Qiagen NV (QGEN) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the QIAGEN N.V. investor and analyst conference call on the Q2 results, 2011. Throughout today's recorded presentation, all participants will be in the listen-only mode. The presentation will be followed by a question and answer session. (Operator Instructions)

I would now like to turn the conference over to Dr. Mahler, Director, Investor Relations. Please go ahead ma'am.

Yes. Thank you very much, Jason, and hello, everybody. Welcome to QIAGEN's second quarter 2011 earnings conference call. I'm Solveigh Mahler, Director of Investor Relations at QIAGEN. With me on the call are QIAGEN's CEO, Peer Schatz, and QIAGEN's CFO, Roland Sackers.

We issued the press release last night announcing QIAGEN's financial results for the second quarter ending June 30, 2011 describing the Company's recent business highlights. A copy of this announcement, as well as the presentation we will be using during this conference call, can be downloaded from the Investor Relations section of our homepage at www.qiagen.com.

This conference call will cover a 30-minute presentation, followed by a Q&A session. The time of the conference call is set at one hour. We therefore would like to ask you to please limit yourself to only two questions during the Q&A session. The call will be archived on our website.

Before I turn over to Peer Schatz, please keep in mind that the following discussion and the responses for your questions reflect management's view as of today, July 26, 2011. As you listen to the call, I encourage you to have our press release and presentation in front of you, since our financial results and the detailed commentaries are included and will correspond to the discussion that follows.

As we share information today to help you better understand our business, it is important to keep in mind that we will make statements and provide responses in the course of this conference call that state our intentions, beliefs, expectations, or predictions of the future. These constitute forward-looking statements for the purpose of the Safe Harbor provision.

These forward-looking statements involve certain risks and uncertainties that could cause QIAGEN's actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statement. In addition, certain statements contained in this presentation are based on Company assumptions, including but not limited to revenue allocations based on business segments.

For the description of such risks and uncertainties, please, refer to the discussions and reports that QIAGEN has filed with the US Securities and Exchange Commission.

Additionally, we will be discussing GAAP and non-GAAP measures. A full reconciliation of the non-GAAP measures to GAAP can be found in the press release on our website.

With this, I would like to hand over to Peer Schatz. Peer?

Yes, thank you Solveigh. I'd like to welcome all of you to our conference call and the opportunity to discuss our results for the second quarter 2011, the progress we've been making on the strategy and our prospectus on the second half of the year.

As we outlined, 2011 is a transition year with difficult comps. At the same time it is also a year for us to build up our portfolio of molecular content and roll out our new automation platforms that we believe will create substantial growth opportunities in 2012 and beyond.

As you saw in the press release issued last night, results in the second quarter improved over the second period of 2010. We delivered higher net sales and earnings along with a significant increase in our free cash flow. Those results were also an improvement on the soft start to the year that we saw in the first quarter. At the same time, we are clearly not growing at a level that we believe is satisfactory.

However, we are making broad progress in our strategic initiatives to expand in 2011 in order to accelerate growth in 2012. This progress is reflected in the milestones that our teams have achieved. The global rollout is going well for QIAsymphony. We have now reached an install base of 475 systems worldwide.

QIAsymphony is a highly versatile, modular automation platform that we believe will play a key role in the dissemination of molecular technologies and in particular will be the driving force for the expanding use of our molecular assays. Every placement creates an opportunity for annual consumable sales, or so-called pull-through, of anywhere between $30,000 and $300,000.

Demand remains strong for the full QIAsymphony RGQ version. This was launched in late 2010 and incorporates the RotoGene Q real-time PCR cycler along with the SP or sample preparation, and AS or asset set of modules that were launched in recent years.

In personalized health care, we reached an important milestone by completing the landmark regulatory submission of the KRAS biomarkers, a companion diagnostic paired with an anticancer medicine. This is the most significant achievement to date from our more than 15 codevelopment projects underway with major pharmaceutical companies. In fact, we will complete our second separate PMA submission in the US this week. It involves the use of the KRAS biomarker with another anticancer medicine also for patients with colorectal cancer.

In addition, we are very actively expanding our project of codevelopment projects and I'll talk to that later.

We're making progress in completing two important acquisitions, both of which were announced in the second quarter. Cellestis and Ipsogen will both add important molecular content, in other words, molecular tests, to the menu of our platforms. This will support QIAGEN in our ambition to be the world leader in molecular diagnostics. I will provide more insights on these acquisitions later in our presentation.

In terms of expanding our geographic presence, our new direct operations in India are growing quickly. Another expansion step this year was our direct entry into Taiwan during the second quarter. We're looking at various options for other regions with attractive growth potential.

As we noted in our release, 2011 is proving to be more challenging than anticipated at the start of the year, given the continued weak economic conditions. Based on these factors and also to incorporate the Cellestis and Ipsogen acquisitions, we have updated expectations.

We are expecting faster growth rates in the second half of the year compared to the first half of 2011 but at a more moderate rate than we had predicted earlier. We are expecting the most deviations to our forecast in the life sciences. This has also had an impact on our full year expectations.

In summary, QIAGEN is making broad progress on our strategic initiatives and are committed to achieving our updated expectations. We are intensifying our focus on growth and innovation and are confident that QIAGEN is well positioned for sustained business expansion.

