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spk12: Ladies and gentlemen, thank you for standing by. I am Jess, your Global Meet Call Operator. Welcome and thank you for joining QIAGEN's Q3 2023 Earnings Conference Call Webcast. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded at QIAGEN's request and will be made available on their internet website. The prepared remarks will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. At this time, I would like to introduce your host, Mr. John Gilardi, Vice President, Head of Corporate Communications and Investor Relations at QIAGEN. Please go ahead, sir.
spk04: Thank you, Jess, and thank you all of you for joining us today for this call. We appreciate your interest in QIAGEN. Our speakers today are Terry Bernard, our Chief Executive Officer, and Roland Sackers, our Chief Financial Officer. We also have Phoebe Lowe from the IR team joining us as well. This call is being webcast live and will be archived on the Investors section of our website at www.kygen.com. You can also find a copy of the quarterly results, press release, and presentation on our website. We'll begin with remarks from Terry and Roland and then move into a Q&A session. Before we start, let me briefly go over the Safe Harbor Statement. The views expressed during this conference call and the responses to your questions represent the perspectives of management as of today, October 31st, 2023. We will be making statements and providing responses to your questions that convey your intentions, beliefs, expectations, or predictions for the future. These statements fall under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. They involve risks and uncertainties, and actual results may differ materially from those suggested by these statements. Factors that could influence results are mentioned in our filings with the SEC. These are also available on the SEC website and also on our own website. QIAGEN disclaims any intention or obligation to update any forward-looking statements. Additionally, we will refer to certain financial measures not approved, sorry, not prepared following generally accepted accounting principles or GAAP. All references to EPS refer to diluted EPS. You can find the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in our press release and presentation. I'd like to now hand over the call to Thierry.
spk08: Thank you, John. Good morning, good afternoon, or good evening, depending, of course, of where you are in the world, and thank you for joining us. We delivered another quarter of solid results that exceeded our outlook in an increasingly volatile macro environment. This confirms again the resilience of our portfolio. Our performance continues to be driven by our strategy of focus and balance. Focus on our pillars of growth and balance in serving over 500,000 customers in the life sciences and molecular diagnostic with our broad geographic presence. At the same time, We are obviously closely monitoring increasingly challenging geopolitical and macro environments and taking actions to reduce as much as possible the impact on our business. We believe that we are very well positioned to finish this year in a strong position, committed to delivering solid sales growth and improved earnings in the fourth quarter as we prepare for more growth and expansion in 2024 and the years ahead. Let me quickly go to our top messages for today. First, we exceeded our outlook for net sales and adjusted EPS for the third quarter, driven by solid growth in the non-COVID-based business and a high level of profitability. Net sales were $470 million at constant exchange rates, which exceeded our outlook for at least $465 million. Our non-COVID product sales rose 5% CER, and these were supported by 10% CER growth in sales of highly recurring consumables revenues that accounted for well over 85% of total sales. For the first nine months of the year, those sales grew 8% CER. Overall results showed a decline of 5% to $476 million, reflecting, of course, the significant drop-off in COVID testing revenues from 2022. We continue to track towards $160 to $165 million of sales for 2023 in our COVID-19 product group. Remember that we had $143 million of sales from this group in 2019 before the pandemic. In terms of profitability, adjusted earnings per shares were $0.50 CER, And once again, above the outlook for at least 48 cents CER. Our second key message. Our key pillars are driving the solid underlying performance. Just to call out a few. The quantitative TB test maintained the momentum we have seen during 2023, growing 25% CER over the third quarter of 2022, and delivering the second consecutive quarter of sales above $100 million. What are the key drivers? Obviously, once again, the strong conversion trends from use of the tuberculin skin test. Another example, the QIAQUITY digital PCR system delivered over 40% sales growth at constant exchange rates, driven by new placement and increasing biopharma consumable sales. The chiostat diagnostic syndromic testing platform also did well this quarter, with a combination of growth in consumables driven by double-digit CER gains in non-COVID testing and placements above the same level achieved in the third quarter of last year. Our third message. We continue to maintain a high level of profitability as we invest into research and development that will help driving future growth trends. The adjusted operating income margin was 26.6% in the third quarter, and we achieved this level while investing around 10% of sales into research and development. We see those investments as an important way to create new relays of growth for tomorrow. And our last point for today, we are reaffirming our full-year outlook for 2023. Our outlook 23 remains for net sales of at least $1.97 billion at constant exchange rate and for adjusted earnings per share of at least $2 We are, of course, closely monitoring the increasingly volatile geopolitical and macro trends. Inflation, the war in Ukraine and now in the Middle East, supply chain issues, the economy in China. Those are a lot of moving parts to observe in terms of macro trends. Before I hand over to Roland, I would also like to mention a change in our leadership team. After leading our molecular diagnostic business since 2020, Jean-Pascal Viola has been appointed senior vice president, head of corporate strategy and development. He remains a member of the executive committee. We here want to capitalize on Jean-Pascal's contribution to QIAGEN since 2007 and his proven track record in business development. After a rigorous selection process, We would like to welcome Fernando Baez as our new senior vice president, head of molecular diagnostic business area, and member of the executive committee. Fernando joined SkyAgen after more than two decades in the life sciences and molecular diagnostics industry. He most recently led the genetic testing solution business at Thermo Fisher Scientific, and previously spent over two decades at Siemens, and his last role as global head of the molecular diagnostic business unit at Siemens Healthiness. We welcome Fernando to the team and are convinced that his passion for innovation and customer focus will help us achieve our ambitions. And now, I'd like to hand over to Roland for a review of our results in greater detail.
