Qiagen N.V.

Ladies and gentlemen, thank you for standing by. I am Cecilia, your PGI call operator. Welcome and thank you for joining QIGEN's Q4 2020 Earnings Conference call. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded at QIGEN's request and will be made available on their Internet site. The presentation will be followed by a question-and-answer session. If you would like to ask a question, you may press the star followed by the one on your touch-tone telephone. Please press the star key followed by the zero for operator assistance. At this time, I would like to introduce your host, John Gilardi, Vice President, Head of Corporate Communications and Investor Relations at QIGEN. Please go ahead, sir.

Thank you very much, and welcome to all of you to our conference call today. The speakers we have for you are Thierry Bernard, the CEO of QIGEN, and Roland Sackers, our Chief Financial Officer. also joining us is Phoebe Lowe, Director of Investor Relations. Please note that this call is being webcast live and will be archived on the investor section of our website at www.kaizen.com. A copy of the press release is also available in the same section. Before we begin, let me cover our safe harbor statement. The discussions and responses to your questions on this call reflect management's views as of today, February 10th, 2021. We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations, or predictions of the future. These constitute forward-looking statements for the purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For more information, please refer to our filings with the U.S. Securities and Exchange Commission. These are also available on our website. We will also be referring to certain financial measures not prepared in accordance with generally accepted accounting principles. You can find a reconciliation of these figures, the gap, in the press release and the presentation for this call. I'd like to now turn the call over to Thierry.

Thank you very much, John, and good evening, good afternoon, good morning to all of you. Let me please begin by welcoming all of you to our conference call today. And as a first remark, on behalf of our QIAGEN team and myself, I would like again to wish you and your families very good health and all the best during those unprecedented times. Without question, 2020 was a year of significant changes and developments for all of us. For QIAGEN, obviously, it significantly shifted the way we work, Thank you very much. Thank you very much. It is indeed a humbling experience to be able to lead such a dedicated team. Let me go through our four key messages of today. First, our teams exceeded the outlook for sales growth and adjusted EPS in the fourth quarter. As you have seen, we continue to deliver on our commitments. Sales grew 36% at constant exchange rates to $571.2 million, and this was well above the outlook set for at least 32% CER growth. Adjusted earnings per share was 68 cents at constant exchange rates, and this was well above our outlook range for 64 to 65 cents CER. Second. The performance in the fourth quarter leads to a second good performance for the full year sales result and adjusted EPS for 2020. This also exceeded our outlook. Sales of $1.87 billion in 2020 represented 23% CER growth over 2019. This was above our outlook for 22% CER increase. Adjusted earnings per shares were $2.17 at constant exchange rates. This was, once again, above the high end of our outlook by 3 cents. The third key message today relates to the ongoing impact of the pandemic in the fourth quarter. We experienced dynamic growth for product groups used in COVID-19 testing while, as well, seeing further improvements in non-COVID areas. The fourth quarter represented indeed the strongest year-on-year growth in sales during 2020 and also a very strong sequential improvement from the second and third quarters of the year. Those results underpin once again that QIAGEN is COVID-19 relevant, but QIAGEN is not COVID-19 dependent. We are actively managing our business, both sales and expenses, to navigate through the pandemic, but also to make sure we are best positioned to continue our business expansion in the future and create therefore long-term value for our shareholders. This is why we are putting a relentless, and I insist on this relentless, focus on the five pillars of growth. which we outlined to you at our recent virtual deep dive event on December 8th of last year. If you remember, those pillars include, first, our leading position in sample technologies. Second, the Quantiferon franchise anchored by our tuberculosis test. Third, the QIAQUITY digital PCR series of platform that we recently launched. Fourth, the Pneumonics Integrated PCR System for Clinical Diagnostic and fifth, the Chiostat Diagnostic Syndromic Testing Platform. As a final key message for today, we are reaffirming our full year 2021 outlook announced in December 20. We are confident to deliver an ongoing high level of sales growth and further improvements in adjusted EPS for 2021. For the full year, we are expecting sales growth of about 18 to 20% CER growth over the same period in 2020. This is based on expectation for ongoing strong demand for COVID-19 product sales during at least the first half of 2021, along with continued improvements in other areas of our portfolio. For adjusted EPS, We continue to expect about $2.42 to $2.46 at CER again. This reflects our plans to invest in our five pillars of growth to strengthen our competitive profile. And I would like now to hand over to Roland.

