Earnings Call Transcript - QGEN Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for your patience. I am Perry, your PGI call operator. Welcome and thank you for joining QIAGEN's Q3 2022 Earnings Conference Call Webcast. Currently, all participants are in listen-only mode. Please note that this call is being recorded at QIAGEN's request and will be available on their website. After the prepared remarks, we will have a question-and-answer session. Now, I would like to introduce your host, John Gilardi, Vice President, Head of Corporate Communications and Investor Relations at QIAGEN. Please go ahead, sir.

John Gilardi, Vice President, Head of Corporate Communications and Investor Relations

Thank you, operator, and welcome to our call. The speakers today are Thierry Bernard, our Chief Executive Officer; and Roland Sackers, our Chief Financial Officer. Also joining us is Phoebe Loh from the Investor Relations team. Please note that this call is being webcast live and will be archived on the Investors section of our website at www.qiagen.com. Today, we'll first have some remarks from Thierry Bernard and Roland and then move into the Q&A session. A presentation with details on our performance is available in the IR section of our website, along with the quarterly release. We will not be showing the slides during this call. Before we begin, let me cover as usual, our safe harbor statement. This conference call discussion and responses to your questions reflect the views of management as of today, November 8, 2022. We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected. QIAGEN disclaims any intentions or obligations to revise any forward-looking statements. For more information, please refer to our filings with the U.S. Securities and Exchange Commission, which are also available on our website. We will also be referring today to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. All references to EPS refer to diluted EPS or earnings per share. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release and the presentation. And again, these are both available on our website. I would like to now turn over the call to Thierry.

Thierry Bernard, CEO

Thank you, John, and good morning, good afternoon. Welcome to our conference call today, and thank you to everyone for joining. We are very pleased to report a strong performance in the third quarter of 2022. We indeed saw solid ongoing market trends with broad-based demand for both our molecular research and clinical diagnostic solutions across the business. So let me get right to the top messages for today. First of all, we again exceeded our quarterly outlook for net sales growth and adjusted EPS. This was driven by the top performance in our non-COVID portfolio and also higher-than-expected sales from products used in COVID testing. Net sales for the third quarter of '22 were $533 million at CER and exceeded our outlook for $510 million. These results were largely unchanged from sales of $535 million in the third quarter of 2021, a period of high COVID-testing demand. Our non-COVID product group delivered an 18% CER sales growth over the third quarter 2021 and represented more than 80% of our total sales. Adjusted diluted earnings per share were $0.55 CER and above the outlook for at least $0.48. Those results demonstrate that our portfolios are performing very well. In fact, this is the seventh consecutive quarter of double-digit CER growth in our non-COVID portfolio. This clearly underlines the strength of our business and the execution mindset across QIAGEN. Second key message, our teams have been delivering on key goals as we advance our five pillars of growth. The performance for the nine months of 2022 underscore the strength and ability of QIAGEN in a very dynamic micro environment. I am definitely very proud of our teams. They have done an