Qiagen NV (QGEN) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I am Patrick Wright, your Chorus Call operator. Welcome and thank you for joining QIAGEN's conference call to discuss results for the quarter one of 2014.

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.

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

A copy of the announcement and the presentation for this call can be downloaded from the Investor Relations section of our website at www.qiagen.com. On slide two, you'll see the customary disclaimer.

The discussion and responses to your questions on this call reflect management's views as of today, May 7th, 2014. 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 risks and uncertainties that could cause actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statement. For more information, please refer to our filings with the SEC.

I would now like to now hand over to Peer.

Thank you, John. Hello and welcome to our call today to discuss our results for the first quarter of 2014 and the progress we are making to accelerate innovation and growth.

We have a lot of news to share with you today. First, on the results, adjusted net sales rose 5% at constant exchange rates, which was in line with our communicated full year 2014 target for 4% to 5% constant exchange rate growth.

Excluding US sales of our HPV test, our human papillomavirus test used for cervical cancer screening, our portfolio grew about 9% constant exchange rate growth.

Adjusted operating income grew 7% and adjusted EPS of $0.22 per share was in line with our target as well.

We're making progress on delivering important regulatory approvals and new product launches, especially among the five growth drivers.

We are pleased to announce the FDA clearance of the full QIAsymphony RGQ MDx automation platform and the clearance for the C. difficile assay for detection of this life threatening infection.

We're working on up to about 10 additional US and European submissions this year. Another is the China approval and successful launch of the QuantiFERON latent TB test.

Our bioinformatics solutions, such as the new CLC Cancer Research Workbench, are delivering the data analysis and interpretation needed to make sense of complex data. And the new universal pre-analytics such as the REPLI-g single cell kits are improving access to nucleic acids in challenging biological samples.

On GeneReader, our teams have been making progress in addressing the challenges to developing this NGS bench top workflow into a complete sample to insight system targeting the needs of customers in clinical research and diagnostics.

Market entry is expected in 12 to 18 months, and the initial focus will be partnering with customers in biomedical research, clinical research, and clinical diagnostics.

As you see on this slide, we have announced the authorization for a third $100 million share repurchase program. This is a signal of our commitment to disciplined capital allocation.

We have also announced some changes in the Supervisory Board. As you know and as planned, Professor Dr. Detlev Riesner, a cofounder of QIAGEN and Chairman of the Board since 2003, has stepped down as Chairman, and Dr. Werner Brandt has taken over as Chairman.

We have also announced that Professor Dr. Elaine Mardis, who many of you know, has been nominated to join the Board as well.

So, in summary, we are confident in the start to 2014 and have reaffirmed our goals for the year. I'm now on slide five to provide an overview of results for our four customer classes, with all of the classes delivering higher sales.

In molecular diagnostics, we saw good double-digit growth from our portfolio when excluding the US HPV test sales, and generated more than a third of total sales.

Among the five growth drivers, sales of consumables used on the QIAsymphony system are advancing at strong double-digit growth. And we also saw higher QIAsymphony instrument sales in the quarter as well, and are on track to add more than 250 placements this year.

QuantiFERON TB, the modern gold standard for latent TB detection, has continued to grow above our 20% constant exchange rate target.

Given that the overall market is still less than 10% penetrated, we are focusing our targeted market segments, particularly congregated living such as the military and prisons. In the US, we continue to gain sales due to the ongoing shortages of materials required for the 120-year-old skin test.

Our personalized healthcare portfolio posted higher sales in the first quarter, overcoming the US reimbursement challenges during 2013 for companion diagnostic kits. We have been very pleased with the pace of new co-development agreements being reached with pharma companies.

In prevention, US sales of HPV testing products declined about 27% in the first quarter, and represented about 9% of total sales. And this was in line with our full year expectations as we absorb the impact of pricing pressure and the nonexclusive transition of a US customer to a competitor test.

As for HPV sales in the rest of the world, we've been very successful in winning by far most of the new tenders, but saw delivery timing impact results in the first quarter.

In the life sciences, all of the customer classes showed improving sales with underlying growth further supported by the bioinformatics contributions from Ingenuity and CLC Bio.

The outstanding growth in applied testing came from double-digit growth in both consumables and instruments. A key driver here has been consumables' contributions from the surge of QIAsymphony placements in 2012 and the ongoing expansion of our human ID and forensics business.

Pharma saw a double-digit expansion in instrument sales, along with a single digit improvement in consumables. Like others, we are watching the M&A actions in the pharma industry, which came on top of the ongoing restructuring activities.

In academia, following the pressures in 2013 on US and European government research funding, we are starting to see some modestly improving trends. However, we continue to expect funding levels to remain below those seen in recent years.

In the US, like you have heard from other companies, we also felt the adverse impact of at least five federal government business days lost due to the winter weather on the East Coast, but sales turned out to be largely at about the same level as a year ago. We also expect the much anticipated 2014 NIH budget funding to become available in the second half of the year.

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 am on slide six, and would like to review our results for the quarter.

Adjusted net sales were $317.4 million, rising 5% at constant exchange rates and also on a reported basis. We saw some currency headwinds from the Japanese yen and various emerging market currencies in the first quarter, but this was largely offset by strong euro denominated sales.

About 3 percentage points of growth came from the Ingenuity and CLC Bio acquisitions, and about 2 percentage points from the rest of the business. And remember that the results include around 4 percentage points of headwind from declining HPV test sales in the US.

