Good morning, everybody. Luke Sergott from Barclays covering Life Sciences Tools and Diagnostics. With me, I have the pleasure of the John Gilardi, IR, and Roland Sackers, CFO of QIAGEN. I guess to kick it off, just kind of go over the real high points of the quarter, what you guys are seeing from a demand perspective, and then how that's really progressing versus what you guys were expecting.
Sure. Yeah, first of all, thanks for having us, and thanks for organizing nice weather. We clearly deserve that. Yeah, as you all know, we clearly finished the year 2022 quite strong, not only the year, but also particularly the first quarter. We had a strong finish, particularly on the non-COVID growth rate, overall good growth rate. I think we were very pleased that all our best work was delivered on what we were expecting and adding to the market. And I know that some investors clearly had some concern about the instrumentation business in general. And also having a, I would say, a strong finish for the year for instrumentation was clearly important for us because at the end of the day, we know that instrumentation is for future consumables sales, which is our recurring business.
Now, moving into this year, you know clearly that we reiterated our guidance for non-COVID growth rate being double-digit for this year. I do think we were quite outspoken that we believe that Q1, for two particular reasons, is probably a bit softer than the rest of the year. Particularly China is something where I think not only we, but many other companies also take a more careful stance moving into the year. On top of that, it's quite obvious that last year we had a very strong Q1 with COVID-related revenues, which hopefully not is repeating by itself. I'd like to get the revenues, but I don't like to get the COVID again. So I do think that normalization is going on. Other than that, I would say trends are, particularly on the consumer side, are quite strong. We see good demands coming in.
Our growth drivers, I would say, on the consumer side are doing quite well.
All right. Let's dig in on that China piece a little bit. So across your portfolio, the life sciences and the diagnostics, where are you seeing the most impact in 1Q? And then talk about the trend lines that you're seeing from a recovery standpoint.
Yeah. I'd remind that last year, QIAGEN was one of the very few companies who had a positive growth rate in China. And that was due to the fact that we had a good balance between, I would say, products we delivered in the COVID-related environment and non-COVID business. So in some quarters, it was really offsetting each other and therefore again a positive growth rate. We all know that China decided there's no COVID anymore, and therefore there's no COVID testing. But there's clearly still some quality healthcare issues, right? And they have to work, so we all know it takes a certain time until a country more or less goes through these waves. And again, people are literally sitting sick at home, right? I don't think that is something unusual. It's something where you have to, as a society, work through.
That's what we're seeing right now. So even if you don't have official lockdowns, you are not really 100% functional. So I would say we expect a rather significant negative growth rate in Q1, going into a slightly negative growth rate in Q2, and then probably improving into positive territory in the first quarter. Again, it's included in our guidance, but it's a reflection. I don't think it's a particular either life science or clinical environment story. I just think it's really affecting in general China.
Because everybody got it. Yeah. So we see some data where the recovery seems to be coming on quite strong. We've heard companies talk about it being explosive. Within your end markets, what are you seeing on the recovery standpoint?
As I said, I do think that we probably will expect sequential improvements over the course of the year. I don't see any reason that that should be different. It will take some time.
Okay, and so on the life sciences side, backing up here, you're talking about the instrument growth on the fourth quarter. You guys put up a really good, like you said, 14%, guiding the low double digits. What was the underlying demand on that instrument growth? What's driving that?
I think it was actually I think we have to benefit as our R&D has a good set of new instruments to the market, not only QIAGEN, QIAstat-Dx, NeuMoDx, and QIAcuity, it's also some of our sample prep platforms like EZ2 and others are being well received by the market, and I think that trend is something that gives, again, also us a good feeling now moving into the year 2023. Nevertheless, I do think it's also important to realize that overall the market for instrumentation is something which is driven very much also by the menu you put on the platforms. Clearly, QIAGEN had a strong focus over the last more or less two to three years in expanding menus on QIAstat-Dx, but also on NeuMoDx. There's still more work to do.
I would clearly have a gastro approval hopefully coming up this year for QIAGEN, and we have laid out on the last call a three-year plan for expansion on NeuMoDx for the test menu. So that should all be quite helpful for us.
