Qiagen - Earnings Call - Q1 2025

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. I'm Lisa, your PGI call operator. Welcome, and thank you for joining Qiagen's Q1 2025 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 site. 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 touch-tone telephone. Please press the star key followed by zero for operator assistance. At this time, I'd like to introduce our host, John Gilardi, Vice President, Head of Corporate Communications at Qiagen. Please go ahead.

John Gilardi (VP and Head of Corporate Communications)

Thank you, Operator, and welcome all of you to our call for the first quarter of 2025. We appreciate your time and interest in QIAGEN. Joining me today are Thierry Bernard, our Chief Executive Officer, and Roland Sackers, our Chief Financial Officer. Also joining us is Dr. Domenica Maturana from our IR team. This call is being webcast live and will be archived in the IR section of our website. A copy of the results, press release, and presentation are available on our website as well. Before we begin, I'd like to remind you that this call will include forward-looking statements. Actual results may differ materially from those projected due to various factors. These are described in our most recent Form 20-F filed with the U.S. Securities and Exchange Commission. We will also refer to certain financial measures not prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAAP.

These non-GAAP measures provide insights for investors, and reconciliations to the most directly comparable GAAP figures are in our release. Please note that all references to earnings per share refer to diluted EPS. And with that, let me hand the call over to Thierry.

Thierry Bernard (CEO)

Thank you, John. Hello and good morning, good afternoon, or good evening to everyone around the world, and thank you once again for joining us. As you have read, QIAGEN delivered a very good and very solid start to 2025, once again demonstrating the resilience and strength of our business. We exceeded our outlook for both net sales and adjusted earnings, even as we continue to operate in a quite complex macro environment marked by cautious customer spending and evolving global trade dynamics. Through focused execution and strong operational discipline, QIAGEN is navigating this environment and capitalizing on opportunities to deliver solid, profitable growth while investing in our future. The performance to start 2025 reflects the differentiation of our portfolio, anchored by growth pillars, all products where QIAGEN has a leadership position in highly attractive markets.

This steady progress and constant execution, now delivering for 22 quarters in a row, gives us confidence to drive sustainable, long-term value creation, so let me highlight our key messages for today. First, we exceeded our outlook for Q1 2025. The full results confirm net sales of $483 million, rising 7% at CER compared to the first quarter of 2024. Adjusted diluted earnings per share were $0.50 at CER again, and this was well ahead of the outlook for at least $0.50 CER. Second key message, our portfolio is performing well in a quite challenging environment. QIAstat-Dx had an outstanding quarter, driven by double-digit sales growth from new panel launches and new instrument placements. We continue to build our global presence in syndromic testing for respiratory, gastrointestinal, but also meningitis conditions.

We continue to advance research and development initiatives to add panels that create even more differentiation in the coming years. Our QuantiFERON tuberculosis test also delivered another strong quarter of double-digit sales growth, as we continue to drive the transition to blood-based testing for TB testing from the outdated skin test. QIAcuity, our digital PCR platform, continues to build momentum in high-growth fields like oncology, infectious diseases, cell and gene therapy, and microbiome research. In our bioinformatics business, QIAGEN Digital Insights is extending its leadership by helping clinical and research customers unlock complex genomics data with greater speed and accuracy. In sample technologies, we are preparing for a new wave of innovations and growth with the upcoming launches of important new automation instruments during the next coming month: QIAsymphony Connect, QIAmini, and QIAsprint. Third message, we are reaffirming our full year 2025 outlook.

We continue to expect around 4% sales growth at CER, which is about 5% growth in our core portfolio, excluding the discontinued products like NeuMoDx or Dialunox. We confirmed the upgrade of our target for adjusted earnings per share for about $2.35 at CER, based on our strong start to 2025, and this is up 7% from the initial outlook for this year. As we look ahead in 2025, maintaining strategic flexibility is critical in this volatile environment. It is about adapting to challenges and sizing growth opportunity. Fourth message for today, we are expanding the range of options to increase return to our shareholders. At our upcoming annual general meeting in June, we will propose the introduction of an annual cash dividend. We will also seek shareholder approval for another synthetic share repurchase of up to $500 million for consideration over an 18-month period.

With about $600 million already returned to shareholders since 2024, those actions reflect our disciplined approach to capital allocation. So we are moving ahead on our target to return at least $1 billion to shareholders by the end of 2028, absent of significant M&A. Finally, I would also like to mention the upcoming leadership transition in our supervisory board, as well as the decision of two members to step down after the upcoming annual general meeting. On behalf of our leadership team and every QIAGENers, we want to sincerely thank Larry Rosen for his dedicated service since 2013, and in particular as our Chairman of QIAGEN since 2020. This transition reflects a long-planned evolution in our governance. After 12 years of valued service on our supervisory board, Larry is no longer classified as independent under proxy advisory guidelines.

