Qiagen N.V. (NYSE:QGEN) Q3 2023 Earnings Call Transcript

Qiagen N.V. (NYSE:QGEN) Q3 2023 Earnings Call Transcript October 31, 2023

Operator: Ladies and gentlemen, thank you for standing by. I am Jess your Global Meet call operator. Welcome, and thank you for joining QIAGEN’s Q3 2023 Earnings Conference Call Webcast. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded at QIAGEN’s request and will be made available on their internet website. A prepared remark will be followed by a question-and-answer session. [Operator Instructions] At this time, I would like to introduce your host, Mr. John Gilardi, Vice President, Head of Corporate Communications and Investor Relations at QIAGEN. Please go ahead, sir.

John Gilardi: Thank you, Jess, and thank you all of you for joining us today for this call. We appreciate your interest in QIAGEN. Our speakers today are Thierry Bernard, our Chief Executive Officer; and Roland Sackers, our Chief Financial Officer. We also have Phoebe Loh from the IR team joining us as well. This call is being webcast live and will be archived on the Investors section of our website at www.qiagen.com. You can also find a copy of the quarterly results press release and presentation on our website. We’ll begin with remarks from Thierry and Roland and then move into a Q&A session. Before we start, let me briefly go over the safe harbor statement. The views expressed during this conference call and in response to your questions represent the perspectives of management as of today, October 31, 2023.

We will be making statements and providing responses to your questions that convey our intentions, beliefs, expectations or predictions for the future. These statements fall under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. They involve risks and uncertainties, and actual results may differ materially from those suggested by these statements. Factors that could influence results are mentioned in our filings with the SEC. These are also available on the SEC website and also on our own website. QIAGEN disclaims any intention or obligation to update any forward-looking statements. Additionally, we will refer to certain financial measures not approved — sorry, not prepared following generally accepted accounting principles or GAAP.

All references to EPS refer to diluted EPS. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in our press release and presentation. I’d like to now hand over the call to Thierry.

Thierry Bernard: Thank you, John. Good morning, good afternoon or good evening, depending, of course, of where you are in the world, and thank you for joining us. We delivered another quarter of solid results that exceeded our outlook in an increasingly volatile macro environment. This confirms again the resilience of our portfolio. Our performance continues to be driven by our strategy of focus and balance, focus on our pillars of growth and balance in serving over 500,000 customers in the Life Sciences and Molecular Diagnostics with our broad geographic presence. At the same time, we are obviously closely monitoring increasingly challenging geopolitical and macro environment and taking actions to reduce as much as possible the impact on our business.

We believe that we are very well positioned to finish this year in a strong position, committed to delivering solid sales growth and improved earnings in the fourth quarter as we prepare for more growth and expansion in 2024 and the years ahead. Let me quickly go to our top messages for today. First, we exceeded our outlook for net sales and adjusted EPS for the third quarter, driven by solid growth in the non-COVID base business and a high level of profitability. Net sales were $470 million at constant exchange rates, which exceeded our outlook for at least $465 million. Our non-COVID product sales rose 5% CER, and this was supported by 10% CER growth in sales of highly recurring consumables revenues that accounted for well over 85% of total sales.

For the first nine months of the year, those sales grew 8% CER. Overall results showed a decline of 5% to $476 million reflecting, of course, the significant drop off in COVID testing revenues from 2022. We continue to track towards $160 million to $165 million of sales for 2023 in our COVID-19 product group. Remember, that we had $143 million of sales from this group in 2019 before the pandemic. In terms of profitability, adjusted earnings per share were $0.50 CER and once again, above the outlook for at least $0.48 CER. Our second key message. Our key pillars are driving the solid underlying performance. Just to call out a few. The QuantiFERON TB test maintained the momentum we have seen during 2023, growing 25% CER over the third quarter of 2022, and delivering the second consecutive quarter of saleable $100 million.

What are the key drivers? Obviously, once again, the strong conversion trends from use of the tuberculin skin test. Another example, the QIAcuity digital PCR system delivered over 40% sales growth at constant exchange rates, driven by new placements and increasing biopharma consumable sales. The QIAstat diagnostic syndromic testing platform also did well this quarter with a combination of growth in consumables, driven by double-digit CER gains in non-coding testing and placements above the same level achieved in the third quarter of last year. Our third message, we continue to maintain a high level of profitability as we invest into research and development that will help driving future growth trends. The adjusted operating income margin was 26.6% in the third quarter, and we achieved this level while investing around 10% of sales into research and development.