Yeah, and on the NeuMoDx, I mean, the deal when you guys finally closed it after the milestone, so you're guiding to roughly flat growth in that business. Talk about what's going on there and the slower uptake than what we were originally anticipating.
I don't think there's a slow uptake. I think what you have to realize is that there is a difference between QIAGEN, QIAstat-Dx, NeuMoDx. In QIAGEN, the majority of revenues are in the meantime already non-COVID. COVID is clearly coming down, whereas on NeuMoDx, there was still more than half of the revenues are actually on the COVID side and the lower part on the non-COVID side. And as I said before, last year we had about $470 million in COVID-related revenues. This year we expect, let's say, somewhere between $200 million and $210 million. Have in mind that we had more or less pre-COVID $150 million COVID-related revenues because we were selling RNA sample prep pre-COVID. So what I would be saying is this year there's no COVID in it, so it comes down.
So we see NeuMoDx sequentially growing actually nicely double-digit, but of course there's a drop to expect it in COVID. Again, before again is another wave. We are not planning. We're not guiding for that. If it comes, we're happy to deliver. We're able to deliver. If not, I think non-NeuMoDx this year, as you said, probably slightly negative, which actually is good news because the good news is that quite significant double-digit growth for non-NeuMoDx as well.
Yeah. So, on the non-COVID side of business, it's growing strong double digits. Does it feel like it's hitting that inflection that QIAGEN hit like two years ago?
Yeah. Again, you know that you did your work here. If you clearly talk to customers, the instruments is very much like, right? It's turnaround time. It's one hour compared to like four hours. It has all features you need: random access, continuous loading, very low consumption on consumables. So literally customers love that instrument. They want us, particularly us, to have more menu in that. In Europe, we have a full menu, or to be more precise, ex-U.S. We have a full menu. It's a question of time.
Yeah. What menu do you need to build out for greater?
It's a very typical menu which we have in Europe, like infectious diseases, transplantation. Again, very typical thing, and I think it's also something we have to realize. We do not have to develop that menu. We have it in-house. We have to get it to regulatory approval in the U.S. Again, I don't want to talk it down, but it's not like a larger idea, but it's a regulatory work we have to do.
Yeah. You don't have to actually create an exact filing. It all right. That's helpful. Let's turn the corner here and talk a little bit about pricing and margins. So talk about the pricing environment that you have. I mean, it's been strong across tools for the last two years.
It's quite obvious that QIAGEN has a reputation of a, I would say, high-quality brand, strong brand name, and therefore I would say also overall a reflection of our overall good margin profile. Last year, we did two price increases. We did a very regular one earlier this year or last year. And then, of course, we have seen that inflation rates went up. So we did a second one more or less to cover our costs in the middle of the years. I clearly also want to be straight. We are not doing price increases necessarily to get extra margin in because we are typically in the markets where we're a number one or number two player. If you overstretch that, it also comes with a certain risk. So we want to have a fair share with our customers in terms of inflation increases on a cost basis.
I think we got that done by middle of the year, where I would say net end of the year probably by, I don't know, 250-300 basis points on net price increases. We did another smaller price increase earlier this year to cover more or less increments of inflation cost as well. So our goal is more or less to keep it cost-neutral to QIAGEN.
Yeah. Did you learn anything on the past few years about price increases, meaning that from where you thought there were more price-sensitive markets, mainly around RUO, all of a sudden that they're not as sensitive as you thought they might be?
I would say the feedback from customers overall in brackets was quite positive. So we didn't have any larger discussions because I guess also we did it meaningful in terms of let's understand where we are coming from and how we calculated it. We really tried to play that quite open. So I think that was good. At the same time, I think it was a quick confirmation that we got it also done in areas where some of our peers said, "That's actually lower price." So we did it also on other areas. So I do think it speaks for our brand as well.
Okay. And then continuing that on the margin front, talk about the additional leverage you have in the P&L outside of the pricing, about your targets for how you balance off the COVID rolling off as well.
