Qiagen NV (QGEN) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to QIAGEN's conference call to discuss results for the third quarter and first 9 months of 2013. At this time all participants are in a listen-only mode. Please be advised that this call is being recorded at QIAGEN's request and will be made available on their internet site. The presentation will be followed by a question-and-answer session. (Operator Instructions).

At this time I would like to introduce your host, John Gilardi, Vice President of Corporate Communications at QIAGEN. Please go ahead.

Good afternoon and welcome to our conference call today. Our speakers are Peer Schatz, the CEO of QIAGEN, and Roland Sackers, our CFO.

A copy of this 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 see the customary disclaimer. This discussion and responses to your questions on this call reflect Management's views as of today, October 30, 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 our Safe Harbor provisions. They involve risks and uncertainties that could cause actual results to differ material from those projected. QIAGEN disclaims any intention or obligations to revise any forward-looking statements. For more information, please refer to our filings with the Securities and Exchange Commission.

Before I hand over to Peer, I would like to remind you about our Investor Day on November 18th in New York. You can find more information on our website about this event, or please also contact Angela Schmidt. We're planning a comprehensive overview of our strategy and to provide deeper insights on our growth drivers (inaudible) QIAsymphony, QuantiFERON-TB, our profiling franchise and our next-generation sequencing initiative. We look forward to your participation.

I would like to now hand over to Peer.

Thank you, John. Hello and welcome to our third quarter conference call in which we will discuss our results and our progress on goals we set for 2013.

We are pleased with our results for the quarter, having exceeded our communicated targets. Adjusted net sales were $323.8 million and grew 7% at constant exchange rates, which was ahead of our 6% target. Adjusted earnings per share were $0.28 and this was also ahead of our target for $0.27.

We are focused on achieving our full-year guidance despite the challenging macroeconomic conditions, and this target remains for adjusted sales growth of about 5% on a constant exchange rate basis and adjusted EPS of $1.13.

The results of the first 9 months of the year show our progress in terms of adding value. We are extremely pleased to report that we recently broke through 1,000 cumulative installed systems for the QIAsymphony automation platform and this is an important milestone for us in achieving the industry's fastest ever uptake of a molecular testing platform. The milestone was achieved ahead of our target. We see significant untapped opportunities ahead of us in terms of placements and we also continue to see robust double-digit growth on Consumables.

The recent launch of a new QIAsymphony test in Europe, one for the detection of CT/NG, or chladmydia trachomatis and neisseria gonorrhoeae, is the last signal of our progress.

In Personalized Healthcare we have begun the US rollout of our Therascreen EGFR Companion Diagnostic Kit after FDA approval in July. Reimbursement discussions have been very positive and we again see premium levels for the validated or FDA-approved test, just like we got with KRAS.

We have also reached several new agreements for companion diagnostic co-development projects during 2013 and have the largest pipeline ever. One such collaboration was actually announced last week involving a new framework collaboration and details on the first project with Clovis Oncology and we anticipate making more announcements this year.

Our next-generation sequencing initiative is moving ahead on many fronts and we have news to share today. Our ambition is to offer a broad portfolio of products and services to drive the use of this breakthrough technology in clinical research and diagnostics.

We have a two-pronged approach in the NGS market. First, we are offering many products as universal solutions; in other words, they can be used on any NGS detection platform. Second, we are also advancing our own GeneReader benchtop sequencer which will use these products as well, but integrate them into a seamless workstream from QIAGEN; as we say, from sample to insight.

For example, as part of this initiative, today we are also announcing the acquisition of CLC bio, one of the world's leading bioinformatics software developers. CLC is a company that has created a strong leadership position with proprietary algorithms and platforms that accelerate the analysis of biological data; in particular, the analysis required to create variant calls from data generated by next-generation sequencers. And this is just one of the many features.

The addition of CLC bio means that we have now brought together the key core elements needed for our NGS program, enabling QIAGEN to offer complete solutions from biological sample through to valuable molecular insights.

CLC bio and Ingenuity are very complementary and the combination of the two further strengthens our ability to create a unique experience for our customers through a seamless link of these engines for data analysis interpretation and reporting. These transactions support our conviction that customers want more than just a lot of data from sequencing. They want a complete high-quality workflow that provides the most powerful insights.

In terms of the NGS portfolio, we continue to make rapid progress on developing our ecosystem of products and services. And remember that this includes an expanding range of gene panels, pre-analytics to extract high-quality DNA material, and also the GeneReader benchtop NGS workflow.

A key initiative in 2014 will be the broad commercialization of the broad portfolio, including assays and also the GeneReader to complete the sample-to-insight experience. Feedback from alpha/beta customers is positive and we are on the right track with our phased launched as outlined in the beginning of the year. We are aiming to release systems to further select customers later in 2013 and are preparing for broad commercialization in 2014.

In summary, we have the capabilities, resources, focus and the employees to continue the transformation of QIAGEN.

I'm no on slide 5 to provide an overview of results for the four customer classes. I think is fair to say that we are very pleased with the strong double-digit growth in Molecular Diagnostics, but growth rates in Academia and Pharma are slower due to sequestration and ongoing sluggish conditions in some markets that have been mentioned also by other companies.

Molecular Diagnostics again led the performance, delivering double-digit constant exchange rate sales growth in both Instrumentation and Consumables. These results show the increasing contributions of our growth drivers, which provided 34% of sales and rose 16% on a constant exchange rate basis.

In Prevention, the QuantiFERON latent TB test is one of these growth drivers and continues to grow above 20% constant exchange rate.

