Earnings Call Transcript - QGEN Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for being here. I am Kyle, your PGI call operator. Welcome, and thank you for joining QIAGEN's Second Quarter 2022 Earnings Conference Call Webcast. At this point, I would like to introduce your host, John Gilardi, Vice President, Head of Corporate Communications and Investor Relations at QIAGEN. Please proceed, sir.

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

So thank you very much, 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 will first have some remarks from Thierry and Roland and then move into the Q&A session. A presentation with details on our performance is available on the IR section of our website, along with the quarterly release. We will not be showing the slides during the 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, July 28, 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 intention or obligation to revise any forward-looking statements. For more information, please refer to our filings with the U.S. Securities and Exchange Commission, which are also available on our website. We will also be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. All references to EPS refer to diluted EPS. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in our press release for the second quarter as well as in the presentation for this call that are both available on our website. I would like to now turn over the call to Thierry. Thierry, please unmute your line.

Thierry Bernard, Chief Executive Officer

Yes. Thank you, John, and it would be even better, obviously, if I unmute the line. I'm sorry for that. Thank you, everyone, for joining, and welcome to our conference call today. We are very pleased to report that our teams worldwide delivered solid results in the second quarter of 2022. We have again exceeded our outlook driven by strong double-digit sales growth at constant exchange rates from our non-COVID portfolio. In line with our guidance, our five pillars of growth are making solid progress towards our 2022 goals. While the macro landscape continues to change and to present new challenges, we still have confidence in the robustness of our company and our strategy. Our teams have been very proactive in shoring up our business to withstand those challenges. At the onset of COVID, we began strengthening our supply and manufacturing infrastructure against various constraints. This has definitely helped us to prepare the company for the current environment of supply chain tightening and rising costs. We also began implementing alternative energy systems late last year at our German site. This will give us flexibility from now on with energy sourcing away from natural gas. This foresight has served us very well, as you can see in our continued delivery of strong results. We have been able to remain commercially and operationally agile during those changing times. And now allow me to get to our key messages for today. First, as mentioned, we exceeded the outlook set for net sales growth and adjusted EPS for Q2 2022. Net sales for the second quarter of 2022 grew to $544 million at constant exchange rates, a decline of 4% over the same period in 2021. This result was driven by 10% constant exchange rate growth in sales of our non-COVID products. At the same time, sales for COVID-19-related solutions decreased by 39% at constant exchange rates compared to 2021 same quarter. Adjusted diluted earnings per share in the second quarter were $0.53 at constant exchange rates, above the outlook for at least $0.46. Second key message. Our teams continue to execute successfully on our goals to advance our portfolios, especially in our five pillars of growth. We have launched instrument upgrades such as the QIAstat diagnostic rise for syndromic testing in high-volume labs and continue to broaden the menus. We have added the NeuMoDx HSV Quant assay. Our installed bases, a key asset for future consumables, also continue to grow. As an example, QIAcuity digital PCR systems have now reached over 1,000 cumulative placements, and QIAsymphony has passed over 3,000 placements. All of our five pillars of growth are perfectly on track to achieve the sales target we have set for the full year of 2022. And the last message for today, we have increased our outlook for the full year 2022 as a result of our performance in the first half. We now expect sales of at least $2.2 billion for the full year 2022 with the reaffirmation of the goal for double-digit constant exchange rate growth coming from our non-COVID portfolio. And as for adjusted EPS, we are now expecting at least $2.30 at constant exchange rates. With this outlook, we are taking into account the challenging macro environment and maintaining a very conservative view on COVID-19 testing demand for the year. As always, we are ready to support COVID testing in case of any outbreaks in the future, but we continue to be focused on executing on our core business to strengthen our foundation for sustainable growth. Our strategy of focus and balance continues to be a cornerstone to how we operate, particularly on our five pillars of growth. We will provide more details on the outlook later in this call. And I would now like to hand over to Roland for the financial update. Roland?

