I'm Derik de Bruin, the Senior Life Sciences and Diagnostics Tools Analyst for Bank of America. Welcome to our 2023 Global Healthcare Conference, coming to you live from London. Our next company up today is QIAGEN. With us from QIAGEN, we have Roland Sackers, CFO, and Phoebe Loh from IR. Thank you for being here today. Appreciate you making this trip.
Thanks for having us.
So do you wanna- I guess, I don't know. There's a lot to do, right? I think. So coming out of 2Q earnings, the macro environment for life sciences is probably more uncertain than it has been in a long time, I would say. So let's do a whirlwind tour of what QIAGEN is seeing, and we'll just go through this and pop it off, and we'll hit down some of the specific product lines, and then I'll open up for questions later. I've been marketing the last couple of days in London, and number one question on everyone's mind is China. So let's start with China. Even though you don't have a ton of exposure to it, but you do have a different perspective than a lot of the other animal instrumentation companies that are sort of out there. So-
Yeah, sure.
What's going on?
Yeah. First of all, thanks for having us. So it's good to be here. Yeah, just to frame it, China for QIAGEN is on about 6% of our total revenues. So it is somewhat meaningful, but clearly not significantly. I think what is different in terms of setups than any other country for QIAGEN, because we have in China also a dual brand strategy. We have a local brand, where we develop locally, where we produce locally, very Chinese, which is on about, let's say, 40% of total, and so remaining 60% is a very usual QIAGEN brand. We clearly also have a different basis than most other companies in China because we were clearly also selling last year into the COVID-related-
Mm.
-business. So we actually were growing last year in China, where already most companies had significant drops, in China in terms of revenues. For this year, we clearly had a more difficult start, particularly also China declared COVID over. I'm not sure it's over, but they clearly said we stopped COVID testing, so that had an impact on our situation as well. So China right now for us is in terms of growth rate slightly negative. We also expect that it stays on that level for the rest of the year. If you compare that to pre-COVID levels, it was like typically a 15%-20% grow up for us. So there was. It is clearly a change, and what we see right now is probably different perspectives.
On the one hand side, it's quite obvious China also has macro challenges. There's from significant unemployment rates to also, I would say, particularly on the CapEx side, hesitation to invest into larger capital equipment. We also see there, which is very typical for us, that our work consumable business is quite resilient, but we also see that there is clearly a benefit right now for having produced locally, developed locally and sell locally. So again, with our second brand, things are overall still moving in the right direction. We have to see how that develops going further. I think it's unfortunately a global trend, this, buying national, I'm not sure the de-globalization, but it's clearly something that we have to watch. We're not part of this, with other companies having this looking into corruption or whatever kind of environment. That is not a topic for us.
Got it. And when you think about your local brands there, is it, I mean, is it this? What are you exactly producing? I mean, what are this, I mean, are, I mean, do you have the blue and red boxes or like, but locally manufactured, or?
By definition, yeah, of course, not blue-
Yes.
But it's really a lot also going into hospitals, research facilities, a lot, much as research as well. So again, it's clearly a different price point, but similar margins. So China in general, as a second brand, doesn't have different margins.
Mm.
But it is a quite profitable business for us as well. But also, again, if you look at the in the regular announcements in China, it is very well known to everybody that for an SFDA approval with the Chinese FDA, a Western company needs an average six months more than any Chinese company. So you have daily disadvantages. If that now gets better or worse, we have to see.
Got it. Let's move on next to the U.S., European biopharma. So, I think many life sciences companies have seen a sharp slowdown in demand for their biopharmaceutical customers, 2023. Some of this due to just overspending during COVID, some of it due to just budget consciousness. What is sort of your take on this end market, to start with? Just what are you seeing in terms of demand?
I think overall for us, I think it's probably, again, the strength of our consumable business. It is actually a quite stable environment. And even on the equipment side, where we see more volatility, we rather experience it more on the more expensive side. So when instruments cost north of $100,000. So, no, a lot of our instruments, like QIAcuity, which is an instrument, which is digital PCR, and actually lots, used a lot in biopharma applications. Probably even get some benefits out of it, because what we're seeing is a, I wouldn't say a trade-off, but for pharma companies in a research environment, a lot of things they can do in the past or had to do in the past with sequencing, they can do now with digital PCR solutions is a very different price point. Some of this cost pressure is actually being somewhat helpful for us-
Mm-hmm.
