Qiagen NV (QGEN) 2011 Q3 法說會逐字稿

(audio in progress) results 2011. Throughout today's recorded presentation, all participants will be in a 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.

Yes. Thank you very much, Jason, and hello, everybody. Welcome to QIAGEN's conference call to discuss our results for the third quarter and first nine months of 2011. A copy of the corresponding announcement and the presentation for this conference call can be downloaded from the Investor Relations section of our homepage at www.qiagen.com.

I would like to take this opportunity to remind you of our investor event on November 17, which will be held at the Association for Molecular Pathology 2011 Annual Meeting in Dallas at the Gaylord Texan Hotel and Convention Center. This event will also be webcasted live and accessible on our webpage.

Before I turn over to Peer Schatz, please, keep in mind that the following discussion and responses to our questions reflect management's view as of today, November 3, 2011. As we share information today to help you better understand our business, we will make statements and provide responses that state our intentions, beliefs, expectations, or predictions of the future. These constitute forward-looking statements for the purpose of the safe harbor provisions.

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. 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.

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

Yes, thank you, Solveigh. I would like to welcome all of you to our conference call and the opportunity to discuss our results for the third quarter of 2011, and also for the first nine months of the year.

As you saw in our release last night, we delivered moderate sales growth in the third quarter, however, fully in line with our targets. And we also exceeded our goal for adjusted EPS. We achieved these results against the backdrop of the expected challenging business environment, one that has not improved so far during the course of 2011.

We have reaffirmed our sales expectation for 2011 and expanded our adjusted EPS target. Achieving our sales target is important for us to be able to accelerate full year sales growth in 2012, compared to 2011.

Our sales in the third quarter were up 1% at a constant exchange rate, and rose 5% on a reported basis. We were particularly pleased with the double digit growth in Europe, Asia-Pacific and Japan. The first time consolidation of Cellestis and Ipsogen also supported our performance.

Instrument sales were up 8% on a constant exchange rate basis. This was driven by targeted initiatives across our broad portfolio. A key focus is obviously the ongoing global rollout of QIASymphony, and the demand from customers for this modular platform that is setting new standards for automation.

For QIASymphony, we are starting to see more of the positive impact from the shift to reagent rental agreements, where revenues are recognized on a pro rata basis over the time of these multi-year contracts. That began earlier this year. While this is not fully reflected in sales for the current period, it increases sales in future periods.

So we are very pleased with the rollout, which we have said involves a long selling cycle. We are on track to reach more than 550 installed systems by the end of 2011, and we are only in the early years of this decade long product cycle.

Among the customer classes, the strongest contributions came from Academia and Pharma. Now, this may seem surprising, giving industry commentary on the uncertain academic funding environment, and Pharma industry cost cutting, but we saw major benefits from various marketing and sales efforts.

In Molecular Diagnostics, in addition to contributions from QIASymphony, higher sales were achieved in Profiling, where our products are used for, for instance, viral load testing and Personalized Healthcare, where we are strengthening our leadership position in companion diagnostics.

Prevention sales were down, and as we said on our last call, due in part to the timing of a natural tender delivery for HPV tests. This tender is now confirmed for the first -- fourth quarter of 2011. So Molecular Diagnostics should see stronger growth in the last quarter this year.

HPV test sales were also lower in the US. As we have said in the past, we are taking actions to solidify our leadership, and this is including closing multi-year contracts with our customers and improving automation for our gold standard tests and solutions. We will discuss this point later.

Moving on to our strategic initiatives, we have been saying 2011 is a transition year, as we build our portfolio of molecular content and roll out QIASymphony. These actions will create growth opportunities in 2012 and beyond. This progress is reflected in the milestones that our teams have achieved to drive platform success with our automated systems, add content to our platforms, broaden our geographic presence, and grow efficiently and effectively.

We have been very active in Personalized Healthcare. In the United States, we completed the second of our two submissions for our KRAS biomarker test. Each submission pairs this biomark with a medicine for treatment with patients with metastatic colorectal cancer. FDA decision times on premarket approval submissions, or PMAs, are usually about 12 months, so we anticipate receiving decisions by mid-2012.

These are important achievements to date from our more than 15 co-development projects underway with major Pharmaceutical companies. In fact, we also added two new projects in the third quarter with existing partners Eli Lilly and Pfizer. I will talk more about these projects later.

The acquisitions of Cellestis and Ipsogen also provided contributions for the first time. We are pleased with our performances, and the integration processes are moving ahead quickly.

In summary, we met our sales target for the third quarter and beat our adjusted EPS target, and are reaffirming our expectations. We are clearly not growing yet at the level that we believe is satisfactory, but our strategic initiatives are on track. They will help us deliver on our targets for 2011, and grow at a faster pace in 2012.

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

Yes, thank you, Peer, and good afternoon to everyone in Europe, and good morning to those joining from the US.

The third quarter of 2011 for QIAGEN came in largely as expected, delivering on our targets for net sales, but beating our goals for adjusted EPS.