We therefore look forward to continuing working closely with Steve Rusckowski, who is intended to be elected by the board as our new chairman after the general assembly. Steve, as you all know, brings extensive global healthcare leadership experience to Qiagen and that will support our ambitions in the years ahead. We would also like to thank Elaine Mardis, who also decided not to stand for re-election. Elaine provided tremendous scientific insight and deep expertise as a member of the board since 2014. With that, we are back to eight supervisory board members, a composition consistent with historical levels at Qiagen. So to give you a quick summary, all of these elements, a great portfolio, a strong execution combined with expanded opportunities for shareholders' returns and development in our leaderships, help position Qiagen to make important progress in 2025 towards delivering on our 2028 ambitions.

With that, I now would like to hand the call over to Roland to provide some more details on our financial results.

Roland Sackers (CFO)

Thank you, Thierry, and hello everyone. We are pleased with the start to 2025 and see opportunities to deliver very strong results. Let me provide some highlights from the quarter. First, we delivered a significant improvement in profitability. Our adjusted operating income margin rose to 29.8% of sales, up more than four percentage points from the first quarter of 2024. We are very encouraged by the key drivers of this margin expansion. They included a favorable shift towards consumables and bioinformatics solutions. We are also seeing benefits from portfolio optimization actions, in particular the phase-out of NeuMoDx, and this is on track for completion in mid-2025. Another point we are seeing is an even higher level of discipline across QIAGEN in managing our cost base, and the recent evolution of our organization was a key trigger for this.

The broad progress is enabling us to invest in targeted areas like R&D, in line with our target for about 9%-10% of sales. And we are steadily driving the digitization of our commercial channels to enhance customer engagement. In light of this strong progress and the fact that we continue to see momentum and an opportunity for growth, we are reviewing our target for an adjusted operating income margin of at least 31%, well ahead of the original timeline for 2028. This represents well over 300 basis points of margin improvements since 2023. Let me now walk you through some of the additional details on our performance. Among our product groups, diagnostic solutions sales rose 11% at constant exchange rates, driven by another strong quarter from QIAstat-Dx sales, rising 37%, and QuantiFERON sales up 16%.

PCR technologies delivered 14% CER growth, led by rising adoption of the QIAcuity, digital PCR system, and very strong growth in consumables. Also supporting the performance were higher sales of other products used in non-regulated PCR applications, including our OEM business. Sample technology sales were down 1% CER, reflecting lower instrument sales amid cautious customer spending. At the same time, we saw good trends for automation consumables in key regions, in particular high single-digit growth in the EMEA region and also higher sales in the Asia-Pacific region outside of China. In genomics and next-generation sequencing, sales were down 2% at CER compared to the first quarter of 2024. This reflected lower demand for some NGS consumables and services during the quarter. However, we saw high single-digit CER growth from QIAGEN Digital Insights, as both our discovery and clinical portfolios delivered strong performance.

The positive momentum in QDI is an encouraging signal as we work through the transition to SaaS subscription models from longer-term licensing agreements, particularly with pharma customers. Returning to regional performance, the Americas grew 9% at constant exchange rates, supported by strong performance in the U.S., Canada, and Latin America. The EMEA region delivered 8% growth at CER, reflecting broad-based contribution across key markets. The top-performing countries included Germany and Italy, as well as the Middle East. Asia-Pacific experienced a modest decline, primarily driven by ongoing weak trends in China, a country that only represents about 3%-4% of total sales, but still saw a high teen CER decline over the same period in 2024. This overshadowed expansion in other countries, in particular solid single-digit growth in Japan.

Turning to cash flow, we generated $140 million in operating cash flow during the first quarter compared to $133 million in the first quarter of 2024. The results were even stronger, given that the 2025 results included about $19 million of cash payments for the efficiency initiatives. Free cash flow was $96 million, reflecting planned investments into targeted digital transformation initiatives. This includes the upgrade of our SAP system that is moving into the implementation phase this year. We continue to see improvements in working capital management based on solid operational control. As an example, we saw another improvement in accounts receivable, as the days of sales outstanding stood at 55 days in the first quarter compared to 58 days in the year-ago period.

Inventory days also improved to 175 days for the first quarter of 2025, compared to 221 days in the same period of 2024, as we continue to closely monitor supply chain trends in this environment to ensure adequate customer product availability. In terms of capital allocation, as noted in our earnings release, we are proposing to introduce a cash dividend to provide a new avenue for increased shareholder returns while preserving flexibility to reinvest in long-term growth. The initial annual dividend payment would be $0.25 U.S.D per ordinary share. We also seek shareholder approval for a new share repurchase authorization. This is complemented by our teams reviewing opportunities for value-creating M&A that strengthen our portfolio and will create new opportunities to enhance our growth profile.

In essence, our strong financial position gives us the possibility to invest in strategic initiatives for future growth while expanding our range of ways to increase returns to shareholders. With that, let me hand the call back to Thierry.

