Qiagen NV (QGEN) 2014 Q2 法說會逐字稿

Presentation

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 two 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.)

I would now 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 today are going to be Peer Schatz, the CEO of QIAGEN, and Roland Sackers, our Chief Financial Officer. A copy of this announcement and the presentation for this call can be downloaded from the Investor Relations section of our website at www.qiagen.com.

On slide 2 you see the customary disclaimer. The discussion and responses to your questions on this call reflect management's views as of today, July 30, 2014. We will be making statements today 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 obligations to revise any forward-looking statements. For more information, please refer to our filings with the SEC; also can be found on our website.

I would like to now hand over to Peer.

Thank you, John. Hello and welcome to our call today where we will be discussing our results for the second quarter and first half of the year and update you on the progress we are making to further 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.

We have three messages for you today. First, we are reaffirming our full-year guidance for improved sales and earnings based on our achievements in the first half of 2014. As you saw in the press release, adjusted net sales in the second quarter rose 4% at constant exchange rates, in line with our communicated targets, and we're up 5% in actual rates due to some currency benefit. When you exclude the US HPV test portfolio, the rest of the QIAGEN portfolio delivered 7% constant exchange rate growth.

In terms of earnings, adjusted EPS was $0.26 per share at constant exchange rates and this was above our target for $0.24 to $0.25 per share at constant exchange rates, and adjusted EPS was $0.25 at actual rates.

For the first half of the year adjusted net sales were also up 4% constant exchange rate and this included about 4 percentage points of headwind from lower US HPV test sales. So that means net of the US HPV test portfolio sales QIAGEN grew about 8% on a constant exchange rate basis in the first half of the full year and this is in line with our communicated full-year target for about 8% to 9% constant exchange rate growth.

The second message, our five growth drivers are gaining momentum and are growing at solid double-digit pace. Among the achievements in the second quarter were two PMA approvals from the FDA; one for our therascreen KRAS companion diagnostic kit, paired with Vectibix from Amgen, and also our artus CMB kit for the cytomegalovirus assay. These build on the progress in the first quarter with the FDA clearances of the full QIAsymphony RGQ MDx automation platform and the C. difficile assay for detection of the life-threatening infection.

Four positive FDA regulatory decisions so far in 2014 is clearly a signal that we are making progress to further build a content menu in the United States and we expect more announcements in the coming months.

Other highlights were in personalized healthcare with the announcement of a large companion diagnostic project involving liquid biopsies with AstraZeneca and the lung cancer drug IRESSA.

Also of note was our fourth collaboration with Eli Lilly and this one involving biomarker projects involving simultaneous DNA and RNA analysis. And in bioinformatics we have added BIOBASE, the gold standard for hereditary disease analysis to our Ingenuity portfolio.

We also recently launched a second generation of gene panels which are used to enrich genes of interest for sequencing and integrating them with our bioinformatics solutions.

The third message, we are committed to disciplined capital allocation through targeted, value-creating bolt-on acquisitions, as well as through share repurchase programs. The second $100 million share repurchase program was completed in June and we are announcing today the start of the third $100 million program.

So in summary, we are pleased with the performance in the first half of the year, especially among our five growth drivers, and have reaffirmed our goals for the full year.

I'm now on slide 5 to provide an overview of the results for our 4 customer classes in the second quarter. Even with the US HPV sales headwinds, molecular diagnostics delivered high single-digit growth and we also saw higher sales in applied testing. On the other hand, the pharma and academia customer classes faced a slowdown, which was mainly due to a sharp decline in instrument sales, a base effect from last year's sequestration and the restrictive funding environment in some countries.

In molecular diagnostics the portfolio, excluding US HPV sales, showed the strongest performance, growing 18% on a constant exchange rate basis on the momentum of our 5 growth drivers and providing about 40% of total QIAGEN sales.

First, we're seeing double-digit sales growth in terms of consumables used on the QIAsymphony system and also for our profiling assays in general that are used for disease detection and monitoring.

Our second growth driver is the QuantiFERON latent TB test and it is delivering growth above our 20% annual target due to ongoing market penetration gains against the 120-year-old skin test.

Our personalized healthcare portfolio also has delivered higher sales in the quarter for both kit sales as well as revenues from companion diagnostic co-development collaborations. As I mentioned earlier, US sales of HPV testing products were down about 30% in the second quarter and represented about 6% of total sales compared to 10% in the same quarter of 2013. For the first half of the year these specific product sales were also down about 30%. These rates are in line with our full-year expectations as we absorb the impact of primarily pricing pressure and the transition to a multi-competitor market. As for HPV sales in the rest of the world, they are growing and rose 8% on a constant exchange rate basis in the second quarter and were largely unchanged in the first half compared to the same period in 2013, which included large national tender orders.

In the life sciences the performance was mixed as applied testing showed low single-digit sales growth, while pharma was flat and academia declined at a single-digit constant exchange rate, and again weighed on by very weak instrument sales.