spk01: Thank you, Thierry. Hello, everyone. Thank you as well for me for joining our call. Let me first discuss our results for the first third quarter and first nine months of the year and then share some views on our outlook. As you saw in our press release, net sales for the third quarter of 2023 were $476 million at actual rates and $470 million at constant exchange rates. We saw a modest impact from currency movements against the US dollar, so sales declined 5% compared to the year-ago period, while results at constant exchange rates were down 6%. As has been the trend during 2023, this was again a quarter with a substantial decline in COVID-19 revenues. Instrument sales led to performance rising 1% CER as our teams generated growth despite more conservative customer spending trends. Even in this environment, we still saw solid placements of lower price point instruments such as Kaya QET and Kaya STAT DX. We continue to see good placement trends for reagent rental agreements. These agreements among molecular diagnostic customers involve placements linked to multi-year consumable contracts and help secure future consumable commitments. Among our four product groups, let's start with sample technologies, which represents about one third of total sales. Here we had growth at a low single digit CR rate for the non-COVID products, and this represented nearly 90% of sales within this product group. Overall, sales declined 13% CER, and this was due to the very tough comparison against 22 results and the drop-off this year in COVID-19 testing demand. Diagnostic solutions, our second product group, also represents about one-third of sales. The quantiferon latent TB test was the main driver, with all regions delivering sales growth of about 20% CER or better. The strong conversion trend from the traditional skin trend test is continuing across the world, but this is still a market that is well below 40% penetrated. Diagnostic solution also includes the KayaStatDX system for syndromic testing. This sales rose 4% CER as non-COVID applications delivered solid growth of 16% CER, which more than overweighted the COVID-19 testing headwinds from 2022. We continue to see excellent non-COVID utilization in Europe, with underlying growth at double-digit CR rate for non-COVID applications that represented about 30% of total sales. NeumodX, our integrated clinical PCR testing platform, saw a sales decline in the third quarter. This was due to headwinds against the high level of COVID testing revenues in Q3 2022. Moving on to the PCR Nucleic Acid Amplification Product Group. These sales declined 25% CER in the third quarter. As we have been discussing on these calls during 2023, the reason was a sharp drop-off in sales to our OM third-party customers that use our reagents for their own products. Excluding this factor, non-COVID sales for this product group rose at a single-digit CER rate. At the same time, Chiroacuity Digital PCR continued to deliver growth above 40% CER and is tracking well towards the 23 goal for at least $70 million of annual sales. This growth is coming from a combination of increasing consumables pulled through along with solid trends in new placements. In Q3, these levels were above the year-ago quarter and for all three versions involving the 1-plate, 4-plate and 8-plate system. Genomics NGS is our last product group and it involves our Kyogen Digital Insight bioinformatics business and our products for use with any next generation sequencer. The QDI business had another solid performance with sales growth at about 20% CER in the third quarter and maintaining a double digit CER growth rate for the first nine months of the year. Here we are seeing the fastest growth in our clinical applications and complemented by double-digit growth as well in discovery and research applications. Moving to sales on a geographic basis, the Americas again delivered growth in terms of total sales, rising 1% CER and at a faster 4% CER rate for the non-COVID business. The key driver was clearly Quantiferon and supported by the sample technologies and