Qiagen NV (QGEN) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I am Sasha, your Chorus Call operator. Welcome and thank you for joining QIAGEN's conference call to discuss results for the Q3 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.

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

Before we begin, I would like to thank all of you for participating today at this unusual time for a QIAGEN results call. The reason for the change was our Supervisory Board meeting this week at our Silicon Valley site. We will return to our traditional schedule with the fourth quarter results in January.

On slide two, you will see the customary disclaimer. The discussions and responses to your questions on this call reflect management's views as of today, October 29th, 2014. We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations, or predictions of the future, and these constitute forward-looking statements for the purpose of the Safe Harbor provisions.

These statements 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 statements. For more information, please refer to our filings with the US Securities and Exchange Commission.

I would like to now hand over to Peer.

Thank you, John. Hello and welcome to our call today to discuss results for the third quarter and also for the first nine months of the year.

Our teams at QIAGEN are moving ahead to accelerate the pace of innovation and growth, and we have three messages for you today. First, we achieved our targets for the third quarter. As you saw in the press release, adjusted net sales rose 4% at constant exchange rates in the third quarter. And this was in line with our communicated target for about 4% to 5% growth.

These results include the expected decline in sales of our US HPV test portfolio, which created about 5 percentage points of headwind in the third quarter. In other words, our growth excluding the HPV headwinds in the US was 10% at constant exchange rates.

In terms of earnings, the adjusted operating income margin remained at 25%, while adjusted EPS was $0.27 per share and at the high end of the guidance set for $0.26 to $0.27 per share. We also had strong free cash flow of $72 million in the quarter.

Second, we are moving ahead on initiatives to accelerate innovation and growth, especially among our growth drivers that are creating a foundation for sustainable and long term expansion. These products together are growing at a solid double digit pace, now providing about 30% of our total sales.

There were many recent achievements, but I would like to quickly highlight the advances in personalized healthcare. First, you saw the news this week about our eighth master collaboration agreement, and this was with Astellas Pharma of Japan.

The Astellas collaboration involves a range of drug candidates in several therapeutic areas. Furthermore, this is another partner gaining access to our development capabilities and full workflows for both tissue and liquid biopsy processing and involving PCR, NGS, and multiplex multimodal testing technologies.

In terms of liquid biopsies, this is a very dynamic area. And we are active in this field across numerous collaborations, and have already standardized key areas of this emerging field with the automated solutions for liquid biopsy processing.

As discussed in our last call, the real challenge in liquid biopsies is not in the detection or sequencing. It is the sample handling, and that is where QIAGEN excels.

Also in personalized healthcare, we recently completed a PMA, or a premarketing approval submission, to the FDA for a companion diagnostic paired with a novel medicine. We are prevented by an agreement with our partner to say anything more about this project, but this is another milestone for us in terms of showing we can work effectively with pharma partners and deliver on extensive US submissions.

This also comes after the four positive FDA decisions so far this year, including our KRAS assay paired with the colorectal cancer drug, Vectibix, from Amgen.

Third, we are reaffirming our full year goals for higher sales and earnings. For adjusted net sales, we have tightened the original range to 4% growth at constant exchange rates, and also tightened the range for adjusted EPS to $1.08 per share, also at constant exchange rates.

So, in summary, we are pleased with the performance so far this year, and we are committed to achieving our full year goals while preparing for further innovation and growth for 2015.

I'm now on slide five, and wanted to share some perspectives on the sales development in 2014. As you know, we are working through the pressure on pricing in our US HPV franchise. Looking at the graph on the right side, the 35% decline in US HPV in the first nine months of 2014 was in line with our full year expectations for about 4 percentage points of top line headwind.

At the same time, we delivered a solid 9% growth at constant exchange rates from the rest of the portfolio in the first nine months of the year. And this is also in line with our full year goals.

We will provide our formal guidance for 2015 in January. But, as for some initial views, we have been saying publicly to expect US HPV headwinds to continue through at least part of 2015. Based on the current situation, this could be up to about 3 percentage points of pressure on total sales for the full year.

Some of you may be asking about the source of the renewed pressure, especially given that this product represented about 7% of total sales for QIAGEN in the first nine months of 2014. The reason is that we are securing longer term market share while renewing customer contracts in light of the challenging pricing environment which was driven by our competition.

While we can often achieve a premium price based on proven clinical superiority of our test, general pricing levels have continued to drop substantially. So, this is expected to have an impact in particular in the first half of 2015, but then we move through this issue once and for all as any change in pricing and volume from that level would not have a material impact on our overall financial results.

So, US HPV sales are expected to fall below 5% of our total sales in 2015. At the same time, the rest of the QIAGEN portfolio continues to grow at a solid pace. And the 6% organic pace, excluding the US HPV sales so far in 2014, provides a provisional baseline to consider going into 2015.

Once we get through this, the broader and more resilient QIAGEN portfolio, which spans some of the most exciting areas of molecular diagnostics and life sciences, is set to have a strong impact on the overall revenue base and become even stronger in 2015.

I'm now on slide six to provide an overview of results from our four customer classes. Our molecular diagnostics customer class is leading the performance, growing 6% at constant exchange rates in the third quarter, and at a faster 19% rate when excluding the US HPV franchise.

And this was on a base of about 46% of our total sales. When you analyze these sales, you have a run rate of about $550 million at this very high growth rate.

The gains in molecular diagnostics are coming from across our portfolio of growth drivers. We are seeing strong double digit consumables growth on the QIAsymphony system, and also for our overall portfolio of profiling assays that are used for disease detection and monitoring.

The QuantiFERON latent TB test continues to deliver growth at its 20% annual target.