Thierry Bernard (CEO)

Thanks a lot, Roland, and let's now look at the progress across our product portfolio, starting, of course, with Sample Technologies. As you have probably read, we are preparing for the next wave of automation with the planned launch of three new instruments at QIAGEN: QIAsymphony Connect, QIAmini, and QIAsprint Connect. First, QIAsymphony Connect is our next-generation flagship system, and this is set for a fast launch starting end of 2025. QIAsymphony Connect combines enhanced automation, digital connectivity, and expanded application flexibility, for example, for liquid biopsy customers.

In 2026, we plan to introduce QIAmini to serve low-throughput labs and QIAsprint Connect to address high-throughput demands with up to 600 samples per day. Early access users have already shown very strong interest for those solutions. Together, those innovations will strengthen and expand our leadership in automated sample preparation by offering comprehensive and scalable solutions to meet customer needs. In terms of supporting public health, and once again in sample technologies, we recently launched the QIAprep and Plasmodium Kit. This uses our proven liquid-based sample prep method as a new way to help research and surveillance of this global health threat, especially in areas with limited healthcare infrastructure. Second, turning to QuantiFERON, our market-leading blood-based test for latent tuberculosis detection, Qiagen remains very confident in our ambition to reach at least $600 million sales by 2028 for QuantiFERON.

We have continuously improved and invested in QuantiFERON development, which is now in its fourth generation. We are obviously not stopping here, and we are already preparing the fifth generation version. The fifth generation version of QuantiFERON will bring further improvements in automation, throughput, and workflow efficiency. Over time, we believe there is a clear opportunity to continue to increase conversion well beyond the current 40% level in the market for the time being. Third, QIAstat-Dx, our syndromic testing platform that continues to expand its American presence. Earlier this year, we received FDA clearance for the second QIAstat-Dx GI mini panel, gastrointestinal, targeting five key bacterial pathogens. Designed for outpatient care, this panel complements the previously cleared bacterial and viral versions, providing fast results with very minimal hands-on time. Our portfolio for QIAstat-Dx now includes all three major American syndromic panels: respiratory, gastrointestinal, and meningitis.

We have, on top of that, in the U.S., three mini panels tailored to outpatient testing. With those options, QIAstat is very well positioned to meet rising demand for flexible and rapid syndromic testing for both hospital but also outpatient settings. Moving to QIAcuity, now, our digital PCR platform that continues to deliver innovation but also market shares and growth. We started 2025 with a major and significant upgrade. QIAcuity, now, supports the simultaneous detection of up to 12 targets from a single biological sample, more than double the capacity we had before. This expanded multiplexing capability is helping researchers across applications like translational research, microbiome analysis, pathogen detection, and the development of cell and gene therapies. By saving time, reagents, and precious sample material, QIAcuity is making laboratory workflows more productive and cost-efficient. And it definitely strengthens our position into the digital PCR market.

We are also on track to launch at least another 100 new assays in 2025, building on an already strong portfolio expansion in 2024 that has been contributor, obviously, to the strong uptake and growth in consumables. As part of this new wave of assays, our teams recently launched the first new cell and gene therapy assays of the year, including our first assay dedicated to antiviral application. This is really a very strong start to our 2025 menu expansion. This definitely helps strengthen our installed base, broadens use cases as well as customer reach, and supports our competitive market shares in digital PCR. Closing with QIAGEN Digital Insights, our bioinformatics business that continues to strengthen its global reach. As you have seen, we recently opened a new data center in Melbourne, Australia, expanding our secure cloud infrastructure to eight global sites.

This investment enhances our presence in the regions by enabling compliance with local regulation and also advancing clinical next-generation sequencing adoptions, so as you can see, with those efforts, QDI, QIAGEN Digital Insights is well positioned to continue to support the growing demand for bioinformatics solutions in both research and clinical settings, and now, once again, back to Roland with the details on our outlook.

Roland Sackers (CFO)

Thank you, Thierry. Let me now provide some more perspectives on our outlook for 2025 and the second quarter. Our ambition remains clear: to deliver another year of solid, profitable growth and continued improvement in operational profitability. For the full year, we are reaffirming our outlook for net sales growth in 2025 of about 4% at CER. This reflects about 5% CER growth from our core portfolio that excludes the discontinued NeuMoDx and Dialunox products.

Given the current volatility, we remain conservative about the revenue growth for the second half of the year but could well increase our net sales guidance once we have more visibility on the macro trends. On adjusted earnings per share, we are reaffirming the recently upgraded target for about $2.35 at constant exchange rates. This reflects about 8% CER growth compared to 2024, supported by operational margin expansion while also accounting for the current tariff environment and a better-than-expected adjusted tax rate versus the beginning of 2025. For the second quarter of 2025, we are targeting net sales growth of at least 5% at constant exchange rates. This translates to at least 5% CER growth in our core portfolio, excluding discontinued NeuMoDx and Dialunox products.

Adjusted earnings per share are expected to be at least $0.60, up from results of $0.55 in the year-ago period, and another solid improvement. Turning briefly to currency trends, these have improved since the start of the year, and we now expect less headwind given the current U.S. dollar trends against the euro and other key currencies. For the full year, we now expect currency movements to be neutral on net sales and a negative impact of about $0.01 to $0.02 on adjusted earnings per share, so slightly better than the assumption from the start of the year. For the second quarter, we anticipate a positive impact on net sales of about 1 percentage point and neutral currency movements on adjusted earnings per share. Overall, our guidance reflects a balanced view of both the opportunities and challenges in today's macroeconomic environment.