outstanding job this year remaining proactive and staying focused on executing our five pillars of growth strategy. This is creating a very solid foundation for sustainable growth in the future. All of our five pillars of growth are on track to achieve and some are even likely to exceed significantly the sales goals we set for 2022. Our Sample Technologies product group is benefiting from a new wave of instrument upgrades. This is helping QIAGEN to leverage our leading position in sample prep, the first step in any molecular biology lab. We are driving consumables growth in non-COVID application, which is the larger portion of this business and by far. Remember, DNA kits and non-viral related RNA prep make up more than 70% of sales in this group with COVID relevant viral RNA kits making up about $150 million of sales in 2019. The QuantiFERON TB franchise for tuberculosis testing is performing very well as well, with year-to-date growth well above our target for more than $310 million. The demand for TB testing is on the rise, as noted in a recent report by the WHO that TB deaths and disease prevalence rose significantly during the COVID-19 pandemic. For our integrated clinical PCR testing platform, NeuMoDx, two new tests were launched for use in areas such as transplant diagnostics. This brings the CE-IVD menu now to 16 tests on NeuMoDx, one of the largest available from any competitor. We are tracking well on system placement and seeing encouraging indicators on the transition from COVID to non-COVID utilization. For QIAstat diagnostic, our offering for syndromic testing, the QIAGEN teams have responded to the monkeypox outbreak with the rapid development of the QIAstat-Dx viral vehicular panel. Placements are continuing to grow worldwide, and it is worth noting that more than 50% of sales for QIAstat are now for non-COVID applications. In terms of QIAcuity, our offering for digital PCR, we recently launched 13 new biopharma assays. This is an extremely important step in our entry into the biopharma area of the market where we see as an important customer segment involving pharma companies around the world, and it creates a strong base for future growth in 2023. So as you can see, we are making good progress in our five pillars of growth. This fits very well into the overall strategy to maximize the value of our portfolio through our ability to address a broad range of customers in the continuum of life science to molecular diagnostics. Third key takeaway message for today. We have increased our outlook for the full year 2022 based on another quarter of solid results. We are now expecting sales of about $2.25 billion for the full year 2022 with a reaffirmation of the goal for double-digit CER growth in our non-COVID portfolio. As for EPS, we are now expecting about $2.40 CER for adjusted EPS, and this is up from our prior outlook for at least $2.30 CER. As always, we will stand ready to support the needs for COVID-19 testing and surveillance. And this also goes for other public health emergencies like we are seeing for monkeypox. As for COVID trends, testing volumes have dropped significantly in most countries around the world. We are continuing to take a very conservative view of demand trends for COVID. But as we have said before, QIAGEN remains relevant for COVID testing, but we are not dependent on those sales. Indeed, we continue to believe it was the very right decision to decouple our performance from COVID trends, and QIAGEN was in fact, among the first, if not the first, to do so. But our overriding focus remains on advancing our strategy based on our non-COVID portfolio while continuing, of course, to have our eyes open to the changing macro environment. Roland will be providing more details on the outlook later on this call. For now, let me hand over to him for the financial update on the quarter.