Our personalized healthcare portfolio has also been growing at a solid double digit rate. And I want to note here that we saw significantly higher revenues in the third quarter of 2014 from companion diagnostic co-development collaborations, along with gains in kit sales.

As mentioned previously, many of our collaborations are not announced. But, even among those that we can make public, 2014 has been a very good year for QIAGEN in terms of expanding our portfolio of partnerships and assay development programs and milestones.

The improvements were further supported by our decision to build an industry leader in bioinformatics through the combination of Ingenuity, CLC, and BIOBASE with our own activities. And these sales' contributions were across all customer classes.

In the life sciences, we saw improving trends against the third quarter of 2013 and also against the second quarter of this year. In applied testing, we saw a return to high single digit growth in both consumables and instruments, and in particular strong demand for forensics and human identification products following the launch of some new investigator assays.

In the pharma customer class, we saw higher instrument sales in the third quarter, along with a similar single digit sales increase at constant exchange rates from consumables and bioinformatics.

And in academia, we have been seeing signs of improving customer sentiment, including in the United States. But, here we also saw a rather modest decline in instrument sales for the third quarter, along with largely flat consumable sales.

The sentiment is improving. But, keep in mind that funding levels are still far below levels seen a few years ago, and also that we have seen a shift in mentality, a much more cautious and prudent approach to spending that has taken hold in the US and Europe.

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

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

I am now on slide seven and would like to review our results in more detail. In terms of adjusted net sales, we delivered 4% growth at constant and actual exchange rates for both the third quarter and the nine month period, and with only a small currency impact.

However, we expect this currency trend to become negative in the fourth quarter. And I will touch on that later with our guidance.

For the third quarter, about 1 percentage point of total sales growth came from the CLC and BIOBASE bioinformatics acquisitions, while about 3 percentage points came from the rest of the business, including Ingenuity.

As for the first nine months, the 4% constant exchange rate growth has been balanced between contributions from the bioinformatics acquisitions and the rest of the portfolio.

Adjusted operating income rose 7% in the third quarter, at a faster pace than sales, and resulting in a 50 basis point increase in the adjusted income margin compared to a year ago.

In terms of margin gains, we were able to maintain the adjusted gross margin at 72%, and also absorbed higher R&D investments, which were about 12% of sales in the 2014 quarter compared to about 11% a year ago.

Sales and marketing expenses also declined slightly compared to a year ago, while margin benefits also came from efficiency improvements in general and administration.

For the first nine months of the year, we saw a similar trend in terms of adjusted operating income, generating an 8% improvement over the same period in 2013. The adjusted operating income margin showed about 80 basis points of improvement in the 2014 period, and that is after absorbing about 20 basis points of foreign currency pressure.

So, we are moving ahead toward our 2014 goal of at least 100 basis points of improvement from the 24.4% margin in 2013 under the new adjustment policy.

Moving down the income statement, adjusted income in the third quarter was up 6%, with adjusted EPS of $0.27 at constant exchange rates and on an actual basis. For the first nine months of 2014, adjusted net income improved at an even faster 8% rate, with adjusted EPS of $0.75 at both constant and actual exchange rates and a steady 21% tax rate compared to the same period in 2013.

I'm now on slide eight to review our adjusted sales in the third quarter by region and product category. In terms of the region, the fastest growth came in the Europe, Middle East, Africa region, which delivered 13% growth at constant exchange rates and about a third of sales.

The Nordic region and Turkey led the performance, and we are seeing some improvement in southern Europe as well. This regional performance also included revenues from the global customer agreement.

Molecular diagnostics sales grew at a double digit pace in this region, but pharma and academia results were slightly lower.

The Americas declined slightly in the quarter compared to the third quarter of 2013. And this was due to the US HPV headwinds, with this region growing 9% at constant rates excluding that impact.

We also saw an adverse impact on results in Mexico and Brazil from the timing of national tenders.

After a relatively slow period in the second quarter, the Asia-Pacific/Japan region returned to faster growth in the third quarter, delivering a 6% improvement at constant exchange rates.

We saw a good overall double digit constant exchange rate improvement in China, driven mainly by performance in molecular diagnostics. Japan also grew at a good pace in the quarter, and we were pleased with double digit gains in Korea.

In terms of the top seven emerging markets, results in the third quarter were disappointing and below the traditional double digit constant exchange rate pace, instead delivering a 1% sales decline at constant exchange rates and providing about 14% of total sales.

On the positive side, we saw solid double digit incremental growth in Turkey, Korea, and China, along with growth in India. But, that was offset by Russia as well as due to the timing impact of national orders in Mexico and Brazil.

In terms of product sales, consumables and other revenues, which includes bioinformatic sales, and this was 3% at constant exchange rates in the third quarter and provided about 87% of sales, maintaining the trend seen so far this year of single digit growth in this category.

Instrument sales advanced at the strongest quarter pace in more than two years, delivering 11% growth at constant exchange rates, and providing about 13% of total sales. And this was supported by increased instrument service revenues.

Reagent rental agreements are underway through ongoing QIAsymphony system placements, especially in molecular diagnostics, as we are moving toward our year-end 2014 goal of 1,250 total system placements.

Moving to slide nine, here you have an update on our balance sheet and cash flow position after the first nine months of the quarter. On the right side of the slide, you see the improving trend in free cash flow during 2014, which was 18% to $72 million in the third quarter of 2014, compared to the same (technical difficulties).

We had cash restructuring charges of about $65 million during 2013, and about $10 million of cash restructuring charges in this year. But, beyond that, we are generating significant improvements from efficiency programs.