Before we get into more depth, I'd like to hand over to Roland for a discussion on the financials. Roland?

Yes, thank you Peer. Good afternoon to everyone in Europe and good morning to those joining from the US. The second quarter of 2011 for QIAGEN came in largely as expected, delivering improved performance and solid gains in free cash flow.

Recapping the key numbers, net sales in the second quarter were up 7%, plus 1% at constant exchange rates or to $282 million from the second quarter of 2010. Consumables contributed solid net sales growth which was partially offset by lower sales of instruments.

Adjusted gross profit was up 9% over the second quarter 2010. This was in part due to product mix related sector for consumables with higher HPV sales in North America.

Sales and marketing expenditures increased by 15% over the second quarter 2010. Increased promotional activities supporting the QIAsymphony rollout going out in India and Taiwan as well as investing in direct sales channel activities were key drivers of the percentage increase in the year over year results.

We continue to increase our efficiencies and (inaudible) are scalable thereby driving down G&A expenditure by 5% over the second quarter 2010. Overall, therefore, SG&A expenditure was up 9% over the same period last year.

We are maintaining our profitability by keeping margins steady in comparison to the second quarter 2010. This is reflected in the 8% growth in adjusted operating income to $78.7 million and the adjusted operating income margin remaining at 28%. It is also worthwhile to keep in mind that this is happening alongside strong investment in R&D and an aggressive push to further expand in new geographic regions.

We are expecting to further enhance productivity and improve [the areas] of our business operations while reducing the cost of routine operations.

The (inaudible) workforce management and reallocation resources to grow initiatives are anticipated to provide additional benefits for our adjusted operating income margin as we move through the remainder of 2011.

Moving to our adjusted diluted earnings per share, this moved to $0.23 in the second quarter from $0.22 in the same period of 2010. In terms of non-operating factors, we have told you in the past about the sustainable benefits that would come -- be coming from our tax optimization strategy.

Free cash flow in the second quarter improved 31% to $37.8 million over the year ago period. Effective working capital management remains to be an important focus for us. Our free cash flow adjusted for building investment increased 24%.

Capital expenditures over the past two years in R&D and production facilities have been quite substantial but particularly from major construction activities at our sites in Germany and Maryland.

[Results] were 65 days at the end of the second quarter compared to 68 days for the first quarter and a level of 65 days a year ago.

Overall our results in the second quarter of 2011 showed our ability to deliver year over year growth while preserving our profitability and achieving our adjusted EPS targets amid continued challenging market conditions.

I'm now on slide six. In terms of geographic results, in the Americas we had net sales growth of 5% at constant exchange rates. We are seeing some solid trends in the US HPV market. Mainly we believe conversion is the critical component as unemployment rates in the US remains high and IMS data confirms that [doctor] visits are still down.

Uncertainty over the NIH budget as part of the discretionary budget cuts in the US is having a negative grant funding rates which are at an all time low. We believe this is having a direct impact on some of our customers in the US.

In Europe, the Middle East and Africa, sales dipped by 5% at constant exchange rates. Although QIAsymphony demands remain strong and sales from molecular products are performing well, we have a number of forces working against us in Southern Europe particularly Italy.

In addition, timing of certain companion diagnostic development milestones and also the impact of measures we have recently taken to transition several sales channels, weighed on the results this past quarter.

The Asia-Pacific Japan region where we saw a significant impact from disruptive events in the first quarter has recovered nicely. Product and life science in China as well as the general market recovery in Japan contributed to growth for us in these countries. We continue to support the recovery of Japan and are collaborating with government agencies in terms of human identification in infectious disease testing products.

On the other end, one of the disappointments in the second quarter has been the sales growth in molecular diagnostics China. This is a market where we have had traditionally very high growth rates. However, we encountered slower than anticipated sales results following the ramp up of our clinical sales channel in this country. We significantly increased this channel in 2010 and had high hopes already for the first half of 2011. Despite this delay in the anticipated boost to sales, we believe the slowdown is only of a temporary nature.

Moving on to slide seven, I would like to provide some comments on our financial position for the first half of the year 2011. Highlighting our strong liquidity position is our equity ratio of 65%. We have provided some proforma data to incorporate our coming completions of Cellestis and Ipsogen acquisitions and this shows a ratio of 64%.

Our net debt to adjusted EBITDA ratio is currently at minus 0.2x but realize to 1.1x after completion of these acquisitions on a proforma basis.

Our cash flow position allows us to pursue growth and investment plans without depending on unstable credit markets and with limited exposure to interest rate developments.

Both operating and free cash flow rates continue to increase steadily. For the six months period ended June 30, 2011, we generated net cash from operating activities of $100.6 -- .1 million. Free cash flow excluding develop investments in buildings for the first half of 2011 was $86.2 million.

Capital expenditures in recent years have been rather significant as we invested in (inaudible) future growth.

In June we largely completed construction of new R&D and production facilities in Germany. Notable here is that in preparation for the transfer of production activities we increased inventories to allow for higher safety stock.

I would now like to hand back to Peer for a strategy update.