chiroacuity portfolios, and this continued the trend seen in the second quarter. The Europe, Middle East, Africa region grew at an even stronger pace than the Americas, with sales rates for non-COVID product groups rising at a double-digit CR rate. Among the top-performing countries for non-COVID results were France, Switzerland, and the United Kingdom. The Asia-Pacific-Japan region had a decline at low single-digit CR rates for non-COVID sales. Non-COVID sales in China declined at a low single-digit CR rate as well. Let's now review the rest of the income statement. Adjusted operating income declined 12% to $126 million from the third quarter of 2022, reflecting the lower sales base due to the pandemic revenues last year. The adjusted operating income margin for the third quarter was 26.6% of sales. Keep in mind that in the third quarter we faced currency headwinds of at least 50 basis points on the margin. The key driver was a decline in the adjusted gross margin to 66.1% of sales. Among the factors was the lower levels of capacity utilization and the change in product mix. At the same time, we continued to make significant investments in R&D, which remained at about 10% of sales and in line with our full-year goals. Sales and marketing expenses benefited from improvements in the quality and efficiency of customer engagement. These expenses were 23.4% of sales in the third quarter, up from 22.9% last year on a significantly higher COVID-driven sales base. General and administrative expenses were 6.0% of sales and slightly lower than in the third quarter of 2022 at 6.2% of sales. To close out the income statement, adjusted EPS for the third quarter was $0.50 at constant exchange rates and above the outlook for at least $0.48 CER and also $0.50 at actual rates. In terms of non-operating net income factors, we have seen incrementally higher interest income during 2023 in this high interest rate environment. At the same time, our interest expenses have declined, and this is due to QIAGEN having repaid nearly $900 million during the last 12 months of maturing debt from existing cash reserves. Results for the first nine months of 23 reflect the lower sales and profit levels compared to 22. Operating cash flow was $308 million for the first nine months of the year, while free cash flow was $210 million. As we have mentioned on earlier calls for 23, we are in a period of higher working capital requirements due to our decision to increase inventories in light of the challenging geopolitical and macro environment. We want to ensure that QIAGEN has adequate product availability to serve customers. This is also seen in the balance sheet in terms of the increase in inventories. At the same time, account for viewables has been trending into a positive direction with days of sales outstanding or DSOs at 54 days at the end of September 23 and down from 58 days a year ago. This is due to the operational improvements achieved by our receivables teams. Continuing with the balance sheet, Our liquidity position was about $1 billion at the end of the third quarter, which is down from $1.4 billion at the end of 2022. As a result, our leverage ratio at the end of the third quarter stood at 0.7 times net debt to adjusted EBITDA and increased from 0.5 times at the end of 2022. One of the drivers for improving our leverage on capital efficiency was the decision to repay about $900 million of debt from existing cash reserves as I mentioned. Of this amount, $400 million of our convertible nodes were paid out in September 2023. Looking ahead, we have an additional $100 million of debt reaching maturity next June and another $500 million in November 2024. Another $500 million of convertible notes could require repayment in December 2025. We continue to review ways to deploy cash within our disciplined allocation strategy that involves targeted M&A as well as share repurchase programs. Given our healthy balance sheet, we want to continue our approach to create value by investing into the business and increasing returns. I would now like to head back to Thierry.