-to, for example, selling into that market. So I think overall, we see a quite healthy environment there.
I mean, have you seen any delays in any of your companion diagnostic programs? I mean, are any companies repositioning, rethinking their pipelines today?
Yeah, I think generally speaking, our companion diagnostics program has always had a little bit of volatility-
Yeah.
Because half of that business is R&D milestone revenues, and that's really based on a contract timeline rather than the trends in the market. So we see some volatility quarter-to-quarter because of that. I wouldn't say that our pharma projects has necessarily slowed down. In fact, we've seen more of a normalization coming out of COVID, when the activity during COVID did really slow down. But now we see a bit of a more normalized level.
Got it. And finally, let's talk about academia and government from a global perspective.
I think also, relatively speaking, we are going quite optimistic into next year. I think it's obvious that after, I think now three years of double-digit NIH budget,
Yeah
-growth rate, we shouldn't expect that for next year. At the same time, we all know next year's election year in the U.S., so the likelihood that they're going to slash that budget, is probably also not likely, because that's typically what they don't do in election years. So I would expect your current discussions as well are on a neutral, slightly positive environment. Similar trends we see in Europe. So funding so far hasn't really affected our business right now, and I don't think there's larger funding concerns right now. Again, I wouldn't expect dramatic increases as we have seen in the past. I think that is not realistic either.
So, just sort of putting it all together, I mean, you've been growing double digits on your non-COVID core business for this year.
Yeah.
It's like-
High single or double.
High single or double digits, right? I mean, okay, we have some, Mark, obviously, the comps are tougher, a little bit, so a little bit of, yeah, a little bit of uncertainty in markets. I mean, what is sort of, what is, is that, is that sort of range still likely for next year, or should it be?
As you know, we most likely will have a capital market day early next year, so I'm going to tell you more details around that time frame. But I do think it's fair to say you shouldn't expect that we guide double digit moving into next year.
Yeah.
I think given the volatile environment-
Yeah.
I don't think that makes any sense. So one question which is still open for answer is also what will be the price increase for next year? Because I think it's fair to say that clearly, this or last year, we clearly had, as many other companies, also benefit from the price increases we were able to do on the market. As inflation rates, particularly in the U.S. are coming down, I think it's also more likely that the price increases, which we typically do January first, next year, will be somewhat lower. We will do a price increase, just to cover the typical inflation driven costs, but I don't think it will be different scale.
Right
-than what we did this year. So, so I would say that's one area. I don't think that the consumable business in general will change for us. I do believe that most of our, growth drivers, from QuantiFERON to QIAstat to QIAcuity, continue to grow double digits. So I, I feel overall quite confident. There's clearly volatility on the large scale, in CapEx side.
Yeah.
I would say that is something that we have to factor in as well. Yes, we will see growth. I'm not going to tell you today what we expect precisely.
Got it. A couple of questions to unpack there. So but you-I, I've had some investors worry that pricing actually needs to come down because it was so high. I don't, I don't think. I've, I mean, I've never seen prices come down in life science.
No, you're not in 21 years. I'm not in 20 years, so-
Yeah.
I wouldn't assume.
Yeah. Yeah, yeah. Okay, fine. Did you suffer from any of the destocking issues? I mean, outside of COVID, I mean, have your-
Um.
Yeah, did you see any of, like, advanced purchasing, is there going on with those dynamics?
Yes and no. In our typical blue box business, which is 85% of our business, no, because unfortunately, our industry, one thing terribly wrong in the last 20 years, educating customers. Whatever you order, we ship in 48 hours, so our customers do not stock our products. So one thing where it's different, that was our typical order size sell on about $1,000. The one area which was different for us is our OEM franchise. That's where we sell oligos and where we sell enzymes.
That is rather where we sell excess capacity to, to end customers, because typically we're only in that business because we need both products for us to produce our own kits. But with COVID, as we had excess capacity, we were selling that clearly also to the market with a low margin. Therefore, also the impact to profitability wasn't as high. That was clearly an area where we're seeing right now that the customers, as a large pharma or large diagnostic companies as well, they're clearly going through inventory situations right now, so there's an impact.
Got it. Got it, got it. You know, how should we sort of think about COVID for next year? I mean, a lot of it's out of the numbers.