Personalized Healthcare is another growth driver. Within this area there are different growth dynamics. We again saw higher sales of companion diagnostic kits, but revenues from pharma co-development projects were down sharply from the third quarter of 2012. This is not indicative of the pipeline, which is actually broader than ever, but due to the fact that milestone payments can be volatile and they are part of our business.

After years of investment and expansion, today we have the critical mass of partnerships so we can manage the changes that are to be expected with pharma R&D projects. And these projects provide us with important differentiated new products for QIAsymphony and our GeneReader NGS solutions.

Our profiling portfolio, also an important growth driver, has been expanding at a solid pace, supported by rising sales contributions from QIAsymphony consumables and instrument placement. As I mentioned, QIAsymphony placements are growing at a double-digit pace and there is a solid opportunity to maintain the current pace of about 200 to 250 new placements a year for the foreseeable future.

Also included in Molecular Diagnostics area is our portfolio of products for screening women for the human papillomavirus, or HPV, and their risk for cervical cancer. Global sales of these products were up in the third quarter of 2013, rising 3% CER and providing 17% of total sales.

Sales outside the US are showing strong growth, well in the double digits, benefiting from successful implementation of screening programs during the third quarter of 2013 and these are part of our business as well. Clearly the US pricing declines are impacting the overall revenue in this area, and so on a year-to-date basis, our global HPV franchise sales are down about 6% on a CER basis and we continue to expect about a 10% decline in HPV sales for 2013.

The challenges for this product are in the US where we are facing significant pricing pressures as new competitors seek some market share gain with what are typically clinically inferior products. We continue to be very competitive and have a solid leadership position.

The sales decline in the third quarter of 2013 in HPV was in line with our expectations and the year-to-date reduction in sales is similar to our full-year estimate. As for 2014, we continue to expect US HPV sales to provide less than 10% of total sales.

Before moving on, I would like to note that Ingenuity revenues were booked in Molecular Diagnostics, as well as in Pharma and Academia.

In the Life Sciences, all customer classes grew despite challenging macroeconomic trends, particularly ahead of the US government shutdown.

Applied Testing sales rose at mid-single digit CER rates, overcoming the outstanding instrument sales a year ago in 2012.

Pharma maintained a low single-digit CER growth rate and was led by the Asia-Pacific Japan region. The impact on pharma industry restructurings is evident on this customer class.

Academia sales were slightly higher in the third quarter, with emerging markets more than offsetting the ongoing cautious spending patterns among customers in the US, and partly also in Europe.

In the US, sales remain under pressure due to sequestration and we obviously felt a slowdown in September ahead of the US government shutdown. As for the full-year impact of the shutdown on our fourth quarter results, you can see that we have reaffirmed our full-year targets.

I would like to now hand over to Roland.

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

I'm now on slide 6 and would like to review our results for the third quarter of 2013, which were ahead of our targets.

Adjusted net sales were $323.8 million, representing a 7% constant exchange rate growth and ahead of our target for a 6% constant exchange rate growth. About half of our sales growth came from Ingenuity and half from the rest of the portfolio. Currency movements had an adverse impact of about 1 percentage point and this was due to the yen.

The adjusted gross profit margin was steady at about 72% and we continue to benefit from the mix towards more consumables and also from the recently completed efficiency programs.

Adjusted operating income rose 5% to $87.7 million supporting major investments in R&D, which were higher than in the year-ago period, as well as in sales and marketing as we ramp up our activities on the growth drivers. We are also absorbing costs and making investments in Ingenuity for which we are facing dilution of about 100 basis points in 2013. The adjusted operating income margin declined a few basis points and rounded out to 27% of sales.

The tax rate in the 2013 quarter came in at 18% and this was generally in line with our target. The outcome is that adjusted EPS was $0.28 and ahead of our target for $0.27.

I'm now on slide 7 to give you an overview on all regions delivering growth at single-digit constant exchange rate rates.

A key growth driver was our performance in the top 7 emerging markets, which together grew 38% and provided about 15% of adjusted net sales. The strongest growth came in in Latin America, with China and India also delivering significant gains. These two countries topped Asia-Pacific and Japan regions which now account for 19% of total sales, with improving results in all customer classes. Japan sales, however, were largely unchanged as stimulus programs have not yet emerged.

In Europe net sales rose 4% constant exchange rate-wise at a faster pace than earlier in the year.

Important contributions came from the United Kingdom, Turkey and the Nordic region, as well from Germany and Italy.

Molecular Diagnostics and Applied Testing showed the best results in the region, but Life Science funding remains an issue, particularly in Southern Europe.

The Americas grew 8% constant exchange rate and contributed 50% of net sales, with Mexico, Brazil up on large customer sales for HPV screening. The US showed gains from the Molecular Diagnostics growth drivers, providing important (inaudible).

I'm now on slide 8 and will provide a few comments on Consumables and Instruments.

Consumables and other revenues provided about 88% of total sales, rising 8% constant exchange rate in the third quarter on growth in all customer classes, particularly with double-digit constant exchange rate growth in Molecular Diagnostics.

Revenues from Instruments contributed about 12% of total adjusted net sales, largely unchanged compared to the same period in 2012. However, [essentially] this performance shows improving trends from declining instrument sales in the first two quarters of the year, which is indicative of the growth in QIAsymphony placements and the [mid-year region] rental agreements.

Capital spending trends continue to weigh on our instrument sales among customers in Academia and Pharma, while Applied Testing returned to growth.