Even with the lower HPV sales, the adjusted gross margin remained steady at about 72% of sales. We are seeing a shift towards more consumables. And the expansion in bioinformatics, which has gross margins well above the company average, is also supporting this trend as well.

Adjusted operating income grew 7%, at a faster rate than sales. R&D investments were higher as a percentage of sales in the first quarter of 2014 compared to the same period in 2013, but we achieved margin gains in sales and marketing and also in general and administrative expenses.

So, these are signs of benefits from our productivity initiatives. As a result, the adjusted operating margin improved by about 60 basis points and was about 24% of sales.

Adjusted net income rose at an even faster 12% pace, and the $0.22 of adjusted EPS and the tax rate of 22% were both in line with our goals for the quarter. In terms of adjusted EPS, we did not see any meaningful net currency impact in the quarter, but we still expect a potential adverse impact on the full year results. I will come back to this topic later.

I am now on slide seven, which shows that all regions grew in the first quarter of the year. The Asia-Pacific/Japan region led the performance, growing 11% constant exchange rate and providing about 19% of sales.

Japan grew at a double-digit pace, supported by strong spending trends at the end of their fiscal year, and also saw solid growth in South Korea. China showed modest growth in the quarter, but we expect better trends in the second half of the year.

About 47% of sales came from the Americas, rising 4% constant exchange rate and more than overcoming the lower sales of HPV products in the US and also in Latin America, which faced a tougher comparison against national product deliveries in the third quarter of 2013.

In the Europe, Middle East, and Africa region, which provides about one third of our sales, the 3% constant exchange rate growth in sales was led by France, the United Kingdom, and the Nordic region, which continues to enjoy growth after a strong performance in 2013.

In the top seven emerging markets, adjusted net sales were up 4% constant exchange rate, which is lower than typical for these countries.

Sales growth was solid in Brazil, South Korea, Turkey, and India, but growth was again more modest in China and much weaker in Russia and Mexico than in the first quarter a year ago. We see these emerging market results as a temporary issue and look for improving sales during the year.

I am now on slide eight and will provide a few comments on consumables and instruments. Consumables and other revenues rose 5% constant exchange rate in the first quarter and provided about 89% of sales. And this shows that we are seeing a shift in the product mix towards higher margin products, including bioinformatics, that will further support this trend.

After a single digit decline in 2013, instrument sales are off to a better start in 2014 and were up 3% constant exchange rate in the first quarter. We continued to see adverse funding trends in academia but all of the other customer classes delivered improvement, and this included higher sales contributions from the QIAsymphony automation platform.

I am now on slide nine and would like to give some insights on the convertible bond transaction that we successfully completed in the first quarter of 2014. We see many positive elements for equity holders, since this transaction strengthened our balance sheet and secured attractive long term financing.

As a reminder, we first repurchased about $294 million of the $300 million issued 2026 convertible note. This had a coupon of 3.25 percentage points, which is far higher than the new note and was in the money with a conversion price of $20.00 per share.

That meant we faced dilution of about 15 million shares once these bonds were converted. We are extinguishing the remaining $6 million of notes, which are cleanup costs.

Second, we raised $730 million at very low rates of 0.375 percentage points for the 2019 note and 0.875 percentage points for the 2021 note. A portion of these proceeds were used to establish a cost cut overlay which increased the conversion price of the new notes to about $32.00.

On a net basis, we raised about $300 million of proceeds, again, at very low rates.

In terms of interest expenses, these will decline on an adjusted basis for the full year 2014 but will rise on a reported basis due to non-cash interest expenses triggered by the way the convertible bonds are accounted for under the respective standards.

The adjustments being made are in line with those of other companies, including in our sector. Before the transaction, annual cash interest expense for 2014 was about $30 million net of interest income, and this included about $11 million of cash interest expenses for the 2026 note. After this transaction, the 2014 cash interest expense is reduced by about $5 million to about $25 million.

On a reported basis, there is dilution of about $0.06 per share in 2014, of which about $0.03 of one-time charges were taken in the first quarter. Dilution comes from an additional $8 million of non-cash interest expenses related to the new and old convertible notes. So, this means that reported interest is about $38 million and adjusted interest expenses are about $25 million.

Also, I want to note that these transactions result in a modest increase in the tax rate for the full year 2014. So, that means, all-in, no impact on adjusted EPS in 2014 and a slight accretion starting in 2015.

In summary, we see this transaction as being in the best interest of our shareholders and puts QIAGEN in a stronger position.

I am now on slide 10 with an update on our financial position. As of March 31st, 2014, we had liquidity of about $680 million, and this shows the net proceeds of the convertible bond transaction.

At the same time, our net debt increased to about $509 million. So, leverage is now at about 1.2 times net debt to adjusted EBITDA, which was the same level as the end of 2013.

We see QIAGEN as continuing to have a healthy financial position, one that provides flexibility to support business expansion as well as to increase returns to shareholders.

In terms of cash flow generation, the amounts were essentially the same the first quarter of 2013 and 2014 respectively, with about $28 million of free cash flow in 2014.

This amount for 2014 included approximately $9 million of cash restructuring charges for completion of the efficiency projects done in 2013. However, with the completion of these projects last year, we are targeting significant improvement in cash flow in 2014 and beyond.

I would like to now hand back to Peer.

Yes, thank you, Roland. I'm now on slide 11 to provide an update on the progress we are making on strategic initiatives.

Our strategy is anchored on expanding our leadership in sample and assay technologies that address the rapidly evolving needs of customers to transform biological samples into valuable molecular insights.