Our results for the first quarter in the latest reviews with our teams give us confidence in our strategy, our execution, and our ability to deliver on these targets. I would like to now hand back to Thierry.

Thierry Bernard (CEO)

Thanks a lot, Roland, Domenica, and John, and as usual, to all of you, we are very respectful of your time, so let me very quickly summarize before we move to the Q&A part. First, we delivered a very good and solid start to 2025, exceeding our outlook for both net sales and adjusting earnings in the first quarter. Our highly recurring revenues account for about 90% of our total sales and are a key foundation for growth, even in this macro environment where customer spending remains cautious.

We were especially very pleased with the strong contribution from QIAstat and from QuantiFERON and the momentum gain in QIAcuity, together with the robust performance of QIAGEN Digital Insights. Those successes, along with our efficiency initiatives, drove a significant improvement in our adjusted operating income margin and supported another quarter of very strong cash flow generation. We have reaffirmed our recently upgraded target for adjusted earnings and also reaffirmed our full-year 2025 targets for net sales. This is combined with our commitment for further significant margin expansions as we move above 30% this year. Our financial strength and operational flexibility give us increasing conviction in our ability to deliver on our 2028 commitments for solid, profitable growth and stronger shareholders' return. That said, back to John and the operator for the Q&A session.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will begin the Q&A 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 yourself to only one question and, if necessary, one follow-up. Your microphone will also be muted after you finish asking your questions. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from Dan Leonard of UBS. Please go ahead, Mr. Leonard.

Dan Leonard (Managing Director and Research Analyst)

Thank you very much. I'll keep it to one. I was hoping you could elaborate a bit further on what drove the acceleration in QuantiFERON in the quarter. I know you mentioned skin test conversion, but that's a trend that's been underway for a couple of decades.

So perhaps there's some additional color on the quarter performance specifically. Thank you.

Thierry Bernard (CEO)

Thanks a lot, Dan. And no, there is no specific event. It's just the confirmation of our strategy, strategy based on constant innovations. As we said today, we are at a fourth generation of product. We definitely have proven reliability and quality. You have seen in our recent deep dive on QuantiFERON the number of citations, the number of publications. Second, the value of our partnership for automation with not only DiaSorin but also Tecan, Hamilton. And all these together reinforce the continuous global performance of QuantiFERON. And I insist on global. It is growing all over the world in North America, Europe, the Middle East, Asia-Pacific.

Dan Leonard (Managing Director and Research Analyst)

Thanks, Thierry.

Operator (participant)

The next question comes from Doug Schenkel of Wolfe Research. Please go ahead, Mr. Schenkel.

Doug Schenkel (Managing Director and Head of Life Science Tools & Diagnostics)

Hi. Good morning, good afternoon, everybody. And thank you for taking the questions.

So just a couple on guidance. Given Q1 strength and given how you're guiding Q2, our math suggests that essentially you're assuming a deceleration in top-line growth to around 4% in the second half. I definitely could be doing the math wrong, but if I'm not, I just want to see if there's something you're seeing that's moderating from a growth standpoint. It doesn't sound like that's the case. So you're really cutting through all of this. Is this just prudent conservatism in the current environment? So that's the first question. And then the second is, again, on guidance, you're maintaining your 4% constant currency outlook for the full year at the top line, recognizing how the environment has changed over the last few weeks and few months. Are there specific areas that we should be thinking of that are doing better than original plan?

And then if so, what are the offsets? Thank you very much.

Thierry Bernard (CEO)

So Doug, thanks a lot. You called that conservatism. I would call it realistic ambitions. Your math is not necessarily wrong, but you have also seen that the volatility in our economic environment or geopolitical environment has not improved, not at all. So we are still living in a kind of and operating in a shaky environment. And this is why we prefer to remain prudent. But obviously, as soon as we have more visibility, we will not hesitate to upgrade and update our top-line also guidance. But we need to have more weeks of visibility behind us before doing this.

And so on the guidance for 4%, which is 5%, excluding DiaSorin and NeuMoDx divestment, we base that guidance taking into account that volatility, taking into account and weathering the current discussions or debates around tariffs in the world, for example. At the same time, factoring the still cautious environment on spending, especially for capital sales, factoring also the discussion around research funding in different countries of the world, but also leveraging the very good start of QuantiFERON, of QIAstat, of QDI, and the good performance of QIAcuity in consumables.

Operator (participant)

The next question comes from Patrick Donnelly with Citi. Please go ahead, Mr. Donnelly.

Patrick Donnelly (Managing Director for Equity Research)

Hey, guys. Thank you for taking the questions. Maybe one just on the tariff exposure, probably for Roland. Can you just run through what you're seeing on that front? Any mitigations?