I'm now on slide 9 to review our year-to-date results for the first 9 months of 2013.

Adjusted net sales rose 4% constant exchange rate-wise to $943.7 million, again with about half of growth coming from acquisitions and half from the rest of the portfolio with the same type of split we saw in the third quarter. Currency movements had little impact on reported sales, but we are expecting about a percentage point of headwind on full-year 2013 results.

Adjusted operating income was largely unchanged at about $249.5 million, showing that the improved profitability in the third quarter compared to results for the first half of the year. The adjusted operating income margin was actually at 26.4% for the first 9 months of 2013 compared to 27.6 months [sic - see slide 9, "27.6%"] for the year-ago period. And our goal remains an adjusted operating income margin of about 28% for the full year.

As we have said, this takes into account about [half a sales point] dilution from the Ingenuity acquisition and related investments.

Moving down the income statement, adjusted net income rose 5% with a lower tax rate for 2013 actually at the high end of our target range and adjusted EPS of $0.78 per share.

I'm now on slide 10 and here is an update on our financial position. It remains very healthy as we invest in the business, such as through the acquisition of Ingenuity, while also increasing the (inaudible) such as through the launch of a new share repurchase program in September totaling $100 million.

As of September 30, 2013 we had liquidity of $356 million and our net debt was at a reasonable level of $508 million.

Leverage has moved up slightly to about 1.2 turns of net debt to adjusted EBITDA, so we continue to have flexibility to support business expansion and increase returns.

Our cash flow performance has been improving during the year with QIAGEN generating $60 million in the third quarter of 2013 and bringing year-to-date free cash flow to $121 million, up from $107 million in the first 9 months of 2012. This has to be seen in the light of the restructuring charges taken in 2013 which are expected to result in an adverse impact of at least $60 million for the year.

(Inaudible) expectations for new material restructuring changes in 2014 we see opportunities for significant improvements next year.

I would now like to hand back to Peer.

Yes. Thanks, Roland.

I'm now on slide 11 to provide some insights on the success of the QIAsymphony automation platform and QIAGEN breaking through the key milestone of 1,000 cumulative placements.

The reasons for the uptake are the unique value propositions of the QIAsymphony. Customers are reacting very favorably to the QIAsymphony being the only modular system offering random access, continuous load, samples-result processing for both commercial assays, as well as for laboratory-developed tests, LDTs.

In addition, the 1,000th QIAsymphony that we placed is a nice example. It is used in a pathology lab doing therascreen companion diagnostic assays, Ipsogen hematology/oncology assays, artus virology assays, as well as PCR-based LDTs and sample preparation for next-generation sequencing. This flexibility is a need that other systems are not able to address. What you see from competitors are screening systems that can only handle a few commercial assays or sample types and not the LDTs which can be more than half of the test volumes in a typical molecular diagnostic lab. So, we are pleased with our progress and are continuing our goal for 200 to 250 annual placements per year.

Moving to slide 12, here you see an overview of our current menu of molecular diagnostics assays and also some of what we are working on in terms of potential submissions. We have 21 CE-IVD assays for use in Europe and other areas of the world. This chart shows only some of the content we have, which is the broadest in the industry, and our ambition is to keep expanding across these franchises.

In the US 2012 was an important year as we gained approvals for the rotor-gene Q PCR cycle and the (inaudible) and therascreen KRAS assays. In terms of potential submissions, we have a full development pipeline.

These are also a mix of internal activities, as well as some external collaborations. A key priority of the R&D teams and our partners is expanding the menu, especially in the United States. So, you will be hearing more from us during the year in terms of regulatory submissions and clearances in the future.

I'm not on slide 13. As I mentioned earlier, we are moving ahead at a rapid pace with our next-generation sequencing initiative targeting clinical research and diagnostics. We've been developing this growth flow with clinical research and diagnostics customers as our top priority in addressing their needs.

As I mentioned earlier, our portfolio involves a two-pronged strategy; first, a broad range of products and services, and this includes universal solutions that can be used on any sequencer or with any sequence data; and second, a complete GeneReader-integrated streamlined workflow.

And our actions to take the lead in bioinformatics, in particular analysis and biological interpretation, will be a key differentiator. We are moving ahead to create seamless solutions for our customers to drive science, drug development and clinical diagnostics use and doing so will position QIAGEN as a unique player in this segment.

I'm now on slide 14 to discuss CLC bio and how this strengthens our offering in bioinformatics.

We are very excited to have the employees of CLC bio joining QIAGEN through the acquisition. CLC bio is the global market leader in bioinformatics analysis, offering a proprietary platform that enables customers to rapidly analyze, compare and visualize complex data generated by all major next-generation sequencing platform using more than 200 different integrated data analysis tools and with the ability to integrate third-party applications in an [app store] type concept as well.

As part of the analysis workflow, insights can be gained by leveraging CLC bio's analytics combined with Ingenuity's interpretation.

CLC has two main products, CLC Genomics Workbench is a user-friendly desktop application that offers more than 200 data analysis tools for any organism. The second product is CLC Genomics Server, which is an enterprise-level platform for rapid and efficient analysis of data from any organism. We see dynamic growth opportunities for these products and bringing them into our emerging portfolio of NGS products will greatly enhance our overall offering.

I'm now on slide 15. This slide provides some perspectives on the powerful solutions offered by CLC and how these user-friendly and scalable solutions are anchored by the CLC Genomics Server to rapidly analyze and visualize any sequence or data from any organism. A key point is that CLC's technologies are used for analysis of any organism by their customers, which span from research to clinical areas, but also in areas beyond human healthcare care as plant science.