Roland Sackers, Chief Financial Officer

Thank you, Thierry. Hello, everyone, and thank you for joining this call to review our results for the second quarter and the upgraded outlook for 2022. Let me begin by walking you through our sales and the results in more detail. For the second quarter, sales were USD 544 million at constant exchange rates. This was well ahead of the outlook we set for at least USD 510 million. The key driver was, again, better-than-expected performance in our non-COVID product groups, which grew 10% at constant exchange rates and represented over 80% of total sales. Also remember that we had called out in the past a genomic technology sale of USD 20 million in the second quarter of 2021. Excluding this factor, non-COVID sales were up 15% at constant exchange rates. Sales of products used in COVID testing declined by 39% at constant exchange rates in the second quarter of 2022. And while this was better than our expectations, testing volumes dropped significantly across many regions. At actual rates, sales in the second quarter declined 9% over the same period in 2021. This was due to above 5 points of currency headwinds from the U.S. dollar against the euro and other currencies. For the second quarter, consumables and related revenues declined 4% at constant exchange rates over the same period in 2021. Although instrument sales were down 5% at constant exchange rates, this was against a very tough comparison due to COVID testing demand. We are still seeing good placement trends in key systems. In terms of sales among the four product groups, let's start with Sample technologies. This is about one-third of total sales. As we said on the last quarterly call, we expect more favorable trends in the non-COVID sales during the course of 2022. That was the case in the second quarter with non-COVID sales up 8% at constant exchange rates, representing nearly 80% of total sample technology sales. This reflects a strong performance for the first half of 2022 and solid market leadership. However, this product group saw an overall sales decline of 7% at constant exchange rates due to the significant headwinds created by reduced COVID testing demand compared to the second quarter of 2021. Sales in Diagnostic Solutions, which represent about 30% of total or 7% at constant exchange rates for the second quarter. The key driver was the QuantiFERON test in tuberculosis. Sales in the second quarter were up 9% on double-digit gains in the Americas and EMEA region. Given that sales for the first half of the year were USD 165 million at constant exchange rates, we are clearly on track to exceed our full year goal for more than USD 310 million at constant exchange rates. The sales trends for the clinical PCR testing systems, QIAstat-Dx, and NeuMoDx remained well on track with our full year expectations, and we were particularly pleased with double-digit constant exchange rate growth in consumables for QIAstat-Dx. In the PCR/Nucleic acid amplification product group, which represents about 20% of total sales, these overall results were largely unchanged from the second quarter of 2021. Our teams delivered double-digit constant exchange rate growth in the non-COVID testing product groups. This includes solid sales gains with QIAcuity digital PCR driven by strong instrument placements and an increase in consumable pull-through. Additionally, the acquisition of BLIRT in May 2022 provided about $1 million one-time sales for the second quarter. The Genomics/NGS product group, which represents about 10% of total sales, saw a 23% decline in sales at constant exchange rates. As we noted earlier, these results faced a difficult comparison due to the genomic technology sales in the 2021 quarter. When you exclude this factor, shares in this product group were up 2% at constant exchange rates. Non-COVID product group sales growth at a single-digit constant exchange rate, thanks to solid demand for universal NGS solutions. We also saw a slowdown in the QIAGEN Digital Insights bioinformatics business, with sales declining at a low single-digit constant exchange rate. We see this as an outlier given that this business can have larger swings in sales trends on a quarterly basis. Moving on to the geographic breakdown of sales. All three of our regions delivered solid sales growth in the non-COVID product groups, but this was more than offset by the drop-off in COVID testing. The best performance came in the Asia Pacific, Japan region, with sales at constant exchange rates largely unchanged from the second quarter of 2021. China was the driver in this region with sales growing at a low-single-digit constant exchange rate. This was in line with our expectations in light of the regional lockdowns. Growth came from non-COVID demand among life science customers and for QuantiFERON-TB. It was also supported by demand for COVID testing components made in China for the local market. The Americas regions felt the impact of reduced COVID testing demand with overall sales down 1% at constant exchange rates for the second quarter. However, we saw double-digit constant exchange rate growth for the non-COVID product groups. In the Europe, Middle East, Africa region, sales were down 10% at constant exchange rates for the quarter due to the sharp drop-off in COVID testing trends. Despite that headwind, Germany, Spain, and the Netherlands maintained a double-digit constant exchange rate growth trend from the first quarter. Moving down the income statement, the adjusted operating income margin declined to 28.4% of sales, mainly due to the lower sales contributions. Turning to the components of the adjusted operating income margin, the adjusted gross margin declined about 1.3 percentage points to 67.4% of sales in the second quarter. This reflected initiatives to increase production capacity, especially for QIAstat-Dx and NeuMoDx. It also includes the cost to secure our supply chain with additional product inventory and secondary suppliers. R&D investments rose to 9.7% of sales in the second quarter from 9.2% in the year-ago period. We are taking the opportunity to increase the pace of R&D investment, and the majority of these are in the five pillars of growth. Sales and marketing expenses were also higher in the second quarter of 2022, rising about 3.6 percentage points to 23.1% of sales from the same period in 2021. This was due to investments into the dedicated sales and marketing activities for the five pillars of growth as well as higher freight costs, which we are seeking to pass on to customers with surcharges. And as a last point, general and administrative expenses rose above 1 percentage point to about 6.4% of sales in the 2022 quarter. This was mainly due to investments into IT systems and cybersecurity. Adjusted EPS for the second quarter was $0.53 at constant exchange rates and again, well above our outlook for at least $0.46. Results in actual rates were $0.51 due to the strong currency headwinds. The adjusted tax rate was 20% and above the outlook for the quarter. We continue to expect a rate of about 18% to 19% for the full year. Turning to cash flow, we saw solid trends continuing in the second quarter of the year in terms of both operating and free cash flow. Operating cash flow increased 33% to USD 379 million from USD 285 million in the first half of 2021. This was driven by sales growth for the first half of the year that led to higher net income and also higher adjustments for non-cash items. Free cash flow rose even faster at 63% in the first half of 2022 over the year-ago period. The key factor was lower purchases of property, plant, and equipment with the completion of important investments to expand production capacity. PPE fell to USD 61 million or 5.3% of sales in the first half of 2022 compared to USD 90 million or 7.9% of sales in the first half of 2021. In terms of our balance sheet, total consolidated net debt stood at USD 625 million at June 30, 2022 compared to USD 877 million at December 31, 2021. This has decreased due to higher levels of cash, cash equivalents, and short-term investments paid at the end of the second quarter. The leverage ratio is unchanged from the third quarter at 0.7x net debt to adjusted EBITDA. Our healthy cash position and strong cash flow provide us with a solid foundation to continue our disciplined capital deployment policy. You saw in the second quarter with the acquisition of BLIRT. I would like to now hand back to Thierry.

