Qiagen NV (QGEN) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I am Patrick Wright, your Chorus Call operator. Welcome and thank you for joining QIAGEN's conference call to discuss the results of the third quarter 2015. 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 and Investor Relations at QIAGEN. Please go ahead.

Thank you, Patrick and thank you for all of you for joining us today for our conference call. Today, we're going to review the results released last night and provide a business update before the Q&A session. Our speakers today are Peer Schatz, the Chief Executive Officer of QIAGEN, and Roland Sackers, the Chief Financial Officer.

On slide two, you'll see the customary safe harbor statement explaining that the discussion and responses to your questions on this call reflect management's views as of today, October 29, 2015. 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 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.

Also during the call, we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. You can find a reconciliation of these figures to GAAP measures in the press release and the presentation for this call. I would like to now hand over to Peer.

Yes, thanks John and welcome to all of you. QIAGEN continues to move ahead on initiatives during this year to accelerate growth in 2016 and beyond and these are reflected in our results for the third quarter and first nine months of this year. Add these messages to summarize our performance. First our results for the third quarter. We saw solid developments in our academia, pharma, and applied testing customer classes but at the same time more moderate growth in molecular diagnostics also when excluded the expected adverse impact of declining US HPV sales.

We also saw overall challenging conditions in Japan and China. This led to adjusted net sales rising 2% at constant exchange rates. At the same time, adjusted earnings per share were $0.29 at constant exchange rates and in line with our target. We maintained the adjusted operating income margin at 25% of sales and this was after making a decision to step up incremental investments into sales and marketing activities.

We feel this will help us prepare for the faster growth phases following the approaching end of the HPV headwinds. Adjusted net sales were $315 million at actual rates, which was a decline of 7% and included a stronger than expected adverse impact from foreign currency movements. We had expected about 7 percentage points to 8 percentage points but was actually about 9 percentage points.

Adjusted earnings per share were $0.27 at actual rates, which was unchanged from the third quarter of 2014. Second, we are moving ahead on transforming QIAGEN and preparing to accelerate growth into 2016 and beyond. As you know, our performance over the last few years has been marked by sharp impact of declining revenues of HPV tests in the United States used for cervical cancer screening against solid growth from the rest of the portfolio.

We saw the same situation in the third quarter, sharply lower US sales of HPV tests created about 3 percentage points of headwinds, which was in line with our expectations against a 2% constant exchange rate overall growth and this applies about 5% constant exchange rate growth from the rest of the portfolio.

Third, we are on track to achieve our full year targets for higher adjusted net sales and earnings per share at the constant exchange rates. Adjusted net sales are expected to rise about 4 percentage points on a constant exchange rate basis. We have tightened the full-year target for adjusted earnings per share to $1.16 at constant exchange rates, which is within the range we had set in January 2015.

Moving to slide five. This shows you how QIAGEN has been growing during this challenging transformation. As you know, we have been facing heavy price pressure on our US HPV test franchise in United States and this was due primarily due to competition induced dramatically lower prices. For the full year in 2015, we continue to expect about 3 percentage points to 4 percentage points of headwind and this is in line with the results for the first nine months of the year. We also expect these sales to only represent about 3 percentage points of our total sales for 2015. So any future change in this HPV franchise is not expected to have a major impact on overall sales. At the same time, we are growing and investing in the rest of our portfolio, which generated 7 percentage points constant exchange rate sales growth during the first nine months of 2015 and provided 96% of our sales. This is why we are making the incremental investments to help drive this acceleration.

I'm now on slide six to discuss some highlights for the third quarter. On the QIAsymphony automation platform, we are moving ahead towards our goal for 250 new placements during the year, which would bring the cumulative placements to more than 1,500 systems. Also during the quarter, we launched in Europe, the first multiplex assay to run on QIAsymphony RGQ. The RespiFast RG Panel received CE-IVD marking for the detection and differentiation of 22 pathogens, 18 viruses, and four bacteria that cause respiratory tract infections in humans. Moving down to next-generation sequencing, preparations are progressing as planned towards commercialization of the GeneReader benchtop next-generation sequencing workflow later this year.

