so a very senior experienced leader. Clearly, with a strong footprint in the life science and in the clinical side. Clearly, given also international settings, somebody was either lift and work in Europe and/or the U.S. So also here, somebody who was very experienced. . I don't think that you should because of the delay into that that we are short of candidates. I think it's probably actually the opposite. But at the same time, as a lot of investors we're waiting for clarity from some of the CMDs, one of our competitors had on the QuantiFERON product on the QIAGEN side. There's also other parties who are waiting for that kind of feedback. And that probably led to the situation and discussion, let's wait a couple of more weeks.

And anything you can say about what the Board is looking for? I mean you mentioned international and -- but...

Again, senior person, C-level experience, again, somebody who did a job in a different country before. .

Let's jump in on QuantiFERON, I guess the biggest swing factor to the reset guidance. You've taken down expectations on immigration. We had a clean base from here? Or are there still moving pieces for the next couple of quarters?

It's about immigration. The rest is very straightforward, hasn't really changed. Again, we are careful in taking out 100% of the exposure in U.S. I'm not sure it's 100% realistic. At the same time, we do not expect any legislation change in the U.S. as well. Therefore, I think it's the right thing to do. In the Middle East, I would call it that at some point, either the war is going to end or we will see these countries going back to a more normalized environment like we see that in [indiscernible] so back to work, if you like. The reason for that is -- and therefore, I think there, we should see, again, some normalization. It's hard to say when, but for sure, will not take us long. .

And just how about underlying growth ex immigration, what did that look like in the first quarter? How do you think about that for the remainder of '26?

As you know, overall, we said it's kind of a 6% growth rate for the full year. Now of course, we took into that number. So at end of the year, we will grow again, that business nicely single digit, and let's see you exactly where we are. .

You mentioned the competitive dynamic. I guess what we saw there was limited markers, limited head-to-head data on sensitivity, specificity, lingering questions on workflow. You've obviously laid out your road map on automation with the [indiscernible] partnership. Just talk a little bit about how you're thinking about competitive dynamics evolving? And was the market obviously getting ahead of itself relatively to the headwinds?

Yes, I think it's probably a fair summary. I do think there was clearly a couple of remarkable outcomes. First and foremost, as you were alluding to it. It looks like that our competitor is missing one very important critical marker, which is CD4/CD8. Why CD4/CD8 is so important that is for the subsegment, which is actually the fastest-growing subsegment if it comes to latent TB testing, [indiscernible] marker. If you don't have that, it's hard to test. And I do think that is important again and clearly, a factor also for the lapse because depending a bit on where you are in the world, it is a population group between 10% and 20% of the total population and the testing palliation. And of course, as I said, the fastest-growing population as well. So I'm not sure that you will see customers going for 2 different work streams to address that topic. Second, we're very clear that the automation solution, I think they said is beyond '28, a bit surprised by the wording typically, if I mean beyond '28, I would say '29. So I'm not sure what beyond '28 means. Very clear also that there's nothing short term in the U.S. We like the fact that they finally come up to the market in Europe because it's a toaster proof what we said before. in terms of, again, our success in the market. So I think, overall, I think it was incremental good news for QuantiFERON as said.

And just on your pipeline, can you talk through the partnership changes [indiscernible] and whether this should be viewed as share defense, new lab adoption potentially both?

I think [indiscernible] was -- it is a great addition to our overall workforce. We have a great partnership on the back end that is not going to change. But in the front, of course, there's a couple of steps which still require certain manual steps, which we are, of course, going to automate this impact resolution going forward. or we fully automate it. And that is clearly unique then to CAG. Nobody else can do that. And [indiscernible] clearly a well-known proven provider for this kind of workflow automation. . As we do believe that TB testing is still a significant volume grower. Have in mind 60% of the global market is still literally 120-year-old skin test and even the skin test market is growing 4%. We do believe that there is an increasing need for automation and therefore, [indiscernible] solution, which then day provides you with a longer way solution is a step in the direction.

And then maybe just shifting over to Life Science. The other piece of the guidance cut there was just reset expectations, partially on the weaker A&G outlook here and then the OEM headwind I guess, between the 2, you said $35 million, $40 million headwind for the year. Could you impact each piece relative to what the expectations were when you first laid out guidance in February?

To be honest, it's not too much the general environment for academic and Life Science in the U.S. So here, we -- I think it's also fair to say that historically, also last year, QIAGEN had a reasonable consumable performance. Clearly, instrumentation business was for us as for many other a bit more volatile. But what we did, as I said before, we look particularly in the larger OEM contracts, which are also part of the Life Science business. And we have a couple of contracts with large governmental organization in U.S., but also in South America, where given the political environment, we are not 100% insurer that pie come up. They were very reliable customers for the last 2 years, always high single-digit million dollars of revenues. But if you do, for example, something like pandemic preparedness, you might have even orders on hand, but you 100% sure that it comes in, in a situation where you have to make sure that the new guide you set out is more than reasonable, you adjusted.