spk08: Thank you, Roland, and if you allow me, I'd like now to take a moment to run through some of our progresses in advancing our portfolio this quarter. First, we continue to sharpen our focus on our pillars of growth and expand in our key areas of expertise to drive sustainable growth in various applications. While we are directing investment into growing our new pillars of growth, such as KayaStat Diagnostics or KayaQuity, we are obviously not complacent in our established leadership in sample tech or Quantifil. First of all, in our market-leading sample technology portfolio, we continue to make progress on automation upgrades with the recent launch of the TissueLizer free instrument. This instrument is used as a key tool in sample disruption of difficult to isolate samples in early steps of RNA of or DNA isolation, such as those involving bone, tissue, or environmental samples like soil or plant matter. The prior generation of this instrument has been seated in over 14,000 publications and is part of a comprehensive lineup of automation that well positions QIAGEN to answer a broad range of customer demands for sample processing. Through the complete upgrade of our sample preparation systems, we have ensured these platforms are not only delivering state-of-the-art technology for the highest quality processing, but also modern solutions for connectivity, which is used for real-time monitoring of runs, cloud management of data, and remote service monitoring. Another example is the next update that will come with the release of an upgraded version of our flat-sheet platform, Kaya Symphony. which will onboard connectivity elements and additional features to even better enable high-volume application, such as liquid biopsies. We also continue to leverage our deep sample prep expertise through some of the more dynamic growth application, such as expanding our microbiome portfolio. Our teams recently launched comprehensive workflows, like the microbiome whole genome sequencing six sets, to enable diverse microbiome research, including gut health, soil microbiology, and antibiotic resistance. Those complete kits leverage our leading microbiome DNA extraction and include library preparation for whole genome sequencing and dedicated bioinformatics. Another notable sample tech expansion is the launch of our kits in our KyaWave portfolio. The KyaWave RNA-Z and multi-analyzed DNA RNA kits were added to the collection of alternative versions of the most popular KyaGen kits, which have been redesigned to use considerably less plastic and cardboard. Those sustainable kit versions are part of our broader initiative to reduce our environmental footprint and achieve milestones toward our STBI validated target of net zero by 2050. Moving now to the Quantiferon franchise. We continue to see strong expansion into the market for this product led by the leading Quantiferon TB Gold Plus test for latent tuberculosis testing. As you have seen in our results, the TB test continue to see strong demand from the continuous successful conversion from the tuberculin skin test alongside with our strong solution for automation with Diasori. This undercalls the power of quantiference differentiation in the latent TB testing market as an established and proven technology with unparalleled automation options. Our team's ongoing public health work leverages established relationships to promote the importance of test and treat strategy for eradicating deadly TB infections across the globe. This month, for example, QIAGEN once again hosted the annual Tuberculosis Summit, bringing together experts, healthcare professionals, policy makers, disease survivors to discuss emerging tools and strategies for TB management. This accredited event saw record-breaking participation with over 2,500 people attending through our webcast or in person in London. This summit works to drive significant investment in the fight against TB and empower healthcare professionals and policymakers by providing them with the latest knowledge, insights, and best practices. While Quantiferon plays an essential role in the global fight against tuberculosis, we are also leveraging the Quantiferon technology to assist in the exploration of cell-mediated immune response in oncology and autoimmune diseases. Just recently, As you have seen in our press release, we launched the Quantiferon EBV assay for research use only to facilitate research in building the understanding of Epstein-Barr virus infections and related malignancies. This builds on the existing portfolio of IVD tests for monitoring CMI response and cytomegalovirus, a Lyme disease assay, and a research use only T cell response assays. So you can see we are building on a strong base in our Quantiferum franchise. We see a solid road to continue double-digit growth in the next few years by leveraging this highly differentiated proprietary technology through well-established commercial channels. And now back again to Roland to give you more details on our outlook for 2023. Thank you, Thierry.
spk01: Let me provide more perspectives on our outlook for 2023 and also for the fourth quarter. As noted earlier, we have reaffirmed our full-year sales outlook for at least 1.97 billion USD at constant exchange rates. In terms of COVID-19 sales for 2023, we continue to expect about 160 to 165 million USD. Remember that in 2019, we had $143 million of sales from products that were redeployed for use during the pandemic. And these were mainly sample technologies for use in obtaining RNA. So we clearly see 2023 as the last full year of significant COVID-19 headwinds. In regards to our OM business, these sales are tracking at about $90 million for the year. To frame this, the pre-COVID OM sales were in the range of 70 million plus US dollar, and we would expect this business to normalize to that level again next year. In terms of regions, we are closely monitoring fast-changing geopolitical and macro trends during the world. We continue to have a cautious view on China, where the environment has not improved as is reflected in the results for the third quarter. We are also closely monitoring the situation in the Middle East. In that region, we are actively working to support our distributors during these challenging times. In terms of profitability, we have reaffirmed our outlook for adjusted EPS to at least $2.07 at constant exchange rates. A significant part of our cost structure is variable, which enables agility in cost management while continuing to invest in the business. This remains a top priority as we position Kyogen to continue delivering solid growth in the midterm. As for currency movements and based on rates as of October 27, we expect a negative impact on full-year net sales of about 1 percentage point and at least 2 cents per share negatively impact on adjusted EPS results. Moving to the fourth quarter, our outlook is for net sales of at least 500 million US dollars CER. Adjusted earnings per share are expected to be at least 53 cents per share also at CER. As for currency movements and based on rates as of October 27, we expect a neutral to slightly negative impact on both net sales and adjusted EPS for the fourth quarter. I would like to now hand back to Thierry.