For the last thing for this year, of course, overall we have still to see that COVID rolls off, right? And therefore probably across margins there's some offset and we might end the year with a, let's say, EBIT margin, I don't know yet, let's say somewhere between 27%-28%. Looking now in 2024 and beyond, I do think there's nice opportunities for us also to get extra leverage in for a couple of reasons. First of all, I do think we should expect, as you said before, better utilization in some of our production environments, particularly non-NeuMoDx and others. So better standard costing, higher utilization should drive also gross margin. R&D probably stays somewhere between 8%-9%. We've just got to commit to, as I said, we did some step-ups during COVID to get even more menu as we talked about it.
Through our pipeline, I do think that it's normalizing over time to a certain extent. Most significant leverage for us is still SG&A. There's a nice opportunity for us. As clearly also COVID teach our industry to become more digital. We had a significant effort in QIAGEN, and I think there's still more to come. Also, again, you see how conferences and marketing activities are held these days. So I'm quite sure that we should be able to, I don't know, somewhere between 30 to 60 basis points per year of our margin improvements. Depends a bit also on currency movements, of course, but there's a nice opportunity to get some leverage into the company.
All right. Yeah. Because I remember that you guys did a couple of, excuse me, you did a couple of reorgs and re-right-sizing the sales force there a couple of years ago. Talk about where you are on that.
I think there's, again, the organizations we're clearly developing, and for example, QIAGEN, I would say, did quite well in utilizing what people would probably call, in general, business shared service centers. We have around 15% of our employees in global shared service centers, which is a very strong backbone, particularly in days like COVID. I think it was one strength, but we were all able to scale our efforts as we did over the last two years in terms of revenue expansion and serving our customers because this concentration of consolidation is, in these days, of course, quite helpful because it's much easier backing if you have 500 people in an office than 20 people in a remote site, and so I think that's helpful, and also the system environment is clearly quite nice to develop. Nevertheless, there's more to come.
First of all, as you know, we do these smaller bolt-on acquisitions, which are always something which we nicely integrate and typically enhance our growth quite a bit. But the same is true for things we talked through like menu expansion and others. It's not only going to the same kind of equipment and the same kind of customer group. It clearly also leverages the same framework. So I'm quite optimistic also on margin expansion. Yes, we do have clearly the leading margins in the environment, but I do think the same record, we have also good track on building on that.
All right. And you touched briefly on the M&A. You just did Verogen. Do you want to talk about that?
Sure. One of the areas where QIAGEN has been active for the last two, three decades is human identification and forensics. And the core of that is really our sample prep business. And if you think about it, we estimate that every 10 seconds there's a crime scene somewhere in the world being analyzed using QIAGEN kits. And the market had really been based on using what are called short tandem repeats to be able to identify a suspect and then also to exonerate persons. But you had to go and do one-to-one and look at a sample and compare. That's what you see on TV all the time with the TV shows. What Verogen did as a spinout out of Illumina is they harnessed the power of two things.
One is NGS technologies, and the second are these Ancestry databases, which is one of the most powerful, one of the most popular hobbies for people in the United States. So through these two products together, we now have a new product that's being used by law enforcement. You saw that in the Golden State Killer. You saw that in the University of Idaho killer case where they don't have a suspect, but they have a sample from a crime scene that they can identify. They will use what we call GEDmatch PRO, our product, to be able to analyze and then be able to come up with an ancestral family tree, then be able to go back and identify the suspect. That's what you're doing now is using the power of NGS.
We sell the Verogen MiSeq sequencer that's specially configured for use with forensic kits that we have, so we can give them a complete solution from the biological sample, getting the DNA, RNA. That's where QIAGEN is really the gold standard for crime scene analysis work into the sequencer and then into the bioinformatics, and then you're able to identify the suspects. We have about 98% coverage now in the United States in terms of being able to identify people through first degree of cousins, first, second degrees of cousins.
I think you're second guessing when you're doing those tests.
When you think about those tests, there's an opt-in box where your information can be shared with law enforcement and for scientific research in these areas. And the rate of people increasingly opting in is going up.
So I mean, that person's gone what, 10%-20% for a long time. So how big is that for you now?
Fortunately, a $100 million franchise for us. Forensics puts us in the top three players.
Good business. And as John said, I do think we're bringing it now to the next level because the Verogen franchise is clearly a great franchise and making a difference not only to crime scenes, but again, seeing also on how much work, unfortunately, the world has to do in locations like Ukraine and others where it really comes through identification and having years of potential to make a difference, I think, is material.