As for some anecdotes about the market adoption power of CLC solutions, more than 1.5 million downloads have already been completed of the software to over 250,000 unique users around the world in over 2,300 different organizations; 250,000 unique users.

The largest genome ever published, a 21-gigabase Norwegian Spruce tree, was analyzed using CLC bio's software and published in Nature in May of 2013. As a comparison, a human genome involved about 7 times less data, about 3 gigabases of DNA. And on the technology side, CLC bio partners with organizations like Intel, IBM and Oracle and many others.

I'm now on slide 16, which shows how we are building on the strength of QIAGEN, CLC bio and Ingenuity to strengthen our leadership in bioinformatics and our overall NGS workflow. This acquisition's a natural, logical step after Ingenuity and together they enable QIAGEN to create a complete and seamless workflow.

In a simplified explanation, CLC bio's products begin with the data generated by the sequencer, taking care of assembly steps before performing very complex analyses to call the variants for what is interesting in the data set. With the output of this variant calling step, which can be a VCF file, customers can use Ingenuity's solutions for interpretation and reporting. No other supplier has the workflow covering this complete workflow, especially in terms of the dry lab bioinformatics offering that is seen as a key bottleneck to adoption of NGS in clinical research and diagnostics.

I'm now on slide 17 and here you see an update on Ingenuity's solutions and, in particular, recent announcements that back up the view that they are becoming the Gold Standard for biological data interpretation. Ingenuity offers the deepest and broadest understanding of biology compared to competitors.

The superior quality of this content has been built up with massive investments over more than a decade and involves scientific experts and key opinion leaders who manually curate and ensure quality control. This quality stands out well ahead of any other product and it has a major impact on the quality of interpretation, even minute quality advantages, and our quality benefits are actually very significant. Even minute differences can lead to significantly increased reproducibility in scientific or clinical interpretation, especially if the customers are mining millions of data points. So, we see Ingenuity's knowledge base and intuitive applications providing a sustainable competitive advantage for years.

For more than 4,000 users, representing over 500 leading institutions, variant analysis is enduring rapid uptake in research and clinical areas. And this goes far beyond oncology.

Among the new customers is the Variant testing laboratory at the Icahn Institute for genomics and multi-scale virology at Mt. Sinai in New York, which has adopted variant analysis for research and translational genomics applications related to characterizing and identifying rare diseases.

We also have a new collaboration with the Center for Applied Genomics at the Children's Hospital in Philadelphia, involving a large-scale NGS study to identify causative variants in rare childhood diseases.

These are just two among the many, many new users of variant analysis, which is clearly becoming the Gold Standard in biological data interpretation and answering a critical need of customers looking for better ways to make sense of biological data.

I'm now on slide 18. We recently announced an important new partnership with Clovis Oncology, which is significant for a variety of reasons. First, this is another of the framework agreements that we are reaching with pharma partners to develop a series of companion diagnostics. Second, this announcement shows how our tests are setting industry standards.

In this case, many of you know that this companion diagnostic project was originally planned with another diagnostics provider and had been widely announced in 2011. However, with the FDA approve of our therascreen EGFR companion diagnostic, a critical differentiator emerged with our test, as is coming more mutations, and in particular T790M, the most prevalent resistant mutation in non-small cell lung cancer patients, that led to the selection of our therascreen test. This was a key factor in this new collaboration; one that we see as adding to our reputation for having the industry's leading portfolio.

Others have recognized the value of our EGFR test, and also the FDA-approved KRAS test as well, to the premium reimbursement in the United States. And in the United Kingdom, both tests have received positive recommendations from the National Institute for Health and Care Excellence, or NIHCE, in draft guideline recommendations.

These collaborations span real-time PCR -- these collaborations in companion diagnostics with our pharma partners span real-time PCR and next-generation sequencing technologies and we are well positioned to offer the broadest range of biological content, detection technologies and bioinformatics for any testing needs.

I'd like to hand now back to Roland.

Yes. Thank you, Peer.

I'm now on slide 19 to review our guidance for the fourth quarter and the full-year 2013.

We have reaffirmed full-year guidance for adjusted net sales growth at about 5% constant exchange rate-wise. This is based on about half coming from AmniSure being treated as an acquisition through May 2013, as well as from Ingenuity, and the other half coming from the rest of the business.

For adjusted diluted EPS, the guidance remains at $1.13 per share.

Our guidance for the fourth quarter of 2013 is for adjusted net sales growth of about 6% constant exchange rate-wise, with about half of growth coming from Ingenuity and half from the rest of the portfolio, and for adjusted diluted EPS of approximately $0.35.

The contributions from CLC bio for 2013 are very modest for the quarter.

The slide also contains assumptions for adjustments to the results for the fourth quarter and we expect share-based compensation of about $10 million, about $30 million for amortization and acquired intellectual property, about $20 million to $25 million for business integration, acquisition and restructuring items on pre-tax operating income. Of this amount we expect about $15 million to $20 million for residual restructuring costs from the efficiency project.

The adjusted tax rate is expected to be about 17% to 18% and this compared with a sequence tax rate of 23% in the second quarter and 18% in the third quarter of 2013.

For the full year we expect share-based compensation of about $37 million. And I want to remind you that we are not going to adjust for these costs starting in 2014.

About $150 million for amortization of acquired intellectual property and about $130 million to $135 million for business integration, acquisition and restructuring costs, of which about $110 million to $115 million were for restructurings. And these types of charges are not going to be adjusted for starting in 2014 as well.