We see those investments as an important way to create new relays of growth for tomorrow. And our last point for today, we are reaffirming our full year outlook for 2023. Our outlook ’23 remains for net sales of at least $1.97 billion at constant exchange rate and for adjusted earnings per share of at least $2.07 CER. We are, of course, closely monitoring the increasingly volatile geopolitical and macro trends, inflation. The war in Ukraine and now in the Middle East, supply chain issues, the economy in China. Those are a lot of moving parts to observe in terms of macro trends. Before I hand over to Roland I would also like to mention a change in our leadership team. After leading our molecular diagnostic business since 2020, Jean-Pascal Viola has been appointed Senior Vice President, Head of Corporate Strategy and Development.

He remains a member of the Executive Committee. We here want to capitalize on Jean-Pascal’s contribution to QIAGEN since 2007 and his proven track record in business development. After a rigorous selection process, we would like to welcome Fernando Beils as our new Senior Vice President, Head of Molecular Diagnostics business area and member of the Executive Committee. Fernando joined QIAGEN after more than two decades in the Life Sciences and Molecular Diagnostics industry. He most recently led the Genetic Testing Solution Business at Thermo Fisher Scientific and previously spent over two decades at Siemens and his last role as Global Head of the Molecular Diagnostics business unit at Siemens Healthineers. We welcome Fernando to the team and are convinced that his passion for innovation and customer focus will help us achieve our ambitions.

And now, I’d like to hand over to Roland for a review of our results in greater detail.

Roland Sackers: Thank you, Thierry. Hello, everyone. Thank you as well for me for joining our call. Let me first discuss our results for the third quarter and first nine months of the year and then share some views on our outlook. As you saw in our press release, net sales for the third quarter of 23 were US$476 million at actual rates and US$470 million at constant exchange rates. We saw a modest impact from currency movements against U.S. dollar, so sales declined 5% compared to the year ago period, while a result at constant exchange rates were down 6%. As has been the trend during ’23, this was again a quarter with a substantial decline in COVID-19 revenues. Instrument sales led the performance, rising 1% CER as our teams generated growth despite more conservative customer spending trends.

Even in this environment, we still saw solid placements of lower price point instruments such as QIAcuity and QIAstat-Dx. We continued to see good placement trends for reagent rental agreements. This agreement among molecular diagnostic customers involved placements linked to multiyear consumable contracts and help secure future consumable commitments. Among our four product groups, let’s start with sample technologies, which represents about 1/3 of total sales. Here we had growth at a low single-digit CER rate for the non-COVID products and this represented nearly 90% of sales within this product group. Overall, sales declined 13% CER, and this was due to the very tough comparison against ’22 results and the drop of this year in COVID-19 testing demand.

Diagnostic Solutions, our second product group also represents about 1/3 of sales. The QuantiFERON latent TB test was the main driver with all regions delivering sales growth of about 20% CER or better. The strong conversion trend from the traditional skin trend test is continuing across the world, but this is still a market that is well below 40% penetrated. Diagnostic solution also includes the QIAstat-Dx system for syndromic testing, this sales rose 4% CER as non-COVID applications delivered solid growth of 16% CER with more than overweight, which more than overweighted the COVID-19 testing headwinds from ’22. We continue to see excellent non-COVID utilization in Europe with underlying growth at double-digit CER rate for non-COVID application that represented about 30% of total sales.

NeuMoDx, our integrated clinical PCR testing platform saw a sales decline in the third quarter. This was due to headwinds against the high level of COVID testing revenues in Q3 ’22. Moving on to the PCR nucleic acid amplification product group, these sales declined 25% CER in the third quarter. As we have been discussing on these calls during ’23, the reason was a sharp drop-off in sales to our OEM third-party customers that use our reagents for their own products. Excluding this factor, non-COVID sales for this product group rose at a single-digit CER rate. At the same time, QIAcuity digital PCR continued to deliver growth above 40% CER and is tracking well towards the ’23 goal of for at least $70 million of annual sales. This growth is coming from a combination of increasing consumables pull-through along with solid trends in new placements.

In Q3, these levels were above the year ago quarter and for all three versions involving the 1-plate, 4-plate, and 8-plate system. Genomics NGS is our last product group, and that involves our QIAGEN Digital Insight Bioinformatics business and our products for use with any next-generation sequencer. The QDI business had another solid performance with sales growth at about 20% CER in the third quarter and maintaining a double-digit CER growth rate for the first nine months of the year. Here, we are seeing the fastest growth in our clinical applications and complemented by double-digit growth as well in discovery and research applications. Moving to sales on a geographic basis, the Americas again delivered growth in terms of total sales rising 1% CER and at a faster 4% CER rate for the non-COVID business.