Thank you, Thierry. Hello, and thank you as well from me for joining us on this conference call. Our sales results for the fourth quarter of 2020 were the strongest of the year. Sales growth was 36% CER and currency movements had a positive impact of 2 percentage points on results. This was driven by both COVID-related sales and sales of non-COVID product groups. These results represented a continuation from the third quarter for improving sales trends in non-COVID products. I will give you more details on our sales performance in the upcoming slides. Moving down the income statement, the adjusted cost margin declined about two percentage points to 69.3% of sales in the fourth quarter. This was due to a continued higher share of instrument sales and increased production expenses. This included the addition of more than 400 new employees in production at the end of 2020 compared to the end of 2019 as we ramp up our expansion plans. For the full year, The adjusted cost margin was 69.6% compared to 71% in 2019. This remains at a strong level and reflects trends seen in the fourth quarter and during the course of 2020. The adjusted operating income for the fourth quarter was 34.4% of sales and improved over the same period in 2019 due to lower expenses as percentage of sales for R&D, sales and marketing, and administration. Areas of savings included the drop-off in travel and marketing expenses during the year. An additional factor is the savings from the decision we announced in October 2019 to change the orientation of our NGS strategy and implement targeted efficiency programs. At the same time, we made investments into our five pillars of growth during the second half of 2020, and results also included the first-time cost associated with the full acquisition of NeumodX in September 2020. Moving to EPS. Adjusted EPS rose 42% CER to 68 cents per share for the fourth quarter and was up 52% to $2.17 at CER for the full year. Results for the fourth quarter and full year in 2020 include an after-tax benefit of about 34 cents per share for ArcherDX. This benefit relates to the pre-tax net capital gain of $113.4 million U.S. dollars related to the sale of Kaizen Steak in Archer DX, which was recently acquired. In addition to upfront cash consideration, we also received shares in Invitae, a publicly traded company. These shares are reported at fair market value with gains and loss recorded in earnings. This change in value during the fourth quarter is included in the pre-tax capital gain, but this entire capital gain is excluded from adjusted results. As for cash flow, we saw a 38% increase in operating cash flow to $457.8 million in 2020 from $330.8 million in 2019. The developments in operating cash flow reflect the higher sales and collection during the year as evidenced by the relatively similar levels of account receivables at the end of 2020 compared to 2019, even considering the 23% increase in sales during the year. Also keep in mind that we had about $126 million of payments in 2020 for the discontinued tender offer and also about $52 million of cash payout in 2020 for the restructuring measures initiated in October 2019. We also saw a significant surge in cash flow during the first quarter to nearly $270 million. This compares to operating cash flow for the first quarter of 2020 of only about $16 million. For free cash flow, we saw a 53% increase compared to the prior year. Purchase of property, plant, and equipment during 2020 reflect our investments in expanded production lines to meet both the current demand for products as well as expanding capacity as we invest in new products focusing on our five pillars of future growth.

Moving to the balance sheet.

