Qiagen NV (QGEN) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to QIAGEN N.V. investor and analyst conference call on the Q2 results 2013. 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 John Gilardi, VP Corporate Communications. Please go ahead, sir.

Good afternoon and thank you. And welcome to our conference call today to discuss our latest results. Our speakers today are Peer Schatz, the CEO of QIAGEN, and Roland Sackers, our CFO.

A copy of the announcement and the presentation for this conference call can be downloaded from the Investor Relations section of our home page at www.qiagen.com.

On slide 2 you'll see the customary legal disclaimer and statements. The discussion and responses to your questions on this call reflect Management's views as of today, July 31, 2013.

Today, we will be making statements and providing responses to your questions that state our intentions, beliefs, expectations, or predictions of the future. These constitute forward-looking statements for the purpose of the Safe Harbor provisions. They involve certain risks and uncertainties that could cause our actual results to differ material from those projected. QIAGEN disclaims any intention or obligations to revise any forward-looking statements. And for more information, please refer to our filings with the SEC.

I would like to now hand over to Peer.

Thank you, John. Hello and welcome to our conference call and the opportunity to discuss our results.

As you saw in the release last night, we achieved our adjusted net sales and EPS targets for the second quarter and reaffirmed our full-year guidance for our adjusted net sales and earnings targets based on the performance for the first half of 2013. We had strong demand for our portfolio of molecular diagnostics growth drivers and delivered higher sales in this overall customer class, despite the anticipated slowdown in revenues related to HPV screening.

In the life sciences we saw a different picture than in the first quarter of 2013, with growth in pharma and academia, but weaker results in applied testing. All regions contributed to growth and were led by the top 7 emerging markets.

We are making progress on our goals for 2013. In personalized healthcare a highlight was the recent FDA approval of our EGFR companion diagnostic kit. This was granted simultaneously with the FDA approval of Gilotrif, which is the brand name for afatinib from Boehringer Ingelheim, as a new first-line treatment for non-small cell lung cancer.

We also reached new confidential agreements for companion diagnostic co-development projects, both within existing partners and also with new pharma companies.

We are on track to begin the launch of our sample-to-insight next-generation sequencing benchtop workflow in 2013. We have reached an important milestone with placements at early access customers. Our ambition is to drive the use of this breakthrough technology in clinical research and diagnostics by offering a fully-integrated workflow from biological sample to highest-quality data interpretation and actionable results.

The very positive response to our Ingenuity acquisition reaffirms our conviction that our Gold Standard and biological data interpretation will be a crucial differentiator for QIAGEN. It is not just about sequencing samples but, instead, about offering a complete, high-quality workflow and one that provides the most powerful insights.

In terms of the QIAsymphony automation system, placements continue at a strong pace, with placements up 15% in the first half of 2013 compared to the same period in 2012, which was already a record year for QIAsymphony. We are well on track to break through 1,000 cumulative installed systems during 2013 and continue to see robust double-digit growth in consumables.

And the last point to mention on this slide is the completion of the major efficiency project that we began in late 2011. QIAGEN has been going through a transformation as we streamlined the organization, consolidated sites and reallocated resources to growth initiatives following a series of bolt-on acquisitions.

The last set of actions involved realigning the sales and regional marketing teams in the United States and Europe. Given the changes in our markets, and also the QIAGEN portfolio, we wanted to better address customer needs across the continuum from basic research to translational medicine and into clinical diagnostics. We continue to have the only US clinical salesforce in the Molecular Diagnostics industry and a strong share of voice in our market segments.

As Roland will discuss later, the restructuring charges for these projects are going to end in 2013. And we realize that it is time for us, even more in light of these changes, to deliver on generating tangible benefits from these actions. We are convinced that these actions have strengthened QIAGEN considerably and will play a key role in accelerating sales growth and improving profitability.

Finally, you saw in the release that we announced plans for a new $100 million share repurchase program. This is a signal of our conviction in the growth opportunities of QIAGEN, especially as we complete this efficiency program, and also that we are not satisfied with the current valuation. As we launch this program, we are maintaining our flexibility to take advantage of strategic opportunities, while increasing returns to shareholders.

Turning to slide 5, I would like to review the results of our customer classes. Molecular Diagnostics led the performance and provided about half of sales.

In Prevention, the QuantiFERON latent TB test continued to grow at a 20%-plus constant exchange rate growth rate with the fastest growth in the United States. Our teams are driving conversion based on QuantiFERON's superior accuracy and delivery problems for tuberculin, the derivative needed for the 120-year-old competing TB skin test.

In Personalized Healthcare, we saw a mixed picture. Sales of companion diagnostic kits rose at a double-digit pace, but the pharma co-development project provided lower revenues. We are seeing improved demand for companion diagnostics in the United States as uncertainty over reimbursement is clearing up and we expect new growth in positives from the EGFR approval.

Our Profiling business again grew at a good pace, supported by rising sales of consumables used on QIAsymphony. As I mentioned, QIAsymphony placements are growing at a double-digit pace and the related assays and consumable sales are also growing at a high double-digit rate. The majority is in Molecular Diagnostics and the percentages placed as reagent rentals continue to rise. Although we are creating multi-year revenue streams, this weighs on current instrument sales.

Staying in Molecular Diagnostics, sales of products for HPV testing fell 17% in the second quarter, which is more than the single-digit decline in the first quarter, but this is something we had anticipated and there are some year-over-year baseline reasons. It is more important to look at the year-to-date trends.

For the first half of 2013, global HPV sales are down about 10% constant exchange rate, representing 15% of total sales, and we continue to expect about a 10% decline in HPV sales for 2013. The challenges are in the United States where we face significant pricing pressure as new competitors search for market share gains. QIAGEN maintains a solid leadership position in the United States with our test ranking as the Gold Standard.

We announced in June that a major US reference lab had reached a new non-exclusive agreement to consolidate the purchase of women's health screening products. I want to make a few points. First, they will continue to offer our HPV test to customers. Second, the transition to the competitor HPV test is one of four products trying to be converted simultaneously and this will take time.

And third, we see no signals of other laboratories wanting to consolidate suppliers. The reason is clear; labs want to have the freedom and flexibility to adapt. They also want to offer Gold Standard tests since this is what customers are demanding, and no single supplier can do so across a broad menu. Our position as the Gold Standard is a key reason why labs are sticking with our HPV test. We continue to sign labs to new multi-year agreements and will remain the market leader.