spk08: Thanks, Roland. We are now coming close to the end of our presentation, so let me provide you with a quick summary before we move into the Q&A session. First, amid the ongoing volatile microenvironment, Kayajan has delivered another solid performance in the third quarter of 2023. We achieved our outlook for both net sales and adjusted EPS, with good demand for our technologies in our non-COVID-based business. Second, those results were driven by resilient performance for our key pillars in both life sciences and molecular diagnostic. Our strengths in sample tech and quantifieron are complemented by the solid progresses the team are making in expanding our footprint in chiostat diagnostic and chiacuity digital PCR systems. Third, as always, We continue to maintain a high level of profitability and are using our healthy balance sheet to create value through organic and inorganic investment. And lastly, we have reaffirmed our full year outlook for 2023. As we move through the end of the year, we are diligently keeping an eye on the global landscape to understand all these dynamics carried into 2024. Despite the currently challenging environment, we see a solid mid-term outlook for both the life sciences and diagnostic markets, and are well positioned to continue to deliver sustainable growth in the coming years. With that, I would like now to hand back to John and to the operator for the question and answer questions. Thank you.
spk12: Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to withdraw your question, you may press star followed by two. To ensure we can accommodate as many people as possible, please limit yourselves to only one question, and if necessary, one follow-up. Your microphone will also be muted after you finish asking the questions. Again, anyone who has a question may press star followed by one at this time. One moment for the first question, please.
spk02: The first question comes from Catherine Schulte of Baird.
spk12: Your line is open. Please go ahead.
spk00: Hi. Thanks for the question. It's great to see these results amidst a lot of pressures on the space. I wanted to start on the life sciences side of your business. We've heard some peers talking about pharma spend caution intensifying throughout the quarter. Meanwhile, academia has been pretty healthy. I think NIH outlays were up over 20% in the third quarter. Can you just talk through the trends you saw throughout the quarter in those customer groups and your expectations for those end markets going forward?
spk08: Thanks, Catherine. Thanks for the questions. Yes, obviously, we are following also what some competitors are saying on the market. It is obvious that funding for the biotech industry is a bit under tension. However, we see still a very good demand for the life science product of QIAGEN, especially in life science. What you have to, in sample tech, I'm sorry, what you have to understand is that, especially in life science, whether we talk sample tech or UNGS, that are self-directed to either the research or the academic sector, we are not a very high budget in those spending, but we are a fundamental part of those spending. So it's difficult to eliminate kyogen even in times of difficult economic environment. Sample take is the first and crucial step for any biological run, yet it is not the most expensive part of activities in those labs. And this is why I think we are pretty protected. That doesn't mean that our company is immune to adverse economic events, but we are monitoring this very carefully. As an example, we keep an eye on the government shutdown in the U.S., and we are carefully analyzing what will be the budget increase, if there is an increase, for organizations like, for example, the CDC and the NIH. But we have it under control.
spk02: The next question comes from Patrick Donnelly of Citi. Your line is open. Please go ahead.
spk05: Hey, guys. Thanks for taking the questions. Thierry, maybe as you look at some of these lingering headwinds, whether it's the OEM piece, instrumentation, and maybe a little bit in China, I guess how do you think about the potential for these to continue into 2024 and impact the growth there? Obviously, we've got some commentary from peers about the first half maybe being a little more subdued given some of these headwinds. And then on the same topic for Roland, just how you think about the margin set up into next year if some of these headwinds do persist, just the leverage you guys have in the P&L. Thank you, guys.