Roland Sackers, CFO

Thank you, Thierry. Hello, and thank you for joining this call. I'll start with a review of our results and then discuss the outlook later. In terms of net sales, they declined 7% in the third quarter year-over-year to USD500 million, primarily due to about six points of currency headwinds from the strong U.S. dollar against the euro and other currencies like the yen. At constant exchange rates, sales were USD533 million, exceeding our expectation of at least $510 million. Our non-COVID product groups performed better than expected, with sales up 18% in constant exchange rates. The COVID product group sales also exceeded expectations, but were still down 43% compared to the previous year. Sales of consumables and related revenues as well as instruments remained unchanged at constant exchange rates. Excluding the impact of COVID-19, consumer sales and related revenues rose 17% in constant exchange rates, while instrument sales increased by about 20%. Looking at the four product groups, Sample Technologies, which makes up about a third of total sales, experienced solid double-digit growth in the non-COVID portfolio, which represented 75% of sales in the third quarter of 2022. However, the decline in COVID-19 testing demand resulted in an overall sales decrease of about 2% at constant exchange rates compared to the same period last year. Our second product group, Diagnostic Solutions, accounts for around 30% of sales, with the QuantiFERON franchise driving growth. Sales for the QuantiFERON TB test rose 14% in constant exchange rates in the third quarter, with strong gains in all regions. Sales for the first nine months of 2022 were $256 million at constant exchange rates, and we are on track to exceed our yearly target of over $310 million. We've seen seven consecutive quarters of double-digit growth for QuantiFERON. The sales trends for QIAstat and NeuMoDx clinical PCR testing systems align with our full-year expectations. QIAstat-Dx is seeing increased demand following the launch of the new CE-IVD meningitis panel earlier this year, which has established a crucial menu for adoption by customers in this area. Sales in the PCR Nucleic Acid Amplification product group declined 5% in constant exchange rates during the third quarter, contrasting with strong non-COVID growth and significant declines in the COVID product groups. The Genomics NGS product group, which constitutes about 10% of total sales, recorded 6% growth at constant exchange rates as COVID-related revenues remained weak. Geographically, the Europe, Middle East, and Africa region showed 3% growth at constant exchange rates during the third quarter, with strong performance in France, Germany, the Netherlands, and the United Kingdom, driven mainly by non-COVID product sales. In the Americas, non-COVID sales grew robustly due to QuantiFERON and the expansion of the QIAcuity franchise, compensating for declines in COVID sales across the portfolio. The Asia Pacific, Japan region saw a 9% decline in sales at constant exchange rates from the third quarter of 2021, driven by lower sales in countries like Thailand, the Philippines, and Indonesia, despite double-digit growth in Australia and India. Sales in China decreased by about 3% in constant exchange rates in the third quarter but improved at a mid-single-digit rate for the year to date. We continue to observe positive underlying trends while closely monitoring the evolving pandemic situation. Turning to the income statement, the adjusted operating income margin was 28.7% of sales, a decrease from 30.8% in the third quarter of 2021, as we accelerated investments based on the higher sales trends. The adjusted gross margin rose by one percentage point to 67.6% of sales compared to the previous year, attributed to higher utilization of QIAstat-Dx and improvements in consumables production. R&D investments increased to 9.8% of sales in the third quarter from 9% in the same period last year, as we ramped up these investments. Sales and marketing expenses climbed to 22.9% of sales, an increase of about 1.8 percentage points from the previous year. We are committed to investing in growth areas, despite facing higher freight costs and commissions reflecting strong sales performance. General and administrative expenses also rose by one percentage point to 6.2% of sales, primarily due to IT and cybersecurity investments. Adjusted earnings per share for the third quarter was $0.55 at constant exchange rates, exceeding our target of at least $0.48, while actual rates were $0.53 due to currency headwinds. The adjusted tax rate was 18%, at the upper end of our expected range of 17% to 18%, and we anticipate a full-year rate of about 18% to 19%. Regarding cash flow, we experienced strong trends in the third quarter and continued our positive trajectory in operating and free cash flow. Operating cash flow increased by 34% to USD591 million over the first nine months of 2021. Free cash flow grew at an even faster rate of 67% compared to the prior year, driven by reduced capital expenditures following significant past investments to expand production capacity. Investments dropped to 5.2% of sales from 8.3% in the prior year period. On the balance sheet, our total consolidated net debt was USD402 million as of September 30, 2022, down from USD876 million at December 31, 2021, due to cash and short-term investments. Consequently, our leverage ratio stood at 0.4 times net debt to adjusted EBITDA. In October, we used USD480 million of our cash to repay several debt maturities from past issuances. We are exploring ways to optimize our balance sheet while maintaining a disciplined approach to capital deployment, which focuses on targeted M&A opportunities and share repurchase programs. Now, I will hand it back to Thierry.