Recapping the key numbers, net sales in the third quarter rose 5%, and rose 1% at constant exchange rates, to $288.9 million on the third quarter of 2010. As Peer mentioned, Instrument sales were up 8% constant exchange rules, whereas Consumables and related revenues were flat.

Looking at this from a customer class perspective, we had higher contributions from Academia and Pharma, which, however, were offset in Molecular Diagnostics for the reasons Peer described before.

Moving below net sales, the adjusted gross profit margin remained relatively flat, despite higher Instrument sales, as adjusted gross profit increased 5% to approximately $207 million. SG&A expenses were up 50% over the third quarter. We are making investments in the rollout of QIASymphony, with initiatives targeting customers in Molecular Diagnostics as well as in clinicalrResearch in Academia and Pharma. We are also seeing good interest from applied testing customers.

Adjusted operating income was down slightly to approximately $75 million, from about $79 million in the third quarter of 2010.

Key factors were sales and marketing investments to globalize the Cellestis and Ipsogen portfolio following their recent acquisitions, as well as investments in the emerging markets of India and Taiwan, where QIAGEN opened (inaudible) operations in 2011. So we are still executing on our midterm operating leverage program, and have a goal of 31% or better by the end of 2013. And we will give you more insight on this topic at our upcoming investor event.

Moving further down the income statement, financial income was higher in the third quarter of 2011, as we benefited from the changing interest rate environment. Other income was also higher, and the reported results included a one-time currency gain of about $10 million that was recognized as part of the Cellestis acquisition. But this amount was excluded from our adjusted net income and EPS figures.

This slide obviously can be volatile, and it has swung between a loss of about $2 million, to income of about $3 million in 2010 and 2011. And this has mainly been driven by foreign currency movements. For modeling purposes, you should consider a slightly positive contribution of $500,000 per quarter, and a bandwidth up and down of $2 million from this figure.

Our adjusted diluted earnings per share were $0.24 per share in the third quarter, compared to $0.25 in the same period of 2010. Remember that we had indicated dilution of about $0.03 per share to full year adjusted EPS due to plant sales and R&D investments in Cellestis and Ipsogen after the acquisitions. We had been anticipating about $0.02 of dilution in the third quarter, and about $0.01 in the fourth quarter.

Although the overall impact has not changed, this has been [inversed]. I mean here that we had about $0.01 in the third quarter, and we now anticipate about $0.02 in the fourth quarter.

In summary, the third quarter for QIAGEN was largely as expected in terms of sales, and we surpassed our adjusted EPS target.

I'm now on slide 6. We were particularly pleased with the double digit expansion into Asia-Pacific/Japan region, and also in the Europe/Middle East/Africa region. The Asia-Pacific and Japan regions returned to its role as a strong growth contributor, recovering nicely from the disruptive events earlier this year.

Net sales was 90% constant exchange rates, and gains were seen in all customer classes. In particular, China returned to a stronger growth Profile, with contributions from Molecular Diagnostics and Life Sciences.

Japan demonstrated solid gains across all customer classes as well. We saw strong demand in particular in Forensics.

In the EMEA region, where sales was 15% constant exchange rates, we are seeing solid growth in Molecular Diagnostics, particularly for our QIASymphony platform, since we have a very broad menu in this region. So we are seeing strong demand for the automation platform, and also, rising Consumables pull-through levels, as customers become more and more accustomed to its benefits. The benefits are becoming increasingly apparent to customers about what our platform really can offer in terms of laboratory automation and workflow consolidation.

Academia grew at a single digit pace in Europe, with expansions particularly driven by the northern region, despite increasing overall pressures from the implementation of government austerity measures.

Finally, in southern Europe, we continue to face a number of forces working against us. But other areas are more than offsetting this modest impact.

The temporary distortion of results for the Americas, where sales were down 12% constant exchange rate, overshadowed the important contributions from other areas of our business. As we mentioned earlier, this regional decline was due mainly to the timing of a national HPV tender outside the US, and also by weaker HPV sales in the US. As noted earlier, we expect better results in the Americas and Molecular Diagnostics in the fourth quarter of this year.

Pharma delivered solid growth in the US, while Academia sales were slightly higher, but still impacted by budget concerns. This ongoing uncertainty over NIH budgets in 2012 remains a key issue in the US. Discretionary budget cuts in the US are having an effect on grant funding rates. We believe this will be continued, to have a direct impact on some of our customers in the US, until we get greater clarity on budgets.

Moving on to slide 7, I would like to provide some comments on our financial position after the first nine months of 2011. As of September 30, our Group liquidity stands at $486 million. Our equity ratio is at 65%, and our leverage is now at about 1 times net debt to adjusted EBITDA.

Free cash flow for the first nine months in 2011 was approximately $109 million, compared to approximately $108 million in the same period of 2010. For the third quarter, free cash flow was $42 million, and this was down from $66 million in the third quarter of 2010.

Free cash flow in the third quarter was affected by higher inventories. We are now relocating some manufacturing activities to our site in Hilden, Germany, after completing construction projects.

Another factor that burdened our cash flow was the impact of contract to hedge a portion of our foreign currency exposure.

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

Yes, thank you, Roland, and we are now on slide 8. I would like to provide some perspectives on the performance of our four customer classes.