We've heard from some others, maybe some of the diagnostic reagents are more on the exempt side with China. I know you guys don't have a ton of exposure there, but can you just talk through what you're seeing on that front and what the impact could be?

Roland Sackers (CFO)

Yeah. Hi, Patrick. I think overall, just to put things in perspective, as you know, it's clearly a very volatile environment, and I'm quite sure there will be more changes. And by the way, there's one of the points that you just raised. There is nothing company-specific which will change the direction. Right now, we really are a bit more conservative right now in terms of the outlook for the year. Same is true here on the tariff side. We feel actually that we were well prepared moving into that year. As you know, we went up quite early our inventory levels.

We reviewed our supply chain in ways. We clearly looked on also a couple of company processes. All of that, which I think allowed us to, I guess, mitigate most of this impact which we right now see. There's clearly also the benefit that we are working closely with our customers in sharing some of these impacts. At the same time, I think it's also very fair to say that we see right now also a somewhat lower tax environment in general, which is helping us not only to compensate, but as you have seen with our guidance increase on the EPS side, even overcompensating for the impacts we see on the tariff side. Have in mind that we do not have anything material from China into the U.S. That is nothing what is important for us.

As you know, from the U.S. into China right now, in general, that is something what is not really material. And therefore, I would say for us, it is really something what we were so far very well able to manage, which is U.S. to Europe. Europe to the U.S., sorry.

Patrick Donnelly (Managing Director for Equity Research)

Yeah. Yeah. That's helpful, Roland. Thanks. And then maybe a quick one just on the margin levers for this year. The expansion has been pretty healthy. Can you just talk about the levers as you work your way through the year on the margins, just the puts and takes, and again, how we should think about the progression as the year goes? Thank you.

Roland Sackers (CFO)

Thanks for that question because I think it allows me also to reemphasize one important message.

As you know, on the one hand side, we said before that we discontinued NeuMoDx in particular last year, but this only accounts for somewhere around 40%-45% of the overall margin improvement. I think Thierry, in one of the earlier calls, alluded to that we have actually ongoing what we call QIAGEN efficiency programs, and they are actually adding up quite nicely. That goes all the way from digitization initiatives. As you know, we also, to a certain extent, reorganized the company end of last year, and this all is helping actually quite nicely to improve margins, so we expect also clearly for this year to end up north of 30% and again, outside any larger whatever tariffs macro impacts, which might or might not happen.

But in that environment which we're seeing right now, I think we feel very confident that we stay north of 30% and clearly expanding from that level also going forward.

Operator (participant)

Our next question comes from Tycho Peterson of Jefferies. Please go ahead, Mr. Peterson.

Tycho Peterson (Managing Director)

Hey, thanks. I want to probe on some of the other guidance assumptions. Academic and government has obviously been a pressure point. We've seen most of your peers kind of recalibrate expectations for the year. Just curious what you guys are baking in for U.S. academic and government for the rest of the year. And then instrument softness, curious if you're assuming any stabilization or recovery on instruments in particular for QIAcuity. And then Roland, you kind of alluded to maybe potential drivers of upside in the back half of the year. Curious where you think that could come from.

Thierry Bernard (CEO)

So thanks, Tycho.

I mean, so first of all, as you know, 90% of our revenues are coming from consumables. So I believe therefore that with this, we are probably a bit less exposed to huge cuts in academia and research. But obviously, like any company involved in research and academia testing, we feel that there is a slow environment and we remain cautious. That drives, by the way, when I answered the questions from Doug, why we continue to maintain our guidance. It's just being cautious because the environment is not moving that fast. That being said, I believe that we are a bit more protected. And I believe also that most of our sales in research and academia are still mainly around sample tech, and those are expenses that are very difficult to completely eliminate.

For capital sales, our assumption continues to be that we should see a level of normalization in the second half of the year or early 2026. Obviously, it's very difficult to predict that. We continue to say that there is a normal cycle of renewal in instruments in labs. It's very difficult to say exactly or to know when it's going to happen, but we believe it has to normalize at a certain point in the coming months. Roland, do you want to take the second part of the question?

Roland Sackers (CFO)

Yeah. Again, just to add on that, on the instrumentation side, of course, have in mind also that most of our instruments clearly have price points, which are probably for instruments on the lower side. So that's clearly also helpful. And you see particular QIAstat and also QIAcuity doing quite well.

I don't see any reason that that should change over the course of the year. In general, of upsides, I think you have seen where we started very well and strong into the year from QIAstat, where again, what is really driving that is the menu expansion. As you know, we got a significant number of products approved last year through the FDA, and that clearly helps us not only in the U.S., where gastro and meningitis to expand on that, as larger instruments going online. So there's a lot of things being helpful. We added menu quite nicely to the QIAstat. You know that we added 100 panels last year. We're going to add another 100 panels this year. Therefore, the consumable pull-through continues to be quite strong.

So I would say it's a mix of new launches and clearly also what we believe that the focus, which I think QIAGEN now is driving since quite some time, still pays off.