spk08: Thanks, Patrick. And we will take Roland and I this question just before going to the margins. So questions on OEM, instrumentation, and China. Obviously, Patrick, I'd like to have a crystal ball. It's obviously extremely challenging those days to forecast given the volatility. However, as we have said in Q2, we strongly believe that our OEM business is now normalizing towards its pre-COVID time. So I expect a normal, let's say, OEM range of revenues around $70 to $80 million in a normalized environment. China. It is obvious that a lot of players on the market We're expecting a sequential improvement of the Chinese market starting in Q1 of this year. This has not happened. And it's clear as well that the anti-corruption campaign in health care launched by President Xi is adding to other challenges met by foreign companies on this market. Pressure towards localization. delays in submission and registration from a regulatory standpoint the so-called vbps policy however china is a very important market both for life science and clinical diagnostic is probably already the second market in the world so i do not see a fundamental improvement on the market in the coming six months, for example, but I believe in the long-term potential of this market because of the needs of the population and the patients locally. Obviously, foreign companies have to adapt their strategy to fit obviously into the Chinese priority. So we need to keep a cool head. It's an important market. It's not going to bounce back immediately, but the long-term perspective are good. Kayagen always said that because of the influx of steel, as we say, of instruments during the COVID period, the post-COVID period would see in many labs more trends toward placements of instruments than capital expenses in the diagnostic world. We are used to that at Kayagen. I still believe that labs, on average, continues to renew and upgrade their instrumentation every five years. There is no scientific rules here, but it's a well-adopted and well-accepted KPI in our market. So whether it is capital sales or placement kyogen are the financial answers for all those options. It is true that it's a bit more constrained, But once again, we believe that the market for diagnostic life science and clinical is solid and will continue at a pretty solid growth rate as well in the coming months. Roland, moving to the margin?
spk01: Sure. Hi, Patrick. Yeah, I think also the margin, as you laid out, while there is, I would say, still volatility and clearly also increasing uncertainty in the market. I do believe that we had shown in the past that we have our hands around our expenses quite well around, and I don't think that is going to change going forward. So even in a more, in brackets, in a scenario where you assume a more muted growth rate moving from 23 into 24, I still believe that we should be able to deliver actually also very reasonable margin improvement. There is clearly, and we said that also on the call today, right now we are rather accelerating some of our R&D investments because we do believe there is a good opportunity for us to invest. We continue to see more and more leverage opportunities on the sales and marketing side. We have seen that trend on the administrative side now, I think, for the last 24 months that we are here, while we had lower overall revenues, still have quite significantly reduced our admin expense ratio, and there's more potential to onset as well. So all in, I think on the aviate line, there should be, even in a more difficult environment, enough room for us to improve margins.
spk02: The next question comes from Daniel Arias of Stifel.
spk12: Your line is open. Please go ahead.
spk13: Hey, it's Paul on for Dan. Thanks for the question. Just in terms of kind of getting a sense of your comfort level heading into 2024, you talked a little bit last quarter about being more or less comfortable with a sort of half single digit growth trajectory, just kind of baseline expectation. Should we expect that that's come down since you know, what we were kind of talking about three months ago. And do you have a sense for as inflation is normalizing and so forth, what the pricing realization might be just in terms of directionality for next year?
spk08: Thank you, Paul. So I'm not sure that I have ever seen a number like high single digit growth for 2024. But what we have always said We believe that we have the people and the product portfolio for QIAGEN, both in life science and clinical diagnostic, to be above market growth. And I still believe in this. Wherever in that market, once again, that market might be experiencing some pressure and pressures those days, but it's a good market. I believe that COVID-19 has definitely proven the relevance of life science diagnostic and clinical diagnostic in the healthcare value chain. This is not disappearing. So even if the market is a bit softer, it's still a growing market. And what we feel at KyleJane is that regardless the level of the market growth, we have the portfolio to be above that market growth. At the moment, we are clearly focusing on achieving 2023 and our guidance in a volatile environment. As you know, we give our guidance for the year around early February. This is what we are going to do this year. But we strongly believe that we have the people and the product portfolio to systematically beat the market growth. On inflation, yes, it has receded compared to 2022. However, Kayagen didn't start to implement price increase because there was a hyperinflation last year. Kayagen has a systematic policy of price increase every year around January, well shared with our customers because we sell value, we sell innovation, and we invest in R&D. In a normalized environment, we believe that a normal price increase of between 2.5, 3.5 per year, according to different geographies, is what we need to look for. And as I said before, I always think that net-net, a company like QIAGEN in a normalized environment should expect a net-net impact of price increase of around 50 to 100 basis points.
spk12: The next question comes from Falco Friedrichs of Deutsche Bank. Please go ahead.