I can tell you how we build guide for that, which means zero. Again, we clearly have had some COVID this year in the Q1 numbers, right? I don't know, like, $20 million or so. But nothing Q2, nothing Q3, Q4, I would say is still open. We have nothing in our guidance. If something comes in, of course, we're happy to deliver and to sell. But right now, the assumption is it's low. We clearly see right now certain things happening in Israel, but I don't think there is any kind of trend change.
Got it. Okay, so COVID out of the numbers for this. So going back to the OEM, is that-was that tied to COVID-related orders there, or is it, or?
Majority was COVID-related.
Yeah.
Again, we had $175 million last year.
Yeah.
We clearly reduced that expectation already for this year, but particularly in June, quite a number of orders dropped because for the reason, as I said. So the expectation for this year is $90 million. That probably compares to pre-COVID levels of $70 million, probably also what we have on order on hand for next year. So there is a certain remaining part. I think the more likely scenario is that it starts to grow from here again, but I think that's probably the framework well then.
Okay. All right. So $20-ish million maybe. Okay.
Hopefully not.
Hopefully not. So okay, let me see, before I go on that one. Sorry, my questions are out of order. Here we go. So let's talk, so let's go through the different business lines, then I'll, then I'll pepper you on margins and EPS and stuff like that. Sample prep has held up remarkably well. You know, I think the, you know, I, I think there was some assumption that, you know, you might have lost some share during the pandemic as some other companies in it, but looks like, looks like the people that were selling things lost share, and it's gone back to QIAGEN. Have you seen any sort of like, you know, changes, I mean, any sort of like, share dynamics going on?
So I think some of the, we heard a lot about that during COVID, but to be clear, some of that market shift was because COVID testing, which is unusual, brought a lot of testing volume into one test that's automated because it's a lot of consolidated laboratories. So that was a growth in the high volume sample tech market, and that's an area where we don't necessarily play. So if you talk about shifting of market share during COVID, definitely that high volume sample prep area was something other people were doing that we weren't so much. So from that perspective, yes. Going back now out of COVID, we see a much more normalization into the low, mid-throughput automation. Also, remember that a fair portion of our life science academic business is also done manually.
Yeah.
So-
Yes, it is.
That doesn't, that high throughput doesn't even impact us in that area. So overall, we've seen our market share remain stable now in a normalized non-COVID time, and we still see that market growing, you know, like we always have in the low to mid single digit range.
Yes, I did far too many manual QIAGEN sample preps-
Yeah, me too.
in my academic career. I just-
Free undergraduate labor.
Yeah, pretty much. Okay, so sample prep. Remind us, that's how much of the business today is sample prep?
Probably I'd say a year, that's somewhere between $700 million and $800 million.
Got it. Okay. So let's go down some of your other, growth pillars. Let's start with, QuantiFERON. Arguably one of the most successful acquisitions that QIAGEN has done. You know, really great growth. I think you had, like, over 25% CER growth in the Q2. Can we talk about just where does that business go? And I think I, I'm starting to get a little bit more questions are coming up on the competitive landscape with PerkinElmer having bought Oxford Immunotec and Roche reportedly looking at the latent TB testing market. Can you sort of talk about-
Sure.
Where you sort of like see the competitive dynamic unfolding in, in?
Yeah. And as you said, it's clearly a good product for us. Again, I still recall the days in 2012 when we acquired that business with a $20 million business. Now it's approaching a $400 million annualized number, accumulated $2 billion in revenues in the time in between. So I would say it is a successful transaction, given also the gross margin we have with that business. But I think it's also important to realize it is still a market where 65%-70% of the market is still a 120-year-old skin test.
The underlying market is still growing, most likely around 5%. It's a market where more and more tests become mandatory. Back to school testing in the U.S., immigration-based testing or hospital worker testing. It is half of the test is really related to that kind of a business, so it's not reimbursed, it's rather having different payer structure. And just the IGRA test, which is our QuantiFERON-based test, is just becoming the new standard. We all know that the clinical environment is rather sticky. It takes a long time-
Mm.
-to convince our customers here that there is a new technology which is better. It's quite clear that the specificity has much better results. And now where we have that market share, you see we are becoming the new standard and that there is an acceleration in terms of growth, is what we're seeing right now. We are also seeing that the skin test, over time, got more expensive, right? One of the topics we always had, while it fully loaded cost was always comparable, the skin test still has the issue of the second visit required because you get an injection in your arm, and after two, three days, you have to go back, because the skin doesn't see if it developed a bubble or not. That is clearly a significant disadvantage.