We continue to have good liquidity and a manageable net debt position, with leverage remaining at about 1.1 times net debt to adjusted EBITDA. This enables us to support the third $100 million share repurchase program underway, as well as maintain strategic flexibility.

I would like now to hand back to Peer.

Yes, thank you, Roland. I'm now on slide 10 to review a few of our growth drivers that continue to deliver a strong double digit gain and now represent about 30% of total sales. And we expect this to increase to about 40% in 2015.

On the QIAsymphony automation platform, we are moving ahead to deliver 250 new placements in 2014, which would put us at about 1,250 cumulative placements at the end of the year, making it one of the most widely placed systems, if not the most widely placed system, for medium throughput molecular processing.

A key driver is the expanding menu of the addition of seven tests so far in 2014 in the United States and Europe on the Rotor-Gene Q, the PCR component of the workflow. With growth of about 20% at constant exchange rates and on track to exceed $100 million in 2014, QuantiFERON has already surpassed the size of our US HPV franchise and is now slated to top our global HPV franchise.

We expect a 20% constant exchange rate growth rate into 2015 and beyond based on the strong demand for this product as the new gold standard for latent TB testing.

The total addressable market for QuantiFERON is actually expanding. We have told you before about the US Preventative Services Taskforce guideline review that is underway in the United States, and that will take a few years to be completed. We also mentioned that clinical data has been showing the need for testing of people with type 2 diabetes.

Both would have a big impact on the total addressable market for latent TB testing, and in particular for QuantiFERON TB Gold, since it was the key test to demonstrate this.

The biggest impact and what is new just as of Tuesday is the announcement this week by the WHO of comprehensive new guidelines for prevention, care, and TB control that now includes screening and treatment for latent TB infection to avert progression to active disease.

We applaud this decision, which will affect more than 100 low and intermediate incidence countries, and these include Brazil, Mexico, and China. As for the expansion of the total addressable market, we believe QuantiFERON is well positioned to take a leading role in this new strategy, especially as we are nearing commercialization of the fourth generation of this test.

I'm now on slide 11 and want to give an update on our sample technology portfolio for use in liquid biopsies, which is a new, noninvasive technology that, as an example, is being used for detection of disease biomarkers in cancer.

To help you understand this area, the focus is on target classes derived from blood, plasma serum, cerebrospinal fluid, urine, or other liquid samples. These targets are free circulating DNA being released from tumor cells, the circulating cells being shed from the tumor itself, or the exosomes containing RNA that are being secreted from tumor cells.

This bar chart shows the explosion in publications on this topic. Liquid biopsies were a hot topic at the recent ESMO conference in Madrid, with a number of posters and peer reviewed papers showing very positive results from using liquid biopsies to capture molecular insights that will help guide treatments for cancer patients.

These can be in patients with diseases such as lung cancer where getting tissue tumor material can be challenging, or in monitoring a patient after surgery to remove the tumor.

We have been expanding our industry leading portfolio of sample technologies during 2014, in particular during the third quarter with the launch of the new exoRNAeasy kit to isolate exosomal RNA from serum or plasma even from a sample as small as one milliliter.

Customers are using our portfolio to generate fascinating insights. As one example, the Pediatric Hematology and Oncology Department at the Hannover Medical has been using these technologies in QIAGEN's REPLI-g single cell kits, which makes single cells accessible to next generation sequencing analysis to perform comparative studies of leukemia stem cells and control stem cells.

These new sample technologies are becoming an essential part of our pharma collaborations. As you may have seen, AstraZeneca received a positive European regulatory opinion in September from the CHMP to include blood-based diagnostic testing for patients who could benefit from treatment with the lung cancer drug Iressa, but are unable to provide a suitable tumor sample.

We applaud this development with our partner, and look forward to advancing the use of these innovative blood-based tests to drive better treatment outcomes for patients.

I'm now on slide 12 and want to share some news on the progress being made in our offering of next generation sequencing, universal solutions, and bioinformatics. A recent milestone was the integration of the 14 GeneRead DNAseq V2 gene panels, which span a wide range of cancer and translational research applications with our Ingenuity Variant Analysis bioinformatics solution.

This is a tangible milestone in achieving our ambition to offer universal products that address key bottlenecks holding back the adoption of next generation sequencing translational research and clinical diagnostics, as well as complete solutions such as the GeneReader workflow that is in development and on track for commercialization in the second half of 2015.

In this case, the bottlenecks to NGS are the need for reliable and proven gene panels. Studies are showing considerable variability among the different competitor offerings, and the need to link assays to the highest quality data analysis and interpretation.

This slide shows you our comprehensive offerings to generate insights for different customer needs, ranging from basic discovery research with RNA and DNA through to translational medicine requirements and then on to routine clinical diagnostics.

As we announced at the recent ASHG conference, adoption of our universal bioinformatics solution is growing rapidly as we continue to integrate and expand the capabilities and knowledge bases of CLC bio, Ingenuity, and BIOBASE, and bring that together with the lab workflow solutions of QIAGEN.

And that is reflected in recently achieving a milestone of more than 250,000 human genomic samples having been used with QIAGEN's bioinformatics interpretation solutions.

Next generation sequencing is not about generating gigabytes of data from the most technically advanced machines. It's about offering customers a range of solutions that provide a means to transform biological samples into valuable molecular insights, and it is about those insights having an impact on treatment decisions or advancing our knowledge of a disease.

This is the motivation of our teams, to move ahead and take advantage of our competitive strengths in the terms of sample technologies, leading clinical assay development capabilities, experience in automation solutions, and leadership in bioinformatics.