The key driver was clearly QuantiFERON and supported by the sample technologies and QIAcuity portfolios and discontinued the trends seen in the second quarter. The Europe, Middle East, Africa region grew at an even stronger pace than the Americas with sales rate for non-COVID product groups rising at a double-digit CER rate. Among the top-performing countries for non-COVID results were France, Switzerland and the United Kingdom. The Asia Pacific Japan region had a decline at low single-digit CER rates for non-COVID sales. Non-COVID sales in China declined at a low single-digit CER rate as well. Let’s now review the rest of the income statement. Adjusted operating income declined 12% to US$126 million from the third quarter of ’22, reflecting the lower sales base due to the pandemic revenues last year.

The adjusted operating income margin for the third quarter was 26.6% of sales. Keep in mind that in the third quarter, we faced currency headwinds of at least 50 basis points on the margin. The key driver was a decline in adjusted gross margin to 66.1% of sales. Among the factors was the lower levels of capacity utilization and the change in product mix. At the same time, we continued to make significant investments in R&D, which remains at about 10% of sales and in line with our full year goals. Sales and marketing expenses benefited from improvements in the quality and efficiency of customer engagement. These expenses were 23.4% of sales in the third quarter, up from 22.9% last year on a significantly higher COVID-driven sales base. General and administrative expenses were 6.0% of sales and slightly lower than in the third quarter of ’22 at 6.2% of sales.

To close out the income statement. Adjusted EPS for the third quarter was $0.50 at constant exchange rates and above the outlook for at least $0.48 CER and also $0.50 at actual rates. In terms of non-operating net income factors, we have seen incrementally higher interest income during ’23 in this high interest rate environment. At the same time, our interest expenses have declined this is due to QIAGEN having repaid nearly $900 million during the last 12 months of maturity, maturing debt from existing cash reserves. Turning to cash flow, results for the first nine months of ’23 reflects the lower sales and profit levels compared to ’22. Operating cash flow was US$308 million for the first nine months of the year, while free cash flow was US$210 million.

As we have mentioned on earlier call to ’23, we are in a period of higher working capital requirements due to our decision to increase inventories in light of the challenging geopolitical and macro environment. We want to ensure that QIAGEN has adequate product availability to serve customers. This is also seen in the balance sheet in terms of the increase in inventories. At the same time, accounts receivables has been trending into a positive direction with days of sales outstanding or DSOs at 54 days at the end of September ’23 and down from 58 days a year ago. This is due to the operational improvements achieved by our receivables teams. Continuing with the balance sheet, our liquidity position was about $1 billion at the end of the third quarter, which is down from $1.4 billion at the end of ’22.

As a result, our leverage ratio at the end of the third quarter stood at 0.7x net debt to adjusted EBITDA, an increase from 0.5x at the end of ’22. One of the drivers for improving our leverage and capital efficiency was a decision to repay about $900 million of debt from existing cash reserves, as I mentioned. Of this amount, $400 million of convertible notes were paid out in September ’23. Looking ahead, we have an additional $100 million of debt reaching maturity next June and another $500 million in November ’24. Another $500 million of convertible notes could require repayment in December ’25. We continue to review ways to deploy cash within our disciplined allocation strategy that involves targeted M&A as well as share repurchase programs.

Given our healthy balance sheet, we want to continue our approach to create value by investing into the business and increasing returns. I would now like to hand back to Thierry.

Thierry Bernard: Thank you, Roland. And if you allow me, I’d like now to take a moment to run through some of our progresses in advancing our portfolio this quarter. First, we continue to sharpen our focus on our pillars of growth and expand in our key areas of expertise to drive sustainable growth in various applications. While we are directing investments into growing our new pillars of growth such as QIAstat diagnostic or QIAcuity, we are obviously not complacent in our established leadership in Sample tech or QuantiFERON. First of all, in our market-leading sample technology portfolio, we continue to make progress on automation upgrades with the recent launch of the TissueLyser III instruments. This instrument is used as a key tool in sample disruption of difficult to isolate samples in early steps of or DNA isolation such as those involving bone, tissue or environmental samples like soil or plant matter.

The prior generation of this instrument has been seated in over 14,000 publications and is part of a comprehensive lineup of automation that well positions QIAGEN to answer a broad range of customer demand for sample processing. Through the complete upgrade of our sample preparation systems, we have ensured these platforms are not only delivering state-of-the-art technology for the highest quality processing but also modern solutions for connectivity, which is used for real-time monitoring of runs, cloud management of data and remote service monitoring. Another example is the next update that will come with the release of an upgraded version of our fledging platform, QIAsymphony, which will onboard connectivity elements and additional features to even better enable high-volume applications such as liquid biopsies.