Our leverage ratio stood at 1.5 times net debt to adjusted EBITDA at the end of 2020. This was slightly lower than the 1.6 turns at the end of 2019. At the same time, our net debt increased to $1.2 billion at the end of 2020 from $953 million at the end of 2019. Late in the fourth quarter of 2020, We redeemed the 2021 convertible notes for $177 million and terminated the related warrants for about $175 million. This removed about 3.5 million potential dilutive shares from our share count to, in essence, have the same effect as a share repurchase. In tandem, we issued $500 million of new zero coupon convertible notes that mature in 2027 This new 2027 notes have an initial conversion price of $80.72 or representing 6.2 million underlying shares. During the fourth quarter of 2020, we also completed about $64 million of $100 million tranche before it expired. These programs are running independently by banks, and the reduced repurchase amount came as the Kyogen share price was rising during the period. I would now like to provide additional perspectives on sales with our new reporting by product groups. We have added this perspective as announced at our virtual Deep Dive Day in December. These groups provide insights into our business portfolio and will now accompany the sales data we typically provide by product type, customer class, and geographic region. Sample Technologies, one of our five pillars of growth, is the first product category and includes products involved in the first step in any molecular lab process. During the fourth quarter of 2020, sales of sample technologies grew 55% DER to $236 million. This category was driven by ongoing strong demand for RNA extraction kits used in COVID testing and research, increasing demand for DNA kits, and the recent launch of ChiaPrep and AMP as a solution to help scale COVID testing. Diagnostic solutions include our molecular testing platforms and products covering three of our pillars of growth, which are Quantiferon, ChiaStatDx and NoimoDx, as well as Precision Medicine and companion diagnostic co-development revenues. Sales grew 36% CER, and were supported by COVID testing solutions and first-time sales contributions from the Neumod X acquisition related to newly acquired U.S. sales. Antiferon sales improved over the course of 2020, finishing strongest in the fourth quarter with solid growth in the U.S. compared to declines for this region in the first three quarters of the year. This was offset by an increasing decline in South Korea throughout 2020. This meant for quantiferon a decline of 3% CER for the fourth quarter of 2020 compared to 2019, and this was a sequential improvement from 46% CER decline in the second quarter and 20% CER decline in the third quarter of 2020. PCR nucleate acid amplification involves our research and applied PCR solutions and components. This category includes another of our growth pillars with the recent launch of ChiAcuity digital PCR platforms. The first orders were received in the fourth quarter, well ahead of our internal plans. This helped to drive dynamic growth in both instruments and consumables. Another driver in this category was the demand for our OM solutions and enzymes used in third-party diagnostic kits for COVID-19 testing. Genomics NGS includes our universal NGS solutions, as well as a full QIAGEN digital insight portfolio. This product group has faced slower customer demand during the pandemic, but we saw improving trends against the second and third quarters of 2020, especially in overall sequencing and clinical oncology applications. I would like to now give you an update on sales results by product type. and Customer Class. In terms of the two product groups, during the fourth quarter, sales of consumables and related revenues rose 33% CER, the highest quarterly rate on a comparative basis in 2020. Instrument sales continued its 2020 growth momentum in the fourth quarter. These sales were up 52% CER and reached $77 million in the fourth quarter of 2020, as we experienced record level placement rates across multiple product categories including sample preparation platforms as well as general and integrated PCR equipment and platforms. Molecular diagnostic sales were supported by an improvement in trends in non-COVID applications where testing such as oncology and non-COVID related infectious diseases began to resume. Additionally, This sales continued to be driven by COVID tailwinds in the fourth quarter of 2020. Fourth quarter sales in life sciences saw the highest growth of the year at 28% CER over the same period of 2019. This growth was driven by viral and vaccine research with demand for RNA extraction, general PCR reagents and enzymes, as well as universal NGS solutions, which offset lower sales in QIAGEN digital insights, and for human identification forensic products. Moving to our geographic results, the Europe, Middle East and Africa region led fourth quarter and full year 2020 in growth. Fourth quarter sales were driven by double-digit CER growth in France, the United Kingdom and Italy across both customer classes and single-digit CER growth in Germany. The Americas region experienced its highest level of 2020 sales growth during the fourth quarter. A key driver was the return to double-digit TER growth in quantiferon TB test tails. Brazil and Mexico also continued to deliver growth at a high level, where sales in molecular diagnostics more than doubled compared to the fourth quarter of 2019 in both countries. In the fourth quarter, the Asia-Pacific-Japan region was supported by China growing above 15% TER from strong Chiostat DX instrument sales. Molecular diagnostics revenues in China saw high single-digit gains in the fourth quarter against declines in the previous quarters of 2020. Sales were also higher in Japan and Australia, and this is more than offset weaker trends in India and South Korea. On the next slide, we have included an overview on the COVID-19 impact to our performance. This provides clarity and understanding of our business performance as we look to manage our growth after the COVID tailwinds. Our non-COVID product groups showed an improving quarterly trend. These totaled 371 million US dollars or about 65% of total sales. We still had a modest decline of 2% CEI in the fourth quarter compared to the same quarter of 2019, but this contrasts the sharp drop of 23% in the second quarter of 2020 improving to minus 8% CER in the third quarter of 2020. COVID-19 related product groups continued to experience significant growth in the fourth quarter. This sales rose about 388% CER from the same quarter in 2019 to $200 million for about 35% of total sales. I would like to now hand back to Thierry.