As for the impact in 2014, we expect this customer development to have an adverse impact on our results, but this is to represent less than 2% of anticipated 2014 total adjusted sales at the worst. We also continue to expect US HPV product revenues to represent less than 10% of total sales in 2014.

Before moving on, I would like to note that Ingenuity revenues were booked in the Pharma and Academia customer classes.

As I mentioned earlier, we saw a change in trends in the Life Sciences from the first quarter of 2013. Applied Testing sales were down and faced a tough comparison to the outstanding instrument sales in 2012. However, we saw solid growth in Consumables and we expect overall positive trends here for overall 2013.

Pharma returned to growth on higher sales in all regions after the significant slowdown in the first quarter. Academia sales were also slightly higher in comparison to the second quarter of 2012 as emerging markets more than offset the ongoing cautious spending in the United States and Europe.

In the US, sales are obviously under pressure due to sequestration, but we are not experiencing market share losses, just overall restrictions on spending. The European landscape did not change during the quarter as we continued to see cautious spending patterns. Also, the anticipated government funding impulses in Japan have not yet materialized.

I'm now on slide 6 to review the completion of our major efficiency project. We have made transformational changes that were designed to address the fast-changing industry conditions, as well as issues specific to QIAGEN. These included the reallocation of resources to growth initiatives, in particular to next-gen sequencing.

This efficiency project had five areas of focus and we have streamlined organizational structures and eliminated duplications. We focused our R&D portfolio on projects offering high-growth potential, improved processes to accelerate innovation. We improved capacity utilization to increase efficiencies by closing down some sites as well, such as Hamburg, [Morgan] and Crawley. We optimized sales and marketing channels to better identify and address customer needs. We captured savings from the expansion of shared services, such as the new service center in Poland, and the outsourcing of some IT activities, creating functions that can be efficiently scaled as QIAGEN grows.

We have taken a $76 million pre-tax charge in operating income in the second quarter and this was to cover the following types of initiatives. One, closing some sites and integrating their activities at our global hubs in the United States, Germany and China to gain efficiencies; two, financing changes in our R&D portfolio to put more emphases on faster-growing areas. This included allocating more resources to the NGS initiative and de-emphasizing HPV-related R&D projects. And last, changes we have made in our commercial and marketing organizations.

So the question is, why were the charges much higher than we had forecast? The answer is that we decided to take the opportunity to accelerate and expand the range of efficiency projects which we had originally planned in light of industry trends, including M&A actions. We wanted to get this finished and we have.

Many of you know QIAGEN well and some of you are very familiar with the new structures, processes and initiatives. The Company is quite transformed and we are using this strength to push for higher growth. We are convinced that the benefits of these actions will become even more evident in 2014 and beyond. This was one of the motivators behind the decision to launch share repurchase program.

I would now like to hand over to Roland.

Yes. Thank you, Peer, and good afternoon to everyone in Europe and good morning to those joining from the US. I'm now on slide 7 to provide some perspectives on our performance in the second quarter of 2013.

Adjusted net sales were $316.4 million, representing 3% growth at constant exchange rates over the same period a year ago. This was ahead of our target for 1% to 2% constant exchange rate wise. About 2 percentage points of growth came from AmniSure, which was treated as acquisition until May, 2013, and also from the recent acquisition of Ingenuity, while the rest of the portfolio provided about 1 percentage point. Currency movements had no meaningful impact on reported results.

The adjusted gross margin was steady at about 71% compared to a period a year ago. Similar to what we saw in the first quarter of this year, there was a benefit from the mix towards more consumables and also from efficiency programs.

Adjusted operating income declined 3% to $83.4 million as the adjusted operating income margin declined to about 26% of net sales compared to 28% in the year-ago period.

R&D investment returned to a more normalized rate of about 10% to 11% of sales in the second quarter of 2013, in part as a ramp-up of the development program and clinical trials to expand our menu on QIAsymphony and drive our NGS program.

Sales and marketing expenses were also higher given the investments being made into the NGS initiative, including Ingenuity as well as expand -- as to expand QIAGEN's commercial presence in key markets.

Adjusted pre-tax income, which you do not see on this chart, however was about 3% to 80.2 -- $82.9 million. This was due in part to non-operating income generated in the second quarter of 2013 from providing access to QIAGEN's technologies. We provide access to other parties on a routine basis as part of our commercial relations strategy, and proceeds are treated as other income when it relates to non-core technologies to avoid distorting the operational performance. Adjusted net income was then up 6% and adjusted EPS was $0.27 per share, which was ahead of the target for $0.25.

I'm now on slide 8, which provides an overview of all regions delivering growth at single-digit constant exchange rate weights.

The top 7 emerging markets led the performance with 12% constant exchange rate growth and provided 13% of total adjusted net sales. In the Asia-Pacific and Japan region, sales rose about 8% constant exchange rate wise. China and India delivered double-digit gains, while sales declined in South Korea.

Our Women's Health initiatives in China have been gaining momentum due to government initiated HPV screening programs. And we saw more positive trends in the Pharma and Academia customer classes compared to the first quarter.

In Europe, where sales -- net sales rose 2% constant exchange rate wise, important contributions came from the United Kingdom, Turkey and the Nordic regions. Life Science funding (inaudible) remained an issue in this region given the austerity measures, while Molecular Diagnostics sales were supported by QuantiFERON-TB and the ongoing rollout of the QIAsymphony platform.

The Americas region grew 2% constant exchange rate wise and contributed 48% of net sales.

Solid growth in Brazil and Mexico led the performance among the countries, while sales in the US were largely unchanged as expansion of our Molecular Diagnostics growth drivers offset lower HPV sales and ongoing soft market conditions in Pharma and Academia.

I'm now on slide 9 and will provide a few comments on the sales of Consumables and Instruments.

Consumables and other revenues provides about 87% of total sales and were up 5% constant exchange rate in the second quarter on the mix of contributions from AmniSure and Ingenuity, as well as the rest of the portfolio. Revenues from Instrumentation contributed about 13% of total adjusted net sales, declining 8% constant exchange rate over the second quarter of 2012. Even so, sales were down, we had strong double-digit growth in QIAsymphony placements.