These five growth drivers are addressing the critical needs of customers across all of the classes as we help drive the dissemination of molecular technologies. Here are points to consider on the growth drivers.

The QIAsymphony automation platform is expected to provide about a percentage point of incremental sales growth in 2014, and new longer term impulses are coming from the recent FDA approval of the full workflow and plans for many new test submissions.

QuantiFERON is set to break through $100 million of sales in 2014 and could surpass the size of our US HPV franchise. We see enormous growth potential ahead, given that modern latent TB testing is only about 10% penetrated and the total addressable market is estimated at $1 billion.

Personalized healthcare is generating more than $100 million of sales and growing at a good pace, with expectations for higher kit sales and revenues from the companion diagnostic co-development agreements in 2014.

Bioinformatics is set to be an important incremental contributor this year as well as we create an industry leading portfolio anchored by the combination of teams and products from Ingenuity, CLC Bio, and QIAGEN.

And on NGS, we are launching a series of new sample technology kits as well as expanding our offering in bioinformatics. Together, we see these activities as having well above $50 million of annual sales and strong growth.

QIAGEN continues to be the unrivaled leader in sample technologies inside next generation sequencing labs. And here we mean extracting valuable DNA and RNA from challenging biological samples.

We estimate that about 80% of all samples being prepared for use in a sequencer have been created with a QIAGEN sample technology kit, and we will continue to expand this market share with new technologies.

While NGS is an important trend, keep in mind that less than 1% to 2% of all biological samples being processed in laboratories around the world are actually going into next gen sequencers, only 1% to 2%.

I'm now on slide 12, which provides an overview of the many new product approvals and launches during the first year of the -- first quarter of the year. I'd like to focus on two of these developments, and both involve China.

First is the approval of the therascreen EGFR kit, which is our first companion diagnostic registered in China. And this comes after a three site clinical trial that enrolled more than 1,200 patients with non-small cell lung cancer.

This is the most prevalent type of cancer in the country, and accounts for roughly 20% of all new cancer cases. We have now gained EGFR assay approvals in the top oncology markets of the world, the US, Europe, Japan, and now China.

This is just the start of our entry into China, as we plan to seek registrations for a number of additional assays, including therascreen KRAS for use in colorectal cancer and therascreen BRAF for use in melanoma.

The second approval involves the QuantiFERON latent TB test in China. Given the size of the TB testing market in China, one could say that our entry is admittedly late, but we wanted to first establish our leadership in the US and Europe before moving into other markets.

After the launch in late March, we are now ramping up market development activities in the tier one and tier two cities and targeting specific TB risk groups. These are substantial opportunities in China that could translate into millions of dollars of sales in the coming years, but it is too early to make specific predictions.

We have a number of further new product approvals and launches planned for the year, and will keep you updated.

I'm now on slide 13, and this shows you the progress we are making on expanding the testing menu. As I mentioned earlier, a highlight is the FDA clearance of the full QIAsymphony RGQ automation platform and the clearance of the artus C. difficile QIAsymphony RGQ kit for the detection of Clostridium difficile, a bacterial infection that is increasingly becoming a public health challenge in the US and many other countries.

Gaining clearance for all three components of the QIAsymphony system, the SP unit for sample technologies, the AS unit for the assay set up, and the Rotor-Gene Q PCR cycler, is an important step towards increasing the utility of this automation platform, a modular automation platform, for customers.

More test menu expansion is on the way. We are in the process of doing the 510(k) submission for the artus VanR QIAsymphony RGQ kit for healthcare associated infections for vancomycin resistant bacteria. We have also completed the CE IVD for this kit as well.

Other submissions planned for the year include a US application for the artus herpes simplex virus 1/2 QIAsymphony RGQ kit for the diagnosis of herpes simplex virus 1/2, and also US and European applications for the artus MRSA QIAsymphony RGQ kit for methicillin-resistant Staphylococcus aureus infections.

We're also on track to achieving our goal for about 250 system placements in 2014, building on the more than 1,000 cumulative placements at the end of 2013.

I'm now on slide 14. A key element of our leadership in personalized healthcare is the growing portfolio of co-development and co-commercialization projects that we have with leading pharmaceutical companies.

We're often restricted by partners on what we can disclose about the agreement, but we wanted to show you the success of our pharma business development team.

First, we now have more than five master collaboration agreements in place to develop and commercialize companion diagnostics, including with Lilly and Bayer, and these typically cover the whole company. They lay the groundwork for future projects in various therapeutic areas by standardizing interfaces and processes between the organizations.

In the last six months alone, our teams have brought in about 10 new co-development or co-commercialization projects. And this means we now have more than 20 projects with pharma companies in both oncology and other therapeutic areas.

Also on this slide you see a graphic showing the rapid growth in recent years in terms of the number of clinical trials involving new medicines that are utilizing biomarkers for patient selection and/or stratification. Indeed, it shows that about 45% of oncology trials are now using biomarkers, and this compares to about 15% to 20% a decade ago. Our companion diagnostic projects include PCR tests, and we are also discussing NGS options with partners as well.

A recent trade publication noted that pharmaceutical companies are using next gen sequencing for biomarker discovery, but we have been cautious about its use in clinical trials or as a tool for companion diagnostics. This is a view that we can confirm within the pharmaceutical industry.

NGS holds many promises for improving the outcome of patients, and the technology is developing very quickly but there are still some limits. They include cost, which is amplified as an issue by the need for DNA/RNA fusions, methylation, micro RNA, and other markers in parallel.