Molecular Diagnostics, which represented 46% of net sales in the quarter, declined 5% on a constant exchange rate basis. As we mentioned earlier, we saw a strong Instrument sales, particularly from the global QIASymphony rollout, and also, growth in Profiling and Personalized Healthcare, while Prevention was lower due to the reduced HPV contributions in the Americas.

Applied Testing, which provides 7% of net sales, has been facing a similar situation during 2011, double digit growth in Consumables but weak Instrument sales, which can be very volatile. This resulted in steady year on year sales.

A key growth driver remains Human Identification and Forensics, where we are benefiting from new European standards. We also have won national police tenders in Eastern Europe and Asia.

In Food Safety and Veterinary, we're obtaining approvals for our food and veterinary assays, particularly for use on QIASymphony.

I would like to review Academia and Pharma together, since we are seeing some similar trends. Compared to the first half of 2011, we saw solid growth in both customer classes, with Pharma up 6% on a constant exchange rates basis, and Academia growing 7%. A key driver was our decision to step up the expansion of our direct marketing channels, and electronic touchpoints to our customers. We have also launched initiatives putting a stronger emphasis on science based selling, and in particular, on our range of products for cancer research, from basic research to translational medicine, and then, drug discovery and development.

We are pleased with these results, but the overall environment remains challenging. In Academia, increasing budget pressure is affecting buying patterns among customers, and in Pharma, although we are benefiting from sustained demand from molecular technologies, you can see from recent announcements that many pharmaceutical companies are intensifying their cost containment measures.

But we are going to intensify our focus on growth initiatives in these customer classes, particularly Academia, given its strategic importance as an innovation driver. And we anticipate these customer classes to provide single digit constant exchange rates sales growth in the fourth quarter this year.

Moving to the next slide, we are making good progress on our strategic initiatives, all of which are supporting our objective to leverage our leadership in Sample and Assay Technologies across our four customer classes. First and foremost, we want to drive platform success, underpinned by the rollout of our flagship platform, QIASymphony, worldwide. Our top priority remains to increase placements and improve the utility of this instrument with an expanded menu.

We are in the early stages of a platform and content story that will play out over the next five to ten years. This will lead to increasing sales growth as we expand the menu of assays available for use on a growing installed base.

The full version, QIAGEN RGQ, which includes three modular elements for sample preparation, assay setup, and real time PCR detection with the Rotor-Gene RGQ, was launched at the end of 2010, so about a year ago. And we are pleased with the uptake. We anticipate reaching an installed base of more than 550 installed systems worldwide by the end of 2011.

We are also seeing strong growth in demand for Consumables use on this system. Every placement creates an opportunity for annual Consumable sales, or so called pull-through of anywhere between $30,000 and $300,000. We already have a number of customers with annual Consumable levels well above $100,000 to $150,000. These types of initial results, particularly given that the full version was launched only in late 2010 in Europe and early 2011 in the US, gives us confidence about the longer term substantial growth potential.

In addition to QIASymphony, keep in mind that we are also selling more than 600 new Rotor-Gene RGQ real time PCR platforms every year, and these -- there are already more than 6,000 of these platforms around the world. Customers using these Rotor-Gene RGQ systems are natural targets for QIASymphony, and replacing manual steps for the use of our other platforms.

The majority of QIASymphony placements in the first wave are with customers who are adding modules, so in other words, creating a full QIASymphony RGQ system. But full, off the shelf system sales have been jumping significantly as well. We are not aware of any other competitor offering such a broad range of instruments to meet diverse customer needs, and then combining this with an extensive testing menu. We will provide more insights on QIASymphony at our investor event on November 17 at the AMP meeting in Dallas.

I would like to now spend some time reviewing how Cellestis and Ipsogen underpin these strategic initiatives, and also provide an update on our perspectives about HPV initiatives to strengthen our leadership in Personalized Healthcare.

Moving to the next slide, Cellestis and Ipsogen fully support our strategic initiative to add content. We completed the full acquisition of Cellestis in late August, and QuantiFERON TB Gold, a breakthrough in detecting latent tuberculosis, has been delivering uninterrupted strong growth. Key drivers in the third quarter were the sales expansion in the US, Europe and Japan. We are making investments to quickly address new markets and drive global expansion. We are already investing into sales and marketing initiatives, and are planning new R&D projects to develop tests that would detect latent diseases, and mirror some of the Molecular Diagnostics that are used in patients with active diseases.

A market potential we are now targeting is the use of QuantiFERON TB Gold as a companion diagnostic to test patients for latent TB status before being prescribed certain medicines. We are launching a new campaign targeting rheumatologists who prescribe TNF alpha blocking medicines. It is well known that the risk of latent TB reactivating is significantly greater when using these types of medicines. So we are adding sales and marketing resources to target this opportunity.

Turning to Ipsogen, we now hold approximately 72% of the shares and launched a tender to fully acquire the leader in blood cancer diagnostics. In fact, the most important post-acquisition progress was the agreement with Eli Lilly to develop a companion diagnostic for the JAK2 biomarker, for which Ipsogen has worldwide exclusive license and a great assay portfolio. We anticipate reaching more co-development agreements for Ipsogen's biomarker portfolio as well.