Bioinformatics contributions were seen in all of these customer classes; from Ingenuity, which was acquired in 2013, and CLINICAL Bio, which was acquired in August of last year. BIOBASE did not have a meaningful impact yet on overall sales.

In applied testing we saw single-digit growth in both consumables and instruments and, in particular, strong demand in forensics human ID products in the Europe, Middle East, Africa region.

pharma experienced a single-digit increase in consumables, but saw a double-digit decline in instrument sales against the very strong sales in the same period of 2013.

In academia we also saw a significant double-digit constant exchange rate decline in instrument sales, and that was coupled with a modest decline in consumables sales as well that was felt across the regions.

Despite these results for the quarter, we anticipate modestly improving trends in the second half of the year. At the same time, keep in mind that any gains have to be seen in light of the reduced funding levels in 2013 and cautious spending habits.

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

Thank you, Peer. Good afternoon to everyone in Europe and good morning to those joining from the US. I am on slide 6 and would like to first review in more detail our financial results for the second quarter.

Adjusted net sales were $331.2 million in the quarter, rising 5% at actual rates and 4% at constant exchange rates. We saw some currency benefits on sales from the strength of the euro and the British pound against the dollar on reported currency, which more than compensated for headwinds from the yen and other currencies.

About two-thirds of the sales growth came from the Bioinformatics acquisition and about one-third came from the rest of the portfolio. And as mentioned earlier, the 4% constant exchange rate sales growth included about 3 percentage points of headwind from lower US HPV test sales.

Adjusted operating income rose 10% in the quarter at a much faster pace than sales, with adjusted operating income margin improving to 25% of sales compared to 23% a year ago. It is worth noting that the adjusted gross margin at 72% reflects a shift towards more consumables, which made up 88% of sales in the quarter compared to 87% a year ago. It's the high-margin bioinformatics sales helping to offset reduced US HPV sales contributions.

In addition to the gross margin gains, operating margin improvements came from sales and marketing, as well as general administration expenses declining as a percentage of sales in the quarter, and this together more than absorbed the higher R&D expenses, which were about 11% of sales.

The leverage is coming through from the efficiency projects we completed in 2013; in particular, projects in accounting, IT and procurement to gain more flexibility and scale through our new shared service center. I also want to note that we had about 40 basis points of currency pressure in the adjusted operating income margin.

Moving down the income statement, adjusted net income rose 9% and resulted in adjusted EPS of $0.26 at constant exchange rates and $0.25 on an actual basis. The adjusted tax rate of 22% was actually a tick above our expectation for (inaudible) at 21% tax rate in the quarter. As a reminder, our adjusted EPS guidance for the year is on a constant exchange rate basis given the currency volatility in some of the countries we operate in.

I am now on slide 7, which shows sales by geographic region and product categories for the second quarter.

In terms of the regions, the fastest growth came in the Europe, Middle East, Africa region, which provided about a third of sales and grew 7% constant exchange rate. The Nordic region, Turkey and the United Kingdom led the performance and we are seeing some improvement in Southern Europe as well. Molecular diagnostics sales grew a double-digit constant exchange rate pace in this region and applied testing grew as well, but pharma and academia sales were lower. For the first half of the year, this region generated 5% constant exchange rate growth.

In the Americas, which provided about 47% of sales and grew 1% constant exchange rate, Brazil and [CS] delivered growth to help the region overcome lower sales of HPV products in the US. When excluding the US, HPV test portfolio sales were up 9% constant exchange rate in the region. For the first half of the year sales in the Americas rose 2% constant exchange rate and were up 12% constant exchange rate, excluding US HPV test sales.

The Asia-Pacific/Japan region experienced a slower period in the second quarter with 3% constant exchange rate sales growth. China and Japan both grew at solid single-digit constant exchange rates, but softness in other Asian markets, in particular in the pharma and academia customer classes, weighted on the performance. Still, growth in the region for the first half was 7% constant exchange rate.

In the top seven emerging markets, adjusted net sales rose 11% constant exchange rate and provided 14% of sales. We saw improved year-on-year sales in Brazil, China, Korea and Turkey against a double-digit decline in Russia. And for the first half of the year, these markets generated 8% total exchange -- constant exchange rate sales growth and provided about 12% of sales.

In terms of product sales, consumables and other revenues were up 5% constant exchange rate in the second quarter and provided about 88% of sales, maintaining the trend seen in the first quarter with 5% constant exchange rate growth, as well as supported by gains in both consumables as well as the contributions from the Bioinformatics acquisition.

Instrument sales, however, declined 5% constant exchange rate in the second quarter after year-on-year gains in the first quarter. In the academia and pharma customer classes, instrument sales double-digit constant exchange rate reductions in second quarter sales, which overshadowed low single-digit constant exchange rate growth in molecular diagnostics and applied testing. For the first half of the year instrument sales were down 1% constant exchange rate.

Moving to slide 8, here you have an overview of our financial results for the first half of the year. Adjusted net sales were $648.6 million and growth rates were the same as the second quarter with 4% constant exchange rate total sales growth and 5% on a reported basis due to some modest currency movement benefits. All customer classes delivered growth for the period, led by molecular diagnostics and applied testing.