I'm now on slide seven for a quick update on QuantiFERON, our latent TB test that is setting new standards for detection of this potentially deadly infection. As you see on the left side, sales have been ramping up and we are on track for about 20% growth this year at constant exchange rates. In the United States, I wanted to note that we had [record months] in August and September. The third quarter is traditionally the strongest quarter of the year due to back to school testing. We significantly revamped and expanded our sales organization during the first half of 2015 and we're now seeing a very positive impact.

We're also using digital media campaigns to target various groups such as parents with children going back to school. In Europe, we had a strong quarter in terms of sales growth with accelerating adoption of the fourth generation QuantiFERON-TB Gold Plus that was launched earlier this year.

Moving on to China where we introduced QuantiFERON during 2014, we're making progress on our commercialization efforts in the top-tier cities. We're building a strong national distribution network and sales so far have quadrupled and are set to exceed $2 million. While this is still a small number, it is the ramp that we are focused on and that is excellent for such a screening test that needs time to adopt. Our efforts are ramping up well as we move ahead on the validation and reimbursement discussions required to bring a screening test into this large market.

Beyond the top markets, we are expanding the use of QuantiFERON into other regions such as Southeast Asia. In August, Stop TB and QIAGEN organized a regional meeting in Indonesia for key opinion leaders from more than 20 countries and the World Health Organization (WHO) to discuss TB prevention standards. The reason is that, the WHO and others realize that the fight against latent TB infections is critical to controlling this disease overall. So we see significant growth prospects ahead in this $1 billion market opportunity.

I'm now on slide eight for a quick update on the progress in our personalized healthcare portfolio where we are expanding our position as the top partner to pharma companies for companion diagnostics. Among recent highlights was that our teams reached new master collaboration agreements with two pharma companies. This brings the number of publicly announced deals to 12 under which we have framework agreements for collaborations involving multiple biomarkers.

The inflow of new projects has never been stronger and spans across all platforms and this includes QIAsymphony and ModaPlex as well as next-generation sequencing and our gene panels. We recently added new projects involving key biomarkers such as EGFR and KRAS, where we have seen so far the most regulatory and commercial success and as well for IDH1/2, FGFR, PI3-kinase, and BRAF.

On our last call, we mentioned the FDA approval in July of the therascreen EGFR kit as a companion diagnostic to guide the use of AstraZeneca's targeted lung cancer therapy IRESSA. This marked the fourth US regulatory approval of a QIAGEN companion diagnostic compared with a cancer therapy. Since then, we have completed the submission of the therascreen EGFR kit for use as a companion diagnostic with Clovis Oncology's

rociletinib therapy for use in a specific type of patient with lung cancer differentiated by the status of the T790M mutation in the EGFR gene.

So having these multiple approvals linked to our KRAS and EGFR kits means that we are setting new standards. A fast growing part of our offering involves liquid biopsy sample technologies, which have the potential to improve outcomes for patients. On this slide, you see two recent journal articles mentioning liquid biopsy solutions. In these cases, they are using our QIAamp Circulating Nucleic Acid Kit for the isolation of pre-circulating DNA from plasma.

This is the kit we have also automated on the QIAsymphony. Commercial demand has been extremely strong. In general, we've created strong standards and have a broad range of solutions for liquid biopsy sample processing and that is the real challenge since these QIAGEN solutions are used in almost every laboratory working in this area. The first study here involves using liquid biopsy in a 54 gene next-generation sequencing panel to detect somatic mutations in patients with metastatic solid cancer tumors. This prospective blinded study done by Guardant Health showed the free circulating DNA panel revealed at very high sensitivity specificity and accuracy compared with tissue based reference standard analysis for the KRAS and BRAF biomarkers in colorectal cancer patients.

The second study involved researchers at MD Anderson and a trial involving actionable mutations in patients with advanced cancers referring for experimental targeted therapies. Among the findings was that testing of cell-free DNA demonstrated acceptable concordance with standard of care mutation analysis of primary or metastatic tumor tissue obtained during clinical care.

As we have said before, we see significant opportunities for liquid biopsies and we will further develop our leadership position in this area. Yet, it may take some time to see this technology become more standardized in clinical diagnostics and that will require more studies just like these.