But even without taking the cost for that, it is something which, again, has increased in price, is now comparable. It's clearly also an attractive test for our customers. While we probably get an average $15-$20 for the test, they probably get, I don't know, seven to eight times as in terms of reimbursement. So it's also an attractive test for customers. But it's also important to understand that it was always competitive. So not only the skin test, as you said, Oxford was always in the market, now it's part of, of Revvity. We assume they are growing since 2012, similar than we do, but we have a factor of seven to eight bigger than they are. So we clearly kept the mark, were able to keep and potentially even growing the market share.
We have seen always a couple of Asian companies in that market. We have seen bioMérieux coming in that market. Unfortunately for them, they had to withdraw from the market as well. So it is a competitive market, and since a while. There was always rumors that other companies trying to come into that market. I would be shocked if not, because it is an attractive market. But if you look at the facts. It is clearly a market where you need approvals. You have to go to the FDA, you have to do clinical trials.
So before you, for example, can enter the US market, I think it's hard to assume that given what we see today, that it is realistic to expect something before 2027 U.S., i n Europe, it can be probably a bit earlier because you are CE approval, but nevertheless, you have to do the IVDR test, so there's an opportunity to be quicker. But at the end of the day, I'm not sure that it is necessarily always a negative to have more competition, because we see it as a benefit right now with the competition we're having. The number one competition is a skin test.
Yeah.
There's a lot of growth still to get done.
Do the labs or the docs make more money on this, or they make more money on the skin test?
Yeah, absolutely. Because again, the skin test is difficult-
Yeah
In terms of handling, there's significant advantage for the labs to do it. And I have to remind you, I know that you know it anyway, but we had a similar discussion in 2019 when Quest was buying the Oxford Labs in the U.S., and everybody was saying, Quest will go away and do their own test and automate T-SPOT and so on.
Yeah. Yeah. I think that-I mean, look, I think the concern over this is obviously when people hear competition, they obviously hear the big players.
Sure.
I mean, they're flashing back to-
I'm not saying that we're not concerned, but-
Yeah.
But there's also a reason why we have now, in the meantime, the fourth generation of the test, right? And we're not standing still. There's a reason why we have a fully automated system, because I think that's also one thing we have to remind ourselves. We have by far the best automated solution on the market for latent TB tests. There's nothing better. It's a very different situation. We are very happy with our partnership with DiaSorin. They have 11,000 placements, I guess, in the market, so there's also a large installed base, which being very helpful for us.
Got it. And product extensions, I mean, you've launched the Lyme test, like that.
Exactly. That's, that is, of course, a nice add-on. Lyme test is a big market, particularly in the U.S. We are approved in Europe, we have to go probably more precisely, DiaSorin, as they sell it, has to go to the FDA approval for the U.S. Probably happening next year. So we expect also here, a good number of revenues in 2025.
Great. Let's go to QIAstat. Multi-syndromic testing, certainly getting an uptick coming out of the pandemic. A little bit more people looking at it. Like, how should we sort of think about that business as that evolves?
So that's one that we still see doing very well, despite the pandemic boost it got. Now, you still see revenues growing, even despite the height of the revenues during COVID, which were all respiratory related. We're seeing a nice transition of those systems into non-COVID use. We have a nice menu of the three key panels outside of the U.S., so respiratory, gastrointestinal, meningitis, and we're working on building our U.S. menu. So although in the U.S., a bulk of respiratory testing is, I mean, of syndromic testing is respiratory, which we're covering, we're also launching the GI panel, and next year, we'll submit the meningitis panel. So the menu expansion is going well. We're still placing 150-200 systems per quarter. So, you know, the progress is still going well and looking good coming out of COVID.
Are those new accounts or are they coming in, or do they have an existing?
It's a bit of both. So it's a mixed terrain landscape.
Yeah.
So we do see that as syndromic and general volumes grow, because that was a nice market growth, the CAGR for the market of syndromic testing, 15%-20% pre-COVID. We still see that syndromic volumes overall are growing, not just respiratory. So people are adding more capacity for syndromic. So we'll see our QIAstat placed side by side with BioFire. Also, you know, the BioFire instruments have some... Let's say that our instrument has some nice ease of use comparatively on some panels, especially respiratory. You just take a swab, stick it into the cartridge, break it off, scan it, and load it. Whereas, you know, on other instruments, there's some wet lab prep you have to do before you can load it. So on certain panels also, they see the benefit of the QIAstat over some of its other competitors.
