Storm-tossed Qiagen plots a course to higher growth

A shift to higher-growth systems and a tie-up with Illumina are sensible moves, but will take time to pay off.

Deals

Something of a maelstrom engulfed Qiagen last night. The group suffered a triple blow – disappointing third-quarter results and the shuttering of its GeneReader next-generation sequencing technology were capped with the departure of its long-standing chief executive.

The other, more positive announcement the company made, of a 15-year partnership with the sequencing giant Illumina under which Qiagen’s tests will be run on Illumina’s machines, did little to propitiate shareholders. Qiagen’s stock is off 21% so far today, and if the group does not get its act together soon the depressed share price might tempt a buyer.

Qiagen’s decision to cease future development of its GeneReader machines is probably a wise one, albeit somewhat embarrassing after the company spent a great deal of time and money pushing into next-gen technology. 

The system was launched in 2015 with an unusual “price-per-insight” model under which customers received the sequencing machine and consumables such as individual test kits or reagents for free, instead being charged for each clinical report the system generated. This differs from the more common razor/razorblade model in which an instrument is placed for free but consumables are paid for. 

Since then, though, the market has rapidly shifted towards larger multi-gene testing, leaving the GeneReader offering, which is primarily used with smaller, targeted gene panels, increasingly redundant. Berenberg analysts wrote last month that canning the GeneReader might be the most pragmatic solution for Qiagen, allowing management to increase focus on more significant growth drivers, such as the Quantiferon range, an Elisa-based diagnostic for applications including tuberculosis.

The cost of shutting down the programme, however, was greater than expected. The analysts put it at up to $150m, but in the event it cost Qiagen about $260-265m. 

The next generation 

Cutting its GeneReader losses and pivoting to higher-growth technologies ought to help Qiagen in the long term, but its immediate future will be tough to navigate. The company's third quarter sales grew 3%, missing its growth target of 4-5%, mainly because of weaker-than-expected revenues in China – excluding its Chinese activities, the group’s sales growth was about 6%. The company said its overall earnings would be within the range it had forecast. 

The departure of chief executive and chairman, Peer Schatz, who has been with Qiagen for 27 years and led it for 15, also spooked shareholders. Mr Schatz, who will remain a special adviser to the company and a significant shareholder, is credited with building the business from start-up to a major diagnostics player – the 15th largest IVD group by sales in the world, according to EvaluateMedTech

Mr Schatz’s successor has not yet been announced, though Thierry Bernard, Qiagen’s senior vice-president and head of molecular diagnostics, will hold the post on an interim basis. One of the tasks for the group's new leader will be wringing the most out of the company’s new collaboration with Illumina. 

This will see Qiagen develop clinical kits to run on Illumina’s MiSeq Dx and NextSeq 550Dx sequencers. The companies will initially focus on oncology but could expand into tests for cardiology, hereditary diseases, infection, inflammation or autoimmune conditions. The agreement might also be expanded to encompass other Illumina diagnostic systems.

Theoretically the deal should play to both groups’ strengths: Illumina is one of the leaders in high-throughput sequencing, alongside Thermo Fisher and Pacbio, and Qiagen excels at sample prep,  IVD development and back-end bioinformatics. 

Financial terms were not revealed, though Qiagen is believed to be on the hook for an access fee for use of the sequencers and a royalty on sales of its tests. And of course the elimination of the GeneReader is an incremental positive for Illumina, since it removes a minor competitor. 

But Illumina does not expect sales resulting from this partnership to manifest until 2022 or 2023. 

From here, there are two paths that Qiagen could take. The change in strategy that will essentially see it contract out its next-gen sequencing activities could pay off, though this might not happen for three or four years. Alternatively a buyer could step in – and with the share price down by a fifth, this could happen sooner rather than later.

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