And I guess was the recent more forecasting issue or demand deterioration?

I think it's probably also just to make sure that the forecast is realistic, and therefore, I think we well doable. And again, that's probably the base bet. I would say overall, the automation business was actually quite strong for us. We talked about that on the call, Tycho. As you know, sample, for example, implementation was growing double digit. So hard to complain about that. But -- and as I said, consumable in general, let's move in the right direction. Always a couple of pockets who can do better. PCI in general is something, but we clearly probably will draw a bit more attention to. But in general, we clearly see an increased activity, particularly on demos, in terms of request for proposals on the academic side on instruments. Will all of that lead to more revenues in cental probably not, but do we see, I would say, a certain kind of refreshment of interest yes.

And then just honing in on U.S. A&G. Obviously, you've got a slight increase in the budget up 1%. You've got this multiyear budget dynamic that's impacting labs. I guess how would you describe the backdrop now? And do you think there's a chance to get a pickup as we go through the [indiscernible]

Just to frame it out with some numbers. So our more or less work from H1 to H2 only requires $5 million more incremental revenues coming from a better life science environment. If that is our issue, I'm fine, right? So we do assume it will improve, as I said on the implementation side. Since a bigger step forward for us, clearly comes also with some of the new launches, particularly on sample prep. There, we do expect around about $20 million of current revenues given the size of instruments we are launching with [indiscernible]. And also, I would say, the visibility on pipeline and so on. I think there's -- what I would say, so far, we feel quite good about that. So I would say environment in Europe, life science is good. Horizon budget is distributed. We're seeing more and more budgets in U.S. finally reaching the benches. Is everything perfect right now? Absolutely not. But do we see that people are clearly getting more interested, particularly on the implementation side, yes.

And then maybe just shifting over to pharma. It seems to be better for most in the industry. Just from a high level, how did it do in 1Q relative to expectations for you guys?

Pharma for QuantiFERON has a couple of very specific rather, which make it quite successful for us. One is QIAcuity. Clearly, pharma is a big partner here in biopharma research, double-digit growth rate in consumable income in Q1. Same is actually past acquisition. I think what we pass clearly an outstanding product offering by itself. Now with the acquisition of QIAGEN, so partnering with our global pharma teams hubs and also to gain access to some of these larger accounts. And these are sizable deals. There's also a reason why we said we feel quite comfortable on the $40 million guide we have given from past. So I would say, in general, Pharma is for us probably more on the positive side. .

And then as we think about biotech, I mean, funding has been good, sentiment strongest since 2022. Where in the portfolio will you see it when that funding starts to convert to spending biotech?

Several reasons, of course, basic research we see also biotech, clearly again doing more at not sure if they all want to generate now AI-based data. But there's clearly more fundamental network done. And therefore, again, areas like sample prep, biotech is not like the largest customer group for QIAGEN, but clearly incremental to be helpful. Other area is actually around biopharmalics. Also here, I think we see increasingly request. So I would say, it's always good that finally, I think the funding is on the highest level since 2020. Let's keep on going.

You mentioned Sample Tech a couple of times in the expectation for a 200 basis point uplift in the back half of the year. I guess -- what's happening now? Is it funnel conversion? Is it replacement detailing, competitive wins? Just talk a little bit about what you're actually seeing on the ground to give you confidence in that pickup?

As a uplift is actually somewhere between 40 and 50 bps, but some of them is quite easy because 200 bps is just the headwind from the deconsolidation of [indiscernible] abilities apps of end of June 30, so it's just a technical impact, right? So that's a 200 basis points, 200 basis points, as you said correctly, it's coming from the new product launches, particularly [indiscernible]. So good news is these instruments are launching the market. The pipeline is building. There was not too much in Q1. There's really only a few in Q2, but again, pipeline for [indiscernible] looks good. So I think that is going to happen. Have in mind also that [indiscernible] clearly is a brand-new instrument. So instrumental cell is not all the implementation sale. It's clearly also generating incremental consumable pull-through, therefore important. Also on the QIAstat-D side, you know that there's new launches coming up. So blood culture is a big topic here as well. So I would say on the new product launches, it's good. Then we have another 50 bps of what we discussed before. We clearly do believe that QuantiFERON should get better in the second quarter compared to the first half -- sorry, in the second half compared to the first half. And last but not least, past as it is still growing and kicking off, we'll have $5 million more waves in the second half compared to the first half, so another 50 bps there.

