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

All right. Welcome, everyone, to our fireside chat with QIAGEN. I'm Aisyah Noor, Head of European Medtech research at Morgan Stanley. And it's my pleasure to host QIAGEN's CEO, Jonathan Pratt; and CFO, Roland Sackers today; as well as IR Domenica Martorana. Before we start, I'm obligated to inform you to check ms.com/researchdisclosures for important disclosures and to check with your MS sales rep, if you have any questions.

With that, welcome, John and Roland. It's great to have you here in New York and Jonathan, for the first time as CEO of QIAGEN. Very pleased to have you. If we kick off with your recent joining of Qiagen, it's great that you've set it to join us here today. Could you briefly introduce yourself and why you decided to join this organization? And what do you see as the biggest opportunities in this business?

Okay. Well, thank you, Aisyah. Hello, everyone. Good to be here. To briefly introduce myself, as you can probably tell by the accent. I'm a Brit. I grew up in Europe, moved to States in '01. In the industry, I spent a lot of my career [indiscernible] where I ran the laboratory businesses, some of the instrumentation business in the food and beverage businesses. From Paul, I ran as President of Beckman Coulter Life Sciences as part of Danaher and did that for a few years, moved to Florida in the process. After Beckman Coulter Life Sciences, I led what we call the Waters Division at Waters Corporation, which was about 90% of the corporation at that time. And from Waters I actually took an opportunity to run Filtration Group, which was a life science process tech and industrial enterprise that we were going to take public. But as it happened, we had strategic interest and sold that company -- about -- we closed it out 2 weeks ago, 2.5 weeks ago. I would -- QIAGEN Board had approached me to join earlier in the year, and we eventually were able to join as CEO 2 weeks ago. The next part of the question was what attracted me to QIAGEN?

Yes.

So I guess the first thing to say is I'm a scientist. I'm an undergrad chemist, I first used QIAGEN in the lab. And from there, in each of my career steps, the kind of ever present QIAGEN blue boxes or in the labs, we at in Waters, be it in Port Corporation, Beckman, et cetera. So near the brand and the reputation of the brand, which was pretty much deep customer intimacy and high-quality product. When I joined, I was intrigued, so when I spoke to -- the Board. And then the portfolio itself is very interesting. In sample prep, we touch kind of every part of the health care space. And so we're exposed to everything in sample prep and it's kind of deep rooted part of the organization. Some recent interesting acquisitions and bolt-ons in NGS. We also have the digital PCR franchise as well as the recent past acquisition. And then also, there's a diagnostic play, which each of the niche kind of 2 [indiscernible], you've got the QIAstat and QuantiFERON. So interesting portfolio. And then you look at that and say what can I bring through it? If there's been a theme in my career, it's been simplifying the complex capital allocation focused on 1 or 2 things, not 6 or 7 things. It's kind of a theme and then bringing that right down through an enterprise in terms of choice and simplicity sounds easy, but it's kind of want I try and bring to it from a strategic choice perspective, make sure you're structured to execute on that strategic choice. But I'm a front-end guy really a commercial guy. I think if there's a theme again through Beckman & Waters and others, it's improving that commercial execution, really bringing commercial excellence management, demand generation, product launch excellence, everything to a business. And in a business like ours, which I love because it's razor to razor blades, everything placement matters, every single instrument matters. And so have enough great front-end commercial enterprise can really serve you very, very well. So I thought I could bring a lot of that to it as well. And so here I am at QIAGEN.

If you think about your principles as a CEO, what do you consider the most important priorities for an organization public listed. Is it top line growth, profitability, EPS growth, free cash flow returns. Help us think about that.

Yes. At the end of the day, in the situation we're in QIAGEN right now, I think growth is a priority. We have some sensible margin expansion opportunities as well. I think some of those come from wonderful things like price and growth and instrument choice, et cetera. Roland, perhaps you want to comment on where you see QIAGEN from a capital allocation perspective right now.

No, I think as I know, we have since 2012, I would say, long-standing capital allocation policy. First and foremost, we're happy to invest in organic growth opportunities. I'm quite sure that also our focus on bolt-on acquisitions is still there. I don't think they'd be looking for anything larger in terms of transformative deals. But of course, we do have excess cash. And if there's an opportunity, once we more or less continue to have excess cash and the current net debt to EBITDA is below 1%, there's opportunity also to continue with share buybacks. Most important, we asked on the latest AGM for the approval. So if the Board decides to move forward, we can do it at any time.