Also of note was the fact that this JAK2 test, Ipsogen's JAK2 test, was chosen in July by the Myeloproliferative Disorders Research Consortium to [test] mutation loads in two international multi-center trials, supported by the National Cancer Institute and Roche Pharma. Key growth drivers are the flagship JAK2 and BCR-ABL biomarker tests.

Ipsogen has been seeking to accelerate its expansion beyond Europe and the US, and our global operations provide an excellent infrastructure for that. We are also now working on US submission strategies.

I'm now on slide 11. On HPV, we wanted to frame the discussion to explain how we are addressing market dynamics in various parts of the world. As you know, the relative contribution of HPV to total sales has declined in recent years, due to strong growth in our Profiling and Personalized Healthcare portfolio. It was about 20% of total sales in the first nine months of 2011, and this is down from about 25% for the same period in 2008.

This is also reflected in the geographic breakdown. About 15%, 1-5, of our total sales came from HPV in the United States in the first nine months of 2011, and this is down from about 20% for the same period in 2008. We are providing this new level of disclosure, since we believe the market is overestimating the contributions of HPV in the United States to our business.

We also see HPV as having a broader strategic role to QIAGEN. It has been key in driving the expansion of our overall Molecular Diagnostics initiatives. In fact, we generated about 25% of our total Company sales from non-HPV areas of Molecular Diagnostics, so significantly more than the HPV area, in the first nine months of 2011. And this is up from about 19% in 2008. So HPV is providing great critical mass to get more face time with our customers.

I want to make clear that we are not talking about bundling, but instead, maximizing the value of customer relations built up over the years since we entered Molecular Diagnostics. We've been talking about HPV initiatives for some time. Driving market conversion remains paramount. The recently announced guideline changes are positive for us in many ways. They favor HPV/Pap co-testing, and they have put a clinical counterweight against some marketing driven initiatives, pushing genotyping for a very small subset of patients.

We have been successful in signing many customers to new multiyear contracts, stressing the many benefits of our Hybrid Capture 2 test, as well as the risks and costs of switching. This could be accomplished with only very moderate pricing concessions, and this will continue into 2012, but this was to be expected.

Customers [are] also told us that they were very pleased with the Rapid Capture system, the Hybrid Capture 2 tests, and again, still the proven gold standard, but want us to improve automation. So we are launching the Decapper unit during the second half of this year, and working on automation initiatives.

Outside of the United States, we also have a high market share, with more than 20 competitors. We are working to convert markets to primary screening, either from Pap tests, or even just to implement cervical cancer screening at all. In Europe, we have a leading market share, and have won a number of pilots and regional tenders across the continent. These pilots and tenders are done as part of the selection process to implement national screening programs. But decisions on national programs are long-term processes, and can be delayed and impacted by macroeconomic conditions.

During the third quarter, we, for instance, won an additional large tender for a European country. We are well positioned in a number of markets to move quickly if decisions are made on national implementation, and we are working with authorities.

Primary screening in Mexico, using our Hybrid Capture 2 test, has been a major achievement. We are addressing opportunities across Latin America, as well as in the Asia-Pacific region. These involved our Hybrid Capture 2 test as well, as a low resource version, so-called Care HPV, which we believe is a commercially viable product that can play a critical role in preventing the burden of cervical cancer.

Turning to the next slide, slide 12, we have already discussed the new biomarker project with Eli Lilly, involving JAK2. We also recently announced a new project with Pfizer that builds on our existing projects for the KRAS biomarker. We have projects on this biomarker with Bristol-Myers Squibb and Lilly for Erbitux, and Amgen for Vectibix. These submissions, as you know, were completed in the third quarter for use of this biomarker, paired with these medicines in patients with metastatic colorectal cancer.

We are expanding the market potential for the KRAS biomarker with this new project with Pfizer, since it involves patients being treated for non-small cell lung cancer. Non-small cell lung cancer accounts for approximately 85% of all lung cancers, and it is the leading cause of cancer-related mortality in both men and women in the United States, and throughout the world.

This is only a portion of our projects. We have over 15 underway. But many are confidential, and we cannot and would like not to disclose details. We are working on many new opportunities and have more to come.

I would now like to hand back to Roland.

Yes, thank you, Peer. I am now on slide 13. We have updated our expectations for 2011 when we published half year results in July. The sectors were noted were the impact of the Cellestis and Ipsogen acquisitions, as well as the ongoing challenging market conditions, and then also, due to the impact of the timing for the HPV tender.

We are reaffirming the sales targets provided in July, and we have expanded the adjusted EPS range for the second half of 2011 and the full year.

For the fourth quarter of 2011, total sales growth is expected to be approximately 14% at constant exchange rates. Molecular Diagnostics is expected to be much higher than this rate, including contributions from the national HPV tender, and we are expecting single digit sales growth contributions from the other customer classes.

For the full year, we continue to expect total sales growth of approximately 3% constant exchange rates, with contributions from organic growth and acquisitions.