This is actually prompting pharma companies to push us to consider additional technologies beyond our PCR and NGS offerings that can generate the data they need for clinical trials and even as companion diagnostics in addition to NGS and PCR.

In particular, we are hearing requests for systems that allow so-called multi-analyte, multimodal testing. And that can integrate together various technologies into low cost tests, and that needs to be performed only once to get the test results across all markers.

Our priority is to address the evolving needs of our pharma partners and those of pathologists as well. This means we are not wed to any one type of technology platform, but instead want to offer a range of workflows and technologies to get the job done.

Moving to slide 15, we are expanding our range of universal solutions for use in next gen sequencing applications especially to address bottlenecks in sample technologies and bioinformatics. These are products that can be used with samples going into any sequencer or with any sequence data, and they are also elements of our GeneReader NGS workflow.

And as I mentioned earlier, we are planning for market entry in 12 to 18 months with GeneReader, but have many universal products coming to market already during 2014 and 2015. And they are generating a fast growing $50 million business in NGS universal solutions and bioinformatics alone.

In terms of sample technologies, among the new products' launch are exciting launches in single cell analytics with the REPLI-G kits that make single cells accessible to next generation sequencing by amplifying DNA and RNA from individual cells. This is one of the hottest areas of research these days, and we are very quickly seeing strong demand for these products.

Related to the launch of new sample technologies is the launch of QIAxpert. This compact microfluidic system enables customers to assess the quality and quantity of the nucleic acid samples and get detailed information on the quality of the sample and an analysis of the contaminants. Here we are entering a market with annual sales of about $250 million, mostly served by some very dated technologies.

Our teams are also launching new bioinformatics solutions designed to improve data analysis and interpretation. An important product introduction at the AGBT conference in Marco Island was the CLC Cancer Research Workbench and its range of customizable cancer focused bioinformatic solutions.

The early access testing of Ingenuity Clinical is also moving ahead, and about 20 clinical laboratories are participating in the program. We showed the solution at the AMP meeting last year, and the resonance for our Web-based solution that can quickly and effectively visualize treatment options based on data interpretation has been very positive.

Moving to slide 16, I mentioned earlier some important changes to our Supervisory Board. First, Professor Dr. Detlev Riesner retired as Chairman at a Supervisory Board meeting held earlier this week. And as previously announced, he will not stand for reelection at the next annual general meeting in June.

He's a cofounder of QIAGEN, and was instrumental in our long term success. I would like to personally thank him, also in the name of all of our employees, for his tremendous support, guidance, and collaboration.

Dr. Werner Brandt, who has been a member of the Supervisory Board since 2007 and Chairman of the audit committee, has been named Chairman of the Supervisory Board.

With his 30 years of experience in healthcare and IT, Dr. Brandt provides critical insights as QIAGEN seeks to expand its bioinformatics franchise. And also as previously announced, Dr. Brandt will be retiring this year from his current role as the Chief Financial Officer of SAP AG.

We also are extremely pleased to announce that Professor Dr. Elaine Mardis will be nominated for election to the Supervisory Board at the next annual general meeting. Many of you know Dr. Mardis, who is the Co-Director and Director of Technology Development at The Genome Institute at Washington University and a very prominent key opinion leader in next generation sequencing and bioinformatics.

Her addition to our Board is very timely as well, given our initiatives to expand QIAGEN's presence in personalized healthcare with the adoption of new technologies in bioinformatics to deepen the understanding of cancer and other diseases.

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

Thank you, Peer. I'm now on slide 17 to review our guidance for the second quarter of 2014 and our reaffirmation of our full year guidance as well.

As you know, a new adjustment policy took effect with the first quarter of 2014. First, share-based compensation is included as a cost in adjusted results. Second, costs for restructuring are only adjusted when related to business integration, acquisition related activities. These comparable figures for 2013 are provided in the appendix of this presentation.

In terms of guidance for the full year, as mentioned earlier we continue to expect total sales growth of about 4% to 5% constant exchange rate. This includes a headwind of up to about 4 percentage points from the declining US HPV test sales and for the rest of the business to grow about 8% to 9% constant exchange rate.

Adjusted operating income is expected to grow faster than sales and generate at least 100 basis points of adjusted operating margin improvement. We also continue to expect adjusted diluted earnings per share of approximately $1.07 to $1.09 for full year 2014 compared to $1.02 in 2013.

Also, I want to note these expectations do not take into account any acquisitions that could be done in 2014.

We have given this target for adjusted EPS at constant exchange rates since we continue to see the risk for an adverse currency impact on the earnings due to the volatility of some currencies against the dollar.

In the first quarter, the stronger euro and British pound essentially netted out the adverse currency impact of about $5 million on sales in countries where we have a low cost basis. This includes Japan, Turkey, Brazil, and Australia. You can find this information in the appendix to the slide deck.

For the second quarter of 2014, adjusted net sales are expected to rise about 4% constant exchange rate, and we expect about $0.24 to $0.25 of adjusted EPS, also at constant exchange rate.

We have a cautiously optimistic outlook for the second quarter, as we look for increasing contributions from our five growth drivers. We are also monitoring trends in the life science market, particularly in Asia and the US, and have not changed our views on the US HPV trend.

These slides also contain assumptions for adjustment to results for the second quarter and the full year. For the full year 2014, we expect about $120 million from amortization of acquired intellectual property, about $10 million to $15 million for business integration acquisition items, and an adjusted tax rate of about 20% to 21%. And this is slightly higher than the earlier estimate of 19% to 21% due to the convertible bond transaction.