I'm now on slide nine for an update on the progress in bioinformatics. On this slide you see that our offerings are set to further drive clinical NGS adoption and to push barriers of data analysis. The QIAGEN Clinical Insight platform continues to build great momentum. This evidence-based clinical decision support solution is designed for clinical labs to analyze somatic and hereditary cancer panel tests.

Another of the highlights was the launch of a new end-to-end hereditary disease solution for labs to accelerate their solve rates in diagnostic odyssey cases. These are cases that involve patients who have to go from doctor to doctor searching for a solution to their health issue and it often involves a rare disease. Our teams showed data at the American Society of Human Genetics explaining how labs using this new hereditary disease solution can solve up to 99% of these cases and the benchmarking study showed that this was not possible using other bioinformatics solutions.

As these cases are clinically and emotionally incredibly challenging, these results are very exciting. Also, Intel recently announced some data on a new collaboration with QIAGEN in whole-genome analysis. Together, we have developed a reference architecture that is able to rapidly and efficiently process vast amounts of NGS data at a significantly lower cost and infrastructure requirement, yet with a higher accuracy. The optimized service solution consisting of the CLC genomic server and the biomedical genomics workbench has cut the required number of computer nodes by 50% compared to the current recommendation from the leading sequencing supplier. This minimizes the total cost of ownership for our customers significantly. With this, I'll hand over to Roland.

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

I'm now on slide 10 to begin with an overview of our financial performance for the third quarter and then review our results for the first nine months of 2015. First, adjusted net sales rose 2% at constant exchange rates in the third quarter, which was below the target for 3% constant exchange rate. The acquisition of Enzymatics provided about 2 percentage points while the rest of the portfolio was largely stable compared to the third quarter of 2014, but that was after absorbing 3 percentage points lost to lower US HPV sales and the underlying business grew about 5% constant exchange rate. In the third quarter, we saw a mix of factors that included improving performances in the life science against what we see as a temporary weakness in molecular diagnostics in part due to volatile market conditions in China, Japan, and Latin America.

We had also expected faster growth in instrument sales, which were up only 4% constant exchange rate for the quarter after solid gains in the first two quarters of 2015. Another factor was the slowdown in China where sales in the third quarter were largely flat compared to the same period of 2014. We were also impacted by macro factors you have been hearing from other companies. Furthermore, adverse currency movements created about 9 percentage points of pressure on sales in the third quarter, which was more than our expectations for about 7 percentage points to 8 percentage points and led to the 7% decline to $315 million. The devaluation in China and Brazil [was among] factors for this outcome.

Moving down the income statement, adjusted operating income declined 8% to about $78 million and the adjusted operating income margin was steady at 25% of sales compared to the third quarter of 2014. We had been planning for some operating income margin gains in the quarter but we made a decision to reinvest some of the savings coming from our efficiency programs to increase sales and marketing investments.

These involve expanding the sales force and promotional activities for the latent TB test QuantiFERON as well as increasing resources devoted to our portfolio targeting next-generation sequencing. We've also been expanding our global presence especially in emerging markets in Asia and the EMEA region and are looking to enter new geographic markets.

Another area has been to step up investments in e-commerce initiatives and digital transformation design to increase customer engagement and accelerate sales growth. In other words, we felt these investments were a worthwhile short-term trade-off given the opportunities we see to bolster sales growth. For the full year, we are now planning for an adjusted operating income margin at about 25% of sales, which is the same as the 25% underlying margin last year. Keep in mind that this target is based on actual currency rates.

Coming back to the third quarter, a decline is the adjusted gross margin and some incremental investments in sales and marketing were largely offset by reduced R&D investments and efficiency gains in general and administration. The adjusted gross margin declined about 1 percentage point, which was due to a mix of factors that included a change in product mix and lower capacity utilization. R&D expenses were lower as a percentage of sales reflecting the benefits of divesting our site in Marseille, France into a new stand-alone company as well as more efficient overall project spending and targeting bigger sales growth opportunities.

Adjusted net income was $63 million, which declined at a [slow of 4% rate] compared to operating income against the year ago period. One factor was the lower adjusted tax rate at 16%, was also below our target of 19%. This is below the usual level you see and this was due to the factors in the quarter that included leveraging financial structures and our activities in various geographic locations.

