Qiagen N.V.

Ladies and gentlemen, thank you for standing by. I'm Melinda, your PGI call operator. Welcome and thank you for joining QIAGEN's first quarter 2024 earnings conference call webcast. At this time, all participants are in a listen-only mode. Please be advised this call is being recorded at QIAGEN's request and will be made available on their internet site. The prepared remarks will be followed by a question and answer session. If you'd 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'd like to introduce your host, John Ghilardi, Vice President of Corporate Communications and Investor Relations at QIAGEN. Please go ahead.

Thank you, operator, and welcome to all of you for joining us on 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. This call is being webcast live and will be archived on the Investor Relations section of our website at www.kygen.com. You can also find a copy of the quarterly results, press release, and the presentation on our website. We will begin with remarks from Terry and Roland, followed by a Q&A session. Before we start, let me note again that we are going to host the Capital Markets Day on June 17th, and the event will be held at the New York Stock Exchange. An invitation has already been sent out and information is available under our website under the events section. You can also attend this event online, but we'd love to see you in person. Let's now go over our safe harbor statement. The views expressed during this conference call and the responses to your questions represent the views and perspectives of management as of today, April 30th, 2024. We will be making statements and providing responses to your questions that convey our intentions, beliefs, expectations, and predictions for the future. These forward-looking 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 forward-looking statements. Factors that could influence results are mentioned in our filings with the U.S. Securities and Exchange Commission. These filings are available on the SEC's website and also on our website. Gaijin disclaims any intention or obligation to update any forward-looking statements. Additionally, we will refer to certain financial measures not prepared following generally accepted accounting principles or GAAP. All references to EPS or earnings per share refer to diluted EPS. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures in our press release and the presentation. Now I'd like to hand over the call to Teri.

Thank you, John, and good morning, good afternoon, or good evening, depending on where you are in the world. To all of you, thanks for joining us. We are very pleased today to report another solid quarter in which our teams focused on execution and delivered results ahead of our plans. Despite the cautious capital spending environment among our customers, our results show that we are on track to achieve the goals for 2024. Let me share our key messages today with you. First, our results for the first quarter of 2024 were ahead of the outlook as we worked through the final quarter of pandemic COVID-19 headwinds. Kayagen achieved net sales of $462 million at constant exchange rates, which was ahead of the outlook for at least $455 million CER. This represented a 5% decline from the first quarter of 2023. And sales were down 1% CER for the non-COVID product groups. Recurring consumable sales continued to account for more than 85% of total net sales, a signal of the durability of our sales base. One of the highlights of Q1 was the 5% CER growth of our diagnostic solutions product group. This confirmed the strength and resilience of our portfolio mix as we saw double-digit sales growth for the Quantiferon TB test, and for the Chiostat syndromic testing system amid solid placement. Adjusted earnings per shares were 0.47 at CER and ahead of the outlook for at least 0.44 CER. As a second key message, our teams executed on our balance and focus strategy and delivering growth in many pillars. This really creates a foundation for us to build momentum during the year. QuantiFerron once again delivered a strong quarter with 11% CER sales growth, fueled by positive demand trends in every region. The first quarter also marked another quarter with net sales above $100 million. Sales of Chiostat Diagnostics were up 21% CER. We saw a high level of demand in panels for both respiratory as well as non-respiratory testing, while we continue to see a solid trend in terms of instruments placement. Our teams are still working collaboratively with the FDA to get a final decision on the gastrointestinal panel submission. Our digital PCR system QIAQUITY also delivers solid double-digit CER growth with strong expansion in consumables and an ongoing high level of instrument placement. We are very pleased to see the increasing demand for this differentiated technology. A key driver of consumables growth has been the expansion of application for use on QIAQUITY particularly for biopharma application to support pharma research and development and new drug discovery. Sample text cells were clearly impacted by the COVID headwind and also by weaker demand trends in China. For this product group, we still anticipate better year-on-year trends during the rest of the year and continue to expect low single-digit CER growth for 2024. Particularly noteworthy in this first quarter were higher sales of automated consumables for use on Kaya Symphony, Kaya Cube Connect, or EZ2. Pneumodics sales were below our expectation for the quarter of 2024. As we have noted before, we are reviewing strategic options and plan to have a decision by our capital markets day in June the 17th. As a third message, we saw an ongoing high level of profitability with a 25.7% adjusted operating income margin. This compared to 25.6% in Q1 2023, as our teams realized efficiency gains, particularly in administrative functions, while QIAGEN made investment into research and development and commercialization initiatives. The progress in the first quarter shows how our teams are determined to deliver on our target for an adjusted operating income margin of at least 28% for the year 2024. And as a last point, we are reaffirming our full year 2024 outlook. Our plan is for 2024 net sales of at least $2 billion at CER and adjusted EPS of at least $2.10 also at constant exchange rate. Like many other companies, we are closely monitoring macro trends, focusing on our goals for 2024 and building confidence in delivering on our guidance. And I would like now to hand over to Roland for a review of our financial results.