Thank you, Roland. We are now moving to the slide number 10 of your presentation. This gives me the opportunity to review some of our more recent development and show you that, indeed, QIAGEN is emerging from 2020 as one, independent, two, stronger, and three, more focused company for the coming years, ready to execute on growth post-pandemic. First of all, aligning our strategy on five pillars of growth ensures we are focusing on our largest and most attractive growth opportunities. In 2020, we made considerable increases in our output of key consumable products, such as sample technology kits, chiostat diagnostics, or again, pneumatic cartridges. Throughout the year, We continue to innovate in anticipation of the changing testing demands and overcome challenges in the market as the pandemic evolved. Moving as rapidly as possible, our teams developed over 10 new solutions for use in the pandemic. And I insist again, all those new solutions have applications beyond the pandemic as well. Also serving both COVID and non-COVID applications, our installed base of instruments saw an accelerated growth. In fact, we made over 3,300 new placements in 2020. To solidify our position in the core testing market, PCR, we completed the full acquisition of pneumotics in September. We acquired the remaining 80.1% stake and this also gave us rights to commercialization in the U.S. market. Another key success was the launch of Kayakuity digital PCR platform in September. Our team delivered over 200 orders in 2020 and about 75% of those orders were placed in labs before the end of the year. On the next slide, I would now like to give you an overview of the QIAGEN products being used in COVID-19 testing and the most recent development. Looking at the split of our fourth quarter sales for COVID-related product groups, the proportion of sales from sample techs shrank slightly due to an increase in sales for testing solutions as we made progress in increasing our production capacity. in PCR testing consumables. The demand for RNA sample tech continued to trend towards automated extraction as expected, and we have made further progress in increasing manufacturing output for those automated consumables. Many of our customers have had great success in implementing our new Kaya Prep and Amp solution to help them increase efficiency and overcome plastic supply constraints. PCR testing solutions see ongoing high demand for single-plex but also multiplex and syndromic testing. Chiostat diagnostic and pneumotics both experience a continuous boost in market penetration. This is indeed setting up a strong foundation for mid-term growth as we are far ahead of the timelines we had only two years ago as we entered the market with those two new systems. Furthermore, Pneumonics has expanded its COVID testing options with an FDA approval for the use of saliva samples with our single-plate test. And the construction project to further build the production capacity are progressing well for chiostat diagnostic in our sites in Germany and Spain. As communicated a couple weeks ago, we plan to resubmit the KIA rich antigen test this quarter to the FDA. We have resolved a chemistry issue and are now working on new data sets for the resubmission. The decision to withdraw the submission was made on our side to proactively address the issue that we found and further improve the performance of the test. Beyond the solution that you are now familiar with, QIAGEN has been developing solutions to fit the needs of every cycle of the pandemic. As an example, recently we have all seen the onset of more frequent sequencing where QIAGEN SARS-CoV-2 panels are being used to monitor the prevalence of viral mutations. Another example, we have also seen the emergence of new applications such as wastewater testing, where our new QIAQUITY digital PCR viral kit is being employed to quantify pathogen load in order to calculate population infection rates. And this has been recently a clear driver for placement, likely today. More than 10% of our kayak witty orders are for COVID wastewater testing. And finally, last but not least, OEM components, where our reagents and enzymes are sold to third-party suppliers, and those experienced significant demand in 2020, and this continued in the fourth quarter. Now, moving on to 2021, We expect COVID will continue to place high demands on our portfolio, especially in the first half of the year. As vaccines are rolled out, we anticipate continued strong demand for PCR and antigen testing solutions, but we expect as well that this could recede during the second half of 2021, depending, of course, on the impact of the new viral variants. In order to provide for those testing trends, we are continuing to invest in the upscale of our production lines. We are dedicated to helping customers get set up with our newly launched technologies, such as Kaya Prep and Amp, or the Quantiferon T-cell test, the Kaya QWERTY platforms, and to further employ those solutions in the fight against COVID. And we are focusing again on gaining FDA and then CE IVD status for our antigen test. On the other hand, we are also managing increasing demands for non-COVID categories and planning for a steady progressive increase of those cells as clinical testing volume return for oncology and infectious diseases. As we described on December 8th, during our deep dive day, We have extensive plans for menu expansion in our five pillars of growth. For chiostat diagnostic, for example, we are planning submission for the meningitis panel in Europe and the gastro panel in the U.S. For mnemonics, we have plans to add four more CE-IVD tests and two additional tests to the U.S. menu. So indeed, we expect those systems to continue seeing solid growth trends after the pandemic testing subsides. We are also planning for upcoming launches in the Quantiferon franchise. Kaya Rich TB will expand modern TB testing into high-burden, low-resource areas, and this is based on the same e-hub platform as our Kaya Rich antigen and antibody test for COVID-19 testing. The Quantiferon Lyme test is also planned for CE IVD launch with our partner, Diasorin, on their liaison platform, just as we did with the QuantiFerron TB test. Our menu expansion plan also includes research application, such as specialty areas of sample preparation and further content for supporting QIA equity digital PCR market penetration. Moving to slide 13 and looking specifically at our five pillars of growth. Here you can see our sales expectation and the key drivers for 2021. Sample technology, as Roland explained, had a strong year in 2020 and will again show solid performance in 21 with more than $750 million in sales. As we explained already, we expect accelerated placement levels to continue through the first half of the year with our flagship system, the Kaya Symphony, continuing with at least 200 placements in 2021. Kaya QC platforms are expected to deliver over $45 million in sales with a rapidly growing install base ending the year with around 600 new placements in 2021. Kayastat Diagnostics should continue to deliver rapidly growing sales at over $120 million in 2021, and we will expand the install base by more than 800 incremental placements during the year. For pneumotics, we are expecting sales of over $140 million, driven by a growing install base with a goal to more than double the current number of placements. and for QuantiFerron, you have seen with Roland, we have seen a sequential improvement of performance since Q2 2020. We expect to see the sales in this franchise to return to 2019 level and deliver around $230 million of sales. We feel confident in our ability to expand market shares despite competitor activity in the TB testing space. As we have said before, a key point of our differentiation is quantitative automation capabilities, which we have built along with our partner, Diasorin, but also for the front-end automation, Tican and Hamilton. And we are expanding our capability to reach completely newer areas of this market in emerging countries with the upcoming Kairis TB launch. Moving to slide 14, an important news. I would like to introduce you to our new supervisory board member. Dr. Thoralf Haag has joined the board and will be nominated for election at our next annual general meeting. As noted in the announcement in January, Thoralf was chosen as part of an expansion process launched by the supervisory board to further complement and enhance the board's already extensive experience in lab science and diagnostic. The addition of Toralf Haag now brings the number of current supervisory board members to seven. And I'd like to hand back over to Roland now.