Thierry Bernard, Chief Executive Officer

Thank you, Roland, and we would like now to share with you all a few key points of progress in our portfolios. In Sample technology first, the new QIAxcel Connect system was launched in the second quarter. After QIAcube Connect and EZ2, this is part of the ongoing program to upgrade our automated sample preparation instruments. This launch of the QIAxcel builds on over 4,000 QIAxcel systems already on the market being used for DNA and RNA quality analysis in both PCR and NGS workflows. The updated system offers higher sensitivity and a new level of connectivity. Much like all their instruments in the QIAGEN automation portfolio, it connects to the QIAsphere app, which allows real-time remote monitoring of the instrument. Second, in Diagnostic Solutions, we already mentioned the QIAstat-Dx Rise. But let me tell you why this is such a great addition to our portfolio. The QIAstat-Dx Rise is the only platform on the market offering automatic loading and unloading of samples. That means hands-off sample preparation and processing. It employs 8 analytical modules and is the only system with the flexibility to allow the modules to be removed and used individually. So this is truly something unique in the industry for high-volume syndromic testing. As a reminder, we have a solid offering of three key CE-IVD tests on QIAstat: respiratory, gastrointestinal, and meningitis panels. In terms of menu in the U.S., we offer the respiratory panel and the respiratory for place. The GI panel was submitted to the FDA on time at the end of 2021. Discussions remain ongoing with the agency. However, it is probable the approval will come after the end of the year. At the beginning of the call, I mentioned the new CE-IVD assay for HSV quantification on NeuMoDx. This brings the menu to 15 CE-IVD tests on NeuMoDx platforms for Europe, making it one of the broadest menus in core lab testing. As a reminder, we continue to invest in research and development to transfer CE-IVD tests onto the U.S. menu in the coming years. In PCR and nucleic acid amplification, QIAcuity Digital PCR not only had strong placement in Q2, but it also crossed another very important milestone with expansion into the biopharma sector. As you have seen recently, we have just released 13 new kits and assays ahead of schedule that allow QIAcuity to be used for quantification and analysis in the development and manufacturing of cell and gene therapy drugs. This is significant since the biopharma sector is probably currently one of the largest customer segments for digital PCR. In genomics and NGS, our QIAGEN Clinical Insight bioinformatics platform has now been used to analyze and report over 3 million cases. To give you a gauge of this success, this is 5 times more than any other comparable commercial offerings. We are strengthening our strategy defined 2 years ago to be a key platform-agnostic player in next-generation sequencing chemistry and data management. This is very relevant because with the introduction of new technology enabling lower cost and faster next-generation sequencing, QIAGEN Digital Insights and our universal consumables are very well placed in a rapidly expanding market. We believe that this is a winning strategy to address a growing number of sequencing platforms in this market. Those are just a few examples of the progress our teams continue to make on goals to advance our portfolio. Not only is this built on our leadership in areas such as Sample Techs or QuantiFERON, but it also sets the stage for market expansion in all of our five pillars of growth. And now once again, let me hand it back over to Roland. Roland?