Adjusted operating income rose at a faster pace then sales in both the first and second quarters, with adjusted operating income margin improving by about 1 percentage point to 24% of sales from 23% in the first half of 2013.

A key driver of margin gains has been the efficiency program completed in 2013 that had a favorable impact on the adjusted gross margin, which improved by a point to 72% of sales, as well as on general administration expenses and sales and marketing since these help to absorb higher R&D investments.

In terms of adjusted net income and EPS, the adjusted tax rate of 22% was actually above our full-year target for 20% to 21% tax rate, while adjusted EPS of $0.47 absorbed $0.01 of adverse currency movements.

I am now on slide 9, which provides an update on our balance sheet and cash flow position after the first half of 2014 and reaffirms our strong financial position.

As a first point, we saw a significant improvement in free cash flow, which was 28% to about $77 million in the first half of the year compared to the same period in 2013. The second quarter was especially strong with about $48 million in this period compared to $30 million a year ago as we see the benefits of our productivity initiatives on operating income.

Also supporting the increase was effective working capital management and the number of days of sales outstanding, or DSOs, declined to about 67 in the first half of 2014 compared to about 70 in the same period of 2013. The figures for the first half of 2014 also include about $10 million of cash restructuring charges related to the completion of our efficiency project in 2013. So, we are seeing the anticipated improvements in free cash flow start to materialize.

And as a last point, you can see that we continue to have good liquidity and a manageable net debt position with leverage moving slightly higher to 1.2 times net debt to adjusted EBITDA. This position is enabling us to use our financial resources to support the business expansion, as well as provide increasing returns to shareholders.

I would like to now hand back to Peer.

Yes, thank you, Roland. I'm now on slide 10 to provide an update on the progress we are making on initiatives among our 5 growth drivers.

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. The five growth drivers are delivering strong double-digit constant exchange rate sales gains and currently provide more than a quarter of sales. We expect this share to increase as we reallocate even more resources to further accelerate their momentum.

With the QIAsymphony automation platform we are moving ahead towards our goal of 250 new placements in 2014, building on the more than 1,000 installed systems at the end of 2013. We already have four FDA approvals this year, two large PMA approvals in May alone and plan for more in 2014.

QuantiFERON is set to break through $100 million of sales in 2014 and has already surpassed the size of a US HPV franchise, providing more than 8% of total sales.

Personalized healthcare is growing on a base of $100 million in annual sales thanks to higher assay sales and growing revenues from the companion diagnostic co-development agreements.

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

And on NGS we are launching new sample technology kits, as well as expanding our offering in combination with bioinformatics. Together, we see these activities as having had more than $50 million of annual sales in 2013.

Our teams are also moving ahead on development of the development of the GeneReader NGS workflow. And as we announced with the first quarter results, market entry is anticipated in the second half of 2015.

I'm now on slide 11, which provides an overview of some selected new product approvals and launches during the first half of the year. First, we are very pleased with the progress to expand the test menu in the United States through clearance of the full QIAsymphony RGQ MDx system earlier this year and then the clearances of artus C. difficile and the cytomegalovirus kits. The C. diff test is a key foundation of our healthcare acquired infection portfolio, which is planned to also include the artus VanR, QIAsymphony RGQ kit for detection of vancomycin-resistant bacteria, and the artus MRSA SAQS RGQ kit for a detection of methicillin resistant and susceptible staphylococcus aureus infections.

Customer response to the C. diff test, which is also available in Europe, has been very positive. A key differentiator is the clinical profile of our assay given that it detects both toxin A and B genes, which is important since either toxin can cause this potentially life-threatening infection. The vast majority of the competitive assays only detect one, so they may miss some positives.

There is also an economic value proposition given the board portfolio coming onto QIAsymphony that enables multiple assay consolidation on one platform. The workflow is fast, providing up to 24 test results in a few hours and with capabilities to flex into much higher sample numbers as well and with very competitive pricing.

The approval of our artus CMV assay in May was another key milestone. This was a full PMA, a very onerous clinical trial and a multi-year regulatory process. CMV is a key assay for our QIAsymphony family as it represents a cornerstone in transplantation testing, and one that many laboratories also in decentralized settings would very much like to perform. It has many advantages over the older marketed competitor test and MDs are leveraged very well with the additional benefits of QIAsymphony in terms of automation, menu and total cost of ownership.

We have a number of further new product approvals and launches planned for 2014 and we will keep you updated on our progress.

I'm now on slide 12 where I would like to provide some views on how QuantiFERON-TB is expanding its position as the modern gold standard for latent TB detection. QuantiFERON-TB is increasingly well positioned based on three major drivers: cost, accuracy and east of use. Our assay has significant cost advantages over the competition because it can be easily run in house and offers economies of scale. And this is why you see competitors having to offer a service business model to compensate for the complexity of their test. In terms of accuracy, the US Centers for Disease Control recommend choosing the test with the highest specificity and that would clearly be our test with a 99% level. These are among the factors that make QuantiFERON the most widely used modern latent TB test and leading to penetration gains in the US and elsewhere.