Thank you, Thierry. As noted earlier, we are reaffirming the full-year outlook previously announced in December 2020 for net sales to about 18% to 20% CER growth. For adjusted EPS, we expect $2.42 to $2.46 CER in base on full-year rate average of about 234 million shares outstanding. For the first quarter, we anticipate ongoing very elevated sales growth of at least 45% CER, driven by continued improvements in non-COVID-related products, coupled with dynamic gains from COVID testing solutions. Adjusted diluted EPS are expected to be about 60 to 62 cents TER, and this is based on 233 million shares outstanding. This includes a significant planned investment in our five pillars of growth during 2021. As for currencies, based on rates as of February 4, 2021, on a full year basis, we expect a currency tailwind of about 2 percentage points on sales results at actual rates, For adjusted EPS, for the full year, we expect a currency tailwind of about 4 cents per share. For the first quarter, we expect a tailwind of net sales of about 4 percentage points and a tailwind of about 2 cents per share. With that, I would like to hand back to Thierry.

Thank you again, Roland, and just as a summary. We have shown excellent results for the fourth quarter and the full year 2020 as we exceeded the outlook for sales growth and adjusted EPS in both periods. This really shows that QIAGEN during an extremely demanding year has stepped up to the challenge. Second, we are encouraged for the future as we see continued improvements in Other areas of our portfolio, the non-COVID areas, but also a continued dynamic growth in COVID-related products. Third, we are focused on investment in our five pillars of growth to fuel our success beyond the pandemic and create long-term shareholder value. And as a last point, we are reaffirming our 2021 outlook for both sales growth and adjusted EPS. We are confident for 2021 and our ability to achieve full year sales growth of about 18 to 20% CER and adjusted EPS of $2.42 to $2.46. With that, I'd like to thank you a lot and hand back to John and the operator for the Q&A session.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press the star followed by the one on their touchtone telephone. If you wish to withdraw your question, you may press the star followed by the two. To ensure we accommodate as many people as possible, please limit yourself to only one question, and if necessary, one follow-up. Your microphone will also be muted after finishing asking the question. Anyone who has questions may press the star followed by the one at this time.

One moment for our first question. We will now take our first question from Jack Meehan from NetBron Research. Please go ahead.

Thank you. Good morning. Thierry, I was hoping you could elaborate a little bit more on the testing offering for COVID with the new variants. Some of your peers have talked about developing PCR tests which can differentiate amongst the variants. Is that a focus for you with Pneumotics and Kyostat? And just maybe more broadly, how do the variants influence your thinking about the testing offering?

Thanks a lot, Jack, for this key question. Obviously, as you noted, there are new needs with this pandemic because there are, for example, new variants, and therefore there are needs for epidemiology testing. The first answer of QIAGEN is what we call our QIASIC testing, which is based on NGS technologies, and we are ramping manufacturing output because we see an increased demand. The second action that QIAGEN took, but not just since 2021, we started JAK in 2020, exactly in May of last year. Every two weeks we continue to monitor our PCR test efficiency on testing and make sure that we pick up all those variants. And so far it's proving extremely successful. Third indeed, we are looking at the moment on the potential to develop a genotyping PCR solution. We are currently talking with customers and governments to see if there is a real need for this. So it's in the making in our plans.

We will now take our next question from Daniel Wendors from Commerce Bank.

Please go ahead.

Yes, good afternoon and thanks for taking my question. My question is on your key pillars of growth basically. Is there anything which has changed your view here since your deep dive day in December? I'm thinking in particular about the new platform launches and the performance of your new platforms, which has been actually quite strong, in my view, in the last quarter. So anything which has changed there maybe since early December, any color, that would be much appreciated. Thank you.

Thank you, Daniel. I wouldn't speak about change but reinforce conviction first of all that those are the key five pillars of growth for QIAGEN and the good ones. You remember in December we explained that out of a total of 11 billion total market addressable by QIAGEN solution, those five pillars only cover at least six billion of those 11 billion.

First point.

Second, we saw a significant acceleration of market penetration for at least two of the solutions, Kayastat and Numodix. And so this is where I insist that COVID-19 is basically triggering an acceleration of already existing business cases for QIAGEN. But as you know, post-pandemic, we have other menus on those two platforms to make sure that we can continue to grow in a healthy way. For QIAQUITY, we are extremely satisfied with a very, very good first three months of launch. We achieved, as we said, 200 purchase orders of which 75% have already been placed at customers. And we have very strong ambition, at least as we said before, 600 for this year. So in a nutshell, COVID, Tailwind, SampleTech, Kyastat, Pneumodics are absolutely non-COVID dependent because initially digital PCR was launched for life science. We are now implementing this wastewater solution, but initially digital PCR was really a life science, non-COVID related. We see strong performance, and we see this continuing around 2021.

We don't see deceleration, and we see increasing rate of placement.

We will now take our next question from Brian Winstein from William Blair. Please go ahead.