Testing spending trends also weighed on instrument sales among customers in Academia and Pharma, while Applied Testing sales were down against the very strong sales in the second quarter of 2012.

I'm now on slide 10. We are now halfway through the year, building momentum and focused on our sales goals for 2013. As you see, adjusted net sales rose 3% at constant exchange rates to $620 million; again, on a mix of contributions from the AmniSure and Ingenuity acquisitions, as well as growth in the rest of the portfolio. Adjusted operating income was down 3% to about $162 million as we continued making important investments.

At the same time, we expect profitability to improve during the second half of the year in line with expectations for faster sales growth. Our goal remains an adjusted operating income margin of about 28% for the full year in 2013. And as we have said, this takes into account about 100 basis points of dilutions from the Ingenuity acquisition and related investments.

Moving down the income statement, adjusted net income rose 3% and adjusted EPS rose to $0.49 per share.

On slide 11 you see a snapshot of our healthy financial position, which takes into account the Ingenuity acquisition in April. As of June 30, 2013 we had a good level of liquidity at $373 million, which compares to $266 million at the same date in 2012.

Also as of June 30, 2013 net debt amounted to $491 million compared to $416 million at the same date in 2012. After the Ingenuity acquisition, our leverage still remains at about 1 turn of net debt to adjusted EBITDA, so we continue to have flexibility to support business expansion, as well as to increase returns such as through the new $100 million share repurchase program that we just announced.

Our cash flow performance is obviously affected by the restructuring charge taken to complete the efficiency project. The current estimate is for the restructuring charges being taken for the efficiency project to have an impact of about $60 million and free cash flow for the full-year 2013. But given our expectations for no material restructuring charges in 2014, we see opportunities for significant improvement next year.

I would like now to hand back to Peer.

Yes. Thank you, Roland. I would like to now provide some views on our strategy to leverage our leadership in sample and assay technologies across all of our customer classes. On slide 12 you see we are using the categorization into Sample and Assay Technologies to list the topics I will talk about.

First, QuantiNova marks the beginning of a series of launches for a new generation of real-time PCR kits. PCR is still the workhorse of every molecular biology lab and the key component in Molecular Diagnostics. And the number of reactions being performed in increasing.

QIAGEN year to date sold far more than 1 million real-time PCR kits to more than 7,000 customers, representing hundreds of millions of dollars of sales. Building on this success and the expertise, the portfolio of QuantiNova kits will enable us to further expand our position in the growing real-time PCR market by enhancing the specificity and sensitivity of probe-based real-time PCR. The first product launches are planned for this year.

As for the other products you see here, I will provide more insights in the next few slides.

Moving to slide 13, last week we announced a new collaboration with Exosome Diagnostics to create high-performance biofluid sample preparation kits for personalized healthcare. The initial product launches are targeted for 2014. Our goal is to develop and market the first comprehensive line of products that enable the use of biofluids to explore and monitor disease status. This would be a breakthrough from the current reliance on tissue samples which, while highest-quality results can be obtained, require biopsies on patients that can be challenging and expensive.

Exosomes are one of many different cell populations of microvesicles that can be isolated from biofluids, such as blood, urine and cerebrospinal fluid and you can extract and purify high-quality RNA and DNA for analysis from them. Exosomes carry nucleic acids and proteins from their host cells and they are more widely considered to be essential for biomarker discovery for personalized healthcare diagnostics. We believe that offering standardized, easy-to-use exosome workflows will offer superior testing solutions for use in a wide range of detection platforms, particularly real-time PCR and next-gen sequencing.

I'm now on slide 14. As I mentioned earlier, we are moving ahead at a rapid pace with our next-generation sequencing initiative targeting clinical research and diagnostics. Workflows have now been placed with customers for early testing and we are preparing for the start of the phased rollout later this year.

We've been developing this workflow with clinical research and diagnostic customers as our top priority and are addressing their concerns about current systems. These include too many manual processing steps, having to rely on various vendors to get the job done, and being required to batch samples to get cost-efficient runs.

One of the most important unmet needs in today's next-generation sequencing solutions is the availability of integrated data interpretation options. This means customers cannot get a complete offering from biological sample to actionable insight. These insights are increasingly where the value will be created with next-generation sequencing data, so just providing a researcher with new clinical insights to advance a project, or even a physician receiving ideas to consider in making treatment decisions.

Based on feedback from our customers, the addition of Ingenuity to the QIAGEN ecosystem was clearly the right decision. We want to do more than just generate sequencing data. We want to generate high-quality data and provide the most valuable insights. This is what QIAGEN and Ingenuity can do together and we see this as a key differentiator to drive adoption of our next-generation sequencing workflow.

Ingenuity is far more than just a data interpretation solutions for NGS applications. We're moving ahead to create seamless solutions for our customers to meet the world's leading resources for interpretation of biological information all together into our range of platform technologies and content to drive sound (inaudible) development in clinical diagnostic use. And doing so will position QIAGEN as a unique player with a content interpretation-centric ecosystem to serve the continuum of customers and their needs from basic research through to diagnostics. Ingenuity is accelerating scientific discovery and enhancing patient care by providing rich, accurate and visional insights into complex -- about complex biological systems.

One of the value propositions of this acquisition is to embed Ingenuity's dry lab interpretation solutions into (inaudible) molecular assays. Many of you know what we have successfully built such a franchise with our GeneGlobe molecular assay content portal which offers hundreds of panels for PCR and next-gen applications, as well as more than 60,000 fully annotated assays for the most sought after diseases. So, the opportunities with GeneGlobe and Ingenuity together in our product offering are going to fascinating for our customers.

Moving to slide 15, I would like to share an example as to what makes Ingenuity the number one choice. Ingenuity offers the deepest and broadest understanding of biological -- of biology compared to competitors. The superior quality of this content, which has been built up with massive investments over more than a decade, is due to the involvement of scientific experts and key opinion leaders who mainly curate and ensure quality control in addition to automated crawling. This is simply lacking with competitor products. And it has a major impact on the quality of interpretation. (Inaudible) differences can lead to distortions and the lack of reproducibility in scientific or clinical interpretation, especially if customers are mining millions of data points. So (inaudible) Ingenuity's knowledge base in intuitive applications providing a sustainable competitive advantage for years.