Thank you, Thierry. Hello, everyone. Thank you as well for me for joining our call. Our results for the first quarter were ahead of our goals and show QIAGEN is building momentum. Net sales of 459 million US dollars declined 5% at actual rates and also 5% at constant exchange rates, despite some modest pressure on results due to the strengthening of the US dollar. Consumables and related revenues had to absorb the COVID headwinds from 2023, and this led to the 4% CER decline over the year-ago period. Instrument sales declined 9% CER, reflecting the challenging environment for capital purchases. At the same time, we saw good placement trends for Kaya Symphony, Kaya Acuity, and Kaya StatDx systems. Among the four product groups, diagnostic solution, led to performance. Here again, we saw double-digit gains for QuantiFeron and Chiastat DX, while our personal healthcare business also delivered single-digit improvements over the first quarter of 2023. In sample technologies, as mentioned earlier, we were pleased to see higher consumable cells for automated kits. The results for sample technologies take into consideration that we, along with other companies, had larger price increases at the start of 2023. This year, the price increase was more in line with the historical levels of a low single-digit increase. Additionally, we faced COVID-19 headwinds with an underlying sales decline at a modest low single-digit CR rate. We are anticipating improved growth trends during the year as we launch marketing initiatives to highlight the differentiation of our portfolio. Additionally, the decision by Congress for essentially flat federal funding for life science research in the U.S. budget was in line with our planning, and this outcome provides customers with clarity on budgets. In PCR Nucleic Acid Amplification, the ChiAcurity digital PCR system continued on a solid trajectory, delivering solid double-digit CR sales growth over the first quarter of 2023. Key drivers have been the expansion of consumable sales, particularly to biopharma customers, along with ongoing high levels of instrument placements. We anticipate better trends in this product group as the year progresses. In Genomics NGS, sales were unchanged from the first quarter of 23. We saw higher sales of universal library prep kits for use with third-party next-generation sequencers. Sales in our Archive and Digital Insights bioinformatics business were slightly lower for the quarter due to the timing of a large customer contract. But we continue to see solid demand trends for this business and continue to expect sales growth above 10% CER for 2024. Among the regions, sales in the Americas reflected the impact of COVID headwinds. Results benefited from improving demand for QuantiFeron, QIAstat, and QIAcurity consumables. The Europe-Middle East-Africa region saw sales decline 2% CER over the first quarter of 2023 but underlying results rose at a single-digit CAR rate, excluding the pandemic headwinds. Among the top countries were France, Switzerland, and the United Kingdom. Our regional expansion in the Middle East helped these results. In the Asia-Pacific-Japan region, sales in China declined at a double-digit CAR rate, reflecting the macro challenges in this market that are not showing signs of improvement. However, at the same time, we saw improved results in India and South Korea and continue to see dynamic opportunities in targeted emerging markets. Let's now review the rest of the income statement. The adjusted gross margin was 67.1% of sales, modestly lower than the first quarter of 23 as we worked on increasing efficiencies after a period of capacity utilization expansion in recent years. For the first quarter, adjusted operating income declined 5% to $180 million from the first quarter of 23 in line with the decline in sales. We focused on investing in R&D and delivered an improvement in the adjusted operating income income margin to 25.7% of sales compared to 25.6% in the year-ago period. To close out the income statement, adjusted EPS was $0.46 for the first quarter, while results at constant exchange rates were $0.47 and ahead of the outlook for at least $0.44. The adjusted tax rate of 20% was at the high end of the outlook while the average diluted share count at $226 million was also in line with our expectations. Turning to cash flow, the trends at the start of 2024 have been very positive. Operating cash flow nearly doubled to $133 million over the first three months of 2023, with significant improvement of working capital management and inventory management, as well as collecting of accounts receivables. Free cash flow rose nearly 1.5 times over the level in the first quarter of $23 to $97 million, while at the same time we saw a slight increase in investments in property, plant and equipment as we continued transition into our new enterprise resource planning environment. We are paying particular attention on measures to ensure a high level of cash conversion while maintaining adequate supplies to provide products to customers around the world without disruptions, especially in light of the current macro trends and logistical challenges. Continuing with the balance sheet, our liquidity position was about $893 million at the end of the first quarter of 2024, compared to $1.1 billion at the end of 2023. This level includes the $300 million of cash payout for the synthetic share repurchase in January, which removed about 6.8 million shares outstanding. As a result, our leverage ratio at the end of the first quarter stood at 0.9 times net debt to EBITDA compared to 0.6 times at the end of 2023. As a reminder, we have about $600 million of debt reaching maturity in September. Given our healthy balance sheet and strong cash flows, we want to create value through our capital allocation policy that has served us well. We continue to invest organically into the business while also reviewing various targeted bolt-on acquisitions that would complement our portfolio. The share repurchase at the start of 24 is also a signal of our views about the valuation of Kyogen and our commitment to increasing returns. I would now like to hand back to Thierry.