And I guess just in midterm on the Sample Tech, I think you've sized that 115,000 placements or greater than for the 3 instruments combined as the opportunity. A couple of points tailwind there. What would get you to do better than that?

Again, I think one thing what we already discussed is clearly, it's always good if you have a more stable environment and people have to believe that they can play in mid and long term because consumable is something what you buy for your daily rotate. So I think that's also a reason why we actually had a very reasonable consumable business last year, while the environment was not the easiest one for many companies, we were still growing well. We shouldn't forget that that QIAGEN still has, again, historically outperformed the industry quite nicely. Instrumentation again, is different. I think the benefit we're having is that most of our instruments are rather the price point between $35,000, $40,000, but even the [indiscernible] configuration is probably around $70,000, $75,000 a I think, is reasonably priced. So we would believe if people believe that there's a midterm budget the year after and not everybody loses his job, are going to buy an increment. More important is it is not only life science, right? We clearly see that the pharma guys are going for efficient solutions. We see volume growth with some of our liquid biopsy customers who are significant customers for us. You have seen a couple of them just minutes ago,? So I do think there's opportunities for us to grow also by other companies doing quite well.

What percentage of this Sample Tech systems do you think go into clinical placements of the new systems?

I would say that share on the sample [indiscernible] is not much different than the global split up, so it's roughly half life science, half on the clinical side. .

And then [indiscernible], you touched on -- I think you suggested potential upside to the $40 million target this year. What's changed since the initial deal in terms of where you're seeing upside?

So yes, the interest of special pharma and translational space for single cell is going up. The tile therapeutics that sat with [ 100 million ] cells is definitely a good proof point that you can scale with the PARS technology and on top of key quality. That's an important factor. And also in general, we see a shift from [indiscernible]. But the major driver here is the pharma part.

And competitively, I mean, how do you see that? Obviously, scale got acquired around the same time? I mean, how do you see kind of the competitive dynamic playing out?

I mean, the [ PAR Technology ] is instrument-free. You named it perfectly right that scale would be the head to have comparison. And here, we're not seeing much -- just look at the revenues, right, $40 million that we expect even more than that for 2026 and then $2 million from scale.

It's also a reason why we doubled down on R&D, you might know why the business is actually doing quite well. It actually has healthy gross margins. clearly put quite some dollars into R&D because we want to build the menu much faster than their right past plan was. It's the reason why it is dilutive for this year, particularly in Q1 and Q2. But again, we do believe also it pays off quite quickly. .

Maybe we can hit on a digital PCR, strong growth there, over 20% in the quarter. One of the more compelling stories, I think, in the 5-pillar plan. I think people are still trying to get comfortable with what the longer-term outlook looks like for that business. So can you just talk on how you think about that trajectory? I know you originally laid out a 25% CAGR at the Capital Markets Day, and it's been below that. But how do you think about that business improving from here?

First and for as we should we should remind ourselves why that 4 of the 5 got drivers, I think, overall on track. And probably more important, nothing has changed our $2 billion target for 2028 on the 5 pillars [indiscernible] hasn't changed. You're right that the compensation -- or the composition of the mix might be different things happen. But I think the $2 billion more than $2 billion, but I do think that is not -- that hasn't changed, and I don't think there's any reason that it should change. . particular, QIAcuity, I think it was fair to say that last year, we had always good double-digit gowns side. But instrumentation environment in general was difficult, not only for us but for many companies. Despite the fact it was very encouraging that Q1 had a very good start, double-digit growth not only in the consumables as always, but also on the implementation side. And I do think we will not expect anything different for the second quarter. And again, for the full year, we feel on track as well. I don't think what makes the difference for us is clearly also the investments we made on the consumable side. I would say historically, quite sure [indiscernible] will read to that -- most people would say that QIAGEN always had the better instrumentation solution. But at the beginning, we were clearly a bit short menu. But with the investments we've made over the last 2 years, and we continue to do this year in expanding menu and portfolio for digital PCR, we are probably more than head to head, right? I think we have even a certain advantage here. And I think that pays off. We are not standing still here. Also here on that side, we're clearly pushing hard on the menu side because we do believe the transformation from qPCR into digital PCR is just the beginning. If sequencing is doing well, it's great news for digital PCR because you need validation. You need quality control, it's always most likely a digital PCR step. So there's a lot of good reasons to believe that business continues to do well.

You mentioned on the 1Q call kind of a prioritization strategically of digital PCR over qPCR. Can you maybe just talk about what needs to be done to drive more of that transition? Is it workflow, cost per sample for the menu development that Roland mentioned?