Yes, thank you Roland and we are now on slide nine. I'd like to provide some perspectives on the performance of our four customer classes. Molecular Diagnostics, which represented 46% of net sales in the quarter rose 2% on constant exchange rates. Solid single-digit growth in consumables was reduced by lower reported sales instruments.

Instrument sales again reflected the shift towards reagent rental agreements in which we place an instrument at the customer's site in return for a guaranteed annual purchase of consumables. Revenue has been recognized over the term of the multi-year contract.

In Prevention, we recorded growth in HPV sales in the US. Our market conversion initiatives were up about 10% in the quarter and penetration of available market is approaching 45%. Our conversion efforts more than offset effects from reduced patient visits and pricing.

On the other hand, we are seeing data that patient visits are down sequentially from the first quarter of the year. This was expected and it is being confirmed by other industry participants. It was one of the reasons for our conservative outlook for overall 2011 that we gave earlier this year.

Like our competitors, we still face economic headwinds. The US unemployment rate has not improved much and this is reflected in enrollment trends for managed care programs. We had expected improving trends based on economic forecasts. Based on the current environment, it is difficult to make predictions for the second half of the year.

We are obviously asked about our views on the entry of competitors in the US HPV market. Will there eventually be an impact? Yes. This is to be expected when you have new competitors on the market but it is clear that none of the competitor assays are anywhere close to being validated to the extent of QIAGEN assay and none have superior data.

We're using this to our advantage and are pleased that customers recognize this value. Our focus is on expanding the market, growing it ourselves and for ourselves and for our customers.

Applied Testing, which is currently 7% of net sales, delivered solid growth in consumables. Year two results were reduced by softer instrument sales. QIAGEN is a key supplier of human identification products to the Japanese government as part of the recovery efforts after the disasters in March.

Also in Japan, QIAGEN recently won a very important national tender to deliver forensic products to the country police. This again underscores the highly competitive position of our human identification portfolio.

Pharma was 21% of net sales and largely unchanged overall. On one side we are benefiting from sustained demand from molecular technologies that support team-based drug development activities. Among top performing product lines is also the certal portfolio. This is a new assay portfolio that runs on QIAsymphony and is used to test for residual DNA during manufacturing processes.

However, in pharma R&D, the R side remains challenging amid industry consolidation and cost containment measures.

Academia, which was 26% of net sales, is facing increasing pressure in key markets. We are seeing substantial increased caution in purchasing behavior due to uncertainty about budgetary restrictions, in particular, in the United States. Net sales were up 1% at constant exchange rates and again a key issue was a decline in instrument sales.

In light of the changing market environment, which is being accelerated by budgetary constraints, we are stepping up expansion of our direct marketing channels and electronic touch points to customers.

Moving to the next slide, we're making broad progress on many of our key initiatives. All of these are supporting our objective to leverage our leadership in sample and assay technologies across our four customer classes. QIAsymphony RGQ is our flagship platform. It offers unprecedented flexibility in automation to customers requiring a broad menu in processing 1 to 300 samples per shift. Our top priority remains to increase placements around the world and to continue to expand the assay menu.

We have achieved about one-third of our placement target for 2011. Giving long-selling process for these types of systems, we've been saying that the majority of placements are anticipated in the second half of the year. Related to that, as most of you know, the majority of the placements will involve reagent rental agreements.

While the impact of placements will not be immediately recognized in our reported sales, trends on pull-through of consumables are encouraging and bode very well for driving growth in the coming years.

In May we announced a comprehensive update of the QIAensemble suite of automation platforms. QIAensemble Evolution, which was initiated in 2011, calls for the addition of modules to improve the automation for the current Rapid Capture System.

The Decapper units, a couple of which are already in the field, are on track for full launch in the fourth quarter and feedback from customer field testing has been extremely positive.

The QIAensemble Revolution program intends to build on the proven core components from QIAsymphony and this will enhance the compatibility of the two platforms in our testing menus.

I'd like to spend more time now providing you with some insights into the strategic initiatives of first adding molecular content to our automation platforms and number two, strengthening our leadership in personalized healthcare, as well as, three, expanding our geographical presence.

Moving to the first topic, adding molecular content, on slide 11, our latest two acquisitions, Cellestis and Ipsogen, fully support our strategic initiatives to add molecular content to our novel platforms. We are moving towards completion of the acquisition process for Cellestis, an Australian diagnostics company. A shareholder meeting is now planned for early August and closing is expected later in the month.

As you know, QIAGEN amended its proposal for Cellestis in early July with the aim of securing a rapid completion of this transaction. The current Cellestis share price and the shareholder voting trends confirm that this transaction should receive very strong approval.

Cellestis is a profitable, publically listed company with two marketed products, QuantiFERON TB for the detection of latent TB and QuantiFERON CMV for the detection of cytomegalovirus, which is a threat in solid organ transplant patients.

This slide shows how we believe the combination of Cellestis and QIAGEN can generate greater results for QIAGEN. Cellestis will provide us with exclusive access to QuantiFERON assay technology. As a next generation proprietary technology, it is capable of querying a previously untapped information source in the human body.

QuantiFERON is considered pre-molecular testing technology because it has the capability to provide diagnostic information far earlier than DNA-based molecular tests. As a result, tests based on the technology can provide information on the latent infections, or in other words, hiding infections, when DNA-based tests cannot because of the low amount of pathogens present in the infection.