Thank you Roland. Now let me take a moment to go over some of the progress our teams have made in advancing our portfolio. First of all, we are strengthening our dominant position in sample technologies. the first step in lab processes to gain access to DNA and RNA. Key expansion areas for Kyogen involve new kits to support customers in fields like microbiome or liquid biopsy. Those areas are increasingly becoming critical to life sciences research and are in the early stages of clinical application. Let me start, for example, with the launch of the PACT gene urine liquid biopsy set, which offers a new non-invasive approach to collect cell-free DNA from urine. This technology holds potential for detecting minimal residual disease, such as in cancer patients, and improving the identification of therapeutic targets and patient monitoring for disease progression. Another example is that QIAGEN has a long-standing commitment to helping improve health for people around the world. Quantiferon for latent TB screening continues to be a key element in the global fight against tuberculosis, which remains a leading cause of death. Recent tuberculosis outbreaks in the U.S., such as in Chicago or in San Diego, underscore the urgent need for robust screening measures. These outbreaks, particularly among immigrant population and in areas with already high tuberculosis incidence rates, highlight the importance of proactive screening initiatives. This is why we continue the conversion to modern blood-based testing from the old skin test, and the majority of the market worldwide and in the US is available for this conversion. In March, Our global awareness event to support World Tuberculosis Day was a great success with over 3,000 participants, underpinning the significance of collaborative efforts in raising awareness. Additionally, we announced a new partnership with the International Panel Physician Association to reinforce our commitment to TB screening. Together with the IPPA, a nonprofit organization focused on improving migrant health, we are jointly promoting the use of IGRA technologies like Quantiferon for screening immigrants as young as two years old. This is part of our efforts to enhance early detection and support the U.S. target of eliminating domestic tuberculosis cases by 2050. As part of QIAgen's commitment to the global fight against tuberculosis, we recently launched a QIA-Seq panel that enables whole genome sequencing of tuberculosis samples. This breakthrough will enable real-time epidemiology of tuberculosis outbreaks, a critical need for tuberculosis surveillance and control. Another important development was the launch of our new software for chiostat diagnostic. This upgraded version enables remote access to the system from other devices and allows healthcare professionals to gain faster access to results and collaborate more efficiently. For chiacuity on digital PCR, We are expanding the utility of this technology for use in cancer research and oncology testing. Our teams recently launched new kits for use in enabling better cancer detection through deeper simultaneous analysis of EGFR and BRAF mutation that has not been possible with other tests. Those mutations are found in many cancer types, and the kits are designed to reduce the incidence of false positive results. In our QIAGEN digital insights bioinformatics business, we have launched an artificial intelligence driven knowledge base for advancing trust discovery among our pharma and biotech customers. This database is built on vast sets of biomedical literature and scientific sources and can extract causal relationships between genes, diseases, drugs, and biological entities from genomic data. This new software will help our customers to better understand disease mechanisms and identify new drug targets. So across our portfolio, you can really see that QIAGEN is developing breakthrough, addressing important customer demands, as we together harness the power of biology that is impacting our daily life. And now back to Roland for details of our outlook.

Thank you, Thierry. Let me now provide more perspectives on our outlook for 2024 and also for the second quarter. The start to the year shows that we are building momentum to achieve our full year outlook for at least $2 billion of sales at CER. This represents at least 2% CER growth from the $1.97 billion in 2023 and also at least 3% CER growth in the non-COVID portfolio. The plan for 2024 remains on track. Like others, we expect a more muted start and return to solid mid-single-digit CER growth in the second half. We continue to expect growth in the QuantiFerron TB test of at least 10% CER while also expecting double-digit CER sales improvements from KayaQuity and KayaStateX. Our KayaGen Digital Insight business is also set to deliver growth at a double-digit CER pace for the year as well. In terms of profitability, we have reaffirmed our outlook for adjusted EPS of at least $2.10 at constant exchange rates. The key profitability driver is our expectation to reach at least 28% adjusted operating income margin for 2024 and up at least 1 percentage point from 27% in 2023. This reflects our commitment to operational efficiency while investing in R&D and new product development and commercialization. As for currency movements, and based on rates as of April 26th, We expect a neutral impact on full-year net sales, but for an adverse impact of about $0.01 per share on adjusted EPS results. For the second quarter, we have set an outlook for net sales of at least $495 million CER and adjusted earnings per share of at least $0.50 per share also at CER. I would like to now hand back to Trier.