Operator, Operator

Ladies and gentlemen, we apologize for the pause in the presentation. Please remain online. We'll be hearing music until the presentation resumes.

Roland Sackers, Chief Financial Officer

Thank you, Thierry, and again, technology. I would like to provide some additional perspective on the upgraded outlook for the full year 2022 and also for the third quarter. We have increased our full-year sales outlook to now reach at least USD 2.2 billion at constant exchange rates. This is an increase from the prior year outlook for at least USD 2.2 billion. We are affirming our expectations for double-digit constant exchange rate growth in the non-COVID product groups after the 12% constant exchange rate performance in the first half of the year. This includes a reestimation of our target for the five pillars of growth. We are also maintaining our conservative view on COVID testing demand. We continue to expect a decline in COVID sales from the 2021 level of USD 704 million. In the first half of 2022, we already generated USD 336 million of sales at constant exchange rates, and this is a significant amount of the COVID sales expected for the full year. The new outlook also reflects our updated views on the current inflation and macroeconomic trends. As Thierry mentioned, we are taking actions to mitigate the impact in terms of our supply chains and energy needs. On that point, our natural gas needs in Germany are going to be covered by other energy sources as of August. And while natural gas is used to heat our buildings, we don't need it for production. Our full-year outlook has already taken into consideration the impact of about 1% of sales coming from Russia, Ukraine, and Belarus. We had suspended our business in Russia after the invasion of Ukraine. In terms of profitability, we now expect adjusted EPS of at least $2.30 at constant exchange rates as compared to the prior outlook for at least $2.14 at constant exchange rates. This takes into consideration our plans to step up investments into our five pillars of growth in terms of R&D expenses and sales and marketing. We have also considered that costs are rising due to the inflationary trends for 2022. At the same time, we continue with our disciplined view on operating expenses and have also implemented product price increases in July on a country-by-country basis. The progress in our business, however, is increasingly impacted by adverse currency movements against the U.S. dollar. Based on exchange rates as of July 2022, currency movements against the dollar are now expected to create an adverse impact of about 5 percentage points on net sales and about $0.10 to $0.11 per share on adjusted EPS for the full year 2022. For the third quarter, we have set a floor for both net sales and adjusted EPS. This calls for sales to reach at least USD 510 million at constant exchange rates and adjusted diluted EPS of at least $0.48 at constant exchange rates. We also expect difficult currency headwinds in the third quarter. This means an adverse impact of about 6 percentage points on sales and about $0.02 to $0.03 on adjusted EPS. I would like to now hand back to Thierry.