Because of this ability, QuantiFERON can complement our portfolio of molecular diagnostics by guiding and driving the use of DNA and RNA molecular tests. We believe that Cellestis as part of QIAGEN will enhance our molecular diagnostics offering from pre-molecular through prevention profiling personalized healthcare and point-of-need testing.

As a sample and assay technology, just like our other products, we plan to migrate into QIAGEN instruments. QuantiFERON TB is already being commercialized in a number of markets, particularly in the United States, in Europe and Japan. But there are significant untapped market potential and QIAGEN sales and marketing operations around the world will be instrumental in driving this expansion.

We are planning to make large investments in sales capabilities and R&D initiatives to integrate the latent TB test on the QIAGEN platforms. This acquisition will be supportive to sales growth and be accretive to adjusted EPS starting in 2012 already.

Turning to the next slide, our Cellestis acquisition has a technology focus but the current TB products also have a very attractive market profile. In combination with our molecular diagnostics for TB, we are creating the leading, next-generation position in TB. QIAGEN already has a wide range of molecular assays. An example for our capabilities here was the recent announcements that the Mayo clinic has licensed patent rights from QIAGEN that will allow Mayo to offer a test for M. tuberculosis complex speciation.

We're also looking at ways to migrate our TB test to point-of-need devices. To understand the TB testing market, it's critical to understand the two different types of TB status. Number one, active TB, which is basically full blown disease with symptoms, and latent TB, where the patient has no symptoms but the disease can flare up at any point to threaten the patient and cause potential spread of tuberculosis.

In the developed world, United States, Europe and other developed countries, latent TB is far more important as a testing franchise than active TB. Latent TB tests are critical for identifying those at risk and immediately treating them thereby reducing the disease burden and the potential spreading of TB. People undergoing routine testing include healthcare workers, college students, people in prisons and the military. TB testing is also useful for immigration. We also see implications such as companion diagnostics given that an increasing number of medicines require latent TB testing prior to first dosing.

Regulatory clearances, reimbursement and guidelines are complete in most countries so we're going to work on global expansion. We were particularly pleased to see Germany adopt QuantiFERON TB as the new standard shortly after we announced this acquisition.

Turning to the next slide, I would like to offer some insights on Ipsogen and how the combination with QIAGEN will create significant opportunities. Ipsogen has a very competitive portfolio in blood cancer testing with assays covering more than 15 biomarkers, including BCR-ABL and JAK2 for patient profiling and monitoring.

The company also has several very interesting IP positions on content including the exclusive worldwide license for JAK2, V617F, the key mutation in the Janus 2 kinase. Portfolio is used to classify blood cancers into the various categories. There are four major classes and dozens of subclasses. Ipsogen assays set a strong standard for this classification worldwide.

In addition, several of the biomarkers are being targeted by pharma companies for a range of blood cancers. These include BCR-ABL and in particular JAK2. So this deal is similar to what we did with PI3 kinase in terms of gaining key intellectual property rights for important biomarkers and with JAK2 we get a marketed product.

Any of Ipsogen's assays have significant potential as companion diagnostics to guide treatment decisions and personalized healthcare. We have the capabilities to offer a complete companion diagnostics solution to pharma companies and with these assays, we can extend our range of partnerships. The addition of Ipsogen has strengthened QIAGEN's leadership in molecular diagnostics, expanding both our profiling and personalized healthcare portfolios.

As you know, our position is driven by more than 20 molecular diagnostic assays available in selected regions of the world as well as more than 15 personalized healthcare projects underway with pharmaceutical companies. This acquisition will support our sales growth in the second half of 2011 and be accretive to adjusted EPS starting in 2013.

Turning to slide 14, we are making dynamic progress in personalized healthcare where QIAGEN is helping to match the right patients with the right drug by offering companion diagnostics. We have built up by far the leading industry position with a portfolio of biomarkers to address needs for both solid and hematological cancers. As we announced in our last conference call, we are moving far beyond cancer to work on companion diagnostics for many other therapeutic areas.

Among the more than 15 projects underway with major pharmaceutical companies, some of our partnerships are shared and thereby leveraged into multiple applications which leads to more companion diagnostics in the pipeline. You should anticipate more co-development agreements being reached in the second half of 2011 as well.

And in terms of regulatory submissions, after the filings of -- for KRAS, we are on track for other US submissions including the assay for the EGFR mutations in 2012 which will be in its first submission submitted for use in combination with an anticancer medicine for treatment of patients with non-small cell lung cancer.

I would now like to hand back to Roland. Roland?

Sure. Based on the completion of the Cellestis and Ipsogen acquisitions this year and the ongoing challenging market conditions, we have updated our expectations for 2011.

For the second half of 2011 QIAGEN expects total sales growth of approximately 7% constant exchange rate, of which approximately half is expected to come from organic growth.

For the full year 2011 QIAGEN now expects total sales growth of approximately 3% which contributions from organic sales and acquisitions calculated using current exchange rates.

One of the factors to consider for the revenue distribution between the third and fourth quarters is that we have an unusual revenue allocation between these two periods. As you might recall, we have won several large HPV tenders globally. Typically the revenue from these tenders are spread equally over the year. In the third quarter this will not be the case. But therefore we will increase significantly in the fourth quarter.