We have also updated our foreign currency assumptions for these periods, which we anticipate to continue to provide a positive effect on net sales.

In terms of adjusted EPS, we have expanded our previous target of approximately $0.96 to a range of about $0.96 to $0.97. And we have done the same with our target for the second half of 2011, with a range of $0.53 to $0.54.

For the fourth quarter, our target is now $0.29, and this effect is updated, acquisition impact of shifting of about $0.02 for the fourth quarter, as I had mentioned earlier.

So, on to the next slide. In terms of adjustments to operating income, we expect equity-based compensation of about $4 million to $5 million for the fourth quarter, amortization of acquired IP of approximately $28 million, and business integration, acquisition, and restructuring of about $7 million. This is higher than we had forecasted on our July call, but it is, again, due to the timing of acquisition related charges. The full year impact remains unchanged.

Our adjusted tax rate for the third quarter was 25%, which was actually higher than the 22% range in the same quarter in 2010. And for the fourth quarter, we expect an adjusted tax rate in the range of 22% to 24%. For the full year, this would imply a range of about 23% to 25%.

The weighted average number of fully diluted shares outstanding will be around 237 million for the fourth quarter, and 239 million for the full year 2011.

Peer?

Thank you, Roland. I'm now on the summary slide, before we move into Q&A. As I mentioned at the start, although our growth is not where we want it to be, nor how we foresee it to develop in the future, we met our targets for the third quarter of 2011 in a challenging environment, and against timing trends from a large transaction and Prevention tenders, and from development milestones for companion diagnostic projects.

It is important to see the progress we are making on our strategic initiatives. We are creating a foundation for future growth, led by the ongoing strong rollout of the QIASymphony, and our initiatives to add content to our portfolio, both through internal R&D, as well as through targeted acquisitions of Cellestis and Ipsogen. And we have reaffirmed our full year guidance, supported by a stronger growth profile in the second half of the year. We are also on track to achieve our targets for the fourth quarter.

In closing, we shown with our performance in the third quarter that we are expanding QIAGEN in 2011, and ready to accelerate growth in 2012. And with that, I'd like to hand back to Solveigh to open up the Q&A session. Thank you.

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) Your first question comes from Mr. Lai. Please state your name, company name, followed by your question.

Good morning. This is actually Matt, in for Quintin Lai at Robert Baird.

Good morning, Matt. How are you?

Good morning. Good, thanks. Starting with kind of the commentary about seeing accelerating growth into 2012, I was just wondering, Peer, if maybe you could help add some color to kind of what you're assuming by end market, or maybe kind of the volume dynamics that you might be expecting. Just a little extra color there.

Right. The majority of these impacts come from the year over year effects that we've seen in 2011, especially against the backdrop of the continuing slide, and positioned utilization rates in the US. And also, the move to reagent rental models, and the rollout of the QIASymphony systems.

So this is kind of the -- more from the year over year and comparative level. You know, we saw slower growth in automation as we've seen in the prior years, also due to the reagent rentals. We also had some -- the underlying shift, as I said, in the physician utilization rate.

So those things should wash out over the course of 2012 as they seem to be in a more stable situation, as we've seen in the first half of this year.

So, that is certainly the major effect that would give us some tailwinds into 2012. We continue to expect very challenging markets in the Academic and the Pharmaceutical arenas, even though our more Company-specific related initiatives around our clinical research packages and Pharmaceutical, molecular development supporting solutions, are seeing very dynamic growth, and we've been quite successful in also linking those into the diagnostic franchises that we have.

So that, as you know, is our -- part of our core strategy.

So those are effects that should continue to boost the top line into 2012. We remain concerned about the general market environment, but see year over year effects and certain Company-specific effects giving us more tailwinds in 2012.

Great. Thanks for that color. And then, just wanted to kind of dive in on the Academic, since you really are kind of an outlier with the sort of growth that you have reported here, given the uncertainty. Anything special in terms of -- you know, that you're hearing from the field, customer tone as it ebbed and flowed kind of throughout the quarter, given some of the uncertainty out there? Thanks.

It definitely is a market that is seeing quite some challenges right now. And as we know in the United States, the budget situation has proven to be a little bit more favorable in 2012 than some people feared, but 2013 doesn't look too good.

And -- however, we should never forget that the US Academic budgets -- you know, we're talking tens of billions of dollars. The NIH budget alone is $10 billion, and you know, we have -- I don't know, half a percent of that. So the ability to grow in this market is not a factor of the overall market growth. It is certainly influenced by that, accelerated or impeded by that, but there remain a lot of growth pockets within the overall academic markets.

And Europe is very similar, so we see strong funding growth in countries like Germany, very difficult funding situations in southern Europe and also the UK.

So, I think there is no real expectation for the funding challenges to go away over the future. However, we seem to be very well positioned, because contrary to most other suppliers to the Academic markets, we've been focusing on the clinical applications. So, being very close to the patient, and very close to clinical research, and leveraging our ability to transition into diagnostic products.

So, a system like QIASymphony, for instance, is also going into some Academic and Pharmaceutical customer areas, simply because it can transition into a more controlled and regulated environment, and provide a certain degree of quality. And so that's indicative of the type of positioning we're taking in these markets.