Thierry Bernard, Chief Executive Officer

Thank you, Roland. And before we go to the Q&A session, let me provide you with a quick summary and leave you with some, obviously, key takeaway messages. First, of course, COVID-related product did better than expected in Q2 while still experiencing a drop in demand compared to the year-ago period. But first and foremost, what is very key is that we exceeded our outlook this quarter driven by a very strong performance from our non-COVID product groups. And we keep the same message. This is where the focus of the company is. Second, our teams continue to execute on advancing our portfolio with the launch of instrument upgrades and menu expansion in our growth drivers perfectly on plan. And as a last point, we have increased our 2022 outlook for sales and EPS after a very strong first half of the year. We are reaffirming our commitment for double-digit growth of our non-COVID portfolio in 2022, and we continue to take a conservative view on demand for COVID testing in the second half of 2022. QIAGEN is delivering on the goals we have set for this year, moving ahead from a position of strength and determined to create greater value from a truly differentiated portfolio with significant growth potential. As our teams stay focused on executing quarter after quarter, we are working to ensure the strength of our company and us in a dynamic and changing microenvironment. We continue to leverage our strategy anchored by focus and balance, focusing on attractive market opportunities and our five pillars of growth and balance among customers in life science and molecular diagnostics as well as among the various regions of the world. With that, thanks a lot for your attention. And I'd like to hand back to John and the operator for the Q&A session. Thank you.

Operator, Operator

The first question comes from Daniel Wendorff of ODDO BHF.

Daniel Wendorff, Analyst

I would like to gain a clearer understanding of the factors affecting non-COVID related sales, particularly what we have observed in the first and second quarters. Can you discuss the significance of catch-up effects and whether the increased installed base during the pandemic serves as a major driver? Alternatively, is there an ongoing trend of increased R&D spending? I'm eager to better understand these dynamics.

Thierry Bernard, Chief Executive Officer

Thanks, Daniel. The main part of my answer is that it's essentially a mix of several factors. Many areas of our portfolio primarily focus on a menu approach. For example, systems like QIAstat or NeuMoDx have benefited from COVID-related trends, seeing a strong increase in placements. However, these systems are not limited to conducting only COVID tests. We've consistently noted that we will keep expanding the menu available for these platforms, thereby enhancing their growth potential. This is why you have observed the expansion of the QIAstat menu beyond respiratory tests to include gastrointestinal and recently meningitis tests in Europe. Additionally, we announced the launch of a new assay for NeuMoDx, which adds to the existing assays available in Europe. This initial movement is clearly driving growth. Furthermore, recall that we had a strong placement quarter in Q1, and those systems will now drive consumption for both COVID and non-COVID menus. There are also parts of our portfolio that have seen little to no impact from COVID and are now benefiting from a return to near-normal lab investment and activity levels. A notable example is QIAcuity. Digital PCR was not launched for COVID, although we leveraged the pandemic to introduce a specific application for wastewater testing. The installed base we have built over the last year and a half is now fully positioned to utilize our offerings in the life sciences sector. Similarly, QuantiFERON was affected during the peak of COVID due to laboratories focusing on COVID testing, which led to a downturn for QuantiFERON in 2020. However, we always maintained that we would recover and return to growth, and now that international migration is approaching normal levels, QuantiFERON consumption is nearly back to pre-pandemic levels. There are dual effects at play here; laboratories are returning to normal activity levels, and our increased installed base thanks to the pandemic is driving demand. This trend is also evident in oncology. I mentioned in 2021 that labs were operating at about 80% of pre-pandemic levels, and now we are closer to full pre-pandemic capacity in oncology. In companion diagnostics, pharmaceutical companies are again investing in new developments, leading to promising contracts in PCR technologies, NGS, and our digital PCR solutions as well. Thus, it's a combination of these various factors that supports our positive trend in non-COVID sales. Does that address your question, Daniel?

Operator, Operator

We take our next question from Dan Brennan of Cowen.

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

Dan, are you there? We don't hear you. Okay. Operator, let's move on to the next person.

Operator, Operator

We move to the next question, Patrick Donnelly with Citi.

Patrick Donnelly, Analyst

Great. Can you guys hear me, okay?

Thierry Bernard, Chief Executive Officer

Very well.

Patrick Donnelly, Analyst

Okay. Good. Maybe just on focusing on the PCR side. It looked like the base PCR performance was really strong even if you back out COVID and digital PCR. Can you just talk about what you're seeing there? Maybe start with base PCR and then obviously, digital PCR, you touched on QIAcuity. You're getting into biopharma a bit, but maybe base PCR and then digital PCR as well, just the performance in the quarter? And then I have a quick follow-up.