Moving to slide 13, I want to share with you some perspectives on our efforts to support public health agencies in the fight against Ebola. Here we are building on our proven capabilities as a leading provider of diagnostic and surveillance solutions in previous health emergencies, in particular the H5N1 and H1N1 influenza outbreaks, as well as the SARS and MERS Respiratory Syndrome outbreak.

Our teams are working closely with international organizations and research institutions in Africa and elsewhere around the world to provide testing components and automation solutions for Ebola virus detection.

As one example, QIAGEN products are part of the protocol of the US Department of Defense, in particular the QIAamp Viral RNA mini kit that can be automated on the QIAcube. And this is the most widely used protocol for Ebola detection in Western Africa.

This screenshot from CNN in October shows the role of our product, in this case at the Walter Reed Army Institute in Bethesda, Maryland, and in particular a QIAcube and assorted QIAGEN kits in the background. The WHO is using the QIAamp viral RNA kit in 15 African countries for Ebola testing.

The Ebola test used by the DOD received FDA emergency use approval in August. In addition, the DOD also relies on the QIAGEN EZ1 instrument and the EZ1 virus mini kit for testing of non US citizens. The DOD has shipped these products to Liberia for Ebola testing, and we are seeing demand from agencies in other countries that are sending teams to Africa.

We're working with the US Centers for Disease Control on how QIAGEN can further support their efforts as well, and they have an emergency use authorization in place using the RNeasy sample technology kits.

We also recently signed an agreement for commercialization of complete test kits with our Hamburg-based partner, altona Diagnostics. This test is already CE marked, and will be made available as part of a full QIAGEN solution through our commercial networks very shortly.

This will enable QIAGEN to offer a full solution from biological sample through to insight. We will provide updates on regulatory milestones when they are achieved.

Beyond these commercial activities, QIAGEN is supporting numerous activities to study the Ebola virus, including a project initiated by the Broad Institute and Harvard University in collaboration with the Kenema Government Hospital in Sierra Leone through donations and assistance to set up local testing infrastructures.

Of course, no one wants this deadly outbreak to become more severe. The business impact to date has been modest and has not had an influence on our 2014 guidance. Given the unpredictable nature of the Ebola situation, it would be inappropriate to speculate on potential revenue implications should the outbreak expand.

Moving to slide 14, today we are announcing the appointments of two internationally experienced industry executives to our Executive Committee. First, Dr. Laura Furmanski joined QIAGEN this summer in a newly created role as Senior Vice President of our bioinformatics business area. She is leading our rapidly growing presence in this area, and is based at our QIAGEN Silicon Valley office.

Laura joined from McKinsey & Company, where she was a partner in their Silicon Valley office, and worked with many med-tech and life science companies on a range of engagements.

Manuel Mendez was appointed Senior Vice President of Global Commercial Operations in October. He's a 25 year veteran of the life sciences and diagnostics industries, having most recently served as Americas' Executive Vice President at bioMerieux.

Prior to that, he held leadership positions with OraSure, Thermo Fisher, and the Abbott Diagnostics business. He has had a truly global career, with assignments so far in the United States, Latin America, Europe, and Korea and Japan.

Manuel succeeds Benedikt von Braunmuhl, who chose to leave QIAGEN for personal reasons. I would like to thank Benedikt for his outstanding contributions in Latin America and Europe and also globally in his most recent role, and wish him all the best for his future endeavors.

These appointments show the ability of QIAGEN to attract top talent and further strengthen our international leadership team.

And with that, I would like to hand back to Roland.

Thank you, Peer. I'm now on slide 15 to review our guidance.

For the full year, we have tightened our adjusted net sales target to 4% at constant exchange rates. And this is in line with our original 2014 guidance for about 4% to 5% constant exchange rate growth.

This is based on about 8% constant exchange rate growth from the portfolio, excluding the US HPV test, with headwinds of about 4 percentage points from the US HPV sales.

Adjusted operating income is expected to grow faster than sales, and generate at least 100 basis points of margin improvement.

We also tightened the range on adjusted diluted EPS to $1.08 per share at constant exchange rates, which is the midpoint of the 2014 full year range.

These expectations do not take into account any further acquisitions this year.

Back in January, we announced adjusted EPS guidance at constant exchange rates in anticipation that some currencies would move against the dollar during the year. Based on recent trends, especially since September, the dollar has strengthened against the euro and some other currencies, especially in countries where we have rising sales but rather limited costs.

So, we now expect a modestly negative currency impact on full year sales of up to about 50 to 100 basis points, and currency related pressure on adjusted EPS that could potentially be up to a rounded $0.01 per share.

For the fourth quarter, adjusted net sales are expected to rise about 4% at constant exchange rates, and adjusted EPS of $0.33 also at constant exchange rates.

This slide also contains the adjustment assumptions. For the full year, we continue to expect about $120 million for amortization of acquired intellectual property, and about $15 million for business integration and acquisition items.

We also tightened the guidance for the adjusted tax rate to 20%, while the number of shares outstanding remains at about 242 million.

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

Yes, thank you, Roland. I'm now on slide 16 for a quick summary before we move into Q&A.

We're pleased with our performance during the first nine months of 2014, moving ahead on initiatives to accelerate innovation and growth while working through headwinds created by the US HPV franchise.

Let me review what we have announced. First, we achieved our targets for the third quarter with higher adjusted net sales and earnings per share, as well as a solid increase in free cash flow.

Second, we are moving ahead on initiatives to accelerate innovation and growth, especially among our growth drivers that are expanding at a solid double digit pace and currently provide about 30% of total sales, moving towards 40% in 2015. They form a foundation for sustainable growth in the coming years, especially as we work through the final year of US HPV headwinds in 2015.