Hey, guys. Thanks for taking the question. I wanted to ask about pneumatics a little bit here and try and understand the placements. I think you have over 130, and I'm curious as to a little bit more detail as to where those placements are going now. Are they sitting alongside competitor products? And if so, in those labs, what kind of confidence do you have that you will be able to see utilization in a post-COVID-19 world? And as part of that, I'm also wondering just how you think about utilization per box post-COVID-19 for pneumatics. Thanks.

So indeed, Brian, thanks for this question on pneumatics. We are extremely pleased by the performance in 2020. As you have said, more than 130 placements. We see that trend continuing as we are entering 2021. The placement configuration really depends by geographies and by also customer configurations. We have sites where we are placing the pneumotics alongside other solutions, be them Hologix or Roche, for example. We have configurations where we have won tenders against those competitors, based not only on the solution we were offering for COVID, but also on the menu. Remember, Brian, already 13 assays non-COVID available CE mark in Europe. and we have also that tremendous benefit of being able on that platform to run alongside both LDTs and regulated assays. So for example in the U.S. where we have at the moment less menu registered to the FDA, we have demand also and sites using our Pneumonics not only for COVID but also for the LDT capabilities. So these are the configuration of our placement. Second part of your questions on the evolution post-pandemic. This is where we say that for pneumotics, like by the way for Kyostat, it's a menu play. This is why we are confident in the placement reason because we have those 13 assays already approved in Europe that we are now bringing as fast as we can to the U.S. in 21, 22, and 23. We are not commenting on actual pull-through per system post-pandemic because we are basically still addressing at the moment mainly the pandemic needs. But what I can tell you, Brian, is that any time we place a pneumotics or we sell it, we do it in a site where we have fully explained the menu and where we are convinced that the site is not just thinking pandemic needs but upcoming menu as well and this is why we have explained in 2020 that as often as we can we try to place those systems with pluriannual contracts two years, three years so that we make sure that we have some customer loyalty here.

We will now take our next question from Scott Bardot from Barenburg.

Please go ahead.

Yeah, thanks so much for taking the questions. Actually, just following on from Brian's question, please. Clearly, testing solutions, Numod DX and Kyostat, forming part of the COVID revenues that you've described in this quarter. Thierry, I think you mentioned then that you expect to continue to grow these franchises Thank you very much. I think if I understand correctly the revenue line for Kyogen is now anticipated to be greater than what you previously outlined in December given that you've closed this year stronger than expected and maintained your growth expectation yet your earnings guidance is the same. Is that because you're investing more than you thought? If you could perhaps just give a little bit of Kylo around that please. Thanks. Go on.

So, Scott, to the first part of your question on the growth profiles of KayaStat and Numadix, first of all, I'd like to remind those business cases were embedded in KayaGen way before the pandemic. So the pandemic has boosted the placement of those two solutions, KayaStat or Numadix. and the way you should see that with the pandemic we have gained potentially one or two years of market growth as regard to instrument placement, first point. Second, the pandemic doesn't change our strategy. We never launched those instruments because of a pandemic. We always said it's a menu play. For KayaStats, it means that we need to continue to bring at least between one and two new applications per year in 21, but also in 22 and in the years after. And for Numodics, it means first that we have said that we need to bring the menu available in Europe to US and then beyond US, China and other markets, for example, and also to continue menu expansion. So, On the growth profile in 2022, it's a bit difficult to answer precisely to the question, Scott, because nobody knows really what is the post-pandemic. Is it 21? Is it 22? What we are doing at QIAGEN, and what you should try to model, is that we are preparing the two solutions, QIAGEN and Eumodix, to continue to grow regardless of the pandemic with the menu that we are developing and making sure that they are approved in the different countries. That is the way you should see it. Roland?

Yeah, and Scott, for your question, I think you're right. It's now since Thierry took over, we reported first quarters and every of these quarters we beat in revenues and we beat in earnings. So I think it's a A nice track record, which we also want to continue. And I think it's right that we, again, do believe that actually in terms of both, in terms of revenues, also in terms of profitability, we're looking into a strong year 2021. But I don't think we have at the same time update now our guidance on a monthly basis, right? We did it more or less in December and looking forward what happens over the course of the year.

We will now take our next question from Doug Schenkel.

Your line is open. Please go ahead.

Hey, good morning and good afternoon, everybody, and thank you for taking my questions. So just a couple on the instrument front and then kind of a related, well, maybe it's an unrelated just guidance question. So first, you're forecasting very strong instrument performance Instrument placements across KIA Acuity, Digital PCR, KIA StatDx, and Pneumodex in 2021. I'm just wondering if you could share, you know, essentially how many of these placements are already ordered or in backlog. My guess is, given where you're sitting today, that, you know, if you were to put error bars around, you know, what you shared in terms of guidance assumptions on each of those platforms, that that Yeah, pretty good visibility in that the error bar is actually skewed to the upside there, but I just want to make sure that's the case. So that's the first question. The second related to that is, you know, regarding Kyosat DX and new Modex, what are the key drivers for demand? And essentially what I'm trying to get at is, are you seeing increased motivation that goes beyond COVID-19 testing or at this point is the primary motivator still COVID-19? And then my last one is just kind of another guidance question. It sounds like you're assuming that COVID-19 revenue becomes a little bit of a headwind as you move into the second half. just based on uncertainty as we look ahead right now, but that also leaves room for potential upside. I just want to make sure that's the case. Thank you very much.