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.

We're off to a solid start in 2014 and delivered on targets for higher sales and earnings. We're moving ahead on initiatives to accelerate innovation and growth while also increasing returns to shareholders.

Let me review what we have announced. We achieved our targets for the first quarter, with our broad portfolio growing at an underlying high single digit constant exchange rate growth against the expected weakness in US sales of HPV tests.

Our five growth drivers are gaining momentum. We have made significant progress with the FDA clearance of the full QIAsymphony automation platform and plan for many new test submissions.

We're signing new co-development agreements and launching new technologies with Exosome sample kits to gain access to valuable molecular insights in personalized healthcare.

We're also driving the expansion of the QuantiFERON latent TB test in key markets, and are now entering China, a very attractive opportunity.

And we're developing our capabilities in bioinformatics and next generation sequencing technologies. Our portfolio of universal solutions is addressing key challenges to adoption of NGS technologies, particularly through products to improve access to challenging biological samples, as well as cutting edge bioinformatics applications to help customers make sense of the massive amounts of data being generated.

In closing, based on the start to the year, we are well positioned to achieve our goals for 2014. And with that, I'd like to hand back to the operator to open up the Q&A session. Thank you.

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

Daniel Wendorff, Commerzbank. Thanks for taking my questions, two if I may. And starting off with next generation sequencing, and there my question would be how do you see the take up of your sample preparation solutions in light of the GeneReader not yet being available? I know you mentioned it the presentation that they can basically be used with any sequencer. I'm just curious to know how this would work in terms of marketing and how do you see the take up there.

Second question would be looking at your planned submissions of diagnostic tests in 2014. What would you consider the most important one in terms of the commercial opportunity? Thank you.

Thanks, Daniel. Good questions. First on universal next generation sequencing and the market opportunity, today if you look at the workflows in next generation sequencing, they are quite fragmented.

So, to go from a raw biological sample through to a report, there are actually multiple, multiple different steps today, sometimes anywhere between 10 and 15 hours of hands on time, a very complex workflow involving many different sub-modules that typically are also supplied by different parties. Very few people actually use larger stretches of solutions provided by any one player.

So, if you look at the sample technology space, which is often mistaken for the sample preparation, sample technologies is the step in which you go from raw biological sample to purified nucleic acid. And there we have an overwhelming market share. In terms of presence in next generation sequencing labs, I think we have the highest market share of any company in laboratories in terms of those workflow steps.

This is a very critical frontend step that involves very specific protocols, often targeted and optimized and very often validated over years of publications and experience. So, the classical sample technology area where QIAGEN has a very, very strong domain strength is one where we have overwhelming market shares, very often 80%, 90%, or in some cases even more.

This is an area where we have an unrivaled leadership as well. And if you go into any laboratory conducting next gen sequencing, you will typically see our solutions running for that step.

The panels that we launched in the first version last year and the second version actually coming this year have gotten some very good uptake. We've seen the first publications come out showing superior performance of these panels that include the combination of specific gene tests into next generation sequencing panels in a very, very fast and slick workflow, dramatically reducing the amount of sample material required for any sequencer and also significantly accelerating the time to panel creation.

Our library preparation solutions have some unique workflow advantages. They are easy to automate. And so, the so-called sample to library workflow is one that is getting very good uptake.

The sequencer itself, and the -- typically what people call sample preparation is the library preparation step and the sequencing template preparation. These are bundled into sequencers often, but often with inferior solutions. So, very few customers typically have a homogenous approach there.

But, it's not really the core target of our focus. We want to go from sample to library plus then pick up on the data output, which is typically generic, a FASTQ file, and go into further processing, into FCV and interpretation and ultimately the report.

In those areas, we have an extremely slick and integrated offering, both on the frontend and on the downstream. There are several dozens of products we actually are launching in this area, or have already today. And as you see from the sales number, it is quite substantial. And people really appreciate the quality and the reputation that we have in these areas.

In terms of the second question, the FDA approvals, there is no really one single test that I would highlight here on the QIAsymphony platform.

We, in the US, see the hospital-acquired infections portfolio as the first one that we will be putting onto the platform, and starting to see also the first women's health assays with the herpes simplex and other assays further down in the pipeline.

In Europe, we are winning across all assay areas. Our blood virals are considered very strong. We are seeing good uptake also in the women's health, in particular with chlamydia and other assays that we put onto the platform last year, our personalized healthcare assays as well.

And now also -- it's too early really to say about the -- talk about the hospital-acquired infections, but they fit a very unique niche in this area. So, I'd say near term if you're looking at 2014, I would highlight that as a very nice portfolio that has some unique advantages to it.

As you saw from the C. diff assay, it actually has a first to the world detection capability in terms of some variants of the bacterium that are quite important for clinical decision making. So, I'd more think in portfolios than any specific assay in this profiling area.

Tycho Peterson, JPMorgan.

Following up on GeneReader here, I'm just wondering if you can maybe elaborate on the new timelines. They've slipped a little bit relative to, I think, our prior expectation for something in the back half of the year. And you did call out some system integration and other issues in the press release. So, I'm wondering if you can elaborate on that.

And then secondly for Roland, the ex HPV growth rates were again robust. But, I'm just wondering if you can call out the profit contribution from the US HPV, both in terms of gross and operating profit, just to put it in the context of the bottom line.