Got it. What's the overall installed base? Have you disclosed that?
We usually do the beginning of the year installed bases. Right now, it's over 3,500 at the beginning of this year.
Got it. Great. So let's go to QuantiFERON next. That one has been a little, not has, has not done as well as QIAstat. So can we talk about your sort of expectations for that one? And I mean, you sounded a tad more cautious on tone on that one, as the COVID sales are declining. So how should we sort of think about that business going, evolving?
First and foremost, I think we are very happy with the instrument itself. I do think it's a leading platform in the industry. It's, it has turnaround times for one hour, where most peers are on four hours. There's all the new features you have to have for random access, continuous loading. If you look on the what, what it does need in chemistry and others, it's really a great instrument, and you will not find any customer or potential customer saying something different. I do think it's fair to say that it clearly got a significant boost during COVID, and now with the drop of COVID, that COVID revenues literally disappear. On the[crosstalk] was two-thirds of the total revenues.
Got it.
On the one side, we still see nice double-digit growth, sequentially. So I don't think that is an issue. The topic is, of course, that we have a full menu outside of U.S. We have 16 panels, as small as what we have. Again, it's very competitive. I don't think that we are missing or lacking there something. So the question for us going forward, of course, is what are we doing to address US market? Is this something where you now significantly push forward and build up the menu? Is it something what you do with a partner, where you open up your platform? Is it a market you leave out? So there's a couple of questions around that, and, and that is, I think, what we said on the last call, we are looking into it right now.
Got it. And you, I guess, what do you sort of see as the market opportunity for that, I mean, overall? I mean, I, I've always just sort of like i t's hard, it's hard. That one's been a little bit hard for me to sort of like, figure out the plan.
It's clearly an attractive market, because otherwise you wouldn't have so many companies already in that market. At the same time, of course, I think it's also fair to say it's a market because where we are new in. So you clearly have to do not inly better, you have to be much better. And then it's a question how much placements you can do in a market. I would argue that we, as an industry, did all a very good job over the last three years, particularly at centralized lab and selling equipment. So I would say that is clearly something what we have to put into equation. As I said, in Europe, we have customers doing a couple of hundred thousand consumable sales on an instrument, so it's perfect.
If you put it into a relativity standpoint, we have over 300 systems in the market. That's 10% of the market leader. So not bad in a few years. And, you know, that's it's a big market, $2.5-$3 billion market. If we were to take 10% of that market share wise, we'd be happy.
Mm. Got it. Let's go to digital PCR. QIAcuity, it's certainly one of the more interesting new products, new technology with this. But it still feels like the digital PCR market is still evolving, in the sense it still is like-
It's evolving.
-looking for, I mean, it's still looking for that real killer application to sort of go out and drive it. So how should we think about the opportunity in that market and applications?
For now, we are not unhappy to reach most likely $70 million in two, well, it's three years, but I don't think it's a bad start for a new instrument, and in particular on that kind of throughput. I think it's fair to say that we, and in particular, having in mind that we started with the biopharma panels, probably even 12 months later, so we just launched it Q3, end of Q3 last year, which clearly increased the throughput on the platform.
Mm-hmm.
Because the pharma customers for sure have a different pulse who sends a research on the academic environments. Midterm, we talked about it as well. We move it into more the clinical environment. It's probably a bit out, but nevertheless, it's something what is for 2024, 2025, step by step on the plan. But we clearly see, as I said before, a good interest from the pharma clients because it is an interesting way for them to come to results for the research work while not using sequencing. Because again, sequencing, as we all know, is a perfect solution if you look for the unknown mutation, right? If you look for the one thing, you don't know exactly what has changed.
While a lot of pharma research, they know exactly these are the three, four, five things which either change or not change, so it's very dedicated. You can do that for what we believe much better with Digital PCR. Of course, you can design it that way, and you, again, it's a very different price point, so it's much more cost effective.
Got it. And how do the two, i mean, it's essentially there's, there's two companies, yourself and Bio-Rad, that are sort of in the competitive landscape here. I mean, Thermo has some, but it's a little bit different format. So how do the two platforms differentiate from each other? I mean, when customers look at and do a compare, how do they go after it?