Thierry Bernard, CEO

Thank you, Roland. And please now allow me to go over some of the key updates our teams have made in the progress of advancing our five pillars of growth within our overall growth strategy. Starting, first of all, in Sample Tech. Here, we are working in tandem to update our instrument and automation system in combination with new kits to further develop applications in key areas. Just as an example, in the third quarter, we released a new workflow leveraging the new easy-to-connect instrument with the QIAcuity digital PCR instruments for liquid biopsy applications. This workflow combines the key features of these two platforms: the very high-quality sample prep with easy tool and QIAcuity's high sensitivity in order to handle the demands of high-volume liquid biopsy samples. This unique power of two offers optimized detection and quantification for successful biomarker profiling. This also builds on QIAGEN's comprehensive liquid biopsy portfolio. In fact, QIAGEN is one of the only providers able to master all liquid biopsy analyses. Those include circulating DNA, circulating tumor cells, and exosomes. Our teams have also expanded the range of kits for the QIAxcel Connect instrument that is used for quality control analysis. Those new kits make QIAxcel even more attractive for analysis of DNA and RNA in next-generation sequencing applications. Our second growth pillar involves QuantiFERON, the modern gold standard for detection of latent tuberculosis. We remain extremely committed to bringing TB testing solutions to as many countries around the world as possible. As for QIAreach, the test version launched earlier this year for high burden low-income countries. Our partner, Illumina has recently entered insolvency proceedings. We are still working on new options for this product and are also very much open to new solutions to improve TB testing in emerging countries. But keep in mind that the QIAreach sales expectation has no impact on the midterm QuantiFERON growth plans. As regard to QIAstat diagnostic, I mentioned the new QIAstat panel for viral vesicular detection. This is a panel for detection of monkeypox and all the viral pathogens for research and epidemiological surveillance. These panels confirm once again our ability to remain extremely agile and responsive to public health needs. It is another example of the flexibility we have with the QIAstat diagnostic system and the growing use for syndromic testing. During 2022, we have added the meningitis panel to the CE-IVD menu in Europe, and we are now able to offer along with the respiratory and GI panels. As you know, we already offered a respiratory panel in the U.S. and have submitted the gastrointestinal panel to the FDA. We are expecting a decision during 2023. The meningitis is planned to be submitted to the U.S. approval in 2023 as well. In terms of placement, we are seeing solid trends for QIAstat diagnostic modules and, in particular, a very good interest among European customers for the higher throughput QIAstat-Dx Rise version. So even after the demand during COVID, we continue to see very encouraging placement trends. For NeuMoDx, we launched two new CE-IVD tests during the third quarter, a test for the Epstein-Barr virus (EBV) and the test for human Herpesvirus 6. We can now offer 16 CE-IVD tests on the NeuMoDx system, and this addition strengthens our offering for transplant patients. Another achievement was the certification of the NeuMoDx platform under the new European Union In Vitro Diagnostic Medical Devices regulation. This replaced the previous IVD rules and is impacting companies across the healthcare sector with additional R&D and regulatory costs. And in terms of placement, we are also continuing to see robust demand around the world, especially given the ability of labs to use NeuMoDx to automate the processing of LDTs laboratory-developed tests. In the PCR and Nucleic acid amplification group, the new biopharma assets for QIAcuity are being well received in the market. QIAcuity systems are increasingly adopted to enhance drug safety and efficacy in order to leverage the higher level of sensitivity and accuracy offered by digital PCR technology. This new group of QIAcuity assays are designed to address key application areas, especially for sales and gene therapy topics. The eight-plate QIAcuity platform is proving to be popular in those customers' applications as well since it delivers high throughput capacity not offered by other platforms. Finally, in genomics and NGS, a new group of QIAseq panels has been launched to expand our offering, involving Universal NGS solutions. This portfolio can be used to prepare and analyze samples on any sequencing system. The new panels are designed for rapid processing to cut library prep time in half and to enable ultra-sensitive variance analysis. Those new kits are confirmation that we are continuing to launch innovative chemistry to help customers optimize NGS workflows worldwide. As part of this strategy, we continue to partner with sequencing instrument providers to ensure access to our solution. At this point, let me hand it back over to Roland for more details on our new 2022 outlook.

