NEW YORK – Qiagen's newly promoted, if temporary, CEO Thierry Bernard this week took on the unenviable task of assuaging investors' fears in the wake of a tumultuous month in which the company announced that it would end development of next-generation sequencing instruments, compounding existing sales weakness in China that caused Qiagen to deliver lower-than-expected revenues for the third quarter and reduce its fourth quarter expectations.
Bernard, who took over Qiagen's helm on an interim basis following the October departure of long-time CEO Peer Schatz, explained to investors during an earnings call the underlying reasons for Qiagen's issues in China, as well as how the NGS instrument decision is expected to have a short-term ripple effect on other revenue streams, such as the company's many companion diagnostic development agreements.
And even if Bernard didn't lay out an explicit plan for future revenue growth, he made a clear statement about how Qiagen's new NGS partnership with Illumina is expected to fill the void, and how Qiagen can spur growth by paying more attention to the tools and technologies it already has as opposed to eyeing M&A opportunities.
"I really believe that at this point, with the significant investment that we have done over the last two to three years, we have ideally positioned Qiagen to be extremely competitive," Bernard said.
"For me it's very clear," he added. "We are a mid-cap company. And when we are a mid-cap, we need to focus on where we can [be] between [the] number one and number three position on the market. It's not about mimicking what others are doing."
On Wednesday after the close of the market, Qiagen reported a 1 percent year-over-year revenue increase for Q3, or 3 percent at constant exchange rates, missing analysts' expectations. The firm also lowered its full-year 2019 sales outlook for the second time in as many quarters, mostly due to continued weakness in China.
The issues in China starting rearing their head mid-year when Qiagen announced alongside disappointing Q2 preliminary earnings that it would be restructuring an NGS partnership with Maccura Biotechnology (originally inked in 2017) due to slower-than-expected uptake of its GeneReader sequencers for IVD use, the partnership's goal.
In retrospect, this seemed to foreshadow the decision to discontinue new NGS instrument development, as Qiagen noted when it made that announcement that even though it will continue to support current instruments, they would be for small panels and research use only, and explicitly never for IVD use.
But apparently, the company's China woes ran deeper than NGS, as Bernard noted that distributors of all of its molecular diagnostics products in that country saw a slowdown in ordering from hospitals and laboratories, creating a 20 percentage point headwind in Q3.
He added that he immediately challenged Qiagen's team in China to monitor its commercial partners more closely, and noted that hospitals have said the situation "should not last for very much longer" and that he sees this as "rather a kind of a hiccup."
Bernard added that the molecular diagnostics market in China has probably slowed down to a 10 percent to 15 percent growth rate from a prior rate of approximately 20 percent. "That is a reasonable expectation for this market," he said. "And this is why I insist that … China is still key for Qiagen, because … I remind everybody that the size of the market in China is probably around $2 billion for diagnostics. A market of that size that is still growing at a healthy double digit [pace] is still very obviously interesting."
Another reason for the lowered revenue guidance is that its discontinuation of GeneReader development forced it to nix or reconfigure certain companion diagnostic development partnerships with pharmaceutical partners.
"We are now expecting lower revenues from companion diagnostic codevelopment projects in the fourth quarter," Bernard said. "Given that we have stopped our NGS instrument development programs, we now have to stop our NGS-based companion diagnostics activities."
He added that the firm plans to transition these programs to Illumina sequencers. "Remember that our companion diagnostic activities are made of two main activities: PCR-based, which [remain] extremely strong; and NGS, that we are going to now progressively transfer to our Illumina partnership," he said. Qiagen has 28 master collaboration agreements with pharmaceutical and biotech companies for test development, but it is unclear how many of these are based on NGS and how many on PCR.
Qiagen still sees NGS as one of its key growth drivers, Bernard said, noting that the company still sells a significant amount of sample prep consumables and gene panels that can be used on any type of sequencer, as well as a suite of NGS informatics platforms. Bernard also stressed that the company would continue to sell the GeneReader system for smaller panels for research use only.
However, for NGS-based CDx, the firm will rely on its new partner Illumina.