Sure, Tycho. I'll take the first one, Roland the second.

So, first, well, we all know next generation sequencing is a pretty dynamically moving area. And in terms of GeneReader, we have refined specifications on the GeneReader system, and thereby adjusted some of our chemistries and other components in our sample to insight workflow.

This has pushed out timelines of systems integration and, with that, the design lock and therefore the overall timelines. We are committed to the basic design target, so the targeted applications in clinical research and diagnostics and the platform technology.

So, we do expect to provide a good return on this investment. And as with all of our R&D programs, we monitor the value equation potential on a constant basis.

On the second question, Tycho, as you know, HPV clearly still has a very nice cost margin. Nevertheless, it is also a product which, as you'll recall, has still a quite significant operational expense linked to it. It's the only product within our organization which really has two different sales organizations.

And therefore I would say the overall EBIT margin contribution is probably even slightly below our company average these days. And this was something also which you can see quite nicely reflected also in the first quarter results.

So, despite the quite significant decrease we have seen in our US HPV revenues, we were able to increase our cost margin in the first quarter, especially driven by our very strong bioinformatics business, which also comes with a very nice cost margin improvement from our QuantiFERON operational capabilities.

That's a couple of things which are very helpful, and also the efficiency programs which we were able to conclude last year showing now the first impact throughout the year, the 60 basis point margin improvement coming in from a couple of different sectors and helping us again, even with the quite significant headwind we have in HPV, to improve our margins. This is also something we believe should be doable better now.

Scott Bardo, Berenberg.

The first question actually just following on on GeneReader, please. Can you just help us understand a little bit more whether the slight pushback in the timeline was more related to you increasing the functionality of this system, or it just relates to some integration hiccups or problems that you hadn't anticipated? So, just perhaps a little bit more visibility there.

And if this project fails in its entirety, can you give us some sense of where you think you can take your next gen business today and into the future? And perhaps even if you can quantify that, that would be very helpful.

The second question just relates to your refinance. Obviously some very impressive low interest rates, quite a bit of cash now sitting on the balance sheet for QIAGEN. Are we to assume that any acquisition that you make, be it this year or next year, is likely to be earnings accretive given the super low interest rates that you now have? So, perhaps if you can answer those two, I might have a follow up.

Sure, Scott. I'll take the first question and hand the second one to Roland.

So, first, in any development project you clearly have technical challenges in the systems integration phase. But, in this project, it was combined also with our wish to upgrade some of the specifications and make them more amendable to a better profile of the product overall and also better economics. So, these two things are very difficult to separate out.

We are seeing such good success on the universal portfolio currently, such good uptake, that our teams are very focused right now in just making sure we have an almost ubiquitous presence with these universal capabilities before we focus too much on a specific segment of the market.

So, from that perspective, next gen sequencing is an important, integral part of our vision going forward. The availability of a system is certainly part of the plan going forward, and we're on track to get there. It isn't pushing back our ability to build presence in this market. And probably even more so, as we have now a universal approach, that will allow us to address any customer regardless of the platform that they currently have.

Roland?

Yes. And on your second question, the refinancing, the issuing of the new convert was really not linked to any potential M&A thoughts we had.

I think we had two major goals here. And the first goal was first of all taking off the potential risk of another 50 million share dilution with an increasing share price going forward, and at the same time of course securing very attractive mid and long term debt financing with very attractive terms, as I said before. So, it was really our two focused points around the refinancing.

At the same time, we clearly see bolt-on probably smaller acquisitions in certain areas as part of our strategy. At the same time, we see that our organic growth rate is clearly accelerating and the five growth drivers are moving in the right direction. So, I think the combination of both is what we had in mind.

But, it's difficult for you to say whether those bolt-ons will be earnings accretive at this stage.

It's clearly the goal to make value enhancing deals. There is no question around that. And I would say, if you look backwards, the recent additions and the acquisitions we made were all quite attractive to QIAGEN, I think. And we clearly keep that a goal. But, again, focus number one is organic growth.

And just one last question, please, if I may. Peer, just wondered if you could share some thoughts on primary screening in the US for HPV. Obviously, one of your competitors has had some success with that claim. Just wonder whether you think that heightens the competitive pressures in the US, or are you relaxed?

Sure. Well, as we know, we've been in the US HPV market for years. This is a co-testing market with Pap and HPV tests are often done simultaneously, and we see that continuing into the future as well.

At the same time, our QIAGEN solutions are approved for primary screening in many countries. And that means in those countries, our Hybrid Capture 2 test is used at the primary test, often in standalone settings.

The primary screening approach is being used in many market like the emerging countries, which did not really have a lot of cytology testing in the past. And in those markets and also in first world countries, we have been leading solution in these markets.

And there for primary screening, what is really interesting is that we have by far the most slick and fast workflow. It is a faster workflow, and we have outperformed the competition significantly in terms of the clinical profile. This is confirmed by the fact that we've been winning almost all primary screening tenders and have not lost any significant tender.

Turning back to the US, a competitor product recently received FDA approval for primary screening, but we do not really anticipate any real impact. This test has very poor clinical results in several studies where primary screening was used, including one in Denmark where QIAGEN showed far better results.

FDA approval does really not mean adoption. The guidelines do not support primary screening, nor is reimbursement in place. And even if that changes, the system cannot deal with it well. So, getting this approach to get some traction will take a lot of time and money and effort.

The Pap test has simply been around forever, and the amount of data needed to convince docs to use this alternative test is extremely high, also considering that there is a significant economic disadvantage to the primary screening method for that.