So if you look at Bio-Rad, they're doing droplet digital PCR, ddPCR, which is fractionating. Digital PCR is basically PCR on steroids, where you take a PCR reaction and fractionate it into thousands of tiny reactions so that you get more precision and accuracy. So they're doing that by fractionating the sample into droplets and oil. This process takes a little under five hours, whereas we use. We do the same thing, but with different tech, where it's all microfluidic and a microplate. It's nanoplate digital PCR. So that happens pretty quickly compared to fractionating the droplets. So we're able to get that time frame, time to result down to under two hours in a more compact benchtop equipment.
So from a workflow standpoint, we have a lot to offer, and also from a scalability standpoint. So that process of microplate is much easier to scale. We've launched three different size scaled systems instead of just one middle range system, and that's really helped us to address a wider, broader audience for Digital PCR. So these academic labs that couldn't afford the barrier to entry of a $100,000 price point can afford to buy a $30,000 QIAcuity instrument instead.
Got it. Got it. And sequencing, NGS, how is that business evolving? You know, what sort of tailwind—I mean, are you starting to sort of see good uptake in that market from some of the relationships you've done with repositioning the portfolio for the Illumina platform? Can you just sort of give us an update on what's going on in the NGS world?
It's clearly an area where we all know it was a more difficult environment during COVID, because a lot of things were just not done. So we do see a normalization. I do think what we also see is that our platform-agnostic approach serves us quite well. As you know, we are clearly working quite closely also with Illumina, but also with other players in that field. And therefore, again, clearly see the benefits from that strategy for our consumer business in general. We see also that the developments we do together on companion diagnostics are working out. They're a bit more volatile, I have to say, because it's milestone driven, and then, again, some of our partners also go through to more difficult times. Nevertheless, it should grow high single digit.
Got it. Financials. So-
His favorite.
It's for you.
Yeah. Yeah, right.
There you go. Look, you've historically enjoyed very robust gross margins in the 70s. You noticed 68%-70%, in three years' time, 'cause you've been investing in the business. So how can we sort of think about the growth, think about the margin progression and sort of, like, going forward once these investments are done?
First and foremost, I think it's fair to say that we still have one of the highest profitabilities in the whole industry.
Yep.
I think you don't have many companies in your coverage which have similar margins as we have. I think it's also fair to say, if you now take the, call it COVID bubble, away for the last three years, if you look on the different segments, it developed also quite nicely in terms of profitability for the company. I also don't see any reason why we shouldn't have better EBIT margin next year than we have this year. I do think there's a nice mix between, again, we accelerated a couple of R&D expenses that most likely goes back to 8-9 percentage points. There's leverage opportunities for SG&A because it's quite obvious that we feel, on the sales side, well equipped in terms of headcount and other measures to deal with what is expected revenue growth rate in general.
So, I would say there's miles and expect to come. On the gross margin side, what is clearly right now keeping the gross margin quite flattish, and over time, again, we expect that it improves, is that we launch three new platforms. Yeah. And that, by definition, they have slightly lower gross margin than, or lower gross margins than, the consumables. In particular, on NeuMoDx, we have a significant underutilization.
Yeah.
Yeah. So again, if I would things comparable to more or less results as 3 platforms, of course, we would have cost margin in the high 70 or in the 70s, right?
Yeah.
So, it is an investment you have to take, and then over time, it hopefully improves and gets again back to normal.
Speaking of new platforms, I believe you teased an updated version of the QIAsymphony is coming.
I heard that rumor, yeah.
You heard that rumor? Yeah. Any, you know-
Yeah, no, I think, I think it's fair to say that, over the last three years, we actually updated a good number of our sample prep instruments, and Symphony is clearly the one, which is probably also due to some updates. And as we like that instrument very much, we probably will develop it further as well.
Got it. Enough to drive an upgrade cycle?
Again, I think it is clearly a very successful instrument, as you know.
Yeah.
But at the same time, of course, we see what is the impact from the existing instruments. Because at the end of the day, if you go back, I think, not sure what you assume is our market share, but I would say the common understanding of most people is that we have around 60% market share of the commercialized sample prep. And we clearly did a good update cycle now during COVID with some of the sample prep instruments. And if you look into a lab which has, I don't know, 10 different applications, then by definition, six coming from QIAGEN, which you now can automate, there's a good reason for them to ask themselves, "Why I'm not doing the other four from QIAGEN as well?" So we see, it's being helpful with penetrating the market.