Thank you, Roland. We are now getting closer to the Q&A session, so let me just provide you with a quick summary. First, we are fully on track to achieve our goals for 2024. Our execution on our balance and focus strategy, anchored by our pillars of growth, has been instrumental in navigating those uncertain times. The anticipated decline in sales for the first quarter was less than our initial expectations, and the results demonstrate the effectiveness of our strategic initiative. In this quarter, we are particularly pleased with the double-digit sales growth for Quantiferon, for Kayastat Diagnostics, and for Kayacuity. This is a real testament to the strength and resilience of our diversified portfolio, led by 85% of sales from highly recurring consumables. Another message is that we are pleased with the very good level of profitability. Our teams are committed to delivering on the full-year adjusted operating income margin target of at least 28%. Efficiency initiatives are helping to create more flexibility and enhance our effectiveness across the QIAGEN organization. All of those actions are positioning QIAGEN for solid mid-term growth as we deliver higher sales and improvements in profitability. I take advantage of this call to personally invite you again to attend our Capital Markets Day event on June 17th at the New York Stock Exchange. This will be an opportunity to meet with our leadership team and learn more about our strategy to deliver our midterm ambitions for improving sales and profitability. I am personally really looking forward again to seeing all of you in person. With that, I'd like now to hand back to John and the operator for the Q&A session. Thanks a lot for your attention.

Anyone who has a question may press star followed by one at this time. One moment for the first question, please. And we'll take our first question from Matt Sykes with Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking my questions. Maybe just to start out, just on quantifier on, it's been a pretty strong engine of growth for you. previously and looking at the first quarter results, I just want to gauge sort of the phasing of growth for quantifier over the course of the year to reach that greater than 450 million target that you set out and just is the OMON collaboration that you announced in January a part of that guide or is that potential upside?

So thanks for the question. So directly on Oman, yes, it's part of our guidance for 2024 since we announced it. We are currently deploying the solution together with the Oman authorities, so it goes per plan, as we said before. And now on the phasing, you know that traditionally quantifieron accelerates starting in Q3 and Q4 for many reasons. First of all, because we have a lot of local initiatives in different countries, such as, for example, the back-to-school initiatives in the U.S. So we always expect basically a weaker Q2 and then an acceleration again in Q3 and Q4. And at this moment, we are well on track to achieve the guidance that we gave you.

Got it. And then just on cash flow, which is really strong this quarter, maybe just talk about sort of further improvements. It looks like working capital and lower accounts receivable was the main driver of the operating cash flow. Just maybe talk about your expectations for free cash flow generation. And then, Terry, from a capital allocation standpoint, maybe just kind of sort of go over your priorities over the course of this year as it relates to debt, M&A, organic opportunities.

Thank you. So I will propose that Roland takes on the cash flow generation, and I will come back to you on the capital allocation. Roland?

Yeah, thank you. And before I go to the cash flow, just to answer your first question, have in mind, of course, what Thierry was describing was clearly the relative growth numbers. Absolutely. And sequentially, we're clearly also going to grow here also from the first to the second quarter. But first to the second quarter last year clearly was a quite strong one. Having said that, on the cash flow, we are very pleased with the full year. It's clearly important to have a good start, and our operating cash flow will be probably somewhere in the midst of $500 million plus, and free cash flow probably at least $350 million. I do think there is potential for upside. The single biggest opportunity for us is clearly Also, inventory levels, it's quite obvious that right now we maintain more or less an all-time high inventory level driven by on one side the logistical challenges, but also some of these political reasons and variability we see around China and others. We do believe that things have an opportunity to normalize in the second half of the year as well. That would be an addition.

Thank you, Roland. On capital deployment, so around the three main axes for capital deployment, I think that Kayagen still prioritizes organic investment and R&D or growth with our investment in R&D. You know that we have a ratio which is slightly higher. above 10% of R&D research and development investments to sales. But we want also these investments to be profitable. So I would say priority to profitable organic investment. You know that we have also a very healthy balance sheet. So we are constantly looking at potentially accretive and synergistic acquisition, mainly bolt-on. We have several discussions ongoing. It's too early to give details, but it's clearly a priority. And third, obviously, any time we see a good opportunity to return value to our shareholders, as we have proven, for example, with the recent share buyback, we will not hesitate to do that. But that would be basically in order of priorities.

Thanks very much.

Our next question comes from Aisha Noor with Morgan Stanley. Please go ahead.

Good morning. Thanks for taking my question. I have two, please. The first is, what's your view on the US lab-developed test or LDT ruling released by the FDA recently? And can you give us a sense of your exposure, whether that's what portion of your test classifies as an LDT or your exposure to reference labs across the business? If you could just help us quantify your exposure, that could be really helpful. The second question is on Newmodex. Appreciate your planning to update us on the business in June. But at this stage of the review and of the outcomes you've considered, which appear most likely, and could you remind us on the margin profile of the pneumotics business, please?