Third, we are reaffirming our full year 2014 guidance for adjusted net sales and earnings growth over 2013. We are committed to achieving our full year goals, and preparing our teams for further innovation and growth in 2015.

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

Thank you. (Operator instructions.) To ensure we can accommodate as many people as possible, please limit yourselves to only one question. (Operator instructions.) Derik de Bruin, Bank of America.

Hi. Good afternoon.

Hey, Derik. How are you?

You've made some really good progress in the op margin this year, 100 basis points of expansion. But, I guess how should we think about that for 2015, particularly since the currencies, I know, will give you -- potentially give you some benefit? And I guess just also for modeling purposes, how are you sort of thinking about the FX on the top line for next year?

Roland, do you want to take that?

Yes, sure. Hi, Derik. Yes, in general we still feel very positive of the momentum we really created here over the last 12 to 18 months. And so, we rather believe that we are able to continue that positive trend also into the quarter of 2015.

Clearly it's also, to a certain extent, depending to the revenue guidance which we are giving early next year. Nevertheless, if you look on the different drivers for that, a couple of them are doing quite well, if you look on our shared service centers, all the things we were able to do in administration, integration and globalization of our procurement efforts.

So, we feel comfortable of at least 100 basis points. And again, you see it also now finally really pushing it through on the cash flow side, so things coming together quite nicely.

Daniel Wendorff, Commerzbank.

Yes, thanks for taking my question. It's actually relating the HPV franchise. And Peer, you mentioned that a number of contracts were prolonged in the US, and this would burden the first half of 2015. So, my question on that is how long do these contracts normally last? If I've got it right from the past, these were around two year contracts. Is that still valid?

Hello, Daniel. So, it's -- well, we're signing every year hundreds of agreements that are coming up for renewal, and they can extend anywhere between -- even down to one year. I'd say the majority are somewhere in the range of three years.

And the important thing for us clearly this year, as the competition has reset the pricing levels, that we're actually able to secure a very large portion of them even now, despite that the pricing is lower. It gives us a very strong market share and position also within these accounts for several years to come, from which we can expand with other offerings.

So, they're typically in the range of a few years. The average duration, I assume, is around three years.

Tycho Peterson, JPMorgan.

Thanks. I guess a question on bioinformatics. You announced fairly senior hire. You announced the Genomics England project, and you've kind of integrated Ingenuity with the Cancer Research Workbench now. So, can you maybe just talk about, A, the pacing of Genomics England, when that flows through? B, are there still gaps you need to fill on the informatics side? And then, C, just any feedback on Ingenuity with the Cancer Research Workbench at this point.

Sure. So, in terms of the portfolio, to start out with that, we have an incredibly strong position in secondary analysis which we are expanding through offerings that are tailored to specific type of users, be they cancer researchers or others.

So, just for those who have never seen these types of tools, the analysis, the secondary analysis of next generation sequencing data is incredibly complex with many, many different ways to ultimately get to the definition of what is a variant. And we are expanding and tailoring that to the different needs.

We already today have by far the largest offering in the space. And so, that position is one that we're building from a real position of strength, and that will continue.

And very similar in the interpretation area, where our knowledge bases are -- we're actually accelerating the efforts in this area to further broaden their capabilities. And this is going at a very rapid pace.

What you saw, for instance, at ASHG is that we're now starting to integrate them, and not only the Ingenuity variant analysis or the Ingenuity clinical systems with secondary analysis from CLC bio, but now also the HGMD franchises from BIOBASE.

And the problem in bioinformatics today is that there are many, many different tools, but there are many small individual tools that are not aggregated. We're creating something very seamless for our customers, targeted towards their applications.

The response of the market is actually very, very positive. So, this seamlessness takes a lot of complexity and interface management out of the system, which in software is just deadly. As systems continue to be upgraded and enhanced over time to ensure a certain seamlessness is extremely valuable for our customers.

In terms of now large contracts, we are very successful as obviously the key go-to resource for interpretation secondary analysis. We have a very strong and competitive position to offer. We have mentioned the 250,000 genomes that were, for instance, processed already -- or genomic samples that were processed in our -- this compares to a few hundred or a few thousand that you see even in very large institutions.

So, this number, 250,000, is one that is just miles ahead of anything else that is out there. And I think this puts us into a very strong position for large scale genomic analysis studies that, for instance, you referred to before.

Peter Lawson, Mizuho Securities.

Peer, just on the HPV business, where are you seeing the most pressure? Is that from large competitors or small private companies? And then, when do you think that business stabilizes?

So, it's very different in terms of the geography. So, the HPV franchise ex US is actually doing quite well. We're very successful. We're winning almost every major tender. We're moving ahead quite rapidly in developed, but also in less developed countries.

And there, typically ex US, we see competition, many, many players, small players. But, we are by far the majority share player there.

The situation in the US is very different, that we clearly have an oligopoly or a few players basically in this market. And what happened was that, due to very poor uptake of competing tests, the pricing button was pushed and the pricing levels collapsed.

And while we are still able to command a premium in many cases, it is quite clear that, if customers have a price of X, it's tough to charge 2X. And so, we've been forced to go along with those pricing levels.

Competition is, in the States, across the three other players basically that are on the market; really only two at the moment.

Doug Schenkel, Cowen & Company.

Hi. This is Ryan Blicker filling in for Doug. A couple on QuantiFERON. How is the launch in China tracking relative to your expectations, firstly? Number two, can you talk a little bit about QuantiFERON in Japan and how successful you've been in winning back those accounts that you lost previously? And lastly, can you provide any additional color on commercialization timelines for TB Plus? Thank you.