The adjusted tax rate is expected at about 20%, which compares with 21% in 2012.

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

Yes. Thank you, Roland.

I'm now on slide 20 for a quick summary before we move into Q&A.

Our results show the ability of QIAGEN to grow amid challenging conditions with discipline and focus on creating value. We are making progress on our initiatives to accelerate innovation and, in particular, growth. And we have reaffirmed our plans to deliver improved sales and earnings for the year.

This commitment to improving sales growth is accompanied by a focus on improving earnings and cash flow as well. And we're also improving returns, such as through the launch of a new $100 million share repurchase program earlier this quarter.

Let me review again what we have announced.

We exceeded our targets for the third quarter in terms of sales and adjusted earnings growth.

We have reached a key milestone by exceeding 1,0000 cumulative placements of the QIAsymphony automation platform and see significant untapped opportunities ahead.

Our next-generation sequencing initiative is moving ahead on multiple fronts. We have announced the acquisition of CLC bio, which provides QIAGEN with its global leadership in biological data analysis and highly complements the Gold Standard biological data interpretation from Ingenuity. The rapid uptake of Ingenuity's solutions confirms our conviction that integrating the Gold Standard for biological interpretation is a crucial differentiator in our NGS product portfolio.

On the NGS workflow we are working with early access customers in alpha/beta testing and we're preparing for the planned phased launch and then broad commercialization in 2014.

And the launch of our second $100 million share repurchase program announced in July, the signal of our commitment to using our solid financial position to strengthen our business, as well as to increase returns.

In closing, we have reaffirmed our full-year 2013 guidance and delivering on the goals for innovation and growth during 2013.

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

Thank you. (Operator Instructions). Daniel Wendorff, Commerzbank.

Daniel Wendorff from Commerzbank. Thanks for taking my questions. One question and maybe one follow-up question. And first of all, on the developments you're currently seeing in the Pharma and Academic research customer segments, can you potentially comment on what you expect in Q4 and potentially going into 2014 as the momentum?

And a follow-up question. The dilution on the adjusted EBIT margin coming from Ingenuity in the 100 basis points. Is that something we should also expect for Q4 when comparing it with Q4 last year? Thank you.

Thanks, Daniel. I'll take the first part and hand over to Roland for the second.

The developments in Academia are very difficult to extrapolate because we clearly have some major impacts in this area in 2013. So, we had sequestration. We have now some -- all these complexities around the budget creation for 2014 and the temporary releases now and the shutdown. So, this has been a very choppy time for Academia.

It's very difficult to predict what we will see in 2014. With increased certainty, with a solid budget, even at a low growth rate, there is hope for some improvement in that area, which is clearly a low growth area at the moment.

US Academia sales are somewhere in the range of 12% to 13% of our sales base, so it's not a huge exposure that we have, but one that we are monitoring. So, I wouldn't expect anything very different in 2014, 2013 yet, but with important milestones coming up this could change.

Pharma is an area that we want to look at more closely. To be very frank, we think we have more potential in Pharma than what we are delivering on now and we're looking at new ways to enhance growth in Pharma.

Consolidation remain headwinds. The increased integration with bioinformatics where you have users, then suddenly hundreds of users (inaudible) that you can link into reagent flows and instrument opportunities. Plus also, the link into companion diagnostics is creating new opportunities for us.

Roland?

Yes. Hi, Daniel. The long answer is yes, so we clearly are continuing to invest in Ingenuity. And as we said in a press release earlier this year, it is clearly an effect we see for the full year 2013, clearly seeing a quite significant revenue impact over the course of 2014, mitigating some of this dilution. Nevertheless, for the fourth quarter, exactly as you assumed, we have a similar impact.

Zarak Khurshid, Wedbush Securities.

Hello?

Hello? Mr. Khurshid, are you there?

Yes.

Yes, go ahead.

Hi. I'm here. Sorry about that. Thank you for taking the questions.

Just curious, Peer and Roland, on the robust QIAsymphony placements. Can you speak to utilization on those instruments? How should we be thinking about consumable pull-through going forward?

Our utilizations have been going up and they're very different across the different regions. So in the US the majority of the revenue base and pull-through is LDT reagents and the components associated with LDTs.

The situation's very different in Europe with 21 assays, as you have seen from this. And I think this is something that is often underestimated. Our menu breadth is far ahead of anything that anybody has in Europe and it's several times larger than the broadest menu that is available in the States. So, the menus that address the commercial assays is definitely driving the growth rates in Europe. And blood virals and companion diagnostics in hematology are definitely leading the pack there.

The utilization rates are moving up. We said that theoretical utilization of the system is in the high hundreds of thousands of dollars at very high utilization. The -- we said that we probably would see numbers in somewhere between 150,000 to 200,000 over time. We're not there yet so we still have a lot of room up. We might be somewhere in the range. If you take an average, it's difficult in Europe. It's well above 100,000. In the States it's below 100,000.

Fantastic. And then, as a brief follow-up regarding the QuantiFERON franchise, obviously very strong growth there. How should we be thinking about the current penetration of that product in the United States and other geographies? What sort of inning are we in and how big can this business be?

Sure. Also here there are regional differences based on the type of application or the type of screening program that is run. So in Japan, where broader-based screening is being done, the penetration is higher. In the US the penetration is very low in theory. We all know that about 55 million skin tests are done every year. And we are -- currently, if you look at the revenue base that we have, we're in the low single-digit millions of tests that we are currently selling. So, this would indicate that there is major headroom and many, many years of growth opportunity in front of us.