Isaac Ro, Goldman Sachs.

Roland, I wanted to ask just a question on margins. I think earlier in the last quarter you talked about a little bit of opportunity to consolidate facilities. And I was wondering if you could maybe provide an update on that process, any extent to which that'll actually help gross margin this year. Just wondering what's baked into your expectations and your guidance for gross margin tied to that specific initiative.

And then, second question would be just on pacing for free cash flow over the balance of the year, any specific items that would cause free cash flow volatility over the balance of the year. I just want to make sure we model that right.

Yes, sure. Let's start with the free cash flow question. We really have seen in the first quarter similar numbers than last year, but still included is that one $9 million, $10 million payout for restructuring charges accrued in 2014. This is now fading out, and we see that it's clearly helping us in our cash flow for the year.

Nevertheless, I would say the much more and bigger driver over the course of 2014 in helping us to improve our cash flow is the operating efficiency we were able to gain and implement, I would say, over the last 12 to 18 months.

So, we expect still a quite significant ramp up in terms of cash flow for the year. And as I said, it's clearly larger than what we expect on the net income side. So, the cash conversion rate is going to increase.

In terms of overall margin improvement, the gross margin clearly in the first quarter had a trend in the right direction. As I said, bioinformatics and as well personalized health were quite helpful.

At the same time, you have to have in mind that the first quarter is typically an instrument quarter where the percentage of revenues coming from the instrumentation business is the lowest one. So, obviously still increasing implementation business and moving through the year 2014, that is clearly to mute a little bit the gross margin expansion.

So, all-in, you probably will see gross margin around what we have seen now in the first quarter mid and long term. It's going the right direction. We have to go through 2014 and eat up the impact on the HPV franchise in the US. Once we have numbers in our baseline, I think there is room for more.

On the operational efficiency with R&D, again the first quarter was slightly above 12% of overall expenses. For the rest of the year, we still believe the number around 12%, somewhere between -- that around 12% is probably a fair representation.

On SG&A, we will see also the benefit of the productivity and efficiency gains we were able to make over the course of 2013. So, that's a 100 basis point margin improvement to the figures. We were able to close down a couple of smaller sites, mostly, as I said, done already in 2013. So, we will see the impact now over the course of 2014 helping us also in terms of productivity.

Romain Zana, Exane.

Thank you for taking my questions, two if I may, the first one regarding the R&D investments. They have increased substantially in Q1, and I can see from the presentation -- the end of the presentation that the number of employees working on R&D has also risen by 11%. Is that purely related to NGS? And what would be a fair assumption for R&D as a percentage of sales looking forward? And I have another question.

Thanks, Romain. Roland, do you want to take that one?

Yes, sure. Actually, it's mainly related to our bioinformatics franchise. So, the increase in terms of headcount is coming mainly with the investment we make in bioinformatics. NGS was already in the baseline, so there is no significant increase so far in 2014, and we also do not expect that in 2014.

We feel very well placed, however, with the investments we made there. Bioinformatics right now, of course, is an area which shows as well a significant growth and opportunities. And clearly, with the acquisitions we made, you see that also reflected in both R&D spending and as well in headcount.

Another question, maybe a bit more technical, regarding follow-ons on the EPS guidance. You left the EPS guidance unchanged for 2014 despite the new share buyback program. Is it linked to a higher than anticipated issuance of shares in the mid time, or was the share buyback already assuming the new initial guidance?

No, but a very good question. Furthermore, we will have to finalize our share buyback program. I think right now we still have outstanding around $20 million to buy back under the approved program. And then, we'll probably start, I guess, in the second part of the year with the third program.

With the limitations we do have in Europe in terms of volume we can buy back on a daily basis, I think it will take some time. So, it's quite a minimal impact on the share buyback on the six month period. We will see how quickly we get it done. It's always a volume number.

So, over the course of 2014, have in mind also with respect to the first one to run a couple of months. So, for 2015, a larger impact, not material to 2014.

Vijay Kumar, ISI Group.

I have one for Peer. There are a lot of moving parts in pharma. It was good to see some strength in that segment. Obviously given some of the consolidation comments that you made, it creates a little bit of volatility. But, also I guess offsetting that, if you look at some of the acceleration on the companion diagnostics side, the strength you are seeing, I think some of the comments you made on liquid biopsy, it felt like things are actually picking up on the pharma side. So, can you just elaborate on those comments and consolidation and compare and contrast that versus the companion diagnostic acceleration that you are seeing?

Sure. Thanks, Vijay. It is definitely quite impressive to see what we have been able to put together in the pipeline. The numbers that we put out on that one slide we actually put out for the first time.

The momentum in this area is very significant. It's a sizeable team that we currently have. And they are basically initiating partnerships and managing partnerships across multiple different platforms, primarily PCR and NGS, and across multiple indications. Cancer is clearly a big one, but we're also seeing others as well.

The pharma consolidations can have a benefit and a disadvantage. So, the benefit is -- if you see mergers into parties where you have master collaboration agreements it's a big benefit. And we've been fortunate partly to see that, and therefore have a promising outlook also on some future pipeline expansions going forward.

But, on top of that, the fact that we have now multiple products in the market. And as you know from the pipeline, there are some near term submissions as well over the course of the next 12 to 18 months we're going to see more momentum.

And these are things that are attracting pharma companies, that this is an actually very doable thing for us to do across multiple different testing technologies. And so, momentum, as the one slide shows, 10% to 15% of the trials included biomarkers 10 years ago, now 45%. That puts us into a very sweet spot.