Adjusted diluted earnings per share are expected to be approximately $0.96 for 2011, which includes previously announced expectations for dilution of approximately $0.03 per share related to planned sales and R&D investments as part of the acquisitions of Cellestis and Ipsogen.

Going to the next slide, in terms of adjustments to operating income, we expect equity based compensation of $5 million for each of the next two periods, amortization of acquired IP of approximately $27 million next quarter and approximately $29 million in the fourth quarter, business integration, acquisition and restructuring of $12 million in the third and $3 million to $4 million in the fourth quarter. This is a significant increase due to transaction costs of Ipsogen and Cellestis.

This quarter our adjusted tax rate was 23% thus lower than the comparable quarter last year of 25%. And going forward with the third quarter, we believe this to be in the range between 24% and 26%, thereafter for the fourth quarter in the range of 22% to 24%.

The weighted average number of fully diluted shares outstanding will be around 240 million shares.

Peer?

Thanks Roland. And now on slide 17 to provide a quick summary before we move into Q&A, as mentioned at the start, the challenging economic environment is more persistent than we had anticipated. In Q2 our markets continued to be soft. We achieved some growth but it is hard to predict how much improvement we will see in the second half.

Against the backdrop of the underlying business performance, it is important to see the progress we are making on our strategic initiatives. We're creating a foundation for future growth. We are pleased with the progress we are making to deliver on some of these strategic goals. The global rollout of the QIAsymphony RGQ is progressing well and the installed base has now exceeded 475 systems.

Our companion diagnostic projects and personalized healthcare reached an important milestone with the first US submission for the therascreen KRAS biomarker. A second submission is coming within a few days and look for more developments in this area.

We're adding molecular content with the addition of Cellestis and Ipsogen and we are moving ahead with the development of new assays and potential submissions in 2011. And we are expanding our geographic presence in emerging regions of the world.

We have updated our full year guidance to give you the clearest view possible and also to incorporate the pending acquisitions. As a result of actions to implement our strategies, we are well positioned to expand in 2011 and to further accelerate growth into 2012.

With that, I'd like to hand back to Solveigh to open up the Q&A session. Solveigh?

Yes, thank you very much Peer. We are now looking forward to discussing your questions. I would like to open the Q&A session by handing over to the operator. Jason?

Thank you. (Operator Instructions)

Quintin Lai.

Hi, good morning. This is Quintin Lai from Robert W. Baird. Looking at the -- putting together your comments about the outlook and then looking at the back half of the year guidance, maybe give us a little bit more color on the visibility that you have. I mean, obviously Q3 looks flat relative to Q2 and Q4 picks up. Now Q4 does have, it looks like, an easier year over year comp but you also mentioned visibility in some tenders. Is that all [that's taken] to guidance or Peer, are you expecting a pick up in the overall end markets in the fourth quarter?

Thanks for the question, Quintin. I think it's important to say that we're basically expecting a very similar underlying performance in the second half of the year as we've seen in the first half of the year so we're not expecting any changes in the economic environment which was the original outlook that we had given earlier in the year, I think in good company with many other participants in this space that there would be a reduction in unemployment, improvement in the healthcare markets and we'd see an improving market outlook in the second half of the year.

This is now being taken out of the underlying business expectation for the second half of the year so a similar performance in the second half of the year as we've seen in the first half of the year.

The one twist to that is that, there are several larger development milestones and from the companion diagnostic partnerships and also the -- some very significant national tenders that will lead to revenue recognition in the fourth quarter versus the third. And these dates are typically set well in advance and it so happens that revenue recognition for those now fall into the fourth quarter versus the third.

But if you take those one-time, kind of like this more -- these two allocations of revenue into the fourth quarter out of the picture, the underlying base is now pretty much assuming the same environment as we've seen in the first half of the year.

Okay, and then kind of the followup question here, QIAsymphony placements were again a good quarter, understanding the agent rentals. As we look forward, the reagent rental model usually means that we start to see revenues start to become a recurring item here over the next quarter. Those systems that you're placing, can we assume that they're on the upper end of the 330 -- the $300,000 reagent pull through rate?

It's difficult to call a trend right now because the RGQ systems with the corresponding assays have been rolling out now over the last nine months basically and the encouraging news is that we have many accounts that are actually pushing the high limit of this number. And this -- if you calculate the throughput of the system and the potential pull through, it's actually much higher than $300,000 a year but we're seeing a number of customers pull these very -- already pushing these very high numbers.

So I wouldn't call this a trend yet. I would take the average lower than that. It might be in the range of $150,000 right now but this could be -- this could simply be an early indication of where everything is going as the menu expands. It's in diagnostics, the game is always the same. You basically create a platform. You aggressively roll that out. That's the phase we're in right now and at the same time you expand your menu, which we're also doing.

We talked about companion diagnostics, Ipsogen, some of the virology assays and transplant panels that we're -- that we already have, that have already passed the regulatory hurdles, are being submitted, and that creates the exponential sales after that.

Once we have a critical massive menu in the regions, also in Asia and the United States, I think you'll have a much clearer picture. But the number is very encouraging and it's on the high end currently.