We have the ability to scale. So unlike other products, we can offer high throughput automation that allows an institution, a laboratory, a hospital to run hundreds of samples and this is not possible with any alternative offering. So, we are quite excited about further penetration opportunities.

Vijay Kumar, ISI.

So really, my first one was for Peer. Clearly your M&A strategy has been very successful. You had AmniSure and Cellestis in January all sort of coming in above expectations. And I want to dig in on the sequencing portfolio on the informatics side, right, in January. I think when you look at those, and the expectations was 20% kind of growth there, you're implying $25 million of revenues for next year, we're clearly at the $40 million (inaudible). A, what is driving this trend and how should we think about growth on the informatics side going forward? And I guess are there any implications for CLC bio now?

Sure. Well, we think that the availability of tools that allow the generation of a lot of data, that that will drive the necessity for more powerful and standardized analysis and interpretation solutions.

So, compared to the emergence of data processing technologies four years ago, the majority of the data processing software solutions were typically homebrew, a self-developed solution in institutions that had the capability to do that. But with the increased dissemination of powerful tools, you saw commercialized software packages emerge, standardizing a broad range of different applications and democratizing the use of these powerful new technologies. And this is exactly what we expect to see in bioinformatics as well.

The majority of the market today is doing homebrewed, self-developed tools and using them; and successfully, also, but it is very difficult to scale. And the solutions we have, both through use of cloud technologies, but also through the availability of enterprise-level solutions now, we have -- we're offering off-the-shelf packaged software solutions that allow almost overnight turnkey installations of highly -- of the most advanced data analysis and interpretation solutions in almost any laboratory.

So, this means that this market in bioinformatics, which is maybe $100 million today, is only the commercial tip of the iceberg and is dwarfed by the expense and the efforts that are currently being employed to homebrew solutions that we think over time will increasingly also -- not completely, obviously, but increasingly also turn to standardized off-the-shelf solutions and we're there with I think a very, very nice offering.

Great. And maybe one quick housekeeping question for Roland. On the restructuring, Roland, what was the breakup between sales and marketing, G&A and R&D?

For the full year we expect it really to be actually in all different operational expense lines. We clearly see a larger positive impact on the sales and marketing side for the second part of 2013 as this was clearly one of the areas where we, I would say, did it very phased, in a very controlled way, where on the administration side we have seen a larger impact already moving into 2013 in terms of positive contributions.

So, I would say it's fairly spread at R&D. I would say also with a long-term (inaudible) very comfortable with about 11% of revenues going into R&D, where at the same time we expect sales and marketing expenses, as a relative number, coming down and giving us leverage moving into 2014.

[Patrick Donnelly], JPMorgan.

Hey, guys. It's actually Tycho here. The first one I guess on NGS. Can you talk about timing for CE Mark? And then I think you had also maybe intimated in the past you might consider introducing the QIAcube NGS module first as a standalone, so can you maybe talk about how you think about bringing that to market?

And then, lastly, do you have all the pieces you need for -- from a workflow perspective? And can you also maybe just talk on the SAP agreement and what -- where that stands?

Sure. So if you look at the GeneReader workflow today, we have obviously an extremely strong position in extraction. And we will be talking about some exciting new samples of purified nucleic acid innovations that we will be bringing forth specifically for next-generation sequencing. We have some quite interesting, and in some cases startling, new discoveries there.

And the second step in the enrichment assay panels, we're moving to 20 assay panels this year. The GeneReader assay panels are all linked into Ingenuity knowledge base interpretation, so a really differentiated capability. The library preparation steps as well. That is pretty much what we already have today. That looks very good.

The sequencing step is, in light of all of these things, actually are quite straightforward application. That's one we are -- we have in the late stage of development. And if you look at the bioinformatics, the generation of a FASTQ file. We have been working on that for several years now. We have a very good solution, we think. We're strengthening that with some algorithms in CLC. CLC brings to us then the FASTQ to VCF file generation. Also beyond that, but that is a core expertise, a FASTQ to VCF. And then from VCF to interpreted results, Ingenuity has a spectacular leadership there.

So in theory we have all the pieces now to put everything together and we're assembling that. And now with the addition of CLC, which we're very proud and excited to have now, we're clearly now using this time off to make sure that the CLC portfolio is perfectly linked into the GeneReader assays and also the GeneReader system.

Now, in terms of--.

And the timing for -- go ahead.

Sorry.

I was just going to ask timing for CE Mark and then potentially when we can start to see some customer data.

Sure. So the -- we've always been very open that the solution that we are bringing to market should have a CE and also an IVD track. And we have been very diligent about making sure that everything we do also allows us to move in that direction very swiftly. So, we're talking years after launch.

This is something that should happen near term. And we want to have a very stable system and one that also has several years of longetivity in front of it, which is a problem. Most systems are now being CE Marked or IVD approved and a month later the software or the reagents change and then all the effort was basically useless. So, what we're trying to do is to create a certain degree of stability, but that should coincide very closely with the launch. So, I'm talking around your question, I know, but we haven't announced a clear date on that and we will be coming out with that shortly.

And data on the system is something that -- I know everybody would like to see that, but we are going to bring that to our customers first. We have several events that, as we always said, would be a crescendo of information. We have an upcoming NP event. We have AGBT. We have several important investor conferences also in January. And we want to make sure that we have a nice [well of news] that we can provide to you.