Thank you, Doug. And I hope that I captured the three components. I won't give you a percentage on what is already based on purchase order for either Kayakwiti or What I can tell you is that just from a simple math, we told you that at the end of 2020, we had 200 purchase orders for Kayakwiti of which 75% were placed at customers. So it gives you already basically the carryover, I would say, that we have to install immediately in the first days of January. But this continues. What I can tell you is that the demand for KyaStat instruments and for pneumodics and for KyaQuity, especially now that we are also launching digital PCR wastewater solution for KyaQuity continues to be very strong. And the way you should see it, I think, is that on KyaStat and pneumodics, because of the volume needed in COVID-19 testing We will be below market demand during the duration of the pandemic, which means that every instrument, every consumable that is going to the market is sold. So that's one way to build your model. The second question on the key drivers. First, let's not forget, and we insisted a lot on this when we launched those two solutions, Doug, They are clearly differentiated. There is no equivalent of simplicity of sample preparation for Chiostat, for example. None on the market at this stage. This is extremely convincing for many customers. And the fact that we can offer not only a syndromic answer to COVID-19, but also other menus in Europe and soon in the U.S. is also another convincing factor for our customers. Pneumonics, the same, significantly differentiated, faster than any competition, ability to run at the same time, LDTs that are very still prevalent in the U.S. or even in some markets in Europe, and regulated assets. All this is seriously convincing for customers, and the fact that on pneumonics, not only you bring a single Plex Thank you very much. for both Chiastat and Pneumodix. But again, it proves what? That those two instruments are COVID relevant, but they are not COVID dependent. Their success story will not stop when the pandemic subsides. Now, the third part of your question regarding potential headwinds, it is very, very interesting. difficult to answer precisely. You have seen a dog in less than a month. Everybody tended to say in December of 2020 sustained demand for COVID for the first year, the first half of the year and potentially receding a bit in the second half. Now moving in January more and more analysts, colleagues of yours, companies, customers saying given the speed of vaccination or the lack of in some countries vaccination it might be the case that demand for testing will continue strong beyond so we continue to adjust we continue to listen to our customers we continue to read and listen to also your analysis and so far we are just saying that we are confirming and reaffirming the guidance we gave in December but Roland you might want to complete this one as well

Yeah, no, I would agree to what I said before, which is, again, we just gave a guidance in early December. Since then, we have seen a couple of news, as you were laying out, and they probably, again, displayed the volatility, which is in the market and the uncertainty in the market. I would agree right now it's probably much more good news in terms of testing requirements, but unfortunately, I haven't found the crystal ball here either. So, again, I think a little bit more time are helpful for us in the industry.

We will now take our next question from Steve Bouchard from Wolf Research.

Please go ahead.

Hi, good afternoon, and thank you for the time here. I thought I might mix things up a little bit and talk about a non-COVID topic. Roland, one of the things that people are going to struggle with a little bit, given all the moving parts in the model, is how to think about the progression of operating margins from 21 to 22 and beyond. We have a framework from you guys about how to think about margins long-term. One of the variables that I think would be really helpful to hear about from you would be actually how much incremental spend there is in 2021 that may be non-repeating as the company works hard to scale things up. And if you could expound upon that to talk about any other sort of swing factors you would suggest we think about between margins in 2021 and 2022. That would be really helpful to hear. Sorry for the very long-winded question. Thanks again.

Yeah, important question and thanks for it. Yeah, of course, very much. As always, it is somewhat revenue-depending and how we see, again, the overall development of the revenue situation moving over the next 24 months. Despite that, I do believe a couple of things are important to note. First of all, On the cost margin side, I do believe over the course, over the next 24 months, we will see incremental improvements with a better utilization of equipment and also, again, for us getting new production sites and production lines online, getting all of this incremental cost over the course of 2021 will be incrementally helpful for the overall cost margin side. Second, I think we talked quite significantly about incremental R&D costs, particularly in developing our U.S. menu for NOMODX. That is something what probably, again, is a phased approach over the next 12, 18 months. And therefore, I believe also moving now into 2022, into 2023, that should be, again, getting a similar lead on that perspective. The sales and marketing side, it's quite obvious that there is significant changes in customer behavior ongoing right now. Again, if you think through, we have now north of 60% of our revenues coming via digital channels. So again, overall, the leverage you get here in terms of sales and marketing activities, I think also the way, for example, marketing will be done going forward will change. So I think it will be somewhat leaner again compared to what we had pre-COVID. If you bind that together with also a healthy revenue situation, I believe quite strongly that we leave the overall COVID situation with a better EBIT margin than we more or less move into that.