Thanks, Aisha. So first question on LDT. First of all, it's a bit premature to comment. You know that the text was issued by the FDA only yesterday. As a reminder, it's a 532 pages long text, so it takes time to proceed. But a couple of points to highlight. This is not new. The FDA has been saying for many years that they believe that they have an oversight of laboratory-developed tests. Taken from what we have seen so far, the text issued yesterday is much softer than the first version that we saw towards the end of 2023. In that version, if you remember, no tests were grandfathered. The option for grandfathering does exist in the new proposal. the exposure of kyogen is very limited not to say not significant at this moment i even believe that it will reinforce the positioning of companies like kyogen which are supplying quality control components to laboratories or industries that are developing LDTs. And fourth, when I say it's premature, it's because everybody is expecting some litigations to start now, as we know that several major actors in the US, especially the Association of Laboratories, are probably not in agreement with this proposal. Too early to say. On pneumotics, we confirm that we will take a definitive stance by June the 17th. We continue to look or to work on several scenarios. As we said previously, both of those scenarios, whether finding partners or shutting down the activities, are accretive to our P&L. They are accretive from a gross margin standpoint, EBIT margin standpoint, and EPS as well. This is what I would say today, and more details and more details on the decision by June the 17th.

Great. Thank you so much.

Our next question comes from Michael Ryskin with Bank of America. Please go ahead.

Hey, thanks for taking the question, guys, and congrats on a solid start to the year. I want to ask a little bit about underlying market conditions. You know, as you look through the rest of the year, we're quartering. You talked a little bit about the demand patterns you're seeing from pharma and biotech and also from academia and government with your comments on the flat US and Asia budget. Just any update on how the first three, four months of the year have played out and if there's any change relative to your expectations, you know, as you look through the rest of the year, it's still very uncertain diamonds.

So, Michael, I must confess that your voice was seriously muffled. I understand that you are asking about the market conditions. So if I got right, but do not hesitate to come back. market condition, especially academia research. I think Roland alluded to that first point that I would say at least in the first quarter, we get clarity or we got clarity on the level of public funding, for example, the budget for the NIH, but also in other countries. We know that it's going to be flat. This is exactly what we factored in our budget 2024. We highlighted in our call this morning that we continue to see certain cautiousness in our customers for capital spending for capital expense which is not a surprise because as you know Michael there are so many so many countries going to election this year that election are always creating a bit of attentism we see this or we plan this to improve as those elections are coming behind us and we are progressing towards the end of the year. That's what I would clearly highlight. We expect the market to slowly ramp up sequentially. We said in the press release this morning, yesterday and this morning, that we do not expect the Chinese market to benchmark anytime soon, at least not before 2025. So at the moment, the market environment fits what we did factor for 2024.

Okay, that's helpful. And I took my headphones off, so hopefully this is easier to hear. I don't know if you still can hear me. A quick follow-up. I wanted to just specifically touch on insurance portfolio. I know that's a very small part of the overall business. I've got to do some challenges. If you could fill out any color within that, you know, you've got a couple of different product lines that fall on the instruments, both by complexity of the instrument about ASP, just any change in that environment as you start the year.

Absolutely. I don't know, John, if you can help me, but from where I am here in Boston, the voice is too muffled. I didn't get half of the question, at least.

There's a lot of background noise. I probably can take it. It was not easy to understand, I agree. No, it's about instrument portfolio and growth rate. And I do think while we see as many other companies that overall the instrumentation business is given the overall market environment, clearly not the easiest one these days. It's the same time that particular instruments like our Kaya2 and KayaStart with price points rather on $30,000, $40,000. actually are still in a quite normal environment. Once an instrument costs more than $100,000, it gets more difficult. So I would say, overall, while it's in a quite difficult environment for the more expensive instruments, given our exposure, in particular, to this ChayaCuties, ChayaStats, and ChayaCubes of this world, we feel quite comfortable going through 2024. Thank you, Roland.

Okay, thank you.

We go next to the line of Hugo Saldé with BNP Paribas.

Hi, hello. Thanks for taking my questions. Hi, guys. I have two first on KyaSat Dakes. Thierry, thank you for the comments around the fact that your teams are working closely with the FDA. Can you maybe help us understand your level of confidence in getting approval by the end of June to roll out the test The gastro test by NH2 and on chiastats, can you maybe give a bit more color on the placement trend? And second on regulation, can you share your thoughts on the FDS process to don't classify high risk IVD tests? Thank you.