All right. We'll change gears here in the last four or five questions. So you do have significant academic government exposure. So talk about the funding environment you see across the U.S. and Europe and Asia. Sequestration and the GOP budgets expected to come out and be some pretty steep cuts. Give us a sense of how your business is positioned to.
Use the S word.
Huh?
Don't use the S word.
Okay. I won't use the S word. Just talk about how you're positioned now versus if you were.
Of course, we're monitoring all these inflation movements right now. At the same time, I would say for this year, the budget is out and so far very reasonable in the U.S., also in Europe. You get very different signals on overall development. For us, of course, it's also important within this huge, for example, NIH budget, which I think is $48 billion-$49 billion, how things are getting allocated. So far, we have seen actually very good growth rates, and I don't think that's going to change short term. The good news in the U.S. is typically it requires a bipartisan approach, and it typically ends with a bipartisan approach to support that budget. There's a lot of headcount in that. So I'm not too concerned.
I would expect that if it becomes more difficult, also with inflation, other topics, that certain businesses like instrument business and others, people will think twice before they spend, while 85% of our business is consumables-related recurring business, which is very resilient in this environment. I wouldn't expect larger changes here anyway.
Okay. It was just a perfunctory question. I had to get in there when you're thinking about where you guys play. So you just sold the bioinformatics business. Talk about when you bought the Ingenuity, right? When you guys bought that, there was a clear synergy across the whole portfolio. So talk about the strategy here.
I think what we're doing here is nothing else that would be good for any other part of our business. We look for ways to enhance our value and also the value to customers. And our QDI business, QIAGEN Digital Insights, is clearly, let's say, a $100 million business, nicely double-digit growing, quite profitable. But clearly, the market, which has good momentum, but also requires consolidation. And there's clearly an opportunity for us to set this new standard in the market. The question is, is this something what you do by yourself, or you do with a partner, you do in a joint venture type? There's a lot of questions. I think you can wait. We should be trying to find appropriate answers for that. So I don't think that our plan is to sell that business. Our plan is to enhance the value for that business.
And if you have to do that with a partner because one of one gets more than two, happy to do so. Because it's also fair to say that while there's a lot of businesses which have good growth rate, there's not too many businesses out there who have good profitabilities. And so it's easy to find something which, whatever, eight-digit million dollars in revenues, but probably higher net losses than revenues. And I'm not sure how much you would like that we do a couple of these things by ourselves. So that's exactly what we are in. We try to value and enhance value here.
The bear's in the hole.
I'm not sure that wholesale is really.
Just to be clear on that, you're not in sales. Okay.
No, no. No, it's sale.
Okay. That's my bad. On the QIAGEN and the digital PCR ramp here, really strong growth. Talk about the inflection in the portfolio that you have around there.
Digital PCR is our entry into this new generation of using PCR technology. We've taken an approach where we see upside because we have a system where we have three different versions of the machine: one plate, four plate, eight plate. First entry point was into academic research. Now we're moving into biopharma processing areas in terms of research and R&D work that's done in biopharma. And then we're going to make the transition to clinical. This is a big franchise moving ahead for us, and we see a lot of opportunities. We see it as the right now is probably the biggest play in our life sciences business beyond where we are with sample prep. That's getting overproportional investment and attention.
And it's a really competitive market. So talk about the pricing environment, how you guys are positioned versus.
Pricing is not the issue here right now. What we see, though, is, again, remembering qPCR, the predecessor technology, it became a ubiquitous technology. You had to find other ways to be able to differentiate. The technology is not the enabler. What we see is that the ability of your systems to provide a cost-efficient, scalable solution that can enable customers to move from qPCR to digital PCR without having to spend a six-figure amount of money to get into the technology like you do have to do with the competitors, that's the advantage that we're giving people. We're democratizing, enabling access to digital PCR. This is an area where we have tremendous upside, and we're not cannibalizing our own business.
All right. Great. That's all the time we have. Again, thank you. Pleasure.
Thank you, Luke. Thanks for having us.
Thank you.
Bye.