The data, per se, on the sequencer is not driving the customer discussions. What is blowing customers away right now is our ability to take the data generation from a blood tube into a report that can be put into an envelope and that potentially can even create a reimbursable event. That is something that we clearly are going to be able to offer and I think that will be a differentiator.

Then do you think KRAS and EGFR could probably get done on assays and then reflex to NGS? And I guess, last question, how do you think about that dynamic with your assays (inaudible)?

No, I think that's an excellent point, Tycho, and that's how these products fit together. I think some of these assays will be -- reflex into NGS. Some will be NGS on a primary and some will only be PCR.

So, there were recent papers written on print in some hematological cancers that are -- people think that NGS might be an option. But it has been clearly shown that it is clinically and economically not justified to do that. So, you probably screen on PCR and, if at all, the reflex. Other types of diseases you might see go NGS.

So, I think having the availability of PCR and NGS under one roof gives us an enormous differentiator in the clinical market because we're basically objective and we'll try to provide what is economically and clinically the best solution. It will be very different for different diseases and for different reimbursement environments.

Bill Quirk, Piper Jaffray.

The first from me, I guess kind of staying on the timing side of things here, Peer, you talked about the deep pipeline within symphony. Can you help us think a little bit about timing around things like moving HPV there, chlamydia/gonorrhoeae, HAIs, perhaps even the virals as well?

Sure. You saw from the slide that we presented in January of this year, and we have a different version of the portfolio now comparing it to competitive offerings in the market now in this deck that we shared today, there's a lot going through the pipeline. We have some near-term launches that, if I recall, the dates that we announced last January. So we have some near-term launches in the HAI and also in some of the women's health areas in the US as well.

In Europe the launch of our CT/NG assay was done in the third quarter. We're getting great uptake. It's a dual-target CT assay with NGs also packaged in. So we're targeting both the genomic and the [platinid] targets in CT in a very unique way with great sensitivity. So, we've seen good uptake on CT/NG already in the third quarter in Europe. And this is one that we're also bringing forward to the States and that will be something that will be in clinicals next year. So, we're churning along and we -- I guess we'll have a handful of submissions overall this year at the Company and maybe a tick more even next year in the US.

And we also have the CMV assay still in front of FDA right now with the final module being submitted hopefully this year. That was a very long process due to the complexity of that target, but the assay looks (inaudible).

Very good--.

(Inaudible.)

Very good. And then just a follow-up on an earlier question around QuantiFERON. Obviously a really open-ended opportunity here given the low penetration rates, particularly in the States. Can you talk a little bit, Peer, about how does the trajectory of this change, if at all, once we see the improved supplies of tuberculin for the skin tests come back on the market? And then if you have any sort of update or guesstimate as to when we might actually see that, that old technology coming back.

Sure. Once people have started using QuantiFERON, we typically don't see them flipping back because the ease of administration in the hospital network, the quality of the product, the digital output, it just makes it so much easier for the physicians.

So from that perspective, you might lose a few back to PST, but there's no cost advantage and there's certainly no clinical advantage and there's absolutely no administrative or workflow advantage of using the skin test. And so we think that the majority is here to stay.

The same is true also with competitive wins with laboratories, the service labs where alternative products are used due to low availability of our product or other -- we had some supply issues in Japan, for instance. We're quite convinced that we can move that back very quickly.

Also, we're in the process now, the final process of moving into China. And these are big markets for these products that we are looking forward to address. So, there's a lot of runway. And we don't think that customers, once they see our benefits, are open to going back to the old world.

Got it. And then if I could just get one last one in here, Peer. You mentioned that Japan, the academic overall was flattish there. At least one of your competitors has talked about potentially the early stages of resurgence in academic funding over there. Can you just talk to that geography in general and then I guess, specifically, kind of how you're looking at that either in the fourth quarter or maybe more of a longer-term, 2014, 2015 outlook? Thanks.

Yes, it's a good question and you're putting us a little bit on the spot here because we all know that there is a very significant uptick that could be expected from any of these similar fundings. The problem is timing and calling that. And we've seen that so often in Japan and we have been burned a few times by expecting laws to pass or this or this to happen. And it's sometimes quite opaque when and how these things get implemented.

So, our team tells us here at the moment that they're not seeing any material inflows at all and there's still a lot of uncertainty if and when this will come. And when we say, look, it's been passed, it's now -- it seems to be firm, the answer comes back nothing is firm at the moment. So, we'll believe it when we see the money and we haven't seen the money yet.

Brian Weinstein, William Blair.

My question's on the investments that you've made in bioinformatics. They've been impressive and I think they make a lot of sense. How specifically do you monetize these investments when you have everything integrated? And then how does SAP and your relationship there continue to play into thing? Thanks.

Thanks, Brian.

And sorry, Tycho, I forgot about the SAP question so I'll bundle that in to here.

The business model for selling -- buying bioinformatics on a standalone basis are difficult. And if you look at the standalone business models, it is difficult to see a lot of value generation in this market. The value really comes from creating a platform and a delivery vehicle. And for us, that is not the sequencer, it is actually the assay. So the important thing in the workflow is the assay. The detection can be generic. And our assay strength is run on most available sequencers (inaudible) bioinformatics and we can get a premium on the price of the assay by embedded bioinformatics.

On the analysis side, we're simply making it easier to use our interpretation, as well as also here are getting subscriptions or are able to create a nicer umbrella and framework for the sample (inaudible) type workflow, regardless of the detection system. That is critical. We're pretty agnostic as to that.