Thierry Bernard, Chief Executive Officer

Thank you, Patrick. Regarding digital PCR, we are still in the early stages of our launch, which has been in place for 1.5 years by QIAGEN. The installation of over 1,000 systems in this challenging environment demonstrates the quality of our solution and the positive market response. Our objective is to encourage these systems to achieve routine consumption quickly after installation by offering more applications to our laboratories. Focusing on biopharma development is crucial as it is a highly active market for digital PCR, which is reflected in the growth of both our installed base and consumption. Additionally, the recent decision by the CDC in the U.S. to utilize digital PCR for wastewater testing related to COVID is a significant endorsement for this technology and for QIAGEN. On the traditional PCR front, while we have noticed a significant decline in COVID-related sales, non-COVID applications are experiencing substantial growth, exceeding double digits. This indicates that many laboratories are returning to their pre-COVID consumption patterns. As we anticipated, investment is resuming in academia, research, and clinical settings focused on non-COVID applications, which is contributing to our growth in this area.

Operator, Operator

We take our next question from Dan Brennan of Cowen.

Daniel Brennan, Analyst

Great. Thanks. Can you hear me?

Operator, Operator

Yes.

Daniel Brennan, Analyst

Great. Sorry about that. So in the last recession in '08 or '09, you guys held up exceptionally well. And I know, Thierry, you talked about it in your prepared remarks in terms of I guess, seeing some impacts or potentially seeing some impacts. I'm just wondering with the revised guide, have you assumed anything for impact this year? And when we look ahead to '23 is double-digit growth, ex-COVID still reasonable given the durability of your portfolio? Or if not, kind of how do we think about potential macro risks?

Thierry Bernard, Chief Executive Officer

Well, both Roland and I can address this, and I would appreciate Roland sharing his thoughts as well. We mentioned in our presentation today that our full-year forecast for 2022 takes into account visible trends, including the ongoing situation with the war in Ukraine and geopolitical tensions. As we communicated, we've suspended our operations in Russia and Ukraine, and this is fully included in our considerations. Current trends related to inflation and supply chain tensions are accounted for as well. However, we emphasize two points: QIAGEN has pricing power, and we are meticulous about implementing price increases annually. Typically, we execute price adjustments in December and January, but this year, due to the inflationary environment, we have opted for a second price increase in June and July. We are also preparing for another round in December and January, which is included in our forecast. It’s important to note that some customers have annual contracts with fixed costs, so the price adjustments won't cover the entire revenue stream. Nevertheless, we are implementing a second price increase where acceptable by customers. We have not included any improvement from supply chain constraints, but as we explained today, QIAGEN is somewhat better positioned compared to others in the industry due to our two years of preparation stemming from the high demand for COVID testing, which initially strained our raw materials and supplies. No company is entirely immune to macroeconomic factors and volatility. However, the healthcare sector, on the whole, tends to be more resilient. QIAGEN has taken proactive steps to effectively navigate this challenging environment. Regarding your question about 2023, we are aware that inflationary pressures are unlikely to simply disappear at the start of the new year. As we plan for 2023, we are currently developing our budget, and we are working under the assumption that supply chain issues may not significantly improve. We are avoiding extra assumptions regarding COVID as its unpredictability could affect our P&L. If it persists, we will view it as an added benefit to our model. We reaffirmed on December 8, 2020, that apart from Sample tech, our five pillars of growth should maintain a double-digit growth profile, and we stand by that for next year. As for Sample tech, given our leadership and the enhancements we've made during the COVID crisis, we expect a growth profile in the low to mid-single digits.

Operator, Operator

We take our next question from Falko Friedrichs of Deutsche Bank.

Falko Friedrichs, Analyst

My question is actually on the Sample tech business. Could you elaborate a little bit on the reasons for the very strong performance in the non-core business in Q2? Within Sample profit seems to be high single digits. So what was driving this higher growth over what you just mentioned your ambition is going forward for this business?

Thierry Bernard, Chief Executive Officer

Thank you, Falko. Over the last two years, we've been explaining that RNA testing, which contributed to the COVID numbers for Sample tech at QIAGEN, represents a relatively small portion of our portfolio, around 25%. The core of our offerings lies in DNA testing. We anticipated that as COVID gradually diminishes, labs would return to pre-COVID levels of DNA testing. They would naturally gravitate back to the leading brand and comprehensive solution offerings from QIAGEN. Moreover, given that Sample tech is a key growth area for us, we are carefully focusing on our commercial deployment and strategy. This involves systematically reaching out to our existing customers to ensure they return to normal consumption levels. It's also important to note that we have consistently enhanced our automation lineup. As mentioned earlier, we launched QIAcube Connect two years ago, followed by EZ2 last year, and now we are introducing QIAxcel. Additionally, we have plans for a new version of QIAsymphony in the next two years. These improvements are helping our customers transition to better-connected, higher-throughput systems, which is boosting our consumption of Sample tech beyond COVID-related products.