And those clinical subsegments are seeing somewhat better growth than the overall, just blue sky basic research area, and I think a few ways of validating that is, you see a lot of initiatives being published by governments, to think about creating clinical development activities within academic research, and focusing more on partnering to get innovation, actually, into utility for patients.

Thank you so much for that color. I'll jump back in the queue.

Thanks, Matt.

(Operator instructions) The next question comes from Mr. Bonello. Please state your name, company name, followed by your question.

Thank you. Bill Bonello with RBC Capital Markets. Hey, I'm just wondering if you can tell us, so that we can get a sense as non-HPV becomes more and more important, what the organic growth in the quarter was on the non-HPV component of the Molecular Diagnostics business. And maybe along with that, you can tell us what organic growth would have looked like if you hadn't had the HPV tender issue.

Yes, that goes into quite some detail, Bill, but I'll try to answer it a few ways. First, the HPV tender was the majority of the difference between the growth and non-growth. And so the gap was basically this tender area. We've seen very good growth in the Profiling and PHC areas. We said before that Personalized Healthcare is growing at a 40% clip, and this is not -- some people say this is a pie in the sky [three-year] business. This is actually very real. We're talking quite significant numbers near term, and we were talking about high double digit million dollars of sales that we're already generating in this area, and this is continuing to grow quite nicely.

The Profiling area is one where we're seeing also very strong double digit growth rates in the assay sales. However, because a lot of these placements are now under reagent rental, people are bundling the modules that they buy to synthesize their QIASymphony RGQ, or they're buying the complete RGQ under reagent rental contracts, and thereby, we're not getting the Instrument sales, which we partly got in 2010 from other Instruments, for instance.

So the growth in the reagents are -- continue to be very high double digit numbers. I wouldn't want to go into more specifics on this at this point in time, and maybe something that we could split out on an annual basis.

That's very helpful. But in general, even with your comment on the Instrument comparison, which is a bit of a -- just a, you know, as you go forward, that growth will look different. I mean, in general, it sounds like we should think of the non-HPV component of Molecular Diagnostics as a business that's growing at least in the high single digits, or certainly growing, at least.

Absolutely. Absolutely. And this was also visible as -- over the last few years, as HPV was actually not a big growth driver -- not a growth driver at all. We were using this as a critical mass base to develop our overall Molecular Diagnostics franchise, and have been able to diversify the portfolio quite successfully, which is, today, actually, quite a broad portfolio across many different disease areas and types of testing.

And this has really been our vision of the future, and so the HPV component went from a 20% of our sales base down to 15%, and is probably over the future, even as we continue efforts to convert markets and drive growth in this area, is probably going to be a lower growth area than PHC and -- or, Personalized Healthcare and Profiling.

Great. Thank you very much.

Thanks.

The next question comes from Mr. Leonard. Please state your name, company name, followed by your question.

Thank you. Dan Leonard here from Leerink Swann. My one question, Peer and Roland, obviously, you're looking to drive margin leverage in the business through 2013. And appreciating we'll get more information at the Analysts Day, conceptually, how much of this leverage assumption is dependent on assumptions for rapid expansion of sales growth versus how much can you actually achieve if sales growth is more moderate, say, in maybe a mid single digit type of range? And what would be the drivers?

Thanks, Dan. Great question. Roland, do you want to take that one?

Yes, sure, (inaudible). If you look in our P&L and just turn it around and just look at our operational expense number, I think you clearly see that we have a significant possibility to leverage operational expense this year at QIAGEN. And also, looking backwards, we clearly did so.

And so one thing you have to have in mind, we just closed on two large acquisitions. It's clearly also had a short-term impact here on our ability to leverage. Nevertheless, I would believe already in the fourth quarter, and for sure in 2012, we will make a significant step forward from the Q3 guidance, which I would call very untypical, and I believe especially around SG&A, we have significant leverage opportunities, and the -- our comfort zone is somewhere between -- around 11% of total revenues investment.

So I feel quite comfortable with achieving our targets in that given time period. We will give, on the Analysts Day, more time -- actually, more insight into the different initiatives we started, and I give also benchmarks here. As you know, we started certain initiatives around logistics, around certain outsourcing activities, and this is clearly helping us going forward, into a very significant way.

In addition to that, also, in general, you still had -- in the majority of our business, over the last couple of years, and I don't think that it's different going forward, also, our effort around pricing, very able to achieve significant pricing opportunities. That is going to continue.

And last but not least, in terms of utilization rights, in terms of production, we still are running right now on a typical average utilization rate of 65%, just by more volume going forward, we should be able to leverage on that as well. And clearly, it also makes more Molecular, less Life Science in terms of growth rates. It's also going to help us to achieving our margins here, of course, here, over the next three years.

Okay, thank you Roland, for that color.

Thanks, Dan.

The next question comes from Mr. Peterson. Please state your name, company name, followed by your question.