We have a very, very good sequencer coming up, but that's the differentiating part of our NGS strategy alone. It is really also the availability of this -- of the ability to monetize the strength in the workflow management in bioinformatics through integration with lab chemistries that are universally applicable.

We are currently in discussion with SAP on implementation of their HANA technology which allows ultrafast analysis of unstructured databases. We've been kind of holding off on that due to -- until we had clarity around the CLC acquisition, which we now have. And with the analysis framework now as part of our organization we are accelerating these discussions to see how we can use that powerful new technology for analysis solutions.

Doug Schenkel, Cowen & Company.

So, I had I guess a couple of questions on HPV. As you noted, US HPV declined about 10% year over year, but if I'm doing the math right, it appears that US HPV revenue was actually stable in Q3 relative to Q2 levels. It may have even improved a little bit sequentially. So, could you discuss what's happening today and what you expect to happen moving forward?

You talked about pricing in your prepared remarks, but it would be interesting to hear a little bit more about that, as well as what's going on in terms of share and the impact of testing intervals. And I guess looking ahead, is there a level where you would expect the US HPV revenue to bottom out? Again, it seemed like you had an okay quarter. Does it seem like US HPV revenue could kind of bottom out in say the high 20s levels on a quarterly basis?

On the high 20s levels?

I'm sorry, high -- like $20 million to $30 million.

US HPV.

Yes.

Okay. Well, in general, you're absolutely right. The third quarter definitely had a nice development on HPV on a number of different fronts. And we are quite successful in bringing forward our -- or highlighting our clinical advantages. And the publications that are coming out, we're not really announcing those now to the Street, but customers are clearly seeing a lot of news come out on alternative testing approaches, PCR or other amplification technologies, that are just showing very, very poor results, and especially in screening programs.

So we are in a good position there and are holding our market share quite nicely. Unfortunately, a lot of labs are under cost pressures so we've seen some quite desperate pricing approaches by some of the competitors that we at least partly have to also accommodate our pricing. And so, while pricing has definitely come down considerably, volumes have gone -- have actually been quite solid.

The outlook going forward for the US HPV market is -- we're fully on track. We said [ex-]genotyping to have in 2014 around two-thirds of the market, maybe 70%. That is -- that's something we still believe is possible. But if you look at some of the doomsday predictions we saw two or three years ago, that slice is high. And we definitely see that -- we will continue, however, to be a decline in revenues, probably through -- at least through 2015 and that will probably be at the same pace that we're currently seeing.

Ex-US, it's a totally different story. We are -- because if you don't have liquid cytology as an adjunct test, our test blows away anything else in the marketplace hands down because it's an easier workflow, much faster and much easier to perform. And so, from that perspective, ex-US will continue to have a lot of opportunities over the next few years.

And maybe my follow-up related to that last comment. It does look like OUS HPV revenue increased by something like $5 million from Q2 to Q3. Is that a sign of demand really picking up along the lines of what you just described, or is there something along the lines of a tender being pulled forward or is this truly just a sign of fundamental demand picking up?

Fundamental demand is definitely quite interesting, but these deals are quite lumpy. (Inaudible) the purchase of a minimum inventory levels when you win these tenders. So, it will definitely be something that will be a little bit more volatile on the revenue base.

Roland, do you want to comment on that?

No, no. More or less exactly what you said. As you just said, Doug, we had a good quarter in third quarter. We won a couple of tenders and typically these tenders start with also a larger shipment at the beginning. Nevertheless, it is typically tenders going for a few years as well.

Derik De Bruin, Bank of America.

Hey, just, Roland, when you start going to including stock comp in your 2014 guidance, is the $37 million your looking at in 2013, is that a reasonable number to think about for next year?

Excellent question and it's clearly one of the focus points on our Analyst Day, to get your some more insight and breakouts that you have a comparable base and we all talk about apples to apples for 2014.

Right.

On the share-based compensation, but also other charges. So, I give you more insight on Analyst Day and happy to welcome you there.

Okay. Also, Roland, can you give us some general split between where Ingenuity was in the different buckets, just some general guidance on the revenue so we can have an apples-to-apples organic growth rate for the businesses?

Yes. As I said on the call, it's really molecular in Life Science and in Pharma where, just [to give an operating indication], it's probably one-fourth in molecular and it will flatten out. But again, it might be different in different quarter. One-fourth in the last quarter in molecular and the rest in Life Science.

Great. And just--.

(Inaudible) Academia together, to be precise.

Great. Just one quick one if I can squeeze it in. Peer, what's the turnaround time on your CT/NG test? And when you think about the strategy in the US, is the QIAsymphony a moderate or a high-complexity platform?

Oh, Derik, the latter one is a very interesting question that, if you look at it, the QIAsymphony, in the modular version that we have today, which is actually the preferred approach for LDT customers and the people using a broad range of menus, they don't want to have an integrated system. They actually prefer a modular system.

But for CT/NG or some other assays, an integrated system is a preferred route and the symphony was always designed as a modular system with the option to fully integrate the detection. If you would do that, in theory you could think about a moderate complexity system that seems to fulfill all of the specifications to get there. And so this is putting -- this is definitely a very interesting question you're asking and one that we're spending time on.

In terms of the system, the turnaround time, I'd have to get back to you on that one. I don't have that data here right now, business maybe that's one we could add to the Analyst Day. It is definitely a very competitive assay.

So with that I'd like to close the conference call and thank all of you for your participation. If you have any questions or comments, please don't hesitate to contact us and we look forward to seeing you at our investor event in November. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Goodbye.