Thank you, Hugo. So first of all, on the level of confidence for the GI approval, Hugo, what I can say is that we have submitted all our data to the FDA, and since our latest submission, we didn't get any more questions. And the data were solid and good. They were solid in terms of analytical performance. and they were solid compared to competition. So now, obviously, I cannot speak on behalf of the agency. We are in constant touch. We will continue to do so because it's important for QIAgen to get this test approved. This is the only thing I can say. I cannot talk on behalf of the agency. Based on our data, I'm confident. On QIAstat, on your questions for the trends of placement. As we said in the press release, it's a healthy trend. We are over the 100 units for the quarter. But what is all the more satisfying for us is, one, to see the growth at more than 20% in many of our panels and not driven by COVID. So I'm referring to GI in Europe, for example, to meningitis. And two, the fact that despite having only one panel available in the U.S., that we are still able to place instruments. That's very encouraging. Third, on the FDA, I wouldn't say downgrading, but making it easier on some tests or moving them from PMA to 510K. I think it's an acknowledgment. of uh or from the agency that they need to keep moving in bringing added value test i remind everybody that a 510k submission is not trivial either you still need to submit a significant level of clinical data you still need to go through a review and so i don't say it's a downgraded it's just the fda willing to move ahead on basically approving added value tests. But both submissions take time and take clinical data.

Thank you very much.

We'll go next to the line of Patrick Donnelly with Citi. Please go ahead.

Hey, guys. Thank you for taking the questions. Thierry, maybe a follow-up on the China piece. I know you guys have a few different verticals there, both life science, diagnostics, and then the Kyogen brand, the private label brand. Can you just talk a little bit about going through each of those, what you're seeing, are there different trends in China, and just expectations as we work our way through the year there? It doesn't sound like you're overly optimistic on improvements. I just want to talk through the outlook of the year there.

Well, I wouldn't say, Patrick, optimistic or pessimistic. I would say coherent. We keep saying the same thing since 2023, where we said that we would never expect the Chinese market to bounce back anytime soon. And we always said, at least not before end of 2024 and probably more 2025. And we maintain that position. The Chinese market is in a transition phase post-COVID that is impacting both life science and clinical diagnostic. QIAGEN has a relatively limited exposure. It's 6% of our revenues. And we have, I think, the strategy that is needed to tackle the need of the Chinese market, which is first, investing into local R&D and manufacturing anytime this makes sense. Second, having a double brand, a second brand, which is serving exclusively the Chinese customers with Chinese products. We are obviously monitoring all the initiatives. taken by the Chinese authority to try to boost their market, especially the recent capital investment initiative. It's too early to say what's going to be the impact, but we are fully and closely monitoring it. So for us, China in 2024 is on track with our expectation. We don't see any bounce back. And as I said many times before, Starting 2025, this market should represent a mid-single-digit growth opportunity for a company like Kayagen.

Okay, that's helpful. And then, Roland, give me one on the margins. You know, obviously, it's a pretty healthy ramp throughout the year, which is pretty typical of you guys, but can you just talk through the moving pieces as we work our way through that higher exit rate on the margin side and the key variables and visibility into the execution. Thank you guys.

Yeah, hi. I think overall, as you said, a good start into the year. We also expect already that the second quarter has another WEMP in terms of operating income adjusted, clearly going nicely to the 27% range. So I do think there's a good WEMP and therefore I think also visibility for the rest of the year that we make at least 28%. While we believe that R&D investment stays around about 10% for the full year, probably a bit lower relatively in the fourth quarter, they still leverage opportunity around SG&A, where again, we clearly still utilization coming from our digitalization efforts, but also scale, of course, is going to help there as well. So overall, We continue to see margin improvements, options not only for 24, but also beyond. And, of course, we're going to talk about that on our capital market day. Tax rate was a bit higher in Q1. I would assume that normalized over the rest of the year as well. So, as I said, so far I would say the start was quite healthy for us.

Thank you.

Next, we go to Jack Meehan with Nephron Research. Please go ahead.

Thank you. Hello, everyone. Maybe just to start, I wanted to dive into the genomics results. Can you talk about visibility into the QDI contract timing you call down the release and just the path to getting back to growth for that business for the rest of the year, what your visibility is?

So, Jack, it's very simple. The Q1 was mainly due to a timing of revenue recognition, and basically it's even for one contract. You know that in this QDI business, sometimes we have large contracts, especially with pharma. That doesn't question at all, first of all, the investment plan that we explained to the market six months ago. And that doesn't question at all our goal for double-digit growth for the rest of the year. So it's just a question of timing of recognition.

Okay, great. And then on CHI Acuity, can you talk about a little bit more on some of the key menu that you expect to roll out throughout the year and just like what that should mean in terms of the pace of growth within the PCR line? Thanks.