The Gold Standard solution for next-gen sequencing is Ingenuity's Variant Analysis. It answers a critical need for researchers trying to rapidly identify relevant cause of variants in human diseases in a matter of hours. Next-generation sequencing customers are making it very clear that the issue is the months or years it can take to make sense of sequencing data. Variant Analysis alleviates this bottleneck and they want it integrated into a complete sample-to-result sequencing solution.

The power of Variant Analysis is reflected in a recent announcement of the National Cancer Institute in the United States which generated the largest data set of cancer-specific genetic variations to date. This new data contains 6 billion data points that connect drugs with genomic variants for the whole [chain] genome. It is designed to provide a better understanding of these genetic variations and how they impact drug response in cancer patients. Ingenuity played a key role in supporting the creation of this data set as researchers us Variant Analysis.

And the value of Variant Analysis as an important way to disseminate the results has been recognized in how the NCI is now making the data available. In addition to its own database solution, the NCI has chosen to make it also available via Ingenuity. So, this is another validation for Ingenuity position as the Gold Standard for biological data interpretation. We are convinced that the rapid uptake up Variant Analysis, already being used for more than 2,500 users at more than 1,000 leading institutions worldwide, will continue at a dynamic pace given its reputation as the Gold Standard for NGS data analysis.

I'm now on slide 16. A highlight of the second quarter was the FDA approval in July of our therascreen EGFR companion diagnostic that identifies EGFR in retention-positive patients with non-small cell lung cancer who are eligible for treatment with Gilotrif from Boehringer Ingelheim. Our EGFR test has a highly competitive profile covering more mutations than the other FDA approved test, including the most prevalent resistance mutation T790M. With this approval we now offer regulated assays for the two big biomarkers, KRAS and EGFR, in the three largest markets of the United States, Europe and Japan, and many more such markers on the pipeline.

Our portfolio of biomarkers goes far beyond KRAS and EGFR and that is reflected on this slide. It shows the depths of QIAGEN's biological content available for use in the Rotor-Gene Q with real-time PCR and power sequencing, a new feature with the GeneReader benchtop NGS workflow. No one else in the industry can offer this type of breadth and depth of content and across so many different technology platforms, along with the new ecosystem tied together with the most advanced biological data interpretation with Ingenuity.

Here you see that we have the therascreen line of biomarkers and these are primarily for solid tumors, while the ipsogen portfolio biomarkers in multi-methodological disorders. And the GeneReader portfolio of gene panels for next-gen sequencing applications is set to soon expand to 20 from the current 9-gene panels. It is this portfolio of biological content, along with a range of technologies, that give us the competitive advantage to be the leader in Personalized Healthcare, a position that we intend to expand with more biological content and new-found collaborations. We are advancing a portfolio of more than 15 co-development projects with pharmaceutical companies and we will be giving more insights into the next wave of filings as the year progresses.

Now I'd like to hand back to Roland.

Thank you, Peer.

I'm now on slide 17 to review our guidance for the third quarter and full-year 2013.

We have reaffirmed full-year guidance for adjusted net sales growth of about 5% constant exchange rate wise. This includes about 1 percentage point from AmniSure being treated as an acquisition through May 2013, and also about 1 percentage point from Ingenuity, which had sales of about $20 million in 2012 and is expected to provide about $50 million of revenues on a non-GAAP basis to QIAGEN in 2013. For adjusted diluted EPS, our guidance remains about $1.13 per share.

Our guidance for the third quarter of 2013 is for adjusted net sales growth of about 6% constant exchange rate wise, with about 2 percentage points from Ingenuity and 4 percentage points from the rest of the portfolio and for adjusted diluted EPS of approximately $0.27.

As we have been saying, we are expecting higher year-on-year growth rates in the second half. Pharma, Academia and Applied Testing are expected to show improved results, in part due to comparison against the second half of 2012. The Molecular Diagnostics growth drivers are set to keep expanding as well.

These slides also contains assumptions for adjusted -- adjustments for the third quarter and the full-year but, before going through these, I would like to make reference to the changes announced in our press release last night in terms of the presentations of adjusted results in 2014.

As of January 1, 2014 stare-based compensation will be included as a cost in adjusted results. Information on share-based compensation will continue to be disclosed in QIAGEN's regulatory filings and annual reports.

Also starting next year, in light of the completion of the efficiency project in 2014, costs for restructuring activities will only be adjusted for business integration and acquisition-related M&A activities. We will continue to adjust for amortization of acquired intellectual property.

So now, for the adjustment for the third quarter we expect share-based compensation of about $8 million, about $29 million for amortization of acquired intellectual property, about $20 million for business integration, acquisition and restructuring items on the pre-tax operating income.

For the third quarter we expect approximately $5 million for business integration and acquisition-related costs and $15 million for restructuring.

We also expect a similar split in the fourth quarter.

As for adjusted -- for adjusted tax rate, it is expected to be about 19% and this compares with a sequential tax rate of 23% in the second quarter of 2013.

For the full year, we expect share-based compensation of about $33 million to $35 million, about $115 million for amortization of acquired intellectual property, and about $130 million to $135 million for business integration, acquisition and restructuring as we complete the efficiency project.

The adjusted tax rate is expected to about 19% to 21%, which compares to 21% in 2012.

With that, I would like to hand back to Peer.

Yes. Thank you, Roland.

I'm now on slide 18 for a quick summary before we move into Q&A.

Our results show the ability of QIAGEN to grow amid challenging conditions. We are making progress on our initiatives to accelerate innovation and growth and have reaffirmed our plans to deliver improved sales and earnings for the year. This commitment to improving sales growth is accompanied by a focus in improving earnings and cash flow as well, and we want to see the benefits emerge from the major efficiency project that we have just completed. This conviction is shown in our decision to launch a new $100 million share repurchase program.

Let me review again what we have announced.

We achieved our targets for the second quarter in terms of sales and adjusted earnings growth.

The FDA approval of our therascreen EGFR companion diagnostic kit and pair it with a breakthrough medicine for lung cancer patients is a key step in strengthening our Personalized Healthcare leadership when backed by the deepest and broadest portfolio of content.