Yes. So just as these are, we also have a deep dive coming up on June 15 on QIAcuity. There, you will learn more about that, but just a few words on that. So -- if you just look into the qPCR space, then you will see that a lot is coming from gene expression, and this is something that we also mentioned earlier this year that this is something that we want to continue focusing on. And here, what is important for that multiplex capability is always a big topic. And here, you saw that we're able to target to analyze full targets in just one reaction. Ease of use is important because, as you know, qPCR is a very simple technology. And then how can you automate that? And this is all what QIAcuity can do cost per sample or cost per experiment is going down, the more targets you can put into one reaction. That's an important factor and the menu as as Roland mentioned, to just catch as many applications as possible in the space.

Maybe we can hit on QDI, and you've taken growth expectations down from double digit to something closer to mid-single digit this year. Just talk a little bit about how much of that is discovery research sluggishness and what specifically changed in the underlying demand environment versus prior expectations?

Yes. all we use very good about the business. We shouldn't forget that right now, we're still going to a SaaS transition. That means, again, typically historically customers were buying other upfront licensing deals for took the 3-plus year periods. Now they're going for other quarterly installments. Overall, I would say it's probably somebody more profitable for us, but clearly having a different revenue recognition event for us. . In general, it's quite obvious that the clinical part of that is an important one. We clearly see also know that, again, some of the AI components are being helpful helping customers getting more volume done. Again, not sure long term is rather a high single-digit or low double-digit business. I wouldn't differentiate you too much. But overall, it's a nicely profitable business for us, which is growing above average.

Okay. I mean, you previously talked about a 15% CAGR for longer term, but now you think high single, low double?

Let's see what ends.

And then, I guess, QIAstat, you're pointing to a meaningful ramp there, right, double digit in the back half of the year. Just walk us through what needs to go?

Format was also a good start in the year in terms of placements. We have helped -- as you know, historically, we always said, if you have around 150 places in the quarter, it's a good quarter for us here at 4x last year. And I would expect it's also kind of a run rate you should expect for this year on average. . Clearly, respiratory is in Q1 but also in Q2, we said on the call as well, is a tough comp. I think it's going to normalize in the second half. And we should also not forget that, again, as we said before, there's clearly an important launch coming for us. We'll see how quickly that involves and contributes. But the significant web still comes from the launches of gastro guides in the U.S. because have in mind while it got launched more or less end of '24. That business in the U.S. is very much a tender-based business. And these tenders are typically 3-plus years. That means only every year, 1/3, 1/4 of the market is addressable for us. So we're still evolving nicely into that business that will drive growth for still quite some time.

I want to hit on margins quickly. So you previously suggested there's a path to pull forward the 31% margin target. Now we're thinking about flat to maybe slightly down this year. Obviously, some FX headwinds in there. But how should we think about confidence in the 31% framework?

In fairness, there's a couple of factors. Furthermore, we did an acquisition where we clearly said it's dilutive or with 100 bps, right? The United States decided to implement some tariffs side, which is also quite some headwinds. And guarantee wasn't helpful either. Despite that fact, we were growing margins, right, last year. And despite the fact we are probably keeping it somewhat flattish with what we said for this year, 29.5% on a constant exchange rate, which actual rate is probably 29.5%-plus percent so all fair. So I would say we're still continuing to expand margins. We still have 40 efficiency steps going forward were helping us to expand margin as well. And on top of that, of course, overall, the menu direction has been very helpful. It's no surprise to you to anybody else that [indiscernible] QIAGEN has probably a higher gross margin than most other products. So if Sample Prep continues, what it is doing right now being growing quite nicely, the mix will be helpful. We always were being quite that QIAstat is an important product in terms of margin expansion because the utilization of production is an important topic in that environment. So again, as you said by ourself, we do believe that is a product which is going to grow as well. Yes, no, I don't see any reason that margins shouldn't improve. Again, I hope that you are not increasing tariffs every second month. But despite that factors, which we cannot control on the efficiency side, we are in the middle of stepping up on changing our ERP system, bringing 2 systems to 1 system. There are a lot of detailed projects behind that. there's clearly updates on that coming up.

A little bit -- just under a minute left, maybe the door is open to ask about the strategic process, and we talked on the CEO timing. Maybe just talk about where the Board heads at? You announced for the world, you hire bankers. So what...

Yes. As we said, as you know, a couple of -- probably a few weeks ago, we announced that we engaged 2 bankers to help the board to review all options, which we have. Clearly also a reaction on all the rumors being around since the announcement of [indiscernible] and QIAGEN taking part. Nevertheless, I do think there's also an important event that we described before, which was important for shareholders, which was the Capital Market Day. It's probably important for a lot of different parties. So let's see how that plays out and then we take it from there.