Got it. Capital allocation. You did one small deal earlier this year, the Verogen deal in forensics.
Yep.
You know, your balance sheets are quite healthy. You're there. So how should we think about capital deployment, M&A?
Sure.
Um, yeah.
Well, we just repaid a convert, right? So, more or less last week. So the 2023 convert is out. It was a cash settlement. Second, we still have, I would say, a healthy balance sheet. I think it's fair. I do think the capital allocation policy, as we had it in place for the last years, is still very valid, meaning a fair mix between investing in the business, bolt-on acquisition and share buybacks. I do think it's also fair to say that, on the bolt-on side, we're finally now in a situation where ventures are more interested in exits than before. Not telling you that necessarily the prices have come down a bit-
Yeah
But at least you have an opportunity for, particularly on the segment where we are looking into smaller deals, where product is commercially available, you have opportunities to look at it. So we are right now quite busy on looking at this kind of a deals. Hopefully, we can close something this year, but it doesn't seem that it will not allow us to do a share buyback as well.
Got it. Any questions from the audience? So I guess, you know, the company has gone through a lot of changes in the last, you know, few years. You know, transparency's improved, and, you know, the growth algorithm has been better articulated. Yet the stock really hasn't done anything. So what do you think people are missing about QIAGEN? I mean, I think, you know, like I've... As I said, I've covered the company for 21 years, right? I think the company is probably in better shape than I've seen it in my career of covering it, and yet it seems to be—I would say, I'm gonna say it's not for looks, but yeah, it just doesn't get a lot of attention. So what do you think people are missing to the story? What are you hearing from investors? What gets the stock moving?
Well, first of all, I do think we have seen nice development-
Yes
-in the stock in general, right? So in all fairness, I would say the changes over the last couple of weeks are rather sector driven than company specific. I think I just look on the peer comparison, we are more or less all in the same pack right now. So I don't think there's something company specific right now. I still do believe that, similar to other companies, people want to see what is more or less the ex-COVID impact, because it's quite obvious that we all had benefits out of COVID, and we want to see what is more or less a path forward. There's clearly, in general, uncertainty, not only in our industry, but in the sector. So I do think that is something.
The best thing what we can do is delivering on our numbers, and as you said, since two years CEO 2019, I think we are now 11 consecutive quarters with either high single-digit or double-digit growth rate. Let's continue on that. I'm not going to guide double-digit into next year. I said that before. I do think even if you look on a CAGR, and put COVID away, we're always like 6-7+ percentage points, right? And again, profitability-wise, ending this year at, let's say 27+%, it's not a bad thing either. So I would say the starting point is not bad. Let us continue there.
Great. Oh. Question: Can you talk about how you think about free cash flow growth? It seems like the company went through a period of kind of flattish free cash flow, but now the last couple of years it's picked up. How do you see free cash flow growth trending over the next few years? And then can you also talk about capital allocation and your thoughts about how some of that can be returned to shareholders, balanced with growing the organization? Thank you.
I think midterm, we should be able to grow cash faster than net income. Reason for that is, first of all, we did quite a significant intensive investment program, particularly in production equipment, during COVID. So I would say we are good on the production side for a couple of years, because whatever we built for COVID-related is good for our other products as well, right? So as you know, it's not a single-use production facility. So I think that's one thing. Right now, I would say we also ramped up inventory quite high. It has to do also a bit with having inventory on stock to get more independent from China and other areas, building up second supplier sources and so on. So I would say that is going to normalize over time as well, so being helpful as well.
As we generally expect that revenue and profitability should grow year-over-year, I expect, as I said, that also cash flow in general should be, have a good trajectory. Again, this year is probably a bit more difficult, particularly obviously, inventory situation. In terms of capital allocation, as I said before, I do think our focus is on driving a fair split between acquisition, because I do think consolidation in our industry is a driver to value generation.
And I think we have proven that even outside QuantiFERON, which is clearly a prime example, but also I think all the other deals we did in the last four or five years turned all out, be doing quite well. But this was our bolt-ons. There's other opportunities, again, from share buybacks. Unfortunately, the dividend side, tax law is not always favorable on this withholding taxes, but things like that, again, are always something that we consider.
Great. With that, we are right on time, so-
Two seconds.
Thank you, Roland. Thank you, Phoebe. Thanks for being here. Thank you, everybody, for listening. Have a great conference.
Thanks, Derik.