Our next-generation sequencing initiative is moving ahead towards a phased customer launch later in 2013. Customer feedback on the acquisition of Ingenuity confirms our conviction that integrating Gold Standard for biological data interpretation will be a crucial differentiator in offering a complete and highest-quality NGS workflow.

We are also nearing the milestone of 1,000 cumulative placements of QIAsymphony. And we have also completed the major efficiency project with the final group of initiatives. We are convinced that this project has put QIAGEN in a far better position today and we are determined to show the benefits through faster and higher value growth.

In closing, we are delivering innovation and growth during 2013, even in a challenging environment, and proactively addressing these market dynamics to leverage our sampling assay technology leadership across all customer classes.

With that, I'd like to hand back to the operator to open up the Q&A session. Thank you.

Operator?

Hello. Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions.)

Operator, do we have a problem with the queue?

Excuse me, Vamil Divan --.

Okay.

Your line is now open. You may proceed with your question.

Okay. Thank you. So, my question relates to EGFR and the (inaudible) work you talked about there. How should we just think about the uptake of that test now that it's approved in the US as compared to what the success -- what seemed like good success you've had with KRAS? So maybe more generally, just -- now that you have approval of these two companion diagnostics, how's that impacting sort of instrument demand in the US? If you could just kind of touch on that, please.

Yes. Thanks, Vamil.

The KRAS experience was definitely a very important one. First, it allowed us to create a broad availability of our platform technology in pathology labs. And clearly, this is something that will benefit the therascreen EGFR uptake due to the fact that the instruments are available now in those labs and the workflows are well understood and trained on. So, that should be a significant benefit.

The KRAS experience was also an interesting one because, during the KRAS adoption, we had turbulences in the reimbursement landscape and they, to a certain degree, are still here, but they're starting to clear. So, the therascreen KRAS experience will definitely serve as a good template for EGFR.

With KRAS we've been able to achieve a very significant adoption. We are -- we very quickly went to 50%-60% market share and are moving higher on that. And people are now appreciating that the investments that they made in the platforms can now be amortized over not only KRAS, but now also EGFR. It is exactly the same customer who does the EGFR testing compared to the KRAS testing. So, from that perspective, we expect a good uptake.

We already have a good share in the research applications and we will make sure that that converts also now to the clinical diagnostic application for EGFR going forward. Especially due to the fact -- and what was very, very helpful and a big benefit for us is that we have such a wide range of mutations that were analytically or clinically validated and part of the label as well. This is a big differentiator and a big value proposition for pathology customers because they can call out specific mutations that are of value.

Okay, thanks. If I could just squeeze in one more, just as a follow-up, unrelated, on the gross margin line. I appreciate the comments you guys made there on the quarter and the first half. Can you provide just a little more color on how to think about that, the gross margins for the third quarter and/or the second half? It did come in a little lower than we were expecting this quarter.

Yes, happy to take that. We do believe that, actually, the trend in the second quarter was quite positive also in terms of margins for QIAGEN. And of course, margin is clearly directed by two factors. On the one hand side is our HPV franchise and the second factor is clearly we are very successful in placing QIAsymphonys. We are [arranging] programs, which clearly leads also to an incremental increase in depreciations. So, I think these are our two biggest factors going forward. I do believe gross margin, the area where we are today, is what we are going to expect.

Okay. Thank you.

The next question is from Tycho Peterson. Please go ahead.

Hey, thanks for taking the question. First, just on TB, wondering if you can talk about maybe some of the competitive dynamics there for QuantiFERON, both with the FDA getting a little bit more vocal with active TB and then Oxford Immunotec maybe making a little bit more of a push in the US.

Sure. Well, the QuantiFERON TB sales are doing very well and we expect that to continue for quite some time. The competitive dynamics in the latent TB area, which is the one that QuantiFERON addresses, there's one small competitor that you mentioned that is primarily selling through a lab service. The process is extremely complicated and difficult to replicate and this is why it has not achieved broad adoption, and that has to do with the way the technology -- or the way the diagnostic is set up in terms of use of a specific technology.

So, from that perspective, we have a very good position. And remember, the IP position that we have or the real value proposition of QuantiFERON is the way that it is -- the technology is configured in a very easy process.

The active TB noise that has been coming up is one that I was quite surprised about. The active TB market in the United States is not really very big. It is very big outside the United States and in emerging countries and in developing countries. In the United States we've been monitoring it. There are some pockets of testing that are quite interesting. But definitely, any noise around TB, it is a very, very important disease to manage for the public health systems. Any noise around TB as a disease is very helpful for also bringing our message across that the best protection inference into the United States or other developed countries is active latent TB monitoring to contain and manage the disease.

And then just a follow-up on the trending in the back half of the year. We've had a number of questions today about kind of the assumptions around the acceleration that you're talking about. How much of that is just a bunch of easy comps versus maybe Pharma getting a little bit better or other dynamics?

We're still quite cautious, particularly in Academia, where the budget cycle is now starting. We also had a very difficult second half last year in Academias. We went into continuing resolution, the questions on sequestration emerged. And now the market's gotten a little bit more used to it, so we are cautiously optimistic on a rather stable situation for now.

In Pharma, it was -- the remedies are quite choppy. So, there's a quarter where we see significant ups and then a quarter of significant downs. This has to do with these (inaudible) site closings or big purchase programs or big clinical trials that we're participating in. That's a little bit more difficult to predict on a quarter.

On the second half of the year we think that the trends are intact. And you're absolutely right, there are some significant year-over-year effects that are impacting the top-line sales growth for the second half of the year. So, I would call it maybe 50/50 base effect versus also a continuation of the trends that we're currently seeing.

Alright. Thank you.

If you do the math this way, we're -- we now have a little bit more than a 48-point-something percent of sales in -- for the first half of this year and this is pretty similar to what we had last year.

Okay. I'll hop back in the queue. Thanks.

Thanks, Tycho.

The next question is from Mr. Daniel Wendorff. Please go ahead.

Yes, hi and good afternoon. One is to staff growth on your next-generation sequencing initiative. And I appreciate that you spent that much time on explaining how Ingenuity would fit into the whole product offering. And what I would be interested to know is, again, what make your product offering unique? And also, what could be sort of sales contribution the first year on the market of the major products, which I assume then will be in 2014. That would be my first question.