spk11: Thank you very much. My question is, how should we think about the future of the Pneumo DX platform within your company, and do you still believe you're the best owner? And then my follow-up would be on KayaStat DX and whether you can remind us of the next steps when it comes to the test menu expansion. Thank you.
spk08: Thank you, Falco. On new MODX, the first consideration is that we acquired that platform because we believe in it, and we strongly believe that it's probably the best platform on the market for many features. Ease of use, speed, versatility, especially the ability to run a laboratory-developed test in parallel to a regulated test. in a very, very, very random access.
spk10: This is the only platform able to do that.
spk08: However, as we have disclosed, we have experienced stability issues at the launch of the platform, which is normal in this market. And therefore, we have given priority to fixing those stability issues. over the last two years and a half. As a result, we are experiencing delays in submitting and approving assays on the US market, which is still by far the main market for infectious diseases PCR testing. Pneumonics is doing well in Europe. We see non-COVID assays double digit growth. At the same time, it is our duty to systematically and constantly review the performance of our product portfolio, market shares, growth, return on capital invested. And there is no dogma at QIAGEN. It is not because a product is part of our five pillars of growth that it will be part of our priorities forever. the product and the team need to deliver. And so we are currently reviewing every kind of options for new modics. This is what we can say at the moment.
spk10: On KayaStat DX, the menu is going on. And I would differentiate two kinds of development.
spk08: The traditional menu to be competitive in syndromic testing is already available for chiostat in Europe. I refer here to respiratory, GI, and meningitis.
spk10: We are going to bring those assays as well in the U.S.
spk08: is to develop a completely differentiated assay that is not existing in our competition portfolio. And I refer here to what we call the complicated UTIs. Once we have launched that assay in Europe first, we will continue the development and registration of more traditional assays, such as direct identification Blood culture positive, already research used only in Europe.
spk10: Pneumonia.
spk08: And then we will go probably to other kind of samples, whether we are talking joint or other kind of samples. This is the roadmap for Chiastat, a solution where we believe we can really take the number two position on that market, which is a very growing market. and expected to be around close to 5 billion total market size by 2026.
spk02: The next question comes from Jack Meehan of Nefron Research. Your line is open. Please go ahead.
spk03: Thank you. Hello, everyone.
spk06: I wanted to focus on Quaniferon. So first, could you just talk about, you know, how you're looking at kind of the competitive landscape and some of the differentiation for the test? Second, are there any macro sensitivities you see here? And maybe finally, just level of confidence this can sustain double-digit growth into 2024.
spk03: Thank you.
spk10: So, Jack, thanks for the questions. Obviously, the first thing about the differentiation of quantifieron.
spk08: A major growth driver that we have decided to protect and grow faster since 2016, where we started the discussion and negotiation with Diasorin for automation. Many people are aware of the partnership with Diasorin. Some people sometimes forget about the partnership also with Hamilton and Tican for the front-end automation of QuantiFerron.
spk10: And therefore, as of today, there is no more automated workflow and easier to use than QuantiFerron.
spk08: and from the back-end automation available in a very sizable install base of the liaison by Diaserin, either XL or XS. Number one.
spk10: Number two.
spk08: The number of publications around the quality, the value, the clinical superiority of Quantiferon is unprecedented. We are talking here about 20 years of public health, medical education, and publications. Third, for the product itself, we continue to invest in R&D. As you have seen, for example, over the last three years, we moved from the Cantiferon third generation to the fourth generation by adding CD8, which seriously increased the sensitivity of the test. This is what explains the success of QuantiFerron, continuous organic and non-organic investment to expand its market penetration. And where do we see the main potential for market penetration? It's still on the skin test. We believe that the skin test market even in the U.S., is between still, let's say, 30% to 40% penetration. So there is a significant room to grow. So we are not complacent despite being the number one. We continue to invest. We continue to push quantifieron in many countries. You have seen two years ago the guidance in Brazil in favor of quantifieron. You have seen some emerging countries in Asia Pacific adopting also quantifieron. So there is no complacency, but there is a strong leadership sustained by R&D investment, partnership, and this is what is fueling, once again, the 25% growth of Q3. We are confident that we can maintain
spk10: a double-digit growth for this product.
spk02: The next question comes from Matt Sykes of Goldman Sachs.
spk12: Your line is open. Please go ahead.