Among developments in the quarter, there was an interesting study published in the Open Forum of Infectious Diseases in late June that discussed the estimated prevalence of TB infection based on the activities of the New York City Department of Health and Mental Hygiene, which has been using our test since 2006. With about 70,000 tests in the study, this is the largest study to date involving IGRA tests. The results showed that the patient characteristics associated with positive test results were consistent with known TB risk factors. The authors also said the results showed IGRA tests, here meaning QuantiFERON-TB, since it was used in the study are reliable for TB infection -- detection. Beyond New York City, all of the other leading big city TB programs, including San Francisco, San Diego and Los Angeles, use QuantiFERON as their standard test.

Also of note was an announcement in early June by the US Preventative Services Task Force, or USPSTF, which is responsible for primary healthcare screening guidelines in the United States. They released a draft research plan on screening for latent TB infection and invited public comment through early July. The resulting evidence report will take some time to be created and will inform the basis for any new USPSTF recommendations. We see this as a very positive step towards greater awareness about the public health threats of TB and how QuantiFERON-TB can play a role in detection.

I'm now on slide 13 for a quick update on our personalized healthcare portfolio and, in particular, three recent developments. First, we announced in May a fourth collaboration with Eli Lilly to co--develop assay panels that can simultaneously detect DNA and RNA biomarkers targeting multiple cellular pathways involved in common types of cancer and associated with various development projects at Lilly, which whom we have a moister collaboration agreement.

Certain applications in biomarker development for tailoring oncology therapeutics require the combined simultaneous analysis of DNA and RNA and this collaboration uses a multi-modal, multi-analyte solution that can process multiple sample types and biomarkers in a single test. Some of the assays will be based on the Modaplex platform which has an FDA 510(k) clearance and became part of QIAGEN through the acquisition of PrimeraDx, a Boston-based company. The acquisition price was very low and related to the Lilly collaboration.

In the meantime, we're seeing very strong demand from other pharma partners for similar agreements, in particular since Modaplex enables so-called multimodal rapid and cost-efficient DNA and RNA analysis that is not possible with other technologies, including next generation sequencing. Our top priority is to address the needs of our pharma partners, and also those of pathologists as well, and we are not wed to any one type of technology platform to get the job done for our customers and patients.

Second, AstraZeneca and QIAGEN just announced the other day a new collaboration to develop a blood-based diagnostic test to identify patients who are suitable for treatment with IRESSA, AstraZeneca's therapy for non-small cell lung cancer. We already provide the FDA-approved therascreen EGFR test that is based on a tumor sample from a surgical procedure, and this test is used in Europe and elsewhere in combination with IRESSA.

Liquid biopsies will provide now a noninvasive way to gain molecular insights into a patient's EGFR and mutation status, especially is there is no chance for an operation. We have a strong leadership position in the liquid biopsy area with success defined by the combination of a clinically proven assay with technologies for sample collection and processing, an era of unrivaled leadership for QIAGEN.

Third, as you also saw during the quarter, we also gained FDA regulatory approval for our therascreen KRAS test in combination with Vectibix from Amgen, and this approval was tied to the label change for this medicine for first-line use in patients with wild type KRAS metastatic colorectal cancer. This marks our third FDA approval for a companion diagnostic.

And as a last point, we have been expanding our portfolio of biomarkers, building up our intellectual property rights; in particular, four new biomarkers in the area of blood cancers. These include the calreticulin, or CALR, and SF3B1, and they are included in the GeneRead DNAseq leukemia V2 gene panels for next generation sequencing.

Moving to slide 14, this gives you an overview of our expanding next-generation sequencing portfolio, particularly in terms of universal solutions that can be used with any biological sample, any sequencer and with any sequence data. As our teams develop GeneReader, we are pushing the expansion and commercialization of our next-generation sequencing products used to prepare a sample for sequencing and then bioinformatics for analysis and interpretation.

In terms of sample technologies in which we help our customers to collect, process and extract nucleic acids from biological samples, we have already launched 10 new kits this year, including 4 in the second quarter alone. We are seeing strong customer demand for the REPLI-g kits that are quickly becoming the technology of choice for single-cell processing for next-generation sequencing analysis. And we are also seeing growing interest across our liquid biopsy area, such as cell-free DNA and exosome processing. In terms of exosomes, we just launched a first kit that is designed to enrich these tiny vesicles found in blood samples and then to extra the nucleic acids that they contain.

Our teams are also developing and expanding the range of bioinformatics solutions offered by QIAGEN. We announced during the quarter the integration of some content from BIOBASE, a privately held Germany company that we acquired into Ingenuity variant analysis. The addition of this expert curated content from BIOBASE is an exciting expansion of our offering. One of the BIOBASE databases is HGMD, the Human Gene Mutation Database, which is the gold standard for comprehensive data on human inherited disease mutations. PGMD, or the PharmacoGenomic Mutation Database, is another database that enables the identification of all published gene variants that have been shown to affect drug response in patients.