Thanks.

Bill Quirk.

Bill Quirk from Piper Jaffray. Good afternoon everybody.

Good morning, Bill.

So a couple of questions, Peer. And I guess just to take Quintin's question and dig a little deeper here. In terms of the delta and the timing for the recognition of the tenders between the third and fourth quarters, is there any way to quantify that and just to make this a little more obvious to [tease the two] out.

Roland, do you want to take that one?

Yes, sure. I think as Peer said before, we -- in the past we won a couple of those large HPV tenders and other things are coming in as well. And so what we see is that normally we have these equally spread over the quarters and especially tender is something where we, as Peer said before, we expect more revenue recognition in the fourth quarter and perhaps the third quarter and partially also in the second quarter.

And that gives clearly for the fourth quarter just out of that low double-digit $1 million amount. And in addition to that, we clearly pushed ahead quite significantly over the last couple of weeks with our KRAS filings and therefore of course we expect other milestone related development -- milestone related revenues more for the fourth quarter than for the third quarter.

Thanks. I didn't mean to cut you off, Roland, go ahead.

And that clearly both together gives them, I would say, a dysfunctional allocation between the third and fourth quarter, normally should spread it more into both quarters quite equally. Therefore we pull it out very detailed for the third and fourth quarter.

Very good. Thanks for the extra color there, appreciate that. And then secondly, Peer, just to talk a little bit, I guess to dig a little deeper into the academic market, you mentioned obviously conditions in Southern Europe remain challenging, that there appears to be a bit of hesitation amongst the US customers as people wait to see where the NIH budget shakes out.

To what extent can you comment on just shifting priorities from the customer base to modalities like sequencing for example? Is this playing a role in what you're seeing in the underlying business? Thanks.

Good question, Bill. There's definitely a shift right now in some of the spending, which probably is temporary and caused by the ARRA spending continuing so there's still a rollout of the number of stimulus monies that are being allocated typically towards larger ticket CapEx items.

The underlying growth of the academic markets is currently very soft and the discussion around potential budget cuts in the National Institutes of Health budgets but also in other budgets around the world is definitely creating a lot of uncertainty and a positive momentum. So there's a great caution right now in a lot of these markets.

I think the allocation of funds out of the ARRA and other areas is much easier to do and they're allocated more towards novel, big ticket items. But going forward this will definitely be more difficult.

If you look at the overall markets, the academic markets worldwide, you know you're talking a $50 billion, $60 billion market or so and so even if you assume that there is a net impact, (inaudible) down and next-generation sequencing up, a few hundred million, maybe even up to a couple billion dollars at some point in time, this is not a huge enough allocation to really change the momentum of these markets.

We are interpreting the majority of this impact right now to budget uncertainties that are not associated with one-time, longer planned, larger capital equipment investments.

Got it. Thanks very much.

I'd like to maybe highlight, if you look at our underlying growth, it is pretty much the industry. There are a number of other players in this industry that are showing very similar performance in this area and in particular in the molecular technologies that people who were showing premium run rates in this space and have gone to a very conservative overall growth in the first half of this year.

Got it. Thanks Peer.

Thanks.

Miss de Lima.

Good afternoon. Brigitte de Lima from Bank of America Merrill Lynch. I've got two questions (inaudible) questions in between. The first one is on Cellestis. You talked about significant investments to migrate the Cellestis test into the QIAGEN platform. Does this in any shape or form compromise your original target to achieve an adjusted operating profit margin of around 31% by the end of 2013? Are you now finding that you're having to invest more than you anticipated?

And then a second question is again on the QIAsymphony. How do the 475 placements, i.e., around 75 additional placements in the second quarter compare to your original interim expectations? And also, could you provide any color as to what the split is between placements in Europe versus other countries like the US?

Sure. Thanks for clarifying the statements I made around the Cellestis or giving me the opportunity to clarify them. We had already planned for the transition of the Cellestis assays onto our platforms when we gave the outlook for investments and expenditures and accretion from this transaction in April.

So these expectations are fully baked in and the programs are well underway, and particularly also we added the point-of-need testing platforms, which are seeing significant interest now to have the latent TB test as part of the testing menu for them.

So that is rolling out fully in plan and there's no change to our forecast in terms of expenditures and accretions and time lines.

The second question was in terms of the rollout of the systems. If you look at the numbers as they're rolling out for these very complex systems and the menu that is unfolding, the numbers are very good for this second quarter as well. If you annualize that, you get to good numbers and we feel very good about the outlook and the funnel.

We can't give the internal estimates here. You know we always want more but we're building a very good funnel and as we've discussed before, the pull through of assays is also very good as well. It's probably even higher than what we originally expected.

The allocation geographically reflects the availability of menu, so we have substantially more placements currently in Europe than we have it the United States but the United States numbers are ramping up very quickly and the pipeline is actually very fairly weighted.

So we expect to see assays become available for the QIAsymphony RGQ system for a number of reagents and ASRs and other products that customers are using in various ways but as we are clearing more menu going forward, we have a number of submissions in the foreseeable future now for this system as well. There will be a very similar ramp up of the -- the weighting will become very similar and also the consumables pull through will become similar as well.