Sure. So, the first question, QuantiFERON China is moving ahead well. As you know, we were the key partner in all of the major studies that provide -- created some groundbreaking also clinical evidence for the Chinese market. Our product was the test of choice and therefore validated the benefits of our product quite impressively for the Chinese market. So, this is moving ahead quite rapidly.

And the uptake of these large screening programs or even subgroup testing is typically also here's something that you don't see a step change suddenly happen, but you start seeing an acceleration over time. This was built into our plan this year, but were fully in line with our expectations for the Chinese market.

The second question was on the Japanese market. In Japan, there was one disruption in 2013. That had to do with the supply chain being disrupted for a certain period of time for the Japanese market, which led to the loss of one account, as described, in Japan.

And we have been very successful in regaining share in the Japanese market all together, with that one exception. But, the evidence is very clear now in the meantime also being built that alternative solutions are providing significantly inferior results. And I think that strong evidence is -- it's just a matter of time, hopefully, for this to convert.

And we're doing all we can. And I think the rest of the world has clearly shown that the QuantiFERON solution is the way to go.

In terms of the QuantiFERON fourth generation product, we are progressing very well on that product. It has some unique new features -- I will leave it at that for now -- that also open up new opportunities and new market segments. And we'll talk about that as that launch nears.

Isaac Ro, Goldman Sachs.

Good afternoon. Thank you. A question on liquid biopsy. This is an area where I think you've been talking a little bit more about the assets that you have and the opportunity for growth. That said, there's clearly a lot of other technologies out there in the marketplace that could be disruptive. So, how would you kind of put the opportunity in liquid biopsy in context for your M&A priorities versus some of the other initiatives you've had in informatics or sequencing, for example?

Sure. Well, see, for us liquid biopsy is a sample technology basically. It is the ability to enrich very scarce amounts of molecular targets from biopsies that are more easily accessible than tissue.

And there in that market, I'm not really sure what you're referring to as disruptive change. But, in the free circulating DNA area, we have an extremely strong position in that area, and also in the RNA. In the exosomal RNA, I think we're basically the only widely available product in the market today.

And so, we're definitely working intensely to standardize sample technologies in these markets, just like we've done in so many other areas of sample processing where we have shares of 50%, 60%, 70%. And this is the starting point for liquid biopsy processing.

We have not been active in circulating tumor cells, and that might be what you're referring to. Circulating tumor cells have some benefits. They also have some disadvantages. And we see with the new molecular techniques that exosome and cell-free DNA is becoming a method of choice.

It started out -- I think cancer is going to be the real opportunity to show the benefits of these technologies. Currently a lot of the activity is in the area of prenatal testing. That has slightly different needs and is, maybe on the long term, a separate area and not really a liquid biopsy as we would define it ultimately for diagnostic testing, for instance for tumors.

In terms of the M&A, if you'd ask if there's something out there that would be interesting for us to acquire in liquid biopsies, I'd struggle to find something that would be something that we would need to actually deliver on a very exciting future for our liquid biopsy franchise.

So, that means that the focus that we have in M&A is clearly along the growth drivers. And buying informatics was a big focus over the last 18 months and will continue to be. And we are, however, also looking at other areas, and I think the news flow will then further validate that.

Dan Arias, Citigroup.

Yes, afternoon. Thanks for the question. Just wanted to ask about the early days of the C. diff assay uptake. How are you finding that market to be, just given the landscape?

And as a related question, if I could, it seems like CMV and C. diff are both sort of need to have assays for hospital labs. So, I'd be curious just to hear how much bundling, if any, you're doing there with those tests.

Absolutely. I think they're two -- you're absolutely right that hospitals -- it's a cornerstone for a hospital, and the QIAsymphony provides an excellent testing platform for these medium size hospitals, as it allows a broad array of different tests, including LDTs, to be run on it. The same is true for cytomegalovirus. That should be closer to patients, as it is a monitoring assay.

We are seeing a very significant interest in C. diff. We already converted first accounts. We have a very strong franchise already in CMV. We've had a CMV franchise since -- almost 10 years. We were under an exception from FDA to continue selling the ASR prior to the approval of the CMV assay this year, which basically allows us now to convert the existing users over into the PMA approved product.

So, CMV is not a new area for us. It's one in transplantation testing where we have an incredibly strong franchise. And I think it's one that we'll be able to talk more about also going forward. There's a lot of exciting things happening in this area.

In hospital-acquired infections, this is simply an add-on to the QIAsymphony to provide value to the hospitals that are thinking about putting instrumentation in. That assay also gives them a certain amount of base volume that allows reagent rentals to happen.

Zarak Khurshid, Wedbush Securities.

Hi there. Good afternoon. A couple of questions on cash flow for Roland. How did the working capital improvement play into cash flow? And then, how sustainable might that be, and generally how much does HPV contribute to cash flow? Thanks, guys.

Working capital improvement is a smaller part of it. It is clearly one part.

But, at the same time we would see the majority coming from operational efficiency, really about the projects we started earlier in 2013, and then finally I would say coming through all the time and giving us a quite significant impact here.

So, I think that it's clearly something where we believe also going forward we see even larger contribution coming from three again. Typically, you do these efficiency programs by starting and rolling it out in a limited area, and then you take it over in a region onto a global base so that you have one entire -- to have it in a controlled setup. At the same time, of course, you're creating larger impacts on a longer time period.

Another thing that we of course -- and to your second question around HPV contributions, HPV on the balance side clearly still is a business with a good gross margin. At the same time, you have to have in mind that this still is the part of our business which has two sales forces. As you know we have a clinical as well as a laboratory sales force.