These solutions are also being integrated into Ingenuity Clinical, our forthcoming web-based solution designed to deliver faster, easier to use in high confidence clinical interpretation and reporting of insights from sequencing-based tests. We will have more to share later this year on Ingenuity Clinical and our commercialization plans.

Moving to slide 15, I'd like to highlight the new GeneRead DNAseq V2 cancer gene panels that we recently launched for use with any sequencer. We have launched 14 new gene panels that encompass 570 clinically relevant cancer genes. They are customizable, include other genes or gene regions of clinical or biological interest and are compatible with any sequencer.

There are three categories of panels: focused panels with 8 to 25 genes, Z-specific panels for 40 to 50 genes, and comprehensive panels containing up to 160 genes. These new panels lead in terms of portfolio breadth and specifications. These benefits were made possible by the very deep molecular content in our gene growth assay biosciences portfolio, as well as our assay development expertise, including the development of regulated diagnostic assays. In addition, we are leveraging our bioinformatics franchises by integrating them with these panels, thereby adding significant value for users seeking fast and high-quality interpretation.

One misconception that we hear from some in the financial community is that gene panels are all essentially the same and that is clearly not the case. We actually see this step, the sampling, extracting and enriching of genes of interest, as one of the most critical steps in targeted sequencing. As you see on the bottom of this slide, the QIAGEN GeneRead Version 2 panels offer a very competitive profile on many metrics. For example, customers can work with as little as 10 nanograms of DNA input with our panels, while turnaround time is also very efficient and the panels are offered at a very competitive price.

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

Thank you, Peer. I'm now on slide 16 to review our guidance for the third quarter of 2014 and also to reaffirm the various parts of our full-year guidance.

For the full year we continue to expect total sales growth of about 4% to 5% constant exchange rate. This includes (inaudible) of up to about four percentage points from 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 at constant exchange rate for full-year 2014 compared to $1.02 in 2013. These expectations do not take into account any further acquisitions that could be done in 2014. We have given these targets for adjusted EPS at constant exchange rates since we continue to expect a modestly positive currency benefit on sales, but an adverse currency impact on the earnings.

For the third quarter of 2014, adjusted net sales are expected to again rise about 4% to 5% constant exchange rate and we expect about $0.26 to $0.27 of adjusted EPS, also at constant exchange rate.

This slide also contains assumption for adjustments to results for the first quarter and the full year. For the full-year 2014 we continue to expect about $120 million for amortization of acquired intellectual property and about $10 million to $15 million for business integration and acquisition items and an adjusted tax rate of about 20% to 21% and this is expected to be at the higher end of this range.

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

Thank you, Roland. I'm now on slide 17 for a quick summary before we move into Q&A.

We're moving ahead on initiatives to accelerate innovation and growth during 2014, while also increasing returns to shareholders. Let me review what we have announced.

First, we achieved our targets for the second quarter. And based on the performance for the first half of the full year, we are reaffirming our full-year guidance for higher adjusted net sales and earnings.

Second, our five growth drivers are gaining momentum. We have made significant progress with 4 positive FDA regulatory decisions so far this year and are seeking to deliver 250 new system placements. We're signing new co-development agreements in personalized healthcare, and these include for the first time the use of liquid biopsies often formalized in large programs to gain access to valuable molecular insights, as well as analyzing DNA and RNA simultaneously from a sample.

We're also driving the expansion of the QuantiFERON latent TB test towards $100 million of sales this year. And we are developing our capabilities in bioinformatics and next-generation sequencing technologies and, in particular, through the addition of BIOBASE, the leader in hereditary disease analysis to our portfolio, as well as through the launch of highly competitive gene panels for use on any sequencer.

Third, we are committed to disciplined capital allocation through targeted acquisitions, as well as by increasing returns through shareholders through share repurchase programs, and today we are launching our third $100 million program.

In closing, 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 for the Q&A session. Thank you.

Thank you. (Operator Instructions) Daniel Wendorff of Commerzbank. Please go ahead.

Good afternoon, gentlemen, and thanks for taking my question. Daniel Wendorff from Commerzbank. Two, if I may. One, a broader question also with regards to your guidance. The weakness you saw in -- or you saw with academic research customers, as well as with pharma customers in the second quarter and is that something we are going to see in the second half as well? And if you see an improvement there, what would that mean in terms of potential full-year performance for these two customer classes?

And the second question would be on the QuantiFERON-TB test. I mean, it sounds alright, what you're telling us; best test for different reasons, limited competition and huge market. And what would you expect -- potentially wrong way of asking it, and where do you see this test in 3 to 4 years' time in terms of sales? I mean, the overall market potential in [TUE] might be $1 billion. Of course, there might be additional competition, there is one additional test, But where do you see the really, truly addressable markets or in what area we would find this test in 3 to 4 years' time? Thank you.