In Europe we're offering the full menu and where we're extremely strong is actually in the blood virals, hepatitis and HIV, in addition to some of the esoteric testing panels that we're very well known for and we expect a similar picture to emerge in the United States as these assays become available.

That's very helpful. Thanks very much.

Thanks Brigitte.

Thanks.

And Brigitte I might add to that Cellestis will be for 2011, again just to reconfirm that accretive by $0.02 to $0.03 on adjusted EPS so we see a significant pick up in profitability once we have integrated into our platform.

Thanks again.

2012 Roland.

2012 yes.

Mr. Blum.

Hi, Holger Blum from Deutsche Bank. Just three questions, first one on clarification on the HPV tender, did you win the tender already or are they still to come?

Second question would be on the reagent and the contract, maybe you can give us some background here, what is the proportion of these kinds of contracts today? Maybe you can say how that was two years ago and how it might be in two years time from now.

And maybe if you can all from your perspective share your thoughts on the NPV on these new contracts. Are all NPV neutral or if you have later on higher margins on the consumables or is it still more negative or any kind of guidance there would be appreciated.

A third question would be just on the -- an update on the Abbott HIV/hepatitis C test. When do you expect a launch there? How is the transformation progressing there?

Thank you.

Thanks. The first question was regarding the tenders. We don't want to highlight any specific tender or give too much detail on these. These are obviously competitive situations but we're confidently winning tenders and also large ones and we wouldn't be putting them in this -- there wouldn't be a very high certainty that we have them or that we already have them. So we feel very confident in these projections.

Okay.

Number two is the reagent rental distribution. The reagent rentals were almost zero two years ago. We had very few reagent rentals. Today on the QIAsymphonys, today it's more than half. It's probably approaching three-quarters and at some point in time, I'd say in two years out, that number will probably go even higher.

As I said in the last quarter, the reagent rentals are a very good sign because this means that the laboratory is actually willing to commit their own revenue stream to using this platform. If they just buy the system to play around with it, it's a different story. If they buy the system and commit to using our assays, that means that they are shifting their own revenue generations or services, in other words, to relying on our assays as well. So we're very pleased with this pick up.

And the NPV, yes, it's very positive so we're putting in very conservative financial metrics getting quick pay-backs for these systems and the consumables have a high degree of profitability, so these systems pay very quickly for themselves.

Okay. The last question was on your arrangement with Abbott and the HIV launch timeline.

Sorry. There's really nothing new to say on that. We're in development right now on these assays and are moving forward to bring them forward to the market. We wanted to, once we have the development plan fully laid out and also the regulatory pathway cleared, these assays are a little bit more complex, we would come out with that on that. But I assume this would be around our Analyst Day we would be happy to give details on that.

But it definitely remains a very important cornerstone of our assay portfolio that we see for the foreseeable future.

Okay, good. Well maybe a last question or maybe it's a little bit early for you to comment on it. Would you dare to provide any kind of organic growth projection for 2012 or is it too early to say or whatever you think is feasible?

I'd probably like to answer it this way, that the current underlying performance is definitely not satisfactory and we are adapting the Company to achieve, also with the underlying business, a better performance. But we were talking about changes that we made to the channels, changes that we made to emerging regions, changes that we made to also some -- the allocation of resources among the various customer classes.

But what we're doing on top of that while still a smaller percentage of our overall sales is moving ahead very nicely, and I'd like to highlight the companion or personalized medicine initiatives that we have and the QIAsymphony rollout, and also the progress of our QIAensemble development program, which is moving along very nicely now in its new format and going forward we think will even further increase our competitiveness here.

So a lot of things that are adding growth inflexion points now over the course of 2012 that we're looking forward to generate. We had the first landmark submissions of KRAS as a companion diagnostic. As I said before, you can expect the second one this week as well. And these things will hopefully provide a very good increased visibility of growth opportunities that we have for 2012 that we will put into numbers when we give guidance for the full year.

Okay, thank you.

Thank you.

Mr. Peterson.

It's Tycho Peterson from J.P. Morgan. Peer, on your comments before on the academic market, I think you also talked about accelerating your direct sales channels. Can you just talk a little bit more about what that entails?

Thanks Tycho. That's definitely an important trend. What we're seeing right now is that we have to be aware in the academic markets that the majority of the academic customers, say 80% of so, probably never even see a sales person. And even the largest players in this space have only a limited reach or touch points into their effective customers.

So what most people are exploring right now and what we've really taken a strong and maybe in some cases call it a leading position, is exploring how to increase the number of touch points into academic customers using novel techniques. It's not only electronic. It's also using call centers and similar. And these services are being perceived very positively by our customers and we started that much more actively last year.

And while we've always had an inside sales activity, it's been much more refined and [expanded] and we started out early this year and are continuing to ramp it up as we see the market shifting.

There is definitely a shift in the academic market and it needs a change in response and this is how we're responding to it.

And then on maybe just shifting it over to QIAsymphony, are you able to talk at all about what percentage of the systems that are out there have been competitive wins or alternatively upgrades to existing instruments? It's got to be one or the other presumably.

I'd say almost all of them are competitive because they typically are done through tenders or at least through a comparative process. And so I think it'd be very rare to say that there's, and you obviously have many extremely loyal QIAGEN customers who are extremely valuable also to us and where we then would have a natural upgrade.