Roland Sackers, CFO

Thank you, Thierry. Based on the better-than-expected results in the third quarter and also the solid outlook for the fourth quarter, we have increased our full year sales outlook to about USD2.25 billion at constant exchange rates. This is an increase from the prior outlook for at least USD2.2 billion and compares to $2.2 billion of sales in '21. In the first three quarters of '22, we delivered 14% CER growth in our non-core product groups and expect double-digit CER growth to continue into the fourth quarter putting us on track to achieve our full year goal. We are maintaining our conservative view on COVID testing and for these sales in '22 to be below the 21% level of USD704 million. In the first three quarters of '22, we had USD427 million of COVID product group sales at constant exchange rates. Our latest planning is for COVID product group sales to be about $500 million at constant exchange rates. Clearly, we are also able to absorb within our full year outlook the impact of losing about 1% of annual sales due to the Russian invasion of Ukraine and the suspension of our business in Russia. In terms of profitability, we have upgraded our outlook for adjusted EPS to be about $2.40 at constant exchange rates. This is an increase of $0.10 from the prior outlook for at least $2.30, and this compares with our initial '22 outlook for adjusted EPS of about $2.05 at CER. The progress in our business, however, is increasingly impacted by adverse currency movements against the U.S. dollar. Based on exchange rates as of October 31, '22, currency movements against the dollar are now expected to create an adverse impact of about six percentage points on net sales. The adverse headwinds are also expected to reduce adjusted EPS at actual rates by $0.09 to $0.10 per share. At actual rates, this applies sales of about USD2.1 billion and adjusted EPS of about $2.30 to $2.31. For the fourth quarter, we have set an outlook for sales to reach at least USD520 million at constant exchange rates, and for adjusted diluted EPS of at least $0.50 also at CER. It takes into consideration the acceleration of investments in light of the strong performance and also our decision to make one-time payments to support QIAGEN employees in light of the current high inflation environment. We expect currency headwinds in the fourth quarter to have an adverse impact of about seven percentage points on sales and about $0.03 on adjusted EPS. At actual rates, this implies sales of at least USD483 million and adjusted EPS of at least $0.47. I would like to now hand back to Thierry.

Thierry Bernard, CEO

Thank you, Roland, and thank you all for your attention. I think it's time to go to a quick recap of our key messages before we move into the Q&A session. First, our results exceeded the outlook for the third quarter of 2022, driven by the 18% CER growth from our non-COVID product group and adjusted earnings per share of $0.55 CER well above the previous outlook of $0.48 CER. Second, our teams remain fully engaged and continue to execute on our five pillars of growth strategy. And lastly, we have increased our 2022 full year outlook to reflect the better-than-expected sales and profitability in the third quarter. With that, we are reaffirming our commitment for double-digit growth of our non-COVID portfolio in 2022. And as we look into 2023, based on what we see today, there is no reason why QIAGEN non-COVID product group should not continue at a double-digit CER growth rate in the new year as well. I now would like to hand back to John and the operator for the Q&A session. Thank you all.

Operator, Operator

And our first question comes from Odysseas Manesiotis of Berenberg. Odysseas, please go ahead.

Odysseas Manesiotis, Analyst

I've got two to three. First of all, I think you've been communicating a high single-digit to low double-digit growth in the non-COVID business potentially rolling on to next year. I wanted to ask the dynamics here between different divisions, particularly your growth pillars. Would it be fair to assume midterm guidance growth, for example, double-digit growth for all growth pillars, except sample prefer next year? And secondly, on QIAstat, could you please I'm sure give us a confirmation of whether you're still planning to launch the GI, meningitis, and BCID panels in the U.S. for next year? Is this plan still on track?

Thierry Bernard, CEO

Thanks a lot, Odysseas. And for your first question, first on the, let's say, midterm growth profile, so first of all, I'd like to highlight that we are not in the midterm, basically, guidelines. But as we said, based on the results that we are seeing today, based on our knowledge of the current environment, we see no reason indeed to see the non-COVID portfolio of QIAGEN not growing at double digit next year. And if you want to focus on the five pillars, you are perfectly right. We see indeed QuantiFERON, QIAstat, NeuMoDx, and QIAcuity continuing to grow at double digits. And as we said back in December 2020 in the QIAGEN Investor Day, we see our Sample Tech portfolio growing at mid-single digit indeed. Now to the question on QIAstat, we have submitted DI for the U.S. approval. We expect, as I said before, an approval in 2023. Our plan is to submit the meningitis panel before the end of 2023. You also mentioned BCID, the BCID panel is not planned to be submitted in 2023. We want first to launch it in Europe. And then we will submit it in the U.S., but probably around the end of 2024.