Sure. Thanks, Daniel. I'll address the second question first and then the first one afterwards.

So you address the potential market for QuantiFERON-TB Gold, 50 million skin tests performed approximately a year in the Western or ex-China world, and this would calculate to about the numbers you described before and we're moving very rapidly and penetrating into that market.

Our primary competition is the skin test where we have enormous advantages, but also against the older competing test that is quite cumbersome to use and currently only available as a service in the United States, we are definitely outperforming and have been seeing some very good success and also gaining share, even against that.

But our primary competition is clearly the skin test. And this is a very core theme of all of our growth drivers. We see these as having very long trajectories of growth opportunity. And in this case, we see no end to this very good, very strong double-digit, high double-digit growth rate. And as we note, there's also a portfolio expansion that we're working on, so there are a number of additional products coming out that we're very much looking forward to report on around the QuantiFERON franchise to further create new opportunities. So, I think the easiest probably now is just to assume that we are expecting a similar, very strong trajectory for many years to come.

In terms of the second quarter performance in academia and pharma, academia was definitely disappointing, the performance there. It is about a fifth of our sales base, but still clearly very important to us. We had a base effect from 2013. Sequestration kicked in over the course of the second quarter into the third quarter last year, so we have a strong base effect that is factoring into the growth rates.

At the same time, we're seeing a more positive funding environment in the US in addition to the base effect possibly kicking in in the second half of the year. In addition, we're obviously focusing more on this market, in particular in instrumentation where we were focusing on some strategically important product areas and are now expanding the focus also across the full instrumentation line. The majority of the impact, as you see, as in instrumentation. And we would expect academia to, on an annual basis, a multi-year basis, to be on that trajectory in the low to mid single-digit numbers.

Dan Leonard of Leerink. Please go ahead.

Thank you. Peer, could you give us an update on your ability to convert -- now that you have additional FDA approval, is your ability to convert the lab-developed test market to your FDA approved products?

Sure. Well, the C. diff was approved in the first quarter and now CMV in the second quarter. We have a number of other assays coming forward we talked about in the HEI area, but also other areas that we see as cornerstone to creating more placements for QIAsymphony RGQ in the US and thereby seeing this conversion happen.

The important thing is to have a cornerstone menu of critical assays that are of certain significance, clinical significance or of a certain throughput to create a cost of ownership proposition for the QIAsymphony RGQ and then selectively convert the LDTs to these assays or even further support the LDTs, but now for us on QIAsymphony.

If we take the European market as an example, and we should never forget 60% of the diagnostic market is ex-US, and the example here for Europe is that we have over 20 assays, approved assays, cleared assays in Europe, CE-marked assays, and they are typically very selectively used to create a cost of ownership proposition to customers. They buy -- let's say on blood virals, some will be HIV/hepatitis accounts, others will be HAI accounts, others women's health accounts and then we start expanding the menu off that initial proposition.

So, having several of these foot holes is important for us. We have HAI and transplantation now coming forward. These are probably two of the most interesting products to disseminate. And so we will then look at selectively converting LDTs or even importing them over to QIAsymphony because the system is clearly also equipped to run both approved and LDT assays.

Tycho Peterson of JPMorgan. Please go ahead.

Thanks. Two just quick ones here. I just wanted to make sure I understand your comments on pharma and academic, Peer. You're certainly a little bit more subdued than your peers. And obviously, you have the top instrument comp for forma. So can you maybe just talk about the order trends exiting the quarter and are you in fact expecting a recovery in both of those segments in the back half of the year?

And then secondly, on the liquid biopsy platform, can you maybe just talk about the pipeline of interest beyond the AstraZeneca deal and how you think about commercializing that more broadly? Thanks.

Sure. Thanks, Tycho. I think the first question there are two answers to that. First, there's a base effect that will kick in in the second half of the year, primarily in academia. So, we continued to see a soft trend in the first half and many peers have also seen something similar. So life sciences is very often reported as a group at many peer companies, but if you go into the academic piece, I think the market continued to be soft in the second quarter, at least in terms of growth grate because of the sequestration base effect that we had.

So, that base effect should then annualize in the second half of the year, thereby driving up the growth rates due to that annualized base effect. And on top of that, the funding -- or committed funding for 2014 was actually quite favorable and we haven't seen a lot of that come in yet. And that, we hope, on top of that base effect could provide further gross stimulus.

In pharma it's a little bit more choppy. It's a smaller piece of our revenue base and individual programs can move up and down, so I wouldn't factor too much into that performance in the second quarter. So we had quarters with high single-digit growth rates and our low single-digit are flat sometimes, so it typically averages out to the mid-single-digit numbers. It can jump around a little bit based on larger programs.

And the second question was the--.

On liquid biopsy.

On liquid biopsy. Extremely important area for us, Tycho. The liquid biopsy success is defined by the quality of the sample processing and this is an area of unrivaled leadership for us. We clearly have extremely strong capabilities and franchises and also leadership positions in how samples can be collected, how samples should be stabilized, processed, enriched, isolated, purified, stored. And that's where the success of liquid biopsies are typically created. Isolating that extremely rate target nucleic acid from a highly complex biological specimen is extremely important for us. So, we have a broad array of products already out there in the market and are by far the leader. Be it in prenatal testing, be it in cancer testing, our products are the standard solution of choice.