We also had higher interest income and lower interest expenses compared to the same period in 2014 along with a lower amount of other expenses. The share count at 237 million was in line with our 2015 target. Adjusted EPS was [$0.29 per share] at constant exchange rate and this was in line with our target for $0.29 to $0.30. At actual rates, adjusted EPS was $0.27 as we had anticipated with our guidance.

On this slide, you also have an overview of results for the first nine months of the year. Adjusted net sales grew 3% at constant exchange rates, which was based on underlying growth of about 7% absorbing about 4 percentage points of headwinds from the US HPV franchise. Currency movements have been severe this year and this led to the swing in results showing a 5% decline to $933 million at actual rates. Adjusted operating income declined 7% to approximately $225 million in the first nine months of 2015 while the adjusted operating income margin remained at about 24% of sales. In terms of adjusted earnings per share, they were $0.81 at constant exchange rates and the results at actual rates of $0.74 shows a heavy impact of adverse currency rates so far this year. The adjusted tax rate of 18% was slightly ahead of our targeted 19% while the weighted share count at 237 million was in line with our plans.

Moving to slide 11. I would like to provide you with an overview of the customer classes. As noted earlier, these include contributions from the Enzymatics acquisition completed in December 2014. Molecular diagnostics sales for the third quarter were softer than seen in recent years with overall sales down 3% at constant exchange rates, but they were up 3% constant exchange rate when excluding US HPV sales.

The latent TB test QuantiFERON continued growing at 20% constant exchange rate pace. Personalized healthcare sales also improved in the quarter and we did have higher revenues from pharma co-development projects but not as high as expected. Instrument and consumables sales for the QIAsymphony automation system were also solid in the quarter, but year-on-year instrument growth was much slower than the [rates] seen in the first and second quarter of 2015 with the exception of the QIAsymphony.

At the same time and this is a benefit of our ability to commercialize our portfolio to both molecular diagnostics and life science customers, we saw improved applied testing, academia and pharma customer classes. All three of these customer classes, applied testing, pharma, and academia delivered 6% constant exchange rate growth in the quarter with underlying expansion at mid-single digit constant exchange rates supported by the first time contributions from the acquisition of Enzymatics in December 2014.

As you have been hearing from other companies, we are also seeing improved customer spending patterns in the US and some European markets compared to earlier in 2015 but Japan remained challenging and China was weaker during the third quarter than earlier in the year.

I'm now on slide 12 to review sales on a regional basis for the third quarter and the year so far in 2015. The Europe, Middle East, Africa region led the regions in the third quarter with sales up 6% constant exchange rate for both the third quarter and the first nine months. Turkey, Switzerland, and the Nordic countries led the performance. Growth slowed in the Americas in Q3 mainly due to the timing of some tenders in Latin America. Excluding US HPV test sales, the Americas was up 5% in the third quarter and 8% for the first nine months of 2015. Key drivers were improving life science markets as well as higher sales contributions from key areas of the molecular diagnostics portfolio.

The Asia-Pacific/Japan region showed a sharp slowdown to 1% constant exchange rate growth, which stands in contrast to the 7% constant exchange rate sales growth for the first nine months. As mentioned earlier, we saw a challenging double-digit constant exchange rate slow down in Japan compared to growth earlier this year and also a slowdown in China. This [weighed] on the Top 7 emerging markets where sales was 3% constant exchange rate in the third quarter but were up 11% constant exchange rate for the first nine months.

Moving to slide 13, here you have an update on our balance sheet and cash flow position for the first nine months of the year. Our full year target is for well above $300 million of operating cash flow compared to $288 million for the full year 2014 and this has to be seen in light of the adverse currency volatility this year. So we are seeing the improvements in our cash flow materialize that we had anticipated as result of our efficiency efforts and this was shown in the increases for both operating cash flow and free cash flow during the first three quarters of this year.

Also on this slide you'll see that we continue to have good liquidity and a manageable net debt position, which leverage at 1.5 times net debt-to-adjusted EBITDA. The increase in leverage which compares to 1.1 times for the same period in 2014 was mainly been due to the $250 million we spent earlier this year to repurchase some of our convertible notes in a de facto share repurchase since it removed about 10 million shares of dilution risk.