So, in terms actually in EBIT contribution, I would say it's below company average. And I think that it is also something to have in mind. And that's also a reason why we are able actually to absorb quite nicely the impact we are seeing here from the revenue side.

And at the same time, with bioinformatics of course we have a huge opportunity going forward, because bioinformatics, to a large part, has even higher gross margins than we have seen and are used to from the HPV side. So, I would say the product mix is also quite helpful for us.

Vijay Kumar, ISI Group.

Hey, guys. Thanks for taking my question. Peer, I have a big picture question for you. And I guess when you look at the QIAGEN story, right, obviously you had a challenging time with some of the challenges in the US on the HPV side. I guess the question is after 2015, right, and assuming HPV stabilizes, I think the core part of your business has been doing high singles, right?

And I think if you look at what -- the key growth drivers out there have basically been QuantiFERON, TB and profiling within molecular diagnostics. I guess given some of your comments on Q TB were reasonable, that market is expanding and 20% growth rate in Q TB is a reasonable assumption. But, in the medium term I guess, what's going to drive that strong double digits within profiling or other parts of your diagnostic business, right? And to that extent, how key is GeneXpert to that thesis? Thank you.

Sure. If you look at the portfolio, the diagnostics portfolio overall, you saw very high double digit growth again in the third quarter, excluding the HPV headwinds. And these are a significant degree of pricing headwinds.

So, we still maintain a very large number of accounts. And now this product is down to 5% or less of sales going forward. So, I think we're seeing stabilization probably happen over the course of 2015, which means that the rest of the growth seems to shine through.

And while clearly we're fully aware this is an impact that we are moving through and therefore it also demands a certain amount of attention, if you look at the diagnostics portfolio, you have several hundred millions of dollars of profiling tests and franchise that where you have the QIAsymphony now being the harbor or the carrier for all that.

And we are moving forward quite aggressively in an early stage of that product life cycle. So, we talked about four approvals in the States, but we have about 23 assays in Europe running on this.

And we just launched the whole hospital-acquired infections portfolio in Europe and a whole suite of STD products as well, and are really charging ahead in the 60% of the world which is not the United States. And now finally in the United States we're seeing very good uptake following the FDA approval.

That's several hundred millions of dollars of opportunity that we basically have there. And personalized healthcare we talked about. I couldn't imagine something more fascinating. We're seeing the assay technologies, the platforms, even the software elements now come together.

We're signing up record agreements. I couldn't imagine anybody having even a tenth even of the number of partnership that we have in the molecular field. And we've clearly proven the capabilities also on the regulatory front in the US, but also globally.

And so, that franchise doesn't need now a rocket or an engine or anything. This is a very long term growth driver, and QuantiFERON certainly as well, that has already proven very high growth rates, and will continue going forward as we expect to do so as well.

So, if you just run the math and see HPV starting to lose its headwind impact, the growth profile is actually quite attractive. And if you look at the individual market segments, a significant premium even compared to what you see from other players in this space.

So, we are aggressively funding growth drivers in the long term, even on the medium term. And they will have an impact even on the medium term on the growth profile and the profitability of the company.

Because as was mentioned before, clearly if you have the headwinds on HPV, that also has an impact on the operating income and cash flow, as the question just alluded to before. And that's something we are working through as well. And that will hopefully then move out of the picture in 2015.

And obviously 2015, with a number of different launches -- I'll only mention next gen, but there are hundreds of other things that are coming forward in this area -- as well I think could be an exciting year for us.

Dan Leonard, Leerink.

Thank you. Another one on HPV. So, for US HPV to be a 3 point headwind in 2015, that seems to imply another decline of about 40% year-over-year. And so, my question is, one, is that math right? And then two, as you look now at your budget for 2014 and the US HPV is coming in I think worse than you planned, is there a primary -- you have a number of growth drivers, but is there a primary offset you'd put up on a pedestal to say that this offset the decline in HPV?

So, to -- we expect the decline to be pretty similar to what it was this year. So, we had a decline this year in plus/minus 30%. And the decline was, to a significant degree, pricing.

If you assume that that would continue for a certain period of time, as these pricing levels have been set at a certain level we're not seeing dramatic declines anymore. That was kind of like a step change due to in particular one competitor and then another following.

That has kind of like floored at a level which is really not far away from chlamydia and other tests, which kind of gives you a sense that this is maybe a level where you wouldn't see a similar step change, at least certainly not in terms of dollars.

So, from that perspective, we are actually fully in line with our targets for this year. It came in pretty much as what we had predicted for the year also in terms of overall headwind.

What offsets it is, if you look at the third quarter, you see almost 20% growth in the molecular diagnostics franchise ex HPV. You see a very, very strong underlying growth, which kind of like sometimes is not in the limelight because we see QuantiFERON as a very strong $100 million growth driver, and we see HPV as a negative impact. But, just personalized healthcare and the profiling portfolio, primarily Symphony, are very strong growth drivers.

Jeff Elliott, Robert W. Baird.

Yes. Thanks for letting me in here. First one on the instrument growth. As you mentioned, really strong growth there, the strongest that we've seen in some time. Was some of this pull ahead from the fourth quarter, I guess? And what's behind the growth and how sustainable is that?

Excuse me. The audio was not -- didn't work. Could you repeat the question? I'm sorry.

Yes. The question is on the instrument growth in the third quarter. Like you said, it's the strongest we've seen in some time. Was some of this pulled ahead from the fourth quarter, or what's behind the growth you saw in the third quarter?

No, I think you sensed in the call in the second quarter that we were -- that's a good catch. We were quite dissatisfied with the instrument performance moving into the second half of the year.