We will now take our next question from Derek DeBroom from Bank of America.

Please go ahead.

Hi, good morning. Two questions, and Steve just took my margin question, so I'll have to ask something else real quick. I guess the first question is, it's more about, one's about long-term strategy. I mean, there's been some press reports recently about potentially some incremental M&A talk. I'm just wondering if you have any general comments on that, since we've been getting a lot of questions from investors. And I guess, can we talk a little bit about the Quantiferon product rollouts and sort of what your expectations are and what's embedded into the model for the Lyme disease in particular. Thank you.

Dirk, I'm sorry. I didn't hear the last part of your sentence for Quantiferon. I do apologize for this.

Sure. It's the Lyme disease. Yeah, the Lyme disease expectation.

The Lyme disease. Okay. Okay. I will start with your first question and then Potential M&A, I mean, as you know, Dirk, and we have discussed that extensively during our Deep Dive event in December 8th, QIAGEN is really pursuing a strategy to execute on opportunities driven by our five pillars of growth. And we believe that those organic growth opportunities have attractive growth potentials. and also large market potential. And so we also believe that with those five pillars, we position QIAGEN for growth beyond the pandemic and this will already generate and deliver shareholder value. Now, in terms of capital deployment, we will continue obviously to consider any kind of potential Bolton acquisitions that could, as we said in December, support and strengthen our portfolio, and specifically the five pillars of growth. Remember in December we said, if it's a game to dilute our activities, no. If it's to reinforce, notably the five pillars of growth, yes. And obviously, capital deployment for Kayagen is also constantly thinking about increasing returns to our shareholders, and we have used in the past, we could use that again, a share repurchase program as an example. So that's to address the first part of your question. Lyme disease, as we presented it when we disclosed this new partnership with diasterein, we see it first as an extension of the interferon gamma technology which is behind The Quantiferon Success. Second, it creates a partnership with a company, Diaserin, which is already extremely present in the live disease market with their IgG, IgM solution. So it's going to complement and leverage that market position. 2021, will be the CE marking. We want to launch the product by the summer, which is the key season for Lyme, but we both know that the key year is one year after in 2022 with the FDA launch in the U.S., where we believe that we will have the stronger impact in terms of numbers. So what is important for us is prove the medical case In 2021, together with our CMR, we don't expect a significant, meaningful contribution to the top line. We will have only a limited number of months of growth.

The key moment will be 2022.

The last question comes from Dan Brennan from UBS. Please go ahead.

Great, thank you. Thanks for taking the question. I kind of joined it late. I had a two-part question. First, I was just wondering, could you provide any customer color on pneumatics? I know that's expected to be a big driver of growth in 2021 amongst the other new platforms that you have, but I'm just wondering what customer feedback is like. I know you just had the investor day, but you're competing with some big players there with differentiated technology. And then the second question would be, just as we think about – the significant capacity expansion being planned by some of the all-in-one box PCR players like Roche, I think, which is expected to quadruple capacity in the first six months of the year. Is that factored into your guidance as you think about your attraction revenue outlook to the extent that these all-in-one players that I don't think rely on your attraction kits potentially take share in 2021? Thank you. So thank you, Derek.

Obviously, Roland, feel free to chime in also at the point. For me, the profile of the customers, first half of your question, Derek, Dan, I'm sorry, is the profile of our customers. mainly hospitals extremely active in infectious diseases. As we said in the previous answers, sometimes we win against competition, sometimes we are placing or selling the Pneumodix alongside existing competition. Why? Because to your question, Dan, it's not the competition which is differentiated. It's the Pneumodix system which is differentiated. And again, we explained when we acquired the company and started the collaboration with Pneumodix, first, much faster than any competition. Second, this tremendous flexibility of running at the same time laboratory developed tests or regulated assays, this is what the customers are finding extremely interesting. And if we are able to execute on the menu development Remember once again, already 13 assays available C-Mark in Europe. Now we bring that to the U.S. and beyond Europe and the U.S. If we are able to execute on the development on this menu, on the success of this menu in regulatory approval in the U.S., I fear no competition. To your question, yes, like QIAGEN, competition is increasing manufacturing capacity because we all have to because the demand is still significant. but if you just want to focus on the markets related to mnemonics, it's a big market then. We are talking about a $3 billion market at least growing at a healthy rate of let's say high single digit to sometimes double digit in some geographies. So there is room especially where or when you have differentiation and I don't think that anybody among our competitors would have expected that we would put 130 numeric systems in this market in a bit more than a year.

So thank you, Thierry, and thank you to all of you for your participation. If you have any questions or comments, please don't hesitate to reach out to Phoebe and me. With this, I'd like to end the call. Thank you very much.

Ladies and gentlemen, this concludes the conference call. Thank you for joining. Have a pleasant day. Goodbye.