Operator (participant)

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

Michael Ryskin (Managing Director)

Great. Thanks for taking the question. I think Tycho touched on NIH, or sorry, I think one of the earlier questions touched on NIH and government policy. I want to talk a little bit about the pharma biotech end market, what you're seeing there. I think it's been a little bit weaker to start the year. Obviously, there's still a lot of noise, and there's potential for more noise from ongoing discussions or from pharma-specific tariffs. Just curious if you're seeing anything different in budgets relative to how you were going into the year.

I'll throw in my second one at the same time. Capital deployment front, the initiation of the dividend, a little bit more color on the buybacks. Just curious how you're going to balance capital allocation priorities between those two and M&A going forward. Just give us a tiering. Thanks.

Thierry Bernard (CEO)

Those are good questions, Michael. Thanks a lot. On the pharma side, I would say on direct testing sales, we are pleased with the performance of especially solutions like QIAcuity on the pharma side. This is where we get the best pull-through. On our large throughput QIAcuity system, we call it the eight-plate system. So we don't see any specific downgrading of the situation here. What I would say, what we believe is encouraging is that we see a growing appetite, again, of pharma company for companion diagnostic. And you see that this is a good activity for QIAGEN.

This is where we are probably the leader in the world. We are the only company offering pharma companies with solution not only on PCR companion diagnostic, but also NGS companion diagnostic, and also digital PCR. You have seen recently also that we have opened contracts on QIAstat. We see a pretty good demand here, and we are pretty confident that it should continue. On capital allocation, we continue to try to optimize the management of our healthy balance sheets. As you know, we have three priorities. First of all, investing into our organic growth, which is R&D. QIAGEN maintains a healthy investment on R&D ratio to sales. It's around 9%-10%. It's a good ratio. We always need to make sure that that ratio is paying off and that we have good return factors from those research and development investments.

Second, the new announcement of share buybacks are just proving our active listening to investors and to analysts. Many of you have been telling us for the last years that dividends could open up our stock price to different kinds of investors. We listened. We took our time, and we decided to come with that policy, and we perfectly understand that it's a long-term policy as well, and the increase to up to 500, it's an authorization. That doesn't mean that it's going to happen on the given date. We said that we have 18 months to deploy that, but it's also that confirm vision and willingness to return the appropriate level of capital to our shareholders. They deserve that, and we believe also in our company. Third, it's M&A. It's not one against the other, or it's not that M&A is going to become less of a priority.

We believe in M&A to create value. It has to be synergistic with our current portfolio. We mainly focus on what we say bolt-on or what we call bolt-on. And I would invite you to stay tuned because we have a very, very good pipeline. And I think we are in a position potentially to close some of those M&A in the coming weeks.

Operator (participant)

Our next question comes from Jan Koch with Deutsche Bank. Please go ahead, Jan.

Jan Koch (VP of Equity Research)

Good afternoon. Thanks for taking my questions. My first question is on sample tech. What kind of growth should we assume over the coming quarters given that the comps are actually getting a bit tougher? And do you expect a catch-up in instrument sales once you have launched the new instruments driven by pent-up demand?

And then secondly, on QuantiFERON, could you remind us of the market potential you are seeing in China? Given that China is not really a focus market for your partner, do you believe that the install base of instruments in China is sufficient to grab that market opportunity once you receive the necessary approval?

Thierry Bernard (CEO)

Thanks a lot, Jan. On sample tech, this is a strategy, but let me highlight something. What the current numbers are not really showing is that where we have decided to clearly put the research and development efforts in what we call high-value sample tech, application like liquid biopsy, minimal residual diseases, microbiome research, we are growing, and we are in some of those fields growing at double digit. And this is exactly where we want to go.

Second, to your point, obviously, there is no other competitor in sample tech with such a program of investment into new systems. And it's not new. It has started three years ago when we started to upgrade QIAcube with QIAcube Connect, EZ1 to EZ2, and now we have those three launches. So all this together makes us believe that the guidance that we gave you in New York during our capital market day last year in June to come back to a growth of around 3% per year is really achievable. To QuantiFERON in China, honestly, Jan, at the moment, QuantiFERON in China is the leading blood-based test for latent TB. We have many competitors that are very local, that are not elsewhere, but in China. It is not our top priority.

We will bring the workflow of automation with DiaSorin to the regulatory authorities, but the growth of QuantiFERON absolutely does not depend on the performance in China. I would not qualify China as a priority for QuantiFERON. It's a market. We are using all our presence, including with DiaSorin, to continue to take market shares, but this is how we would see it.

Operator (participant)

Our next question comes from Jack Meehan with Nephron Research. Please go ahead, Jack. Your line is open.

Jack Meehan (Equity Research Analyst)

Thank you. Hello, everyone. I wanted to ask about the PCR strength in the quarter through two lenses. First was, if you look, the 14% growth, QIAcuity, high single digits. It implies everything else grew in the high teens. So I was just wondering if you could talk about why that was so strong.