In the cancer area, in the link to companion diagnostics we are creating additional utility because we can think about much easier screening programs to identify candidates for certain drugs without having to need assays or access to tissue samples. And we can also create monitoring tools to monitor the success of the drug and also potential recurrence. So, we're creating a complete continuum, a cancer care continuum versus just a stratification.

And the assay might be a real-time PCR, it might be a next-gen sequencing assay, it might be a small panel, but the sample processing will typically define the success of the downstream analytical result. And we're trying to create for many programs that we currently have with pharma not only a stratification companion diagnostic, but also the flanking product as well and this is getting a lot of traction. So, many of the programs now see this is an integral part of the clinical roadmap for the drug or the companion diagnostic.

That, by the way, leads to much higher assay sales, obviously. Instead of just doing the one-time stratification to stratify patients into a drug, we can create recurrence monitoring, almost like [VCR able] when in certain intervals retesting would occur. This is obviously also in our commercial interest for the assay sales.

Brian Weinstein of William Blair. Please go ahead.

Hi, good morning. Thanks for taking the question. Peer, can you comment a little bit as to whether or not you feel bioinformatics has what it needs at this point, or are there other opportunities for acquisitions? And then what does the pipeline look like for non-bioinformatics deals? You guys have had success, obviously, with Cellestis and then also, to some extent, with AmniSure and deals like that, but is there an opportunity to go back into some more kind of product type of acquisitions going forward? Thanks.

Absolutely. So bioinformatics remains an area of key focus for us. We have a very strong lead in this space and we have very successfully now formed teams and organization structures that are integrating these capabilities that we have into a very strong and cohesive unit.

We actually even created a known business area within our organization, lifting this to a direct report to me and we're spending a lot of time and focus on this area. We see this as an area of growth that is attractive for us. It is value creating for us and we see this as a long-term competitive advantage that we're creating in select areas of bioinformatics. So, the growth trajectory we expect will continue for quite some time, both organic and also strategic.

In terms of the deals that we see at the moment, yes, we're clearly looking out there. It is a very -- the market has clearly moved in other directions that it was let's say 5 years ago. But if we look back at the transactions we did over the last 5 years, they were, with hindsight now, incredibly successful and we -- starting with Ipsogen. We're the absolute leader in hemato-oncology testing both in next-gen sequencing now and also in real-time PCR.

With the acquisition of Cellestis we have created tremendous value. This is a great growth driver for many years for us now. With the bioinformatics franchises this is now quickly becoming the leading -- or it is already today the leading unit for next-generation sequencing in bioinformatics with extremely strong leadership positions.

And what we're looking for and continue to look for, and we're extremely selective in this area, are franchises that can delivery many, many years of growth trajectories. So we're not simply looking at filling holes right now, we have enough on our plate, but we're trying to identify areas that are synergistic and have long trajectories of growth that they can contribute to our company.

Scott Bardo of Berenberg. Please go ahead.

Yes, thanks very much for taking my questions, Peer. I have three. Just picking up on your comments that you made about you realizing something like $50 million worth of revenues in next-generation sequencing in 2013, just wondered if you could give a little bit more clarity there. Were you also sort of referring to the $25 million or so of bioinformatics revenues that you acquired actually throughout the course of the year so that your underlying was around $25 million consumables? Just wondered if you could then elaborate upon that a little bit. Obviously, we see some quite interesting technologies coming through from your V2 gene panels. Can you give us a sense of how you see that unfolding in terms of revenue potential for those consumables over the next year or two, just to give us a feeling for your non -- or if you like, your platform agnostic related business with consumables for next-gen? That's question number one, please.

The second question, it's obviously very pleasing to see strong progress with QuantiFERON as expected, certainly by your initial guidance. Can you share some thoughts as to why you're comfortable that the competitive environment for this technology is stronger than perhaps the HPV testing modality? I guess obviously group exposure to this one single test is becoming more and more, so we just want to get a sense over stability of that franchise. That's it and I have one follow-up. Thanks.

Sure. Okay. So the first question was on the next-gen portfolio. There I'd like to maybe clarify that not all of the bioinformatics revenues that came in through acquisition are actually next-gen sequencing related. So Ingenuity also has a very sizeable franchise that works with gene expression data from arrays or real-time PCR. So, the percentage of consumables and assays in that $50 million number is actually much higher.

The CLC, the bio franchise was predominantly next-generation sequencing related, but that was substantially smaller. The growth trajectory there we expect to continue to be extremely strong because we really just started. And the portfolio started developing over the course of 2011 and 2012. We started a lot of the developments. Consumables have shorter development cycles. We started launching in 2013 and now very significantly in 2014 and the portfolio's getting a lot of traction.