And as a follow-up question, you mentioned that QIAsymphony placements are up 15% year-on-year in Q2 and that associated (inaudible) growing double-digits in Q3. Can you potentially comment on the current average consumable revenues per machine per year? That would be helpful. Thank you.

Okay. I'll take the first and Roland can take the second question.

So the first is -- Daniel, I hope you appreciate I won't give you a sales pitch here for NGS. I'd be happy to give you one in a few months and -- but, at this point in time, we -- clearly, this is a very emotionally charged market and one where there are significant opportunities. We feel very confident that we have a very, very competitive offering. We're targeting towards a niche, so we're not going into the overall market of next-gen sequencing. There's some very good and also successful players in this area and they're doing a good job.

Our focus in this area is to integrate into a sample-to-result workflow, meaning -- not sample meaning a purified nucleic acid, but really a sample meaning a block of FFP. And then, in a fully automated workflow, create a sample to interpreted result experience. And this is quite unique in the way the solution is designed. It also allows a very high throughput of samples, which is important in clinical research and diagnostics. And we have a number of benefits. We're also not leveraging a technology philosophy that's completely unknown; very well established and high-performance technology that we're using. Our approach we're using is sequencing by synthesis with our own improvements and this is something that we will get further details on in a few months, most likely around AMP.

So, I'll start giving you a sales pitch later this year at some point and would love to welcome you to our customer list.

Looking forward to it. Thanks.

Roland, do you want to haves--?

Yes, absolutely. On the QIAsymphony, I think there's, as you said, two good news around Symphony. The one good news is that there's still a huge demand for our Symphony out and we have a very good one replacing the instruments in the field. And as Peer said, even better than last year where we had (inaudible) very strong performance.

The second, of course, also the Consumables portfolio is very good; strong double-digit growth rates here. And you have to factor in one thing which is important to realize. I is important to understand, of course, if you have an increasing number of placements, that clearly, actually, in the first 12 months it requires a certain ramp-up phase in Consumables, that adoption of an instrument. Despite that effect, we are asking now (inaudible) in terms of Consumable reports were somewhere between 60,000 and now to the high end of 80,000 and that our top customers are now very nice north of 300,000 Consumables per year.

So, I would say a very nice improvement in terms of both in instrumentation placements, as well as the Consumable pull through. And of course, more opportunities are coming up with increasing our portfolio on (inaudible) this year.

It's clearly one of the growth drivers of QIAGEN. And it's clearly something I think we all have to realize, that this it's -- we have now a set on different growth drivers. It is -- on the one hand side it's the QIAsymphony. It is our (inaudible) healthcare franchise. It is our latent tuberculosis franchise. It is the performance in the emerging markets.

So, we have a set of different drivers for now the second part of 2013, and also for 2014, which should help us in accelerating the growth. But, it's not down to one topic; it's really five, six different topics which are helping us going the right direction.

Thank you.

The next question is from Mr. Vijay Kumar. Please go head.

Thank you for taking my question.

So, Peer, I want to dig in a little bit on Ingenuity. And received really positive feedback at AACC. It feels like for the lab directors, for those who are trying to implement next-gen sequencing, the (inaudible) Ingenuity was unmatched. The ease of use and interpretation the data was really sort of appreciated by lab directors. And my question is, and that's how do you plan to monetize Ingenuity for this specific customer class, I guess? Has anything changed your view on the growth rates or any color you can provide would be helpful.

Thanks, Vijay. And thanks, also, for the comments from AACC. You're absolutely right. This solution is starting to emerge as a very clear leader in the diagnostics field as well. And there are multiple placements or many placements across the industry, including some large ones also announced with large reference labs.

The value proposition is several fold. First of all, we're happy to support any customer using any platform in some way on the interpretation side, because this is something that we can generate value for us for, but also for the customer. At the same time we think there's a value proposition in having a perfect integration where the content is -- the assays, for instance, are perfectly aligned in terms of their workflows and also with the subsequent interpretation, which in some cases is still a transfer or some sort of a translation into an interpretation-ready format. So, having us add in a pushbutton integration, basically a one click from sample to interpreted result processing, is very helpful.

You've seen some of our first panels now emerge already with integrated. Also vouchers and access to the interpretation using these resources for customers who don't want to just look at the standard mutations and get those reported out on. They are part of the standard package. But, to actually then look and scan the databases for potential other findings that the sequence results gave on the panels themselves. So, even on small things like that we're getting very, very nice uptake and that is increasing the value proposition of our overall workflow, including the assays.

As we said in the Spring, for us, the integration of Ingenuity is not about the workflow, it's not about the business model that that company had in the past. It's about integrating that value proposition into our assays, into our workflows, into our instruments and into our whole ecosystem.

Great. So, maybe just one quick one for Roland. Could you just remind what the stock compensation assumptions are for the year, Roland?

Sure. You would have actually found it in an attachment of our -- in the appendix of our slides, but we typically have a very constant number. So, what we have seen in the second quarter is more or less also what you expect in the third and fourth quarter as well.

Thank you.

The next question is from Mr. Doug Schenkel. Mr. Schenkel, please go ahead.

Hello, everyone. Thanks for taking my --.

Hey, Doug.

Questions. I guess one -- sorry to keep harping on Ingenuity, but it is -- it's really great to hear how enthused you are about the product and it's interesting to hear all this talk about how important it can be in clinical applications.

I guess one thing I'd like to hear a little bit more about is, in talking to Ingenuity a number of times over the years, including just before your acquisition of a company, we heard about Ingenuity having a product in the pipeline that's very similar to Variant Analysis, targeted specifically at clinical applications. However, Ingenuity and industry consultants believe that the regulatory pathway for this product would be, at best, a bit unclear for the foreseeable future. Most of Ingenuity sales, as you talked about in your prepared remarks, have been historically the -- to Bio Pharma and, to some degree over recent quarters, increasingly to academic researchers.

How are you guys thinking about the regulatory pathway for Ingenuity in clinical applications? And given that these applications account for a small but growing percentage of Ingenuity sales today, how do you expect the overall sales mix of Ingenuity to evolve over the next year or so?

Well, I think there are three answers to that. First is there is -- there are many different regulatory systems and we should only focus on the United States. So, in other countries of the world, there's a wide open pathway for the use of these tools and they represent almost half of the world's market or maybe even more. So, that's something that we're definitely taking global on this.