spk07: Thanks for taking my questions. Good morning. Congrats on the quarter in a tough environment. Just two quick questions. I'll ask them both up front, but just first on R&D, that 10% level. We kind of look at what it could end up for 23, probably be about 100 basis points above where you were for 22 and probably 200 above the year before. Just wondering, is that 10% sort of the level we should be thinking about R&D investments in terms of percentage of sales as we think into 24? And then secondly, the spread in non-COVID product growth in Europe versus the Americas. Is there anything we can read into that from a customer type or a product or segment that that accounted for that difference in growth. Thanks.
spk08: Thanks for the question. You can go ahead, Roland, if you want.
spk01: I think it's very straightforward. We clearly right now see good opportunities to drive some R&D activities given also our overall profitability and that things going quite well along even in a more difficult environment. I would assume now looking into next year that we are probably next year rather between somewhere let's say 9 and 10%. I don't think that we will have next year any need for staying let's say 10 plus percent. So I do think there is some leverage there. Nevertheless, we continue of course to invest and expand our menu.
spk08: Thank you Roland. And on the spread on the non-COVID growth, I don't think that there are major differences. between American and European customers, but we have also a difference in our portfolio at the moment. So the non-COVID in North America is very much driven by quantifieron, by digital PCR, especially in the biopharma. This is where we have the main concentration of biopharma customers, and this is where we are taking significant market shares, but also UNGS. Whether in Europe, where you have, compared to the U.S., a greater menu for non-COVID on Kayastat, for example. You have a greater menu for non-COVID on Pneumonics. You also have this impact. Obviously, we are also growing our market shares for Quantifero in Europe year on year to a lower level than the U.S. We are also growing our market sharing in digital PCR. So it's rather basically adjusting the status of our product for you rather than differences of customers. I would end up saying that we focus now at KayaGen, as you know, since 2021, clearly, on the non-COVID. This is our core business. We know that we have a range of products available if COVID surge again anytime, but the focus is really on the non-COVID.
spk02: The next question comes from Casey Woodring of J.P. Morgan. Please go ahead.
spk15: Hi. Thanks for taking my questions. Maybe one for Roland. Just can you walk through the debt repayment schedule, how you're thinking about that, and implications for interest income and uh interest expense maybe give us you know a level set for for 2024 that we can model thank you
spk01: showcase it i think it uh... i think it was a people of smaller uh... political but nevertheless i would assume that uh... uh... such a fifty uh... into the remarks the went down on the part of part of the dollar in terms of repayment for end of september probably has an impact now on the uh... that interest expense uh... for uh... fourth quarter compared to the third quarter it's it's probably one five million u s dollars And for next year, probably again depends, of course, where interest rates are going all in. I do think there is an impact on around 2 to 3 cents EPS on the net level as well. So I think that probably helps you. As I said, there's a couple of free payments next year planned as well. And there is clearly also, again, $100 million in June next year and $500 million in November 24. And on the convert side, there might be another $500 million in December 25.
spk02: The last question comes from Andrew Brackman of William Blair.
spk12: Please go ahead.
spk14: Hey, guys. Good morning, and thanks for taking the questions. Maybe just on the sample tech business, you've obviously made a lot of investments there in automation over the last handful of years. Can you just give us an update around what you're seeing in those customers who have upgraded? And I guess, how should we be thinking about additional investments in automation for that business going forward? Thanks.
spk08: Thanks, Andrew. I think it was the right decision when we started let's say five years ago, to systematically upgrade our automation. As a reminder, Kaya Cube became Kaya Cube Connect. EZ-1 became EZ-2. And all the time, adding new features. As we said in today's presentation, the next step is Kaya Symphony, where we are not only adding new connectivity features but we are increasing the volume input which is fundamental to better answer our already existing customers in liquid biopsy and taking more customers this was a fundamental strategy to enhance our market shares and confirm our leadership and we see customers uh who were manual customers before some time being obviously moving to those automation platform, automated platform. The next steps, but it's a bit too early to speak in details about it today, is to think about higher throughput automation, but we will come back to you in due term.
spk04: Okay, Thierry, operator, Roland, thank you very much. for your time today on the call. If you have any follow-up questions, please do not hesitate to reach out to Phoebe and me. Thank you very much again for your interest in QIAGEN. Bye-bye.
spk12: Ladies and gentlemen, this concludes the conference call. Thank you for joining and have a pleasant day. Goodbye.
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