And then on QIAcuity, it seems like things are going well on the consumable side, but it does also feel like that prior $105 million target might be a little bit of a stretch given the instrument environment. I was just curious if you had any updated thoughts on that too. Thank you.

Thierry Bernard (CEO)

Thank you, Jack. And so on the first question, first of all, especially if you compared with what has been disclosed by some competitors, I mean, we are growing in digital PCR. We continue to sell or to place instruments, obviously, given the environment on capital expenses. Of course, we would like to be able to place more, but we still grow, and we are posting, as you said yourself, a very nice growth in consumables. So we are definitely taking market shares, and you have seen from other disclosures that it's not necessarily the case elsewhere.

On the rest of the PCR portfolio, what was quite interesting and encouraging this quarter was the performance of our OEM sales. You remember that this is also an activity of QIAGEN where we have always said it's difficult sometimes to plan for a growth on a quarterly basis because those are mainly bulk sales. You have sometimes high quarters, lower quarter, the quarter after. Overall, OEM for us is on a yearly basis, roughly $80 million activities, but it performed very well in Q1. Now addressing your, is this a stretch or is there a stretch on QIAcuity? For sure, we acknowledge that the capital sales environment, especially in research lab of academia, is not helping. But honestly, Jack, I mean, this solution, QIAcuity, is taking market shares. It has been probably the fastest growing install base ever in diagnostic and life science.

We continue to grow in consumables, as Roland said, as we said during this call. I don't judge the efficiency. I will not judge the efficiency of that solution just on a year, let alone on a quarterly basis. We confirm what we told you. We are on our way to get above $200 million by 2028, and this solution deserves to be the number one on the market on digital PCR. And we confirm that ambition.

Operator (participant)

The next question comes from Dan Brennan with TD Cowen. Please go ahead, Mr. Brennan.

Daniel Brennan (Senior Equity Research Analyst)

Great. Thank you. Thanks for the questions. Maybe one for Roland and then for Thierry. Just Roland, just back on the tariff math, if you could, did you guys ever size what the gross impact is?

Obviously, you're doing a terrific job offsetting a bit, but I'd be interested to see just what that impact is on the gross side and if between cost actions and moving production and suppliers, anything you can share on kind of how you're offsetting that, just a little more detail since it is such a topic. And then B, Thierry, for you, on M&A and a prior question, did I hear you say something about the next couple of weeks? Is there something? Can you just discuss what the pipeline looks like there? And then just finally, kind of what are you guys assuming for the rest of the year for QIAstat after the really strong quarter in first quarter? Thank you.

Thierry Bernard (CEO)

Roland, you want to take the first part?

Roland Sackers (CFO)

Yes, thank you, Dan.

Yeah, to be honest, I wish I could because the reason why I think it's not as easy for us is because we started actually already quite early last year with some of the mitigation actions. As I said, we changed quite a lot of internal procedures. We really went up inventories. And therefore, it is not actually to set a baseline, but I think what is fair to say that our assumption right now is probably that it would be probably a few cents EPS for that period. Nevertheless, as I said, there's clearly an area which we were able to offset so far. So I would say we feel comfortable that that is, in that given environment, something that we can cover quite nicely. And then we have to see where it moves. But I would say so far, we feel quite comfortable. We're still looking into that.

If there's other areas where we can improve, again, a big impact for us is clearly also that we are actively working with our customers and explain to them the actual situation.

Thierry Bernard (CEO)

Thank you, Roland. And to follow up on the question on M&A, what I confirm is that it's clearly one of the top priorities of our capital allocation. As you know, we have a very healthy balance sheet. We have a very long-lasting experience of M&A, especially bolt-on. And I just can tell you that our pipeline is very solid. We are engaged in various discussions that are coming to a close now, I hope. But as you can imagine, it always takes two to tango. And as long as the signature is not done, I don't say anything.

But yes, I confirm that in the coming weeks, we should be in a position to communicate on some of those. That's the first one. On QIAstat, obviously, as you know, this winter has been another, once again, a quite strong respiratory season. We have been able to answer customer needs here. But our growth is not just respiratory. All the parameters, GIs and meningitis. So let me put it like this. It's a strong start. And so we confirm our guidance for QIAstat, and we believe that it will be double digit at the end of the year once again.

Operator (participant)

The next question comes from Catherine Schulte with Baird. Please go ahead, Ms. Schulte.

Catherine Schulte (Senior Research Analyst)

Hey, guys. Thanks for the questions. Maybe first on China, I know a small part of your business, but seeing some decent declines there.

I guess, what does that look like on the diagnostic side versus life sciences? Would just be curious if there are any different trends between those two buckets. And my second question would be on QDI. Can you just talk about what you're seeing there? I think you said you grew high single digits in the quarter, and you're expecting 15% in that longer-term outlook at your investor day. So just curious if you're still confident on that side. Thanks.

Thierry Bernard (CEO)

So thanks, Catherine, for the question. I mean, on China, I think there is no specific change to what we've been saying in the last three years. China is too big of a market to be ignored. And at the same time, it's too specific and too complex of a market and too risky of a market these days to make it a priority.