John Gilardi, Vice President, Head of Corporate Communications and Investor Relations

Operator, let's move to the next question.

Casey Woodring, Analyst

How should we think about the setup for 2023? Is the strong performance this year creating a tough non-COVID comp for next year? And then how should we think about the moving parts to gross margins next year as well with COVID actually rolling off? And higher input costs and you're balancing that out with the pricing. Can we expect gross margin expansion next year?

Thierry Bernard, CEO

I believe Roland and I can address this. I'll also ask Roland to share his thoughts on the gross margin. To give a broader view, we have raised our guidance for COVID sales in 2022 to approximately $500 million. We maintain a cautious stance on the future of COVID post-2022, as we don't want our financial performance to rely on COVID-related fluctuations. Consequently, we anticipate COVID sales in 2023 to decline by over 50%, which is our current expectation. That said, our primary focus remains on the non-COVID segment of our portfolio. Based on what we currently have, we see no reason why the non-COVID part of our portfolio shouldn't grow at a rate of at least double digits in 2023. With that, I would like to invite Roland to discuss the gross margin.

Roland Sackers, CFO

Yes. And as Thierry said before, we are clearly not in the guidance call right now for '23. Nevertheless, I think what we are willing to reconfirm today is as Thierry talked about the revenue side. I think it's also fair to say that the comments we made before on profitability are still very valid, which means, as you know, we always said that we want to be post-COVID stronger than we were pre-COVID, and you recall that pre-COVID we had an adjusted EBITDA margin of 27% plus X percent. And we clearly do believe that also now moving into '23, we should be nicely above the 27%. Right? Look, exactly is clearly also a question of certain things are moving from price increases to inflations. Overall, I would say the trend right now over the last couple of weeks were rather positive. So I do think we will move quite strong into the year '23.

Derik De Bruin, Analyst

Can you talk a little bit about your genomics portfolio, specifically the demand that you're seeing for sample prep and some of your panels and such? There's obviously been a little bit of choppiness in the genomics market to be sort of seeing some results. So what you're feeling there. And just your overall thoughts on how you're viewing Europe and demand there going into the end of the year and in 2023?

Thierry Bernard, CEO

Derik, can you repeat the second part of your question on Europe, please? I didn't get that. Your voice was a bit muted. I apologize.

Derik De Bruin, Analyst

What are your expectations for Europe as you look into the fourth quarter and into 2023? Do you anticipate any softening in that region and potential headwinds?

Thierry Bernard, CEO

Okay. First, regarding genomics, we are closely monitoring the market's evolution and keeping an eye on our competitors' reporting and publications. I want to remind everyone that since 2019, QIAGEN has adopted a platform-agnostic strategy. Our chemistry and bioinformatics are universal and can be utilized across various platforms, including Illumina, Thermo, Element, BDI, and others. Consequently, our non-involvement in platform sales may make us less vulnerable to current market changes than some other companies. Our universal NGS consumables experienced single-digit growth compared to the high sales in the third quarter of 2021. As you may recall, last year in Q3 showed increased consumption of normal UNGS, as customers were returning, and there was ongoing government investment in sequencing for COVID to monitor virus mutation. This explains why we are seeing only single-digit growth in Q3. However, I believe there is no reason for our UNGS portfolio to fall below double-digit growth, as was the case pre-COVID. Regarding your question about Europe, this isn't a guidance call or related to 2020. You may have noticed that Europe, the Middle East, and Africa showed strong growth in Q3, largely due to our strong presence, including direct subsidiaries in most countries. We are very attentive to the economic situation, and Europe is one of the regions where we implemented a second set of price increases in July of this year, with a third set planned for January 2023. That summarizes my perspective for now, as we remain focused on the economic environment while maintaining a solid organization in this region.