So, the capabilities that we have up front in sample processing, enriching of genes, content-specific enrichments I would say are almost second to none here in this space. And we have in the meantime a very sizable revenue base that we expect we'll be able to continue for a very long time.

Your second question was related to QuantiFERON. Every product has a lifecycle, but this product is very early in the lifecycle. The product has a very long trajectory of growth in front of it because the development of an assay like this is extremely tricky and needs access to a number of different technologies that are quite visible in the market. And so if something would occur in terms of new developments, it would be a multi-year development process. The validation of a technology like this is extremely challenging. Also, this is a very large clinical trial that would be required to validate this technology because you're actually detecting something that is very difficult to detect with other technologies; in particular, the skin test has a lot of holes in terms of its performance.

So, our capabilities there to see into the future are very strong. And that said, we're also developing -- and we'll talk about that very soon. We're developing a lot around that portfolio. The current product is extremely strong and beats anything hands down, actually, in terms of performance, validated by many, many peer-review journals, but we're also on top of that continuing development.

So, there is one older product out there that was -- that's a little bit older than ours and represents maybe a first-generation product. That, however, is extremely cumbersome to use and has significant workflow disadvantages. So, our product is really tailored here to extremely slick and easy processing and almost can't get easier and that is something that is giving us a significant competitive advantage over our competition.

Doug Schenkel of Cowen & Company. Please go ahead.

Hi. Good day and thanks for taking the questions. So I think I have just -- I guess three cleanup questions. The first is weather negatively impacted you in the first quarter. I was just wondering if there was some recapture of those lost revenues in the second quarter.

The second question is Japan revenue dropped a bit sequentially, which is of course a typical seasonal phenomena, but it grew very nicely year over year, although that was in part due to base effect. So cutting through that and keeping in mind the tax changes, it does seem like the second quarter was probably better than expected. I'm just wondering if you would agree with that.

And then the third question is just whether or not you would be willing to provide a status update on the commercial rollout of QuantiFERON in China, as well as your efforts to recapture latent TB share in Japan. Thank you.

Okay. So I'll take the second two and, Roland, if you could take the first one.

So in terms of Japan, the team did a very good job in Japan in the second quarter. As you correctly point out, there were some significant tax changes that led to quite some volatility around the first to second quarter change, including also the fiscal year impact. So, good performance. Everybody's a little bit cautious right now to see what is going to happen with Japan in the second half of the year and the team is going to continue to execute very well like they did in the second quarter. I'm confident of that.

It's a little bit early to make a prediction. Does it have a meaningful impact on our overall numbers? No, not really. It's a sizable piece of our revenue base, but Japan is not a fast growing country and, therefore, will not have a meaningful impact, in particular in terms of its academia portion.

The rollout of QuantiFERON in China is going very well. We're seeing great uptake. We're seeing a lot of new publications come out, many exclusively calling out our product now. And the uptake is fully in line with our expectations that were very strong uptake and expansion of the market. As we all know, it's a huge opportunity in terms of numbers. The pricing in certain segments even is very attractive and we're going after those first.

In terms of Japan, yes, we've been able to roll that back. And as many of you know, we had some delivery problems in Japan last year due to some import challenges that were related to quality cutoffs. That was alleviated now and we are seeing a very good rollback of the market. And it's just very, very difficult to run high numbers of tests on any alternative product, be it skin test or competing products, and so that has given us a good catch back of recapturing of the market share.

And in terms of question number one, I'm not sure if I understood correctly, Doug; otherwise please correct me. But I would say weather didn't have too much of an impact. I would say generally we are quite pleased with the performance in the second quarter. I would say the single biggest negative surprise for us actually in the second quarter was the performance of Russia, which clearly was something what came in negatively for us but, all in, we made our guidance in terms of the sales growth. We actually were better than expected in terms of profitability. Again, a 10% rise in profitability with a 5% sales growth is something where we're quite pleased with and we do believe that we have a good basis to move into the second part of the year.

Isaac Ro of Goldman Sachs. Please go ahead.

Yes, good morning. Thanks, guys. A question, Roland, for you on the numbers here just in your guidance. Organic growth looks like it should improve a little bit in the back half of the year, so I'm curious if you could maybe talk a little bit about a range of what you think is reasonable for incremental margins, just what's implied in the guidance that you have given the portfolio evolution that you've made and the restructuring that you've done in the company.

Yes, thanks for the question. First of all, I think the second quarter clearly shows the direction which we can go, a good margin improvement. And our overall guidance still remains at least 100 basis points for the year and this is also what we believe we can do midterm. So, it's clearly something that we believe is also achievable on a period longer than just 12 months. Same is true for cash flow. You have seen a very nice tick up in the first 6 months in terms of cash flow. We do believe that's going to continue not only in the second part of the year, but also going forward. So clearly profitability is in a much faster growth rate right now.

So thank you, Roland, with that answer. With that I'd like to close the call and thank you for your participation. If you have any questions or comments, please do not hesitate to call us and thank you for your time today.

Thanks. Bye-bye.

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

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