We also continue to leverage our deep sample prep expertise through some of the more dynamic growth applications such as expanding our microbiome portfolio. Our teams recently launched comprehensive workflow like the microbiome whole genome sequencing six sets to enable diverse microbiome research, including gut health, sold microbiology and antibiotic resistance. Those complete kits leverage our leading microbiome DNA extraction and include library preparation for whole genome sequencing and dedicated bioinformatics. Another notable sample tech expansion is the launch of our kits in our QIAwave’s portfolio. The QIAwave RNeasy and multianalyte DNA RNeasy kits were added to the collection of alternative version of the most popular QIAGEN kits which have been redesigned to use considerably less plastic and cat board.

Those sustainable kits versions are part of our broader initiative to reduce our environmental footprint and achieve milestones toward our STBI (sic) [SBTi] validated target of net zero by 2050. Moving now to the QuantiFERON franchise. We continue to see strong expansion into the market for this product led by the leading QuantiFERON TB Gold Plus test for latent Tuberculosis testing. As you have seen in our results, the TB test continued to see strong demand from the continued successful conversion from the tuberculin skin test alongside with our strong solution for automation with DiaSorin. This undercalls the power of QuantiFERON differentiation in the latent TB testing market as an established and proven technology with unparalleled automation options.

Our team’s ongoing public health work leverages established relationships to promote the importance of test and treat strategy for eradicating deadly TB infections across the globe. This month, for example, QIAGEN once again hosted the Annual Tuberculosis Summit, bringing together experts, health care professional, policymakers, disease survivals to discuss emerging tools and strategies for TB management. This accredited event, so record-breaking participation with over 2,500 people attending through our webcast or in person in London. This summit works to drive significant investment in the pipe against TB and empower health care professional and policymakers by providing them with the latest knowledge, insights and best practices. While QuantiFERON plays an essential role in the global fight against tuberculosis, we are also leveraging the QuantiFERON technology to assist in the exploration of cell-mediated immune response in oncology and autoimmune diseases.

Just recently, as you have seen in our press release, we launched the QuantiFERON-EBV assay for research use only to facilitate research in building the understanding of Epstein-Barr virus infections and related malignancies. This builds on the existing portfolio of IVD test for monitoring CMI response and cytomegalovirus, a line disease assay and the research use only T cell response assays. So you can see we are building on a strong base in our QuantiFERON franchise. We see a solid road to continued double-digit growth in the next few years by leveraging this highly differentiated proprietary technology through well-established commercial channels. And now back again to Roland to give you more details on our outlook for 2023.

Roland Sackers: Let me provide more perspectives on our outlook for ’23 and also for the fourth quarter. As noted earlier, we have reaffirmed our full year sales outlook for at least US$1.97 billion at constant exchange rates. In terms of COVID-19 sales for 2023, we continue to expect about US$160 million to US$165 million. Remember that in 2019, we had $143 million of sales from products that were redeployed for use during the pandemic, and these were mainly sample technologies for use in obtaining RNA. So we clearly see 2023 as the last full year of significant COVID-19 headwinds. In regards to our OEM business, these sales are tracking at about $90 million for the year. To frame this, the pre-COVID OEM sales were in the range of US$70 million plus.

And we would like — we would expect this business to normalize to that level again next year. In terms of regions, we are closely monitoring fast-changing geopolitical and macro trends during the world. We continue to have a cautious view on China where the environment has not improved as is reflected in the results for the third quarter. We are also closely monitoring the situation in the Middle East. In that region, we are actively working to support our distributors during these challenging times. In terms of profitability, we have reaffirmed our outlook for adjusted EPS to at least $2.07 at constant exchange rates. A significant part of our cost structure is variable, which enables agility in cost management while continuing to invest in the business.

This remains a top priority as we position QIAGEN to continue delivering solid growth in the midterm. As for currency movements and based on rates as of October 27, we expect a negative impact on full year net sales of about 1 percentage point and at least $0.02 per share negatively impact on adjusted EPS results. Moving to the fourth quarter. Our outlook is for net sales of at least US$500 million CER. Adjusted earnings per share expected to be at least $0.53 per share also at CER. As for currency movements and based on rates as of October 27, we expect a neutral to slightly negative impact on both net sales and adjusted EPS for the fourth quarter. I would like to now hand back to Thierry.