Falko Friedrichs, Analyst

Two questions, please. Firstly, can you quantify the price increases that you pushed through this year for us? And what do you expect for next year on top of the ones you passed through this year? And then secondly, on digital PCR, where you showed a pretty good performance again. How do you see that market developing going forward now? And do you see Roche new device as a bit of a risk to your device?

Thierry Bernard, CEO

Thank you so much, Falko. And very quickly, and Roland, obviously, if you want to chime in on the price increase, obviously, feel free. So we always explained that we have a normal established policy of a yearly price increase that happens normally in January of every year, between December of the previous year and January. This year, starting July, we have decided in light of inflation on a selected number of countries to pass a second price increase. And we disclosed in our Q2 results that we were targeting overall lease price, a 6% to 7% price increase, for that second wave. Now obviously, once this objective is set, we negotiate customer by customers to see what we can obviously achieve net-net, and we are still basically living through that at the moment. We have explained to you as well that when we say 6% to 7% price increase, you should not consider the total base of customers. Why? First of all, because, as we said, it's on selected geographies, obviously, in our main markets, but also because we are in a contract, pre-annual contract with some customers, and therefore, in those pre-annual contracts, we have a guaranteed volume that normally price is already locked for one, two or three years. Nonetheless, as I disclosed also in our Q2 call, I said that given the specificities of higher inflation this year, we are also visiting those pre-annual customers to try to negotiate something. So it's too early to give you a definitive impact. What I can tell you is that obviously, we have a net-net positive impact of those price increases. For next year, we are working on the increase. We take into account, obviously, what we have passed in January of '22, what we have passed in July, and then we will determine the best number possible together with our customers. Roland, would you like to add something on the price increase, perhaps?

Roland Sackers, CFO

No. I think it was pretty well answered. Thank you.

Thierry Bernard, CEO

On the digital PCR front, we are observing continued market growth. As you may recall, we indicated that currently the market stands at approximately $350 million to $400 million. However, when considering the total addressable market, we are looking at the entire Q-PCR market, which exceeds $3 billion. This reveals a promising and dynamic market, particularly for QIAGEN. We believe that with QIAcuity, we have a uniquely differentiated solution. To reiterate, we offer three distinct workflows contained in three fully integrated devices, whereas our competitors, including Roche, currently require piecing together various components for a complete digital PCR solution. The entry of Roche into this market is a testament to its dynamism, and we think it will enhance customer interest in digital PCR. However, their offering lacks full integration and consists of two parts. While I refrain from criticizing the competition, I believe that due to its unique features, QIAcuity is well-positioned to lead in this market.

Hugo Solvet, Analyst

I have two on supply chain. Some of your peers have been impacted by shortages of electronics and chips mainly in life science instrumentation. What is the situation for QIAGEN at the moment as it does not seem to have an impact on instrument for life science customers? And second, on NeuMoDx, can you update us on the recent progresses that have been made on the broadening of the U.S. menu?

Thierry Bernard, CEO

Thank you, Hugo. Regarding supply, Roland also covered this extensively during our Q2 call. First, I want to emphasize that unlike other companies, we were well-prepared for the supply challenges posed by COVID. At the onset of COVID in 2020 and throughout 2021, we faced severe supply issues with critical components like biologics and plastics. This means that our supply and purchasing teams have been highly proactive and vigilant in addressing these supply challenges for over two years. We have implemented specific strategies, such as committing to long-term purchases with suppliers, in order to avoid placing our customers in difficult positions. While I don’t want to imply that our supply chain is free from pressure, I believe we effectively manage these challenges at QIAGEN thanks to our proactive measures. It’s also worth noting that our backorder levels have returned to pre-COVID conditions, which is a very positive sign. Roland, do you have any additional comments on the supply chain?