We made some changes in the way we managed the funnel and also in the way the instruments are packaged to our customers. So, we've started to see a reemergence in growth also in terms of the assay portfolio, new assays coming online that are reinvigorating growth of instrumentation sales.

So, I'd say that is more an execution issue. The teams have been doing a very good job now since a few months managing that funnel.

Gunnar Romer, Deutsche Bank.

Yes, good evening, guys. Thanks for taking my question. First one would be to Roland on the likely FX impact on your top line next year. I think this question was already asked earlier, but I probably missed the answer. So, what would be your best guess, given current spot rates, what the impact on your top line would be next year?

And then, if I may have a second question, on the companion diagnostics pipeline, how should we be thinking about that pipeline evolving into next year and potentially translating into sales? When would you be expecting the first significant contributions here?

Roland?

Currency is always a good question, Gunnar. Of course, if I take Deutsche's expectations, then we have still a significant drop to expect.

But, putting that aside, if you would use current rates, I actually don't think it will be too much of an overall topic for us. We would probably have it in an impact that you will see on the rounding side, not necessarily in terms of changing our overall growth rate.

As you know, that's also a reason why we will give constant exchange rate growth rates on the revenue side, which makes it then very transparent in terms of what is the overall growth rate going forward on the revenue side.

On the profitability side, I would say it probably is helpful, of course, on the margin side. It's a question on the absolute dollar side. If it stays as it is right now, it is probably also something which is more in the rounding.

Might be $0.01, might be $0.02 on a full year basis for this year. If you see so far for the nine month period, it was more or less nothing. And we expect now up to $0.01 for the remaining quarter.

Again, I am not too pessimistic on the currency side, as our natural hedge on the profitability side is actually working quite nicely. You typically get hit only by this event if you see one specific country, seeing on Brazil, seeing on Turkey, Australia has very significant developments in a typical period. But, typically that also works out on a global basis as some other countries work in a different direction.

So, again, we have to mention it, and we do so. But, at the same time, I think it is very well manageable from our perspective.

Yes. I think it's a very specific profile that we have as an overall company.

Back to your first question, how do we see the revenues typically kick in. So, again, reiterate there are basically three components within that personalized healthcare portfolio part of it. It's by far the minority that are service related revenues.

So, the development milestone that we are able to achieve, that's sometimes difficult for us to manage. You can easily have 1%, maybe even 2% related in organic growth sometimes floating up and down for an overall company. So, easily $5 million, $6 million up and down per quarter in terms of the development milestones.

That doesn't really mean much. These are multiyear programs, and we're typically paid on specific milestones to offset the cost of development. Then we have by far the majority is consumable and assay and instrument related. And that is a very fast growth portfolio, and together approaching $100 million.

This is a very important and large franchise for us that typically then you generate revenues when the assays kick in. We're less interested in the development milestones. That's more an opportunity cost protection in case a program is discontinued.

We charge cost plus here with the assays, however. That is where we effectively can scale on a global basis. And there we already have about 20 assays in Europe. We have now four in the States that are approved. And we are moving forward quite aggressively in building that menu again.

We just filed a further PMA that we can't talk about. The majority of our partnerships actually we can talk about, but you just see the headline numbers. It's the tip of the iceberg that is already quite impressive.

Tim Evans, Wells Fargo.

Hi. Thank you. I was hoping I might ask a little bit more about the strength in the instruments, particularly in the pharma customer base. Can you talk about -- a little bit more about the dynamics there and maybe also by geographic region?

Sure. If you talk about pharma, it's predominantly US and, to a certain degree, also Europe.

But, in particular if we look at instrumentation in the third quarter of this year, and hopefully this will also carry into future periods, instruments is always a little bit more lumpy business depending on the instrument and the capital cycles and the budget cycles.

But, effectively taking the portfolio that we have, and it's a very, very good portfolio across sample and assay technologies, we've simply improved the funnel management in this area and focused more on the instrumentation side, versus in the first half of the year where we were more focused on some of the reagent and the new assays that were coming in, the next gen sequencing portfolio and others that are actually doing very well.

And so, with additional resources on the instrument funnel starting in the second quarter of this year and moving into the third, you hopefully see the first signs here in the third quarter. And we look forward to further success in that area.

Paul Knight, Janney Capital Markets.

Good evening. I wonder if you have a target growth rate on the personalized medicine business, or what should we really think for on a multiyear period. Is it contract by contract, or should we assume 20% type growth? What's your thought on the business plan?

So, if you look at the overall revenue in that area, it can be anywhere between 20% to 30% is related to development milestones. And we don't expect this to grow at very high growth rates.

We're scaling like crazy in the Manchester site that we have. We already have a couple of hundred assay developers. And for those of you who know the industry, this is probably one of the largest assay development sites in the world. And we're scaling quite aggressively that capability there, but that won't grow at the same growth rate as the scalability of a kit sale and an instrument or reagent sales to pathology labs.

So, be they real-time PCR or be they next generation sequencing panels or be it the related equipment and consumables for that, we see a very strong growth opportunity for this. And we're in the early days of personalized medicine. We're not playing it for 2015 and 2016.

These are growth rates that we assume are well in the double digits, but we're playing it for -- I'll say here this is a very long term high growth driver for us, just like QuantiFERON, just like QIAsymphony, just like bioinformatics, and just like NGS. So, we're lining up multiple growth cylinders that have multiyear perspectives in front of them, and fueling them aggressively.

So, thank you very much, Peer. And with that, I would like to close this conference call and thank all of you for your participation. If you have any questions or comments, please do not hesitate to give us a call. Thank you very much.

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