Thierry Bernard: Thanks, Roland. We are now coming close to the end of our presentation. So let me provide you with a quick summary before we move into the Q&A session. First, amid the ongoing volatile macro environment, QIAGEN has delivered another solid performance in the third quarter of 2023. We achieved our outlook for both net sales and adjusted EPS with good demand for our technologies in our non-COVID base business. Second, those results were driven by resilient performance for our key pillars in both Life Sciences and Molecular Diagnostics. Our strength in sample tech and QuantiFERON are complemented by the solid progress the team are making in expanding our footprint in QIAstat diagnostic and QIAcuity digital PCR systems.

Third, as always, we continue to maintain a high level of profitability and are using our healthy balance sheet to create value through organic and inorganic investment. And lastly, we have reaffirmed our full year outlook for 2023. As we move through the end of the year, we are diligently keeping an eye on the global landscape to understand all these dynamics carry into 2024. Despite the currently challenging environment, we see a solid midterm outlook for both the Life Sciences and Diagnostics market and are well positioned to continue to deliver sustainable growth in the coming years. With that, I would like now to hand back to John and to the operator for the question-and-answer questions. Thank you.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] The first question comes from Catherine Schulte with R. Baird. Your line is open. Please go ahead.

Catherine Schulte: It’s great to see these results amidst a lot of pressures on the space. I wanted to start on the Life Sciences side of your business. We’ve heard some peers talking about pharma spend caution intensifying throughout the quarter. Meanwhile, academia has been pretty healthy. I think NIH outlays were up over 20% in the third quarter. Can you just talk through the trends you saw throughout the quarter in those customer groups and your expectations for those end markets going forward?

Thierry Bernard: Thanks, Catherine. Thanks for the questions. Yes, obviously, we are following also what some competitors are saying on the market. It is obvious that funding for the biotech industry is a bit under tension. However, we see still a very good demand for the life science product of QIAGEN, especially in Life Science. What you have to — in sample, I’m sorry, what you have to understand is that especially in Life Science, whether we talk sample tech or UNGS that are self-directed to either the research of the academic sector, we are not a very high budget in those spending, but we are a fundamental part of those spending. So it’s difficult to eliminate QIAGEN even in times of difficult economic environment. Sample tech is the first and crucial step for any biological run, yet it is not the most expensive part of activities in those labs.

And this is why I think we are pretty protected. That doesn’t mean that our company is immune to adverse economic events, but we are monitoring this very carefully. As an example, we keep a line on the government shown down in the U.S. and we are carefully analyzing what will be the budget increase, if there is an increase for organization like, for example, the CDC and the NIH, but we have it under control.

Operator: The next question comes from Patrick Donnelly of Citi. Your line is open. Please go ahead.

Patrick Donnelly: Terry, maybe as you look at some of these lingering headwinds, whether it’s the OEM piece, instrumentation and maybe a little bit in China, I guess how do you think about the potential for these to continue into 2024 and impact the growth there? Obviously, we’ve got some commentary from peers about the first half maybe being a little more subdued given some of these headwinds. And then on the same topic for Roland, just how you think about the margin set up into next year if some of these headwinds do persist, just the leverage you guys have in the P&L?

Thierry Bernard: Thanks, Patrick, and we will take [indiscernible] [Roland] this question just before going to the margin, so questions on OEM instrumentation in China. Obviously, Patrick, I’d like to have a crystal ball. It’s obviously extremely challenging those days to forecast given the volatility. However, as we have said in Q2, we strongly believe that our OEM business is now normalizing towards its pre-COVID time. So I expect a normal, let’s say, OEM range of revenues around $70 million to $80 million in a normalized environment. China, it is obvious that a lot of players in the market were expecting a sequential improvement of the Chinese market starting in Q1 of this year. This has not happened. And it’s clear as well that the anticorruption campaign in health care, launched by President Xi is adding to other challenges met by foreign companies on this market, pressure towards localization, delays in permission and registration from a regulatory standpoint, the so-called VBP policy.

However, China is a very important market, both for life science and clinical diagnostics, it’s probably already the second market in the world. So I do not see a fundamental improvement on the market in the coming six months, for example, but I believe in the long-term potential of this market because of the needs of the population and the patients locally. Obviously, foreign companies have to adapt their strategy to fit, obviously, into the Chinese priority. So, we need to keep a cool head. It’s an important market. It’s not going to bounce back immediately, but the long-term perspectives are good. Instrumentation, QIAGEN always said that because of the influx of tier, as we say, of instrument during the COVID period, the post-COVID period would see in many labs more trends towards placements of instruments than capital expenses in the diagnostic world.