The second thing is, if you don't believe in the use of these tools, you don't believe in next-gen sequencing and diagnostics. And we all know that -- because that's essentially what you're doing. So, if you're -- any diagnostic sequencing result, there's not a single FDA approved product out there. And data is being reported out that currently is still far away from being in a format that is regulated. And there's also -- there are a lot of question marks in terms of the regulatory pathway of next-generation sequencing overall, at least for these broader scans.

So, we are actively working with regulators. And the power of the technology is just so convincing that it can be followed up with regulated tests. Exploratory scans can be done in research use mode. The question is, who reports what and under what Safe Harbor, i.e. regulatory process, is then the confirmation done.

We heavily believe that the use of regulated real-time PCR kits will continue for quite a long time because that is a very, very established regulatory pathway. But, we also see that there is synergy in next-gen sequencing and that synergy, the length between the real-time PCR and the sequencing products is on the interpretation side, interpretation of broad masses of information into potentially actual mutations that could be tested for using an FDA approved product.

So, there's a certain sequence that people are looking at. But right now, the whole industry is in search for a regulatory pathway. We are in intense discussions, as I said, and we want to work with the agencies around the world to bring the power of this technology to not only pathologists but to patients.

That's really helpful, Peer. Thank you for that.

And I guess a guidance question for either you or Roland. So, correct me if I'm wrong, but it seems that your organic revenue guidance for both Q3 and Q4 is for about 4%-5% growth. You talked about some Academic improvement, or at least stability versus easier comps. You've also talked about choppiness in Pharma. Pharma's been an area where you guys have been growing a little bit below the peer group the last few quarters. Is there some specific backlog to the Pharma end market that you expect to drive some notable growth beyond favorable comps in the second half?

And I -- if I -- if you talk about Japan stimulus activity I missed it. I'm just curious if you picked up some business there, maybe at the end of Q2, that's going to help you in the second half? And also, this LDT reimbursement issue. Are you expecting that to be less of an issue in the second half? Thank you.

Well, there are a number of things that I would point to as impact. And Roland, if you can maybe prepare the year-over-year numbers and also sequential additions. But, it -- as I said before, there are base effects which are about half of that and the other half is a continuation of trends similar to what we saw in the third quarter. So, we're not expecting manna from Heaven or we're not expecting magical jumps in any way. If you look at the math, there's a pathway in front of us, which is pretty similar to what we saw last year.

You're right. Pharma has been choppy. I would debate that it was below the peer group. If you remember, we were high single-digits last year in growth. I don't -- I didn't see that with anybody. The first quarter was very weak. The second quarter was now a little bit better. It is -- as an overall group, it's a little bit difficult to predict. We think we have some predictability now into the fourth quarter and are assuming a very modest growth rate for Pharma. But also, here the year-over-year is more difficult in Pharma. It's much easier in Academia. On the net, it's actually a favorable base comparison.

Roland?

Yes, I think for (inaudible) your question on Japan, we haven't seen yet so far something in Q2, so it's clearly a step up if something is going to happen in the third and fourth quarter. But, I would remind on what Peer said before. We are actually in a quite similar pattern than what we have seen last year in terms of allocation source after next year. So, we actually see that it's -- we are well on track also in terms of performance from Q1 to Q2. We have seen in our customer segments an improvement.

And into Q3 a lot of growth drivers are coming now into impact. We talked about EGFR portal, we talked about the QIAsymphony placements doing well. We've talked about the Consumables are growing quite nicely. We clearly have seen a very nice improvement also around the QuantiFERON-TB business. And the only non-organic one for the (inaudible) is an annuity and we've clearly laid out the number here as well.

So clearly, a lot of different reasons coming together here. So again, as always, business is a challenge, but I would say it's no different than what we have seen last year as well.

Okay, that's great. Thank you so much.

The next question is from Mr. Derik De Bruin. Mr. De Bruin, please go ahead.

Hi. Good morning.

Good morning, Derik.

So, if we take a look at the margin outlook over the next couple years, you obviously have taken a lot of instruction actions. You've got mix changes, you've got acquisitions coming in, you've got pricing going all over the place. I guess how do we really think about where is this -- where do you go from the 27%-28% adjusted operating margin this year to -- arguing '14 will be a transition year as you sort of launch out the sequencing stuff, but when we sort of look at '15 and '16, what do we think about in the margin trajectory?

Roland?

Yes, sure. In general, I would say we see similar performance in terms of margin development, what we are expecting for this year. Please have in mind that CCS margins got diluted by 100 basis points because of the Ingenuity acquisition as we laid out when we announced the acquisition. Despite this fact, we are probably able to improve margins already this year. We clearly did a lot of structuring efforts, so it's clearly onto to something where we believe that we should expect some (inaudible) out of that.

So in general, things are moving into the right direction. We still believe our mid-term goal of 100 basis point EBIT margin improvement is that -- what we are looking for. Nevertheless, seeing all of the initiatives also on the top line, on the midterm, that this should be a kind of -- something what we should reach quite nicely.

Great. And then just one quick follow-up on that one. I guess what are you sort of looking for ex-US HPB screening growth? Is it something (inaudible)?

Actually, no. On ex-US, we moved a little bit quieter in talking about it because a lot of this business is tender business and we want to talk about it once we've won a couple of the business here. And as you see now, we did, for example, this quarter on our China franchise. So, it's really something where we don't want to create too much expectation right now because sometimes this takes longer than you internally predict. Nevertheless, in terms of market share and winning tenders, we still have a good track record here. So, there's a couple of tenders out in Europe, as well as in the emerging markets, and we will report about it once we've won them.

I think to note, just to add onto that, we're winning almost every tender in this area as well. And recent data, especially from a large population-based screening study in Denmark came out dismal for some of our competitors and very strong for us. And this has clearly made the power of our technology very clear for these population-based screening tenders. So, while they're happening on a regional basis continually, we're winning a lot of them. But in terms of growth, it is not a high growth because most of the countries are still on ASCUS and very limited co-screening regionally.

Great. Thank you very much.

The next question is from Mr. Bill Quirk. Please go ahead, Mr. Quirk.

Great, thanks. Good afternoon, everybody.