And we're the only company that has all technologies in molecular under one roof, and also has gone PMA routes and has done so successfully. And that always takes a few years to prove to the market. And we've gone through that phase, and I think those things coming together put us into a good position.

I don't expect it to stop. We expect also continued very good inflow of these partnerships.

Derik de Bruin, Bank of America.

One quick one and then a follow up. Roland, can you just give us a -- can you quantify the HPV hit to the gross margin?

As I said, it's down -- so you can do the math by yourself, I guess. It's down in the US 27% and now 9% of total, and the gross margin is still in the mid 80%'s.

And I guess on the QIAsymphony and sort of looking at the C. diff approval, so I guess how does this work? I mean, are -- do you have to go back and retrofit your current existing installed base of the QIAsymphony to get it -- basically get it up to spec for what the FDA approval was on it? And do you have to do any change with the installed base to make it compliant?

And I guess on the -- when you think about the C. diff test, I mean, where are you expecting to go in -- what types of labs are you expecting to go into and what are those labs currently testing for and currently using for in the C. diff? Are they more immunoassay tests? Are they more molecular tests? And I'm just curious to think of how you think about taking share and moving the share, moving the gains in the C. diff space.

Sure. Well, again, C. diff as a single marker is a thin path. But, if you think of this as a complete portfolio across HAI, it is a pretty powerful proposition.

The availability of a broad menu makes it very attractive to laboratories that are providing a wide range of different tests, in particular in hospitals. The ability to do random access continuous load testing gives it some very unique features, low cost of capital, a very broad menu, but still allows quite a sizeable throughput of testing at a very attractive cost.

So, it is a classic medium throughput hospital market testing machine for these hospital-acquired tests. It can also serve as a higher throughput base machine. We've seen that also. Some demand coming in there with -- some of the more expensive near patient tests are then simply done a little bit further out towards the patient.

But, the central laboratory takes a stronger role in providing these tests in the centralized format, which is very often in hospitals and also other types of healthcare settings quite an attractive proposition. Some labs are actually doing very high throughput testing even of C. diff.

And the systems that are out there -- or the QIAsymphony RGQ system that we've now got FDA clearance for is identical to the systems that we have out there in the market with the exception that in some cases the cycler would need a software upgrade and would -- to reflect the newest version of the software that was included in the clearance. So, it's quite an easy migration path that can be performed.

Zarak Khurshid, Wedbush.

First, on the NGS business, just digging into that $50 million revenue number that you mentioned, if you stripped out the plain vanilla extraction, can you speak to the run rate of the NGS prep kit business?

The run rate, well, we said $50 million as an overall number at high growth rates. So, those are the two variables that we put out. I didn't quite understand what you wanted to get in addition to that.

Just the NGS prep kits, targeted prep and the things that have been launched more recently, love to understand kind of the traction there and kind of the growth rates.

Okay, sure. So, when we talk about sample preparation in NGS, and I'd like to reiterate that and use this opportunity, that very often is mistaken for the sample technologies as we describe them.

So, the preparation from a raw biological sample into a purified nucleic acid, what we describe sample technologies, is not sample preparation for NGS. What typically is described as sample preparation for NGS are then the steps downstream, so the target enrichment and library preparation into sequencing.

And on that frontend, it is very sizeable on the sample technology side, even though it is only 1% to 2% of the biological samples that we process. The majority are other types of downstream analytical techniques. That area is one where you typically have higher cost product because you're working with clinical samples or ones that need a very high quality frontend sample technology.

In terms of the enrichment panels for NGS and also in terms of library preparation, we started ramping up in 2013 and are now significantly expanding in this quarter in 2014 with the two zero panels that are coming out. And they really have some very, very unique features.

This is a very sizeable market opportunity. And we're in there right now with a very competitive product, and we think we're step changing now into something which is probably going to have specification leadership. And that opens up a new market opportunity for us.

I would not want to put out any numbers in terms of our expectations other than to say we've seen very good uptake. The first publications are coming out. They are applauding our products in terms of their capabilities, and it is quite a sizeable market opportunity for us.

Jon Groberg, Macquarie.

This is actually [Harris] on for Jon. So, I think going into this year, the plan was to offset the expected losses in HPV from the contract loss with growth in NGS. And it seems like the HPV losses are happening a little bit quicker than expected, while at the same time you've delayed the NGS launch. So, where are you seeing better performance than you had anticipated at the start of the year?

Sure. So, what we always said is that, if you look at the prevention portfolio, it currently has two elements in it. One is tuberculosis that is going to surpass $100 million in sales, and US HPV, which is around that number as well.

So, we're probably going to -- and in tuberculosis, we see over 20% growth. And in HPV, we saw a pricing related decline. We're actually quite successful in maintaining market shares in this market. And so, those two products basically, as we expect flooring of the pricing situation in the United States to levels where even market share shifts would not really be too meaningful in terms of their overall impact on us as a company.

TB and HPV are the two products that are offsetting each other currently. It has nothing to do with NGS. NGS has never been part of our financial plan going forward. We always made it very clear that we're asking that no numbers be included in this as this is still a product in development.

I would like to close the conference call here and thank everyone for their participation. If you have any questions or comments, please do not hesitate to call and contact us. Thank you very much.

Thank you.

Ladies and gentlemen, this concludes the QIAGEN conference call. Thank you for joining and have a pleasant day. Goodbye.