But the majority are clearly looking at whatever might be considered a competitive system in the marketplace but we have been providing very, very clear wins. And the win rate has been very impressive.

This is also reflected, if you look at some of the numbers of these systems out there, they are typically seen after five years, ten years or so to be in the several hundred, maybe a little bit over a thousand, and we, for a very short period of time are now approaching 500 systems. It just shows that there's a significant adoption we're getting here and it definitely is a sweet spot in the market.

What we need now is for the assay pull through the come through for the money to expand on these systems and that will generate very substantial returns. We're currently in the investment phase of this rollout.

Okay. And then the comments on China were a little bit surprising around the molecular diagnostics business. Can you just elaborate on, I know it's a nascent market for you but what the underlying dynamics are there?

Yes. We have a very strong activity in China and the market is definitely growing but we have more hopes for the Chinese market because we made substantial investments in 2010 to create a clinical sales channel. The clinical sales channel, very comparable to what we have here in the United States is creating demand for, in particular, HPV testing, but also other assays that we have.

In the portfolio we have a number of SFD approved assays in China. And we just expanded the portfolio actually in the first half of the year, again quite considerably. So there is a -- there was a (inaudible) clinical sales channel which provides similar growth to the underlying business that we've seen here in the United States typically have effect.

And this was a little bit slower. It had to do with the way that the Chinese market works. It was absolutely the right decision to do and we expect to reap the benefits of this clinical sales channel in future periods but it didn't come as fast as we originally thought. And the focus and the attention that we put onto this distracted it from other areas and made the growth a little more subdued in the MDX market.

So we didn't typically see the 30%, 40% growth that we typically see in this market. We saw similar in the life sciences but in the MDX area, we see what -- we're seeing what we think is a temporary dip in that growth rate which should re-emerge.

Okay, then the last one on HPV, I understand you don't want to give a lot of color on the tenders but is there any change in kind of the dynamic around pricing terms, duration of contracts, technology (inaudible), other aspects that you're hearing about in the market?

Sure. The market, actually our revenues in HPV grew in North America in the second quarter so it came from very soft performance in the first quarter into growth in the second quarter. So we have actually been very successful in full light of a -- of competitive products from strong companies, been able to find and extend and expand dozens of contracts again in the first half of this year. And we see a very strong competitive profile increasingly emerging.

Now this is helped by a number of things. First of all, our platform expansion, so-called QIAensemble Evolution program, which I think is a little bit underestimated in the public view, but I think if you talk to laboratories, you'll see that the addition of the audios that we put onto the existing Rapid Capture System make this a very, very competitive work flow.

And the -- and that going forward is creating a great opportunity for us to continue our very strong competitive position.

There's one thing that I'd like to highlight as well. You know we had some recent, very important announcements last week from the IOM that had decided to add HPV testing to the Preventive Services Task Force list and this basically would remove copayment or in other words significantly remove or eliminate the link to economic trends.

I don't want to overplay it but this is an extremely important decision that was made by the IOM, obviously an extremely important body that decided to come out to support this. So going forward, starting 2013 when this will effect the copayment, will probably start early as insurance companies are starting to move over to accept these new standards, will remove copayment from HPV testing, detaching it then from economic trends and making it a much more robust and independent and reliable revenue stream.

The interesting thing is that the focus there is on negative predictive value which really only QIAGEN can prove in long term studies and it focuses on HPV DNA-based testing. And clearly also limiting a technology that is being applied.

So there are a number of very important trends that are working for us here and we're actively also shaping this market.

Okay, thank you.

Thanks Tycho.

Mr. Welford.

Hi, it's Peter Welford from Jefferies. Two questions, first just going to the applied testing, I was interested in your comment about weak instruments out there. I wonder if you can give us some more visibility on (inaudible) applied testing you think you're seeing a slow down in instrument placements there.

And then perhaps secondly then, just looking at the reagent rental agreements, do you put in place for these agreements minimum purchase requirements for the customers? And sort of how do they -- how do you, I guess, lock in the customers for those agreements or is it at the moment relatively flexible given the early stage of the rollout of these products? Thank you.

Thanks. Good questions. The second one is the minimum number of sales, yes, there is a contractual commitment that the client gives in terms of assay or consumable pull through or revenue through to QIAGEN, so that is the underlying premium that we use for a financial analysis and it's based on commitment.

Number two is the applied testing, automation growth, and that I would attribute more to timing and to year over year effect. The applied testing team is moving ahead very nicely. We're seeing very good trends in this space and we expect them to make or exceed their targets.

So this is a -- this also includes their -- the instrumentation components that are working very nicely for them as they're also leveraging the QIAsymphony RGQ and components.

That's great. Thank you.

Thanks.

And with this, I would like to close the conference call by thanking you all for participating. We hope to welcome you again to our third quarter 2011 earnings conference call on Thursday, November 3, 2011. If you have any additional questions, please do not hesitate to contact us.

Again, thank you very much and have a nice day. Bye-bye.

Ladies and gentlemen, this concludes the Q2 investor and analyst conference call of QIAGEN N.V. Thank you for participating. You may now disconnect.