I just wanted to follow-up, Peer. You talked a little bit about reimbursement on a couple of different occasions. But, to follow-up an earlier questions, in 2Q this is -- in the States anyway, it's become quite a problem for a number of companies, both small and large. And so, I'd be curious. It doesn't really affect some of our infectious disease products, which is obviously some personalized healthcare or even some of your sample (inaudible) business where you have some overlap on genetic analysis. How should we be thinking about that? I guess how have you thought about that in terms of the back half guidance? Thank you.

Sure, Bill. Good question. There has definitely been a lot of turbulence in the reimbursement landscape in the first half of the year. The largest focus that we had in our own reimbursement effort -- we've been up on the Hill at least 50-60 times in the last six months in various formats and have been actively lobbying for fairer reimbursement rates for both LDTs and also FDA approved kits. Some of our labs are truly suffering and we're doing everything we can to support that.

Now, when the reimbursement rates for LDTs came out in January, clearly that was a little bit a shocker for everybody. At the same time, a few weeks later, we were informed that there would be a premium reimbursement rate for FDA approved kids. And the KRAS reimbursement rate came out at $385, substantially above where we had the average on the code stacking and this has been very favorable for customers who have run the math, because the difference between the LDT and the FDA reimbursement rate is actually about the price per reportable. So, it is actually economically favorable to use the FDA approved kit for a laboratory compared to the LDT. Nevertheless, the base rate, the LDT rate, is just too low and there's no question about it and we're trying to raise that.

So, we are providing some additional value drivers for our laboratory customers. And the same will hopefully be true for EGFR, where reimbursement rates are going to be set in the next few weeks.

But nevertheless, it is -- this -- these differential reimbursements have not yet broadened through the United States. They started only in certain regions or certain coverage areas and we expect them to go broader. Currently, a lot of laboratories are not getting these premium reimbursement rates, so it has been very difficult to adopt and to accelerate. But, this is something I think which is more a matter of time.

So, to make a long thing short, we have a very interesting value proposition for laboratories by going through these very, very expensive FDA approval processes. At the same time, laboratories are currently suffering because premium reimbursement rates for FDA approved products are not available and a lot of them are using LDTs, which are not very attractive.

And so, Peer, just to sum it up, would you expect reimbursement, from the headwinds that you've seen, to continue to dissipate here? And I guess what I'm -- I guess the question is not just CMS, but managed care as well.

And then a follow-up question is just on sequencing. Is it reasonable to assume that we should start to get some specs at the meeting in the fall or back half of the year, something like an ASHG? Thank you.

Well, you're absolutely right that we offer a value for our customers. So, the reimbursement rates we're able to secure for our assays will give us tailwind, or is giving us tailwind, to move into the laboratory because it's economically a lot more attractive to work with a therascreen KRAS kit, for instance, that it is to do an LDT. So, this is giving us a benefit. And we have the only approved KRAS test and we have the best EGFR test out there and this is something that should be a benefit to us. But again, we are feeling for our customers and are actively working with them because we also have an interest in LDTs as well.

In terms of the NGS disclosure, yes, we will start providing more information later this year. ASHG or potentially AMP would be sites to do that and increasingly then build the information base over the next few months.

Great. Thank you.

Thank you.

The next question is from [Mr. Matthew Sherberg]. Mr. Sherberg, please go ahead.

Yes, good afternoon. Thanks for taking the question.

If we are looking at the H1 results, I was wondering, actually, what makes you very confident to reach that guidance and what could be your biggest worries in terms of H2? And just as a quick follow-up on the PHT franchise, we saw some lower co-development revenues in Q2. I was wondering if you could give us some comment on that for the rest of the year, and as well as the new [G2] you assigned this quarter? Thank you.

Good. I'll take the second, Roland, if you could take the first one.

Sure, then I'll start.

Yes, as I tried to say, yes, we do believe that the ramp up from Q1 to Q2 is quite promising because it was really driven in our customer segments. We clearly do believe that Academia is continuing to be a challenging environment; nevertheless, it improved a bit compared to the first quarter. And as Peer said before, we have still to see what's happening in our -- especially in the US for end of year, but I would say that it's too early to speculate (inaudible).

In all other areas our growth drivers are very well on track. We see that our latent tuberculosis franchise is on track this year. Our QuantiFERON franchise is doing very well. We see double-digit Consumable growth within Applied Testing. We are seeing good growth rate into the emerging markets.

So, a lot of different reasons why we believe things are moving in the right direction. And a very difficult environment. I think we have to admit that as well. That's why we also kept the guidance as it is and we feel so far we're well track by delivering that. And again, we are going to update you as the year proceeds.

But so far, I would say we are even slightly better than we thought we are. We were able to close our restructuring efforts in the second quarter of 2013, which is an important internal milestone that is probably not foreseen much from the outside, but internally, of course, it gives us even more focus and, again, a very clear layout for the next couple of years. So, I would say, also, the structure is well in place.

And to the first question, the project milestones are typically related to development milestones that we have with Pharma partners. So, we basically conduct a development to reach a certain milestone. It could be a validation milestone or a regulatory milestone and we then write an invoice and recognize the revenue. And that can be lumpy. This is not the majority of our sales. This is actually part of the minority of our sales in this space, but is one that can go up a few million and down a few million.

We are signing a lot of new partnerships and this year has been very good. We've been filling the pipeline for the next few years very well. And -- however, we have decided not to announce most of the deals that we do because, clearly, some of our Pharma partners have pipeline attrition risk that they want to make sure that they manage correctly, also in terms of the public information. So, a lot of this is still confidential. Wherever possible we're -- we discuss if we can or should release some information on it.

We're trying to take this a lot closer now to market introduction. But the interesting thing is we are not only in cancer, we're also in autoimmune, CNS and other diseases as well and have a broad set of biomarkers, both QIAGEN proprietary, but also partner proprietary assays that are being added to the portfolio.

So, the list I gave you in the presentation is really only what we have publicly available on the shelf. If you would take the pipeline, then it would be much bigger.

Very clear. Thank you.

Thank you.

So with that, we'd like to close the conference call and thank you for your participation. If you have any questions or comments, please don't hesitate to contact me. And we look forward to talking to you. Thank you very much.

Ladies and gentlemen, the Q1 results 2013 conference call has now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.