It's Tycho Peterson, JPMorgan. You know, maybe starting out with QIASymphony here in the US, I'm just wondering if we can get a little bit more color on some of the uptake patterns. I think in the past, you've talked about maybe half would be reagent rentals, half CapEx sales, and obviously, a split between Molecular Diagnostics and Academia.

So, any color you can provide on some of the dynamics there, and to what degree you're getting competitive swapouts as well?

Sure. By far, the majority of the placements are in clinical areas, and followed by Applied Testing, which is also seeing some success. We will have new packages on the QIASymphony coming forward for Forensic applications next year. And so, that will probably see stronger growth. Also in Instrumentation sales, we saw it was a little bit weaker this year, in some cases, in anticipation of that.

But by far, the majority of the placements are in the clinical area. And the placements in Europe, where we have enough assays to be able to generate the reagent pull-through, are almost all reagent rentals, which is actually great news out of the box, as I said in a recent call, that people put their faith in the system and are willing to commit to multi-year reagent rental contracts, primarily in the area of HIV and hepatitis, but also in the area of esoteric testing and even in some cases, homebrew reagents,

So in the United States, there is some packaging around ASRs that people are using, and also, homebrew reagents, and clearly, as some of the assays are now moving to the clinic and towards submission, and in anticipation of that, we expect a much stronger reagent rental opportunity. But so, it's almost all of them in Europe, and less than the majority in the States.

And then, with regards to HPV, you know, I appreciate the fact you've gone back and locked up a lot of your contracts. Are you hearing from the customers interest in kind of the bundling dynamic, and the idea that HPV will be done with, chlamydia, gonorrhea, and trich and other tests? And how do you respond to that? Obviously, you'll have those tests -- some of those tests with Ensemble. Maybe not trich, but chlamydia, gonorrhea. But how do you deal with that in the near term?

Yes, the majority of the add-on tests are actually quite easy to develop, and not really differentiated products, and there are several suppliers -- or, there will be several suppliers offering these additional tests as well. So it's very difficult to differentiate on chlamydia and trich in the future.

I think it all has to do with the solution offering that you're giving to the customer. For a lot of customers in the higher throughput area, most of the systems are maxed out anyway, and the cost of switching is just quite significant, especially if they're thinking about moving to a system which has different workflows, or also, different analytes that are being used.

So the switching costs are quite significant for any customer over the next few years, and until alternative systems are established. And we're providing a gold standard, highly validated solution, that has shown clinical superiority, in terms of being able to detect diseases, significantly above the potential and existing competition.

And so from that perspective, customers feel quite good about running this system, which is running in the high volumes, and therefore, utilizing the instrument basis that they have on site right now quite well. They feel very comfortable in doing that also for the foreseeable future.

And the last one on capital deployment. Any comments here, given, you know, where the stock is, and any change in strategy? And overall, what do you view as kind of the optimal capital structure for the business?

Roland, do you want to take that one?

Yes, sure. (inaudible) the year, we'll give a more detailed update on our capital allocation policy on our investor event. You probably are aware that on our recent Annual General Meeting, we asked for approval to do a share buyback. We got an approval for up to 10%, and we will give more details and insight on our thinking on our investor event.

Okay, thank you.

The next question comes from Mr. Quirk. Please state your name, company name, followed by your question.

Thanks. Bill Quirk, Piper Jaffray. Thanks. Good afternoon, everybody.

Bill, good morning.

Question. First off, Peer, given the timing of the tender, and ebbs and flow of academic research funding, I certainly understand that the North American business had a lot of gives and takes here this quarter. If we simply exclude HPV, was the business positive in terms of constant exchange rates? And then secondly, give us any color just into what the Cellestis (technical difficulty) contributions were in the quarter. Thanks very much.

Okay, well, the first part of the question, I'll take, and the second one, Roland, if you could take that one.

The trends are, as we talked to a little bit in the prepared remarks, have been actually quite good, also in Academia, based on some of our initiatives, and Pharma. And we've also seen good trends in Molecular Diagnostics. So the answer is, yes, we've seen growth also in the United States, excluding these one-time effects, and the year over year effects of the physician office visit decline.

So, it's not where we want it to be, but in certain pockets, we've seen very high growth, and those are some of our strategic areas, such as the Profiling, the QIASymphony rollouts, and Personalized Healthcare have been doing extremely well.

We were also very pleased with the growth of the blood cancer profiling portfolio that Ipsogen is now soon to bring to our franchise, has been doing very well, is something that we're very excited about also as we can now put it onto our platforms, and as we know, the assays are already validated for our systems.

And Cellestis has shown some breakthrough standardization achievements in terms of becoming the standard assay to be used in latent TB testing in several guidelines in major countries. We heard about Germany. I think a lot of you have heard about, also, the new guidelines that have come out in Germany that call for the use of this test. And so we're going to do more and more of that going forward.

Roland, do you want to give the numbers of the Cellestis and Ipsogen contributors?

Yes, sure. As you know, we broke out in the press release also organic growth rate in general, but of course, Ipsogen was still a small number, and Cellestis was small, was consolidated for one month. And you probably have seen their latest financial statements as a standalone company, where they came in roughly with a $50 million run rate on a yearly basis, and we had more or less one month, slightly more than one month in our books.