"In terms of revenue streams, we want to increase the number of codevelopment deals for companion diagnostics based on NGS," Bernard said. "Qiagen will receive milestone and other payments for this work from our pharmaceutical and biotech partners. Illumina also is eligible to receive milestone payments from those projects. We are also planning to generate sales of the IVD kits for which we get regulatory approvals in Europe, the US, and other markets worldwide."
Qiagen will log those sales, he said, while Illumina will be eligible for a single-digit percentage royalty payment in addition to the "modest" one-time upfront technology access payment it has received from Qiagen. "We will continue to book sales for our sample technologies, including instruments, and from our bioinformatics solutions from those customers just like we are currently doing with our universal NGS solution," Bernard said.
Beyond NGS and CDx development, infectious disease diagnostics remains a cornerstone of future growth for the company. Sales of its QuantiFeron-TB test for latent tuberculosis has shown no signs of slowing down, with 18 percent year-over-year growth at constant exchange rates in Q3.
Qiagen also is targeting mid- and high-capacity infectious disease testing laboratories through its partnership with and investment in NeuMoDx; and the lower-throughput but higher-plex "syndromic testing" market through its QiaStat-Dx system and associated infectious disease panels.
But even this area of the business is not without its hiccups.
"Another factor for the [reduced revenue] outlook is our decision to take a more cautious view on the planned sales ramp-up for the QiaStat diagnostic syndromic testing system for  ahead of the upcoming flu season in the US," Bernard said. "The very positive point is that we have now reached 800 cumulative placements for the QiaStat [instrument]. We had $11 million of sales for the first nine months of  against our target for about $15 million for this period."
Qiagen has already garnered US Food and Drug Administration clearance for a multiplex respiratory panel for QiaStat-Dx, and landed McKesson as exclusive distributor of the platform in US hospitals with 200 or fewer beds.
However, Qiagen is delaying the launch of its QiaStat meningitis panel in Europe and its gastrointestinal panel in the US to the first half of 2020 from an initial target launch in the fourth quarter of 2019.
"I spent a significant number of years in diagnostic and development activities and diagnostics are not always completely easy to focus" Bernard said. "We are working on living organisms. And obviously, sometimes we have hiccups in the development. Those hiccups could be contamination issues or could be some organisms are showing either false negatives or false positives."
He said that IVD development typically takes around three years for a new assay, "and the closer you get to the market launch ... the more surprising sometimes are very [last-minute] results. So this is under control … in our Barcelona site for QIAstat, but this is why we prefer to say the first half of 2020 for those two assays."
Bernard stressed that the delays have nothing to do with the quality of the QIAstat technology, which is based on real-time PCR. And, he added, the commercialization trajectory is still solid, "because, just to give you an example, we are currently starting to evaluate some research-use-only formats of our meningitis [assay] for Europe. So that shows you that we are very much at the end of the development."
Plan for the future
Bernard made it clear that if he had his druthers — and he will for at least the next several months as interim CEO — Qiagen would not look to acquire any more new technologies and instead would focus on what the company currently has in hand.
"If you look at the recent investments … NeuMoDx is ramping up quite nicely; QiaStat the same; … the Illumina partnership, just for the molecular diagnostics portfolio; and if you consider the coming launch in the second half of 2020 of our digital PCR [platform] in life science, we have everything in hand at this moment to compete and to be successful," he said.
"To me now, it's a matter of execution," Bernard added. "And so, in terms of reallocation of resources, we will see much more resources dedicated to, first, development, fueling those platforms with the appropriate menu; and in sales and marketing, obviously, making sure that we have the feet on the ground to push those solutions on the market."
In fact, under Bernard, it's possible that Qiagen will trim its portfolio a little bit more.
"Like any company, we have to constantly review our portfolio allocation," he said. "Obviously, we continuously monitor to make sure that we really invest … where we really can take a leadership position. This is key for me. We cannot be everywhere. We cannot invest everywhere. We cannot dilute our activities into too many activities."
When asked by an analyst what the plan is for finding a permanent CEO to replace Schatz, Bernard noted that this is really up to the company's board, and that internal and external candidates will be "very welcome to apply."
"At the same time, at the moment there is a CEO of the company," he said. "There is an executive team. There is a very good synergistic tandem between [me] and [CFO] Roland [Sackers]. And we are here to steer the company for the coming months and into 2020."