Operator, Operator

We move to the next question from Casey Woodring of JPMorgan.

Casey Woodring, Analyst

Just wanted to go through the business regionally. So I was wondering what drove strength in China? How much of that was COVID versus the base business there? And then, can you talk towards what you're seeing in Europe? It seems like results were mixed between countries there. So was that simply due to some COVID headwinds between countries? Or is there something else going on? And then specifically on the U.K. side, did you see any slowdown from academic customers related to the noise around the EU pulling the region's Horizon academic funding?

Thierry Bernard, Chief Executive Officer

So first on to China. You remember when we communicated after Q1 results, we explained that we took very proactive measures on China regarding the potential lockdown. And we saw it come in as early as the first part of Q1, and therefore, we decided to basically deliver our commercial partners with more product than usual so that they could supply even if, obviously, shipping to China would become more difficult. So that's #1. It's not driven by COVID because you remember we have two activities in China. We have the purely classical QIAGEN product, and we have also a second brand. The QIAGEN product in China is not benefiting from COVID; why? Because no foreign products on COVID are accepted in China or are registered in China. So our growth in the classical QIAGEN solution is fully non-COVID. Of course, with our second brand, which, as Roland described, is a purely manufactured product locally. We also benefit also anytime there is a surge of demand for COVID. So that's for China. For Europe, as you said yourself, it's simply a very diversified picture of the situation between countries. You know that Europe is a mosaic. So when you see, for example, Germany, Spain, and the Netherlands, we still have double-digit constant exchange rate growth trends in our Q2. We had, let's say, slower sales in France, Switzerland, and the United Kingdom. The United Kingdom is far too early for us to see a decline in investment into academia or research labs. On the contrary, we still believe that the budget allocated to the national center of research is still healthy. I think it's rather just sequentially one quarter. It's too early to say if it's a trend. Europe, every quarter shows a diversified picture. I would say two things to conclude. First of all, there are some countries, obviously, where we also benefit from what has started in the second half of Q2, which is obviously strong demands on COVID. The strong demand for COVID goes either to antigen testing. It's not obviously a case in play, but let's be clear, it also goes to our PCR portfolio. But Europe, despite COVID, is also a perfect translation of QIAGEN strategy, with most of our instruments, which is the menu play. And it's very interesting, as Roland said in his part to see that, for example, the ratio between COVID and non-COVID in Europe of consumption of assays on NeuMoDx is still very much impacted by COVID, obviously in Europe, but has decreased in favor of the non-COVID portfolio already in Q2. And this is very encouraging because this is exactly where we want to drive our installed base.

Operator, Operator

We take our next question from Hugo Solvet with BNP Paribas.

Hugo Solvet, Analyst

I have a few on supply chain, Thierry, which you alluded to. Can you maybe remind us what business or product is mostly impacted by supply chain issue at the moment? And if you see that spreading to other parts of the business? Or is it contained or getting better? On the single-digit growth of the non-COVID Life Science business, which you mentioned in the press release, any differences in regional dynamics or client dynamics here that we should be aware of? Are you seeing any weakening of weak biotech funding environment starting to come through? And on NeuMoDx and on the sequential slowdown, could you maybe share with us some data point on the pull-through for the COVID and the non-COVID tests?

Thierry Bernard, Chief Executive Officer

So thanks, Hugo. On the supply chain, again, I'm going to stress that while we said that no company is immune to the tension, I think that we are prepared because we are working hard on that for the last two years. And I believe that I wouldn't say we are completely protected, but we have it under control. Which are the parts that are the most affected? It's a mix of different products. There are some raw materials. There are some, for example, also specific papers for labeling components of instruments, such as, for example, electronic led boards. But overall, basically, we can manage. It doesn't create pure back orders in our companies, but we are for some products in allocation. It's better than pure back orders. We are working on that. We have significantly also increased the level and granularity of communication to our people in the field and also our customers to make sure that they are fully informed of the situation. There is nothing more than the customers not knowing what's the situation of their order. But perhaps Roland, you want to add something also on the supply chain solution situation, I'm sorry.