Thank you very much.

(Operator instructions) The next question comes from Miss de Lima. Please state your name, company name, followed by your question.

Good afternoon. It's Brigitte de Lima from Bank of America Merrill Lynch, and I'll stick to the one question. Just wondering on HPV as well, I'm just wondering how I should think about the coming quarter [rate], (inaudible) clearly in the second half or in the fourth quarter, you'll have this big one-time effect. So what happens as we go into Q1? Do sales sort of fall back to the 3Q level, or are there more tenders in the pipeline that will sort of take on from Q4, and we should see similar rates? I'm just trying to understand how that works, or are we going to see a big hole again next year? Thank you.

Sure, Brigitte, thanks. The underlying target is to have a rather stable base on the HPV franchise, and build on the growth elements that we have around the QIASymphony platform and the PHC platform. There will be some positive contributions due to the rollout of our automation systems for the various applications that are now completing the workflow, and that will be happening over the next few months, so that could provide a further benefit.

But in general, the overall goal is for us to have -- to see the HPV franchise be a stable critical mass base that we're not really expecting growth from, but can leverage off new initiatives.

I can understand that, but I guess the question is more, are there any other, sort of national tenders in the pipeline? Because otherwise -- the only thing that worries me is, Q3, we saw a bit of a drop in HPV. Q4 is going to be a big increase. So what happens in Q1? Is it going to drop back, or are there more smaller tenders coming through that will make up so we don't see a big shortfall as we go into Q1?

Right. I think this one tender was simply -- it was, unfortunately, moved into the fourth quarter from the third quarter, so this is why you see the big growth in Q4, and the low growth in Q3. And normally, we have enough of these, but this was just a very large order that moved.

We are in so many different tenders and programs. There are dozens of these ongoing right now that we are very active in. And I'd hope to have more of them, and also, to -- the downside would be that there would be some increase to this type of exposure, but there's so many that I wouldn't expect this to have this type of volatility that we've seen in Q3. It's rather unusual that we highlighted a deal that would have this type of an impact. And I think this is the first time.

That's very helpful. Thank you.

Thank you.

The next question comes from Mr. Lawson. Please state your name, company name, followed by your question.

Peter Lawson, Mizuho Securities. Roland and Peer, thanks for the US HPV breakout. Since you've done a really solid job in European placements, can we get a breakout of the international HPV contribution (inaudible) in the period? And then how should we think about the ramp and the pacing of that European tender?

Sure. If you look at the overall contribution in the US being 15% -- and again, that's the portion that there -- that has gone from basically a two competitor franchise to a four competitor franchise over the last 12 months. That is 15% of our sales. So basically, 10% market share are worth 1.5% onetime organic sales at QIAGEN.

The international portion is the difference between the 15% and the 20% that we have. So we've actually been quite successful in Europe, where we have over 25 competitors, including almost all competitors that are -- including all competitors that are in the United States, and many more beyond that, and also some very substantial ones.

So, we've actually seen a better growth, and it's a more competitive environment in Europe than we've seen in the United States.

That answer the question, Peter? Yes, I guess it did. Okay, thanks, Peter. Operator?

The next question is the last question, and comes from Mr. Groberg. Please state your name, company name, followed by your question.

Hi, thanks a million for taking the question. This is Jon Groberg from Macquarie Capital. Peer, you obviously talked a lot, and I think, as you kind of rightly highlighted concerns amongst the investor base on HPV. Would you mind just providing a little bit more detail about the nature of the long-term agreements that you're able to sign? You know, how long they are, whether or not they're completely exclusive to QIAGEN, and kind of what you're giving up on price? That would be great. Thanks.

Yes. Well, traditionally, in this industry, contracts are anywhere between two and five years. That would, I'd say, be the standard timeframe that typically is considered one that customers can enter into quite freely. There is a -- there are several clauses that are important in these contracts, the ability to potentially switch technologies if something major emerges, they're called technology out clauses. And we have a lot of these contracts that don't have those. So we have a very, very committed customer base, and over the next few years, they're -- it's a very strong stability in our franchise overall.

The -- when you renegotiate these types of contracts, there is always a price discussion, and we have to remember that the markets have become a lot more competitive, and a lot more difficult and challenging than they were 12 or 24 months ago. And despite that increase in the difference in macro environment, the impacts on pricing have been very moderate. We haven't detailed that, but customers have been very open to prolong contracts with moderate price concessions, which we've seen also in 2009, 2008 and 2007 as well. Every time you renegotiate an agreement, there's always a certain discussion around pricing as volumes go up, and as the market changes, or the customers have more price, or cost concerns.

I think we've been very successful in that regard. I'm very pleased with the performance of our sales teams bringing over the value proposition that we have to customers.

The -- yes, that's, I think, as much color as I think would be helpful now.

Thanks a million for that color.

Thanks.

Yes, with this, I would like to close the conference call by thanking you all for participating. We hope to welcome you again to our fourth quarter and full year 2011 earnings conference call on Wednesday, February 1, 2012. 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 Q3 investor and analyst conference call of QIAGEN N.V. Thank you for participating. You may now disconnect.