Yes. I'd add as well. In terms of bolt-on acquisitions, we'd do something tomorrow if it made sense. But I think strengthening the core, strengthening our execution, being the best owner of an asset comes from how strong you execute in many ways as well. So I think there's a lot of focus on bringing to it on organic execution as well.

Okay. Excellent. I wanted to start the discussion on -- you recently announced an AI partnership in testing with the QIASymphony Connect. Just talk us through the AI-driven automation opportunity and any benefits you see or hoping to see in your kind of early tests?

Yes. I think you are referring to the [indiscernible] topic because, again, together with MHS part of the business, I think it's a very nice opportunity for QIAGEN to extend its standardization even in the days of AI. Of course, at the end of the day, it is about automation of our -- lab environment. It's about standardization, it's about early detection of trouble shooting, there's more and more workflows in all labs from research all the way to clinical, where you have -- which are very data-rich and, of course, having here an opportunity to be in early stage involved. Again, that is just one part that's more to come, makes a difference. We started here with QIAsymphony. There's for sure an opportunity to go left and wide. .

Okay. With this -- if you think about the software integration layer used to monitor the QIAsymphony Connect today, would this be applicable across your the Sample tech instrumentation. And could you talk about the use cases or customer types that make most sense to adopt these automation layers? And when do you see that translating into a financial opportunity.

Just to remind, everybody, we have more than 30,000 sample machines out there. So there's a lot of opportunities for us as well for our customers. I do think it makes sense for large-scale customers because, as I said, there's a lot of data generated and of course, workflow automation, limbs embeddedness is key to them. But even in smaller settings, having a walkaway solution have opportunities to control that even if you're not in the environment, makes a significant opportunities, having automation being stand-alone operated. So I don't think there's any specific limit to the size of the customers, not to the kind of origin of a customer, if it's a clinical environment, a research or a pharma company. We see interest coming from all different groups. Again, we're early stage is a research review. Nevertheless, I do think, given the speed of AI in this day, there's an opportunity to get that hopefully in some way out next year.

Okay. And in terms of use cases, what types of applications are you seeing AI being used today? Beyond the [indiscernible], you mentioned troubleshooting. What types of -- in pharma? Are you having those discussions with the biopharma customers at the moment? Or is it Acadia?

As you know, we have a lot of different areas where AI is already embedded into our revenue streams. First and foremost, clearly, all our QDI solutions have an integrated AI part because at the end of the day, everything is what comes out of the sequencer has a significant data size. But the same is also true for QIAstat, for example, because at the end of the day, also here is a quite data-rich process and qualification and validation is an important part of that. And I, again, plays an -- can play even a more important role going forward as well. But that is only one part of the business. There's another offering which comes around QuantiFERON. We talked about that, enabling our customers or the health care providers at the end of the day with the interpretation of the data is somebody going from [indiscernible] you see on this path. We are the only company having these hundreds of millions of different data points, which enables the interpretation but AI, of course, is not only something that we do on the revenue side. We do it also in-house thing on operations. We have AI embedded validation processes, for example, for identifying scrapping. If you talk about QIAstat AI plays an important role for us if it comes, for example, to customer care, trust level support, more than 50% of all answers in the meantime, getting AI answered on the first level. So there's a lot of opportunities for us QIAGEN has more than 300 software developers in the company, quite sure that they're all looking forward that their life gets easier, more effective using these kind of tools. AI is changing also our world.

Yes. Perfect. Okay. If we take it back to kind of 2026 and 2027, if we look at -- start with the Sample tech business, so the organic growth per your guide is going to accelerate for Sample tech quite significantly in the second half. How confident are you in achieving this? And how much of that is pricing versus volume? We know you're launching some new products to connect many. Can you provide some KPIs on how that's gone so far?

First and foremost, we have seen already -- this is starting this year, a nice underlying acceleration of the [indiscernible] business. We have now, I think, the third quarter in a row with a 3% growth rate, ex PAS, which again speaks for itself, PAS of course, is on top. We were very clear that PAS, when we moved into the year, we were expecting around $40 million in revenues. Right now, we are rather at $45 plus million. So it's moving in the right direction. . On the organic business, I would say also here, the pipeline is building quite nicely. The good news is QIAmini now also in the market a few days earlier than they thought, which is always good news, and we're quite, I would say, optimistic on that contribution going forward. Nevertheless, it's also fair to say. So overall, [indiscernible] market while improving in the U.S., it's clearly not in a normal environment, right? It is clearly something where the confidence building has to happen. Nobody knows what the next weeks bring in terms of election results on which whatever kind of communication from any politician might change. So there are a lot of factors which we can't control Nevertheless, on the product side, we believe it goes in the right direction in terms of placements at all in terms of consumables.