Well, we believe, as we said many times, Jack, that this solution has a double-digit growth potential. I'm referring to the digital PCR-K equity line. And when I say double-digit, it's much closer to the 20% than the, let's say, low double-digit, number one. Second, as you know, we have an extremely differentiated company. We offer many workflows. And systematically, for the last three years, we developed a menu first for life science. And it really made a difference, started a year and a half ago when we started to have biopharma application. Now we are moving also to cell and gene therapy application and QC control for pharma. But remember also that we remain committed to launching this solution for the clinical market. We want Kayakuity to be FDA approved. We expect this, the platform, To be FDA approved, we expect that for this for 2024. And then the plan is to launch a menu around hematology panels like BCR-ABL, for example. So that's the plan that we confer. And this is where we want to go, both life science and research and clinical applications.

We'll go next to Catherine Schulte with Baird. Please go ahead.

Hey, guys. Thanks for the questions. Maybe first on the academic side, you mentioned the NIH budget came in in line with your expectations. We have seen a slowdown in NIH outlays in the last two quarters, so could you just talk to what you're hearing from customers in that end market?

Well, as we said before, Catherine, if you compare, for example, 2023 with 24. In 23, we did budget for roughly a 3% increase of the NIH budget, and we were right. This year, we were more cautious for different reasons, the economic context, the political context, and we said flat, and we were right as well. We continue to have extremely active collaboration with the NIH in the sense, for example, that you have heard about the recent detection, for example, of H5N1 in milk, for example. This is a field where we collaborate with the NIH. You have seen also the previous discussion, especially in February, around the detection of clade 1 and clade 2 for monkeypox. This is another field where we collaborate with the NIH. We have an amplitude of fields where we can collaborate with this major research from components, oligos, enzymes, to a finished product, whether it is PCR or digital PCR. So it It fits what we plan for the year. We believe that I cannot speak on behalf of the American authorities, obviously, but it's a kind of transition period. And it's clear that I haven't seen the U.S. authorities saying that they don't want to invest in high-value technologies or research and development for the future. So we are still confident that this funding will bounce back at a point.

Okay, great. And then in sample tech, how does the non-COVID business perform outside of China? And what's your outlook for sample tech for the second quarter? Should we see a return to growth on a non-COVID basis or will that be more of a back half event?

I would prefer, as Roland said, to say that we still expect low single-digit growth throughout the year. It's too early in the quarter, you see, as we explained. I mean, we are impacted here by weak demand in China, obviously the COVID impact, but on the non-COVID, we are pleased on one hand with the placement of instruments. Now we need to accelerate the consumables, both manual and automated. The market is moving probably faster into automated sample tech. But once again, I ask you to see the sequence of growth through the full year, not just on quarter two.

Great. Thank you. We go next to Falco Friedrichs with Deutsche Bank. Please go ahead.

Hey, thank you for taking my question. So the Roche CMD is coming up now in May. Everyone's looking forward to see if they do anything on the latent tuberculosis side of things. Irrespective of the decision, can you just briefly remind us why you still believe that you'd be sitting on a great business here that you can grow further even if they were to enter that market? And then related to that, If they decide to enter the market, would that change anything with regard to your further rollout strategy? Thank you.

Thanks, Falco. I cannot talk on behalf of any competitors. I'm talking for Kyogen, and I know that we have built what is the most automated, universal, automated workflow for latent TB detection. Many people have in mind the agreement with Diasorin, which is key and has proven extremely efficient since we executed on it. But it starts also on the pre-analytical step with agreement with Tican and Hamilton. There is no comparison on the market at the moment with that workflow. Second, as you have seen also recently, Falco, we continue to invest on the product itself. The fourth generation did replace the third generation, and we continue to get publications in peer reviews on this fourth generation. Overall, since we have launched LatentDB Quantiferon, it's more than 3,000 publications. It's unprecedented third generation. There have been competitions for many years for Quantiferon. The main one is an antiquated technology called Kintest. And that market is still under-penetrated, probably below 40%. So the potential to convert is still significant in the U.S., obviously, but also in other markets. And beyond Kintest, The emergence or the presence of other competitors, independent or not, never really changed the growth rate of QIAGEN or our market shares. So do not take this for complacency. We monitor the market very well, but we have not seen anything concrete yet. What I know is we continue to invest on our solution. on the market conversion, and we believe that we are still very well positioned to lead that market.

Okay, thank you.

Next, we go to the line of Dan Leonard with UBS. Please go ahead.

Hello, and thank you. I have a follow-up to an earlier question on your sample tech business. Has your level of conviction that sample tech can grow low single digits for the year, has that level of conviction changed at all in the past three months?

No. As we have said, we reiterate that vision for the full year, once again, 2024. We are spending significant marketing time and analysis to understand the trends of the markets. worldwide. And so far, this basically confirms that assumption. So, no change for the moment.

Thank you. And then my follow-up, Terry, you mentioned H5N1. How are you thinking about QIAGEN's ability to respond if there is a greater need for testing for H5N1, either in livestock or, you know, God forbid, humans?