It's a very limited percentage of our sales. Roland spoke about that. At the moment, it's at 4%. The market is very specific in the sense that they favor local manufacturing, and they will always favor local manufacturers. It does impact not only life science, but also diagnostic solutions. But as far as QIAGEN is concerned, we continue to grow in QuantiFERON every quarter. We have more difficulties, and we are more impacted by that context that I described on life science and other activities. That's the way to see it. Again, too large of a market to be ignored, too complex, too risky to make it a priority.

QDI, what we are pleased with in Q1, and we communicated that, if you remember, in the deep dive we organized in December, this leading position from QIAGEN. I remind you that at around $100 million, we are the leader on the market. Not only the leader, but we are also a profitable leader unlike competition. Is moving, is evolving to a SaaS business model. And we said in December that it will take probably a year. We start to see that normalization already in Q1. What we were pleased with in Q1 is that both activities of QDI, as Roland said, not only clinical, but also discovery, were doing better than Q4 and Q3 of last year. So this is encouraging. Now, for the ambition for this year, I would put it as a high single digit. That's our objective, and this is what we want to deliver.

I continue to believe that the full normalization and transition to that SaaS business model will happen throughout 2025.

Operator (participant)

We'll move to our next question from Matt Sykes with Goldman Sachs. Please go ahead, Mr. Sykes.

Matthew Sykes (Managing Director and Research Analyst)

Thank you. Good morning. Thanks for your questions. I'll leave it to one. Just wanted to focus on sample tech. You guys have talked about a pretty clearly articulated strategy to improve growth in that area through the launching of the automated instruments, and you've given us a timeline.

I guess my question is, given that timeline and given sort of the CapEx constraints that are currently in the environment from the customer side, do you feel that the value proposition, the cost savings, or higher throughput that you're offering through this automation will help penetrate through maybe a sustained weaker capital equipment environment so you could still see that acceleration in sample tech as we move through 2026?

Thierry Bernard (CEO)

Well, Matt, we believe so. This is our assumption because none of those systems are me too. They all come with innovation, and this is visible to customers. When I said about QIAsymphony and our customers in liquid biopsy, this is the feedback at the moment. I said that QIAsprint was already highly regarded by some major pharma potential partners. This is encouraging. Why? Because they bring innovation in cost saving, in time to result, in easy-to-use handling.

So we believe that this will help us, despite the constrained environment, to bring them to customers and get those contracts. Obviously, if capital expense remains very low, we might see some delays around 2025 and 2026, but over the long run, our ambition for 2028 remains unchanged because those are instruments that are bringing value and differentiation.

Matthew Sykes (Managing Director and Research Analyst)

Thank you.

Operator (participant)

Our last question comes from Casey Woodring with JPMorgan. Please go ahead, Mr. Woodring.

Casey Woodring (VP of Equity Research)

Great. Thanks for fitting me in, guys. Roland, you mentioned expecting to reach your 31% midterm margin goal well ahead of 2028. Does that well ahead mean 2026 or 2027? And I guess, what are the variables that would get you there in 2026 versus 2027? And then on companion diagnostics, you said that the partnership revenue there grew double digits in the quarter.

Can you just give us a sense as to what you're expecting from a revenue perspective from the companion diagnostics partnership revenue, how that's growing, and then how to think about that opportunity moving forward? Thank you.

Roland Sackers (CFO)

Hi, Casey. I think we had so many news today that I want to keep something for probably later into the year. So again, we will update the number, as we said, at a given point when we also feel that we were well on our way with our planning for 2026. Again, for me, there's no question that we're going to reach it. For me, there's no question that's going to reach earlier. But we also want to give you the right magnitude because we probably have to update then not only the 2026 number, but also the 2028 ambition. So give us a bit of time.

As always, once you feel ready, we will go out. To your question on CDx, on companion diagnostic, we see a potential, and we have always disclosed the same of double digit. Those products are bringing value to pharma. You know that we have probably the most extended network of pharma contracts in the market. We have more than 35 main contracts with pharma. What is very interesting is that we keep adding solutions. Four years ago, five years ago, QIAGEN companion diagnostic was mainly PCR. Then we added NGS capabilities. More recently, we added digital PCR. Last year, as you have seen, we added syndromic capabilities. So it's healthy. It's a very good window for our technology as well.

As you know, also, we have signed a network of what we call Day-One Laboratory Contract because what is the key of companion diagnostic, Casey, is that anytime the drug is available, you need to make sure that the test is available at the same time. So we have a network of partners, labs all over the world that make sure that as soon as the drug hits the market, we are ready to test the patient as well. And this is why that we believe that a double-digit growth for this business is perfectly achievable.

John Gilardi (VP and Head of Corporate Communications)

Okay, Thierry and Roland, thank you very much. And thank you for all of you for joining our call. Let me close it here. If you have any questions or comments, please don't hesitate to reach out to Domenica and me. Thank you very much. Bye-bye.

Operator (participant)

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