Roland Sackers, Chief Financial Officer

Yes. I think for us now to be honest, I don't think there's any specific product to mention, but I do think if we had all impacted, it comes mainly by logistic hiccups because, as you know, shipping things around these days is difficult, in particular also out of China. But we think we are well-prepared because clearly, with all the volatility we were facing over the last 18 months because of COVID, we were actively ramping up inventories quite significantly. You can see it also in our balance sheet. So I do think that having these larger inventory levels so far served us quite well to have these more or less temporary issues becoming never an issue, which were affecting QIAGEN customers so far.

Thierry Bernard, Chief Executive Officer

Thanks, Roland. And to your second part of the question, Hugo. So first, you wanted to understand a bit the non-COVID basically situation for life science? And is that something that we can highlight? Yes, indeed, we see stronger trends at the moment in the U.S. As I shared with you, if you remember at the end of Q1, academia, especially in Europe, was rather soft in Q1 and has evolved a bit more favorably as we were progressing into Q2. So it's coming back. It's still a bit softer than in the U.S. but it's coming back. So it's encouraging. Let's see what is happening with the summer, obviously, starting in Europe. We don't see clearly, at the moment, a real impact at least on our activities on basically decreasing funding for biotechs or for so-called some research activities. We believe that the level of funding for public research and public academia is still rather healthy. And we don't see a drop for us of interest in our collaboration, especially with biotech companies. For NeuMoDx, I would just leave you with one number. I always disclosed to the market in the previous months that it was fair to say that NeuMoDx between Europe and the U.S. and even more in the U.S., as you know, because we don't have the menu that we have in Europe. The 2021 results for NeuMoDx were driven by COVID at probably 80% to 85% of the total consumption. I'm happy to see that in Q2 in Europe, obviously, because this is where we have the menu, that ratio of COVID on the menu consumption for NeuMoDx is lower than 65% to 70%. It depends on the country. So we see now that the system is installed, laboratories are starting to pick up our blood-borne viruses or our sexually transmitted diseases. Obviously, we need to continue to push that, but this is encouraging.

Operator, Operator

We take our last question from Matt Sykes with Goldman Sachs.

Matthew Sykes, Analyst

Thierry, maybe a high-level question for you. Just given the sustainable growth you've seen in non-COVID of double digits and what you're calling for in '23 and the level of investment you've been putting into your five pillars of growth, how are you thinking about the growth versus margin trade-off as you want to spend to fuel that growth at the same time, you want to protect margins? Do you feel that there is a necessary trade-off? Or can you balance the two as we move into '23? Just would love to get your thoughts in terms of strategy for that.

Thierry Bernard, Chief Executive Officer

I believe Roland could also provide input. I don't view this as a trade-off; rather, it's a management responsibility. We understand that to optimize the potential of our five pillars of growth, we need to continue making significant investments in R&D. This aligns with the recent changes in our gross margin, which is currently below 68%. We have provided clear explanations regarding this. Our commitment to investing remains strong. I see two primary areas where this company can demonstrate potential, and as these investments begin to yield results, we expect to return to a more normalized gross margin between 68% and 70%. I truly believe we can approach a 30% operating margin, but we must remember that we are still in investment mode for parts of our portfolio. This is not necessarily a trade-off; it’s about managing our priorities carefully. I am confident that Roland also has valuable insights on this matter.

Roland Sackers, Chief Financial Officer

Matt, I agree that QIAGEN has a premium gross margin and particularly strong operating margins compared to the overall industry. Given the growth rate we are achieving, especially over the last 2.5 years on the non-COVID side, I think we can effectively balance both aspects. It's clear that growth is significant for the entire industry and for QIAGEN as well. However, we have a proven history of maintaining very strong margins within QIAGEN.

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

Okay. With that, I'd like to end the call here. Thank you very much for your participation. As you know, please reach out to Phoebe or me. If you have any questions or comments or follow-up topics, we'd be glad to discuss them with you. Thank you.

Operator, Operator

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