So as usual, we are extremely proactive with every relevant authorities. I spoke about the NIH before, but it's not only the NIH, to discuss proactively about, one, the situation without panicking, and second, the solutions. And as I said before, what is very interesting with QIAGEN is that when I say solution, it's not just about the kit. If the NIH decides to develop their own kit or the CDC, they will use QIAGEN components. So we can answer from component to finished kits, whether this kit is on a PCR format, on a digital PCR format, or a next-generation sequencing format. You know that during the first major outbreak some years ago of H5N1, QIAGEN was one of the most relevant companies to step up to this challenge. And we will continue to do the same. We are very vigilant on H5001, on the development of monkeypox as well. And so we are ready and constantly negotiating and discussing with those agencies.

Understood. Thank you.

We go next to Doug Schenkel with Wolf Research. Please go ahead. Doug Schenkel Hi, guys.

Thanks for taking my questions. A very quick follow-up on QuantiFERON. Terry, as I think you described really well, you know, the focus in the investment community on competition is, you know, it's not like we unearthed something that you haven't been thinking about for years. You've been competing against legacy approaches. There's an existing IGRA competitor on the market With that in mind, is it fair to say you're going to describe in detail the CMD, not just how you stack up clinically and from a process perspective compared to alternatives, but that you'll also talk in detail about efforts you've made to contractually lock in customers based on the strength of your assay and anticipating potential competition that gets broader? Is that a fair assumption?

It's a very clear assumption, Doug. It's such a key product for us that the CMD plans to give indeed details of what our expectations for the coming years. We are also very much monitoring the situation of our contracts, so we will give details on the percentage of contracts that are locked into pre-annual contracts so that you will see really that there is no complacency, there is extreme vigilance, there is investment, and there is confidence that this can continue to be a growth driver for our company.

Thank you for that. And then just a quick question on the quarter. Other companies have reported at least those that have reported thus far, a slower than expected start to the year when it came to lab activity and reagent demand. And then, you know, it seemed to indicate that there was a pickup in activity in March and April. I just want to be clear, did you guys see the same thing? And if so, is a continuation of that trend fully reflected in guidance assumptions, or are you waiting for the trend to extend for a longer period of time before you would factor something like that into your guide? Thank you.

I think, Doug, Roland alluded to that during the presentation in his part. There is softness on the life science market, not just for QIAGEN. If you look at competition, I believe that we outperform competition and competition results in terms of growth. And there is more dynamism at the moment on the clinical markets. The softness on life science mainly translates into cautiousness on capital expense. And as we have explained, for us, it was planned. We did even better than what we expected on Q1. We did better than the competition that have reported the results, at least those that are completely comparable to QIAGEN. And as we said, and Roland as well, we reaffirm our guidance. So we see a sequential improvement. This is where we are at the moment.

Okay, thank you again.

We'll take our last question from Dan Brennan with TD Cowan. Please go ahead.

Great, thank you. Maybe first one just on... PCR amplification. I know there was a question earlier on the digital PCR portfolio, but after the 12% decline in 1Q, I know the press release says you expect the business to improve through the year. What's assumed for the base business, X digital PCR, and kind of what drives that improvement as you see it progress through the year?

Because we have such a wide portfolio in PCR, I'm not talking digital PCR, which is made of older technologies, newer applications, that overall we believe that the trend will follow the market trend in our sequential improvement expectation. So do not forget that we have a significant install base also, which is driving this assumption. So this is confirming what we have said. But again, Dan, clearly in PCR, because we focus and because this is also a symbol of that new QIAGEN for the last years, the effort in R&D, the effort in presence on the ground, marketing and sales, will not go overall for the PCR portfolio. It will go to the digital PCR portfolio because this is where we can really take a number one or a number one position on the market. So that's the allocation of priorities and this is what you will see also clearly on June 17th.

Maybe related to that, is it reasonable to think you'll roll out kind of new multi-year growth and or margin targets in June and kind of can you step back and What are the goals for the investor day?

I think the goal, and Roland can chime in as well, the goal for the investor day is to go on the ambitions, top line and also bottom line, for the coming four years. is to show why we do believe that we have significant growth drivers in our portfolio. And we will show clear numbers here. But we also believe that QIAGEN needs to accelerate on improving profitability. And we want also to show with what kind of efficiency measures we want to achieve that. And obviously, it's also an opportunity for you guys to meet also part of the new management of QIAGEN. You know that we have brought different new manager at the executive committee, a new head of operation, a new head for life science, a new head for clinical diagnostic. And you will see also those last two ones, head of lab science and clinical diagnostic, on stage and giving their also assumptions for the growth of their respective portfolio.

Terrific. Thank you.

Yes, thank you, Terry, on that point. Again, we look forward to seeing you on June 17th in New York at our event. And if you have any questions or comments in the meantime, please do not hesitate to reach out to us. And thank you again for your interest in QIAGEN. Bye-bye.

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