Okay. Just on the U.S. academic and government segment specifically, how is the academic budget been trending so far by your estimates? The NIA data would suggest there is money flowing in, but it's not being spent. What do you think the customers need to see to start investing into R&D once again?

Caution is the word I would do is it's improving, but slowly in right, there seems to be a disconnect between available funds and spend. It is very slow to ramp. I think in the U.S., you've got some midterms coming up and whilst they won't have any direct impact. I think there's a confidence factor that may come from results depending on how those midterms go, it'd be in the U.S. and all that. So I think there's just a sense of what's next? And so there's a little bit of caution on spend. Does that result in some sort of end-of-year flush -- we haven't factored that in, so to speak. But I think the Midlands will play even emotional component and the way money has been spent at the moment. Some of the instruments we're launching like the Mini, for example, probably have no real impact on that in a good or a negative way because that price as a capital point that tends to be a bit more of a fast spend rather than a true capital spend. So we've got some offsets to that depending on that. But I think fundamentally, the midterms will have some emotional effect.

Okay. If we touch on the Parse acquisition currently, is this business being impacted by the current weak market conditions or the Middle East disruption? And can you guys the midterm growth opportunity here for Parse?

I'll start by saying -- I'll hand it to Roland, I start to say in the Parse is ahead of plan as we get through this year.

Yes. And just also to frame it into numbers, '24 million was $20 million in revenues, as we said, '26 million, probably, let's say, $45 million plus. So you can see the the acceleration, and we're quite sure that we will continue to see that. The current environment might be somewhat helpful for Parse because it is automation free. So again, it's, for sure, a nice alternative. Clearly, a good benefit is that now being able to integrate Parse also in our pharma sales force, which by factor is larger than what Parse had a standalone company is being quite helpful. So a lot of success from pharma right now from past comes out of the biopharma connection, and we do not see any reason why that should change. So we're also very optimistic look now into '27.

Okay. Maybe a last one on your launches in Qia -- in Sample Tech specifically the Mini, the Connect in the symphony. Where are you at in the ramp in sales contribution for those products? Are we just at the early innings? Or are you halfway through? Just kind of talk through that?

It's just to the early innings. I'll start by that. Roland can add some color. And we haven't really launched them in yet, so there's really no material revenue at all from that. Having said that, the mini has hundreds of thousands of potential placement opportunities. So you will see a ramp from it. But on the other fairly early stage, you see a little bit of it in the back half, but it's really a 2027 ramp. The sales funnels are growing, building stronger, but it's really early innings. Any other color?

Yes, not good in U.S. sports, so -- John. But nevertheless, just compare with QIAsymphony, while we sell QIAsymphonys in 2008. So you clearly see it, it takes some time. Nevertheless, the pipeline is feeling quite nicely. I think we are -- in we are well on track. .

I'm not very good at U.S. sports either. So if I got it wrong. We're at lunch in the second day of the cricket test for anybody that's interested in that analogy.

Okay. If we move on to QuantiFERON, so how is the U.S.-linked tuberculosis testing market trending versus your expectations? Is the immigration destock that we saw earlier in the year fully behind us? Just give us some color there?

Yes. Just to remind everybody, what we said earlier this year is that the $50 million global integration testing market or for TB testing, clearly we're seeing some changes. $30 million of that is U.S. -- was U.S.-based. And with the change in immigration laws in the U.S., we more or less have seen this business collapsing at the end of the day. And we also do not believe that it comes any time soon back because the policies and immigration in the U.S. probable to stay as it is, in particular, legal immigration. It's legal immigration is only very to a very small part about illegal immigration. We believe -- I don't believe that it goes back to the levels we have seen before. . $5 million we took out, which was related to the Middle East TB testing. Here, we do believe that is probably coming back over time because quite sure either the war there stops where we will see any other kind of opportunities that this areas go back into a more normalized environment because there's a lot of construction going on, a lot of people from whatever Pakistan, Bangladesh, India working in this environment. And once they go back, they have to get tested again. So that is the question of time. Now ex immigration. I think there's a general understanding that the overall market is growing somewhere between 4% and 5%. There's no reason that, that is going to change. Skin test is still the majority of the overall market, somewhere between 50% and 60% of the global latent TB testing is still the literally 120-year-old skin test. There is an ongoing penetration that should benefit QIAGEN going forward.

Okay. Perfect. And then with respect to Roche TB competition, we know this product is now in the European market. U.S. market launch is TBD, although rumors say it's a few years out from now. Have you seen any signs of competition or customer preferences post Roche's launch in Europe?