Roland Sackers, CFO

Overall, I would say the advantage we gained is largely due to the volatility we have encountered in some of our markets, coupled with COVID and the growth opportunities we identified outside of COVID. We made the decision early on, as early as 2020, to increase our inventory of semi-finished goods, which has been very beneficial at this moment. It’s also important to acknowledge that many of the challenges faced by companies in this industry arise from logistical issues. With a relatively strong inventory level, I believe we can manage through these challenges more effectively.

Thierry Bernard, CEO

Now we will address your second question regarding the status of the U.S. menu expansion for NeuMoDx. As we have discussed multiple times since 2021, the regulatory situation in the U.S. for NeuMoDx remains a focus. I want to emphasize that our midterm growth outlook for this solution is unchanged, and we continue to anticipate double-digit growth for NeuMoDx globally. Our primary goal has been to respond to the global demand for testing during the COVID pandemic. It is important to remember that the development of single plex or the development of four plex on NeuMoDx was not part of the initial forecast. The pandemic coincided with the initial launch of the system, and as is the case with any new system, there was a necessary period for improving its stability. This was prioritized by QIAGEN and resulted in delays with the FDA submission. By the end of 2022, we are in a position to allocate more resources and focus on expanding the U.S. test menu in the upcoming years, and you can expect to see more submissions starting in 2023. Additionally, NeuMoDx has a unique capability in the U.S. as it is still the only system that can run regulated assays and LDTs simultaneously and randomly. This uniqueness allows us to continue selling in the U.S., even though we currently have a more limited menu than in Europe.

Ed Ridley-Day, Analyst

For your domestic clients, do you see any specific wage inflation and labor shortages? And to what extent do you feel you're positioned to help them with those challenges? Additionally, could you remind us of the current percentage of sales in China and provide more insight into the current trading environment there?

Thierry Bernard, CEO

So Ed, I do apologize once again, I don't know if it's coming from my hand, but I didn't understand the first part of your question. I heard words like inflation and wages. Perhaps you might want to repeat that one?

Roland Sackers, CFO

Sure. No, let's do that. No. And I think what I was trying to say in our prepared minutes is that QIAGEN decided in countries where inflation has clearly a larger than average increase to help our employees with a one-time payment here in the fourth quarter. So it will overall affect roughly more than half of our employees. And that's clearly something what we're doing for this year. We clearly also more in the situation for next year. We clearly expect also that salary increases in next year overall will be probably higher than what we have seen before because of, again, on the one hand side, we are having a good performance, but clearly also that inflation challenges are going to stay. So I think it's one way to really take out our ownership here and our responsibility towards employees very seriously.

Thierry Bernard, CEO

Thanks a lot, Roland. And moving to China, Ed. So clearly, ratio-wise, I would say, China is around 6% to 7% of our sales. So we don't have the same kind of exposure than some of our peers. At the same time, I would highlight that I think organization-wise, we are quite well prepared to answer the challenges of the Chinese market. You remember in the past, we mentioned localization, and the nationalization of some healthcare segments. Remember that we have a site in Shenzhen for local manufacturing and development, and we have also a second brand in China. So obviously, we follow extremely carefully the very unpredictable situation with lockdown because it's a very moving situation. And so results wise, as we have said today, for the first nine months of 2022, our sales are up 4% CER over 2021 same period. But in Q3, we saw a sales decline of 3%. It was completely factored in our new guidance that we gave already in the Q2 call. We continue, obviously, to see opportunities in the China market. Let's never forget that whatever the challenge is, it's still the second market in the world from a size standpoint. But compared to probably the pre-COVID period, we see those opportunities at a lower rate than before 2019.

John Gilardi, Vice President, Head of Corporate Communications and Investor Relations

Okay. Thank you very much, Thierry. And with that, we want to end the call here. We appreciate your interest in QIAGEN. If you have any follow-up questions or topics to discuss, please reach out to Phoebe and me, and we're available to help you out. Thank you very much.

Operator, Operator

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