I'm now on slide 14, which provides you with an overall view of our full year guidance for adjusted net sales and adjusted earnings per share both at constant exchange rates given the currency volatility seen during the year. We continue to expect full year sales growth of about 4% at constant exchange rates. This is based on about 7 percentage points to 8 percentage points of constant exchange rate growth from our core portfolio against the final year of significant headwinds from the US HPV test sales, which are expected to be about 3 percentage points to 4 percentage points.

In terms of adjusted EPS, based on the results for the first nine months of $0.81 per share at constant exchange rates and our goal for about $0.35 for the fourth quarter. And also at constant exchange rates, we have tightened our full year target to $1.16 per share. This is within the range for 2015 we had set for $1.16 per share to $1.18 per share in January.

Moving to slide 15, here you see our outlook for the fourth quarter and the full year as well as the details for assumptions on our adjusted results. In line with our full year 2015 goals, we have set a target for about 5% [total] constant exchange rate sales growth in the fourth quarter. This is based on the US HPV franchise creating about 2 percentage points of headwind against approximately 7% constant exchange growth for the rest of the portfolio in the fourth quarter. As for currency movements, the headwinds created by the strengthening US dollar began rather late in 2014, so we still anticipate an adverse impact for the fourth quarter, but this is expected to be less than the 8 percentage points to 9 percentage points seen in previous quarters.

So for the fourth quarter and based on rates as of September 30, we expect about 5 percentage points to 6 percentage points of currency pressure on sales. Given the outlook for about 5 percentage points constant exchange rate growth, this implies that total sales would be down about 1% compared to the fourth quarter of 2014 at actual rates. On adjusted EPS, we expect an adverse impact of about $0.02. So based on the target of $0.35 at constant exchange rates, this would imply about $0.33 per share at actual rates.

This slide also contains adjustment assumption for the full year and the fourth quarter. So only assumption that has been changed is the adjusted tax rate on a full year basis, and this has been reduced to about 17% from the prior target at 19%. Again, this is due to our ability to leverage some financial structures and take advantage of the geographic distribution of our business. At the same time, we see the adjusted tax rate returning to the more usual range in 2016. With that, I would like to hand back to Peer.

Yes, thank you, Roland. I'm now on slide 16 for a summary before we move into the Q&A. Let me review what we have announced. First, our results for the first nine months of the year are in line with our full year targets, which we have reaffirmed and are determined to achieve. The sales performance in the third quarter was marked by strong growth in the life sciences while molecular diagnostics faced some volatility in part due to the timing of national tenders and also with weaker results in China and Japan. Second, we are moving ahead on initiatives to transform QIAGEN and are demonstrating success in areas with strong prospects.

The benefits of these efforts will become even more apparent during 2016 as we put behind us the significant headwinds from the declining sales in the United States HPV test franchise. Indeed, this year is setting a good foundation for accelerating innovation and growth from our core portfolio and as a last point, we are reaffirming our full year guidance for higher adjusted net sales and earnings per share at constant exchange rates along with ambitions to increase free cash flow and improve our margins, but again for results at actual rates to be adversely impacted by currencies. With that, I'd like to hand back to the operator for the Q&A session. Thank you.

(Operator instructions) Dan Leonard, Leerink.

My first question I was hoping you could elaborate on the weakness in China and your outlook for that region. Are there specific customer classes, product lines or was the weakness more broad-based?

So the weakness was primarily in the MDx area. We've seen better growth plan in the life sciences which is however a smaller piece of the business in China. We are not attributing this to a trend. We are just very encouraged with the uptake of QuantiFERON. We know this is a very substantial market opportunity for us in China and so moving into 2016, we expect these growth rates to be very healthy as we've seen also in previous periods.

Thanks. And then my follow up, Peer, could you elaborate a bit on some of the areas where you're expanding the sales force that you mentioned them on the call. You or Roland had mentioned that.

Well, the first area that we also highlighted in the call was the significant expansion in the QuantiFERON franchise. QuantiFERON is in the meantime a very important product group. It has TB but also other assays that we're also taking forward into the US and as you know clinical trials and regulatory activities are ongoing. In Europe, we have sold products already in the QuantiFERON and franchise and they are marketed by a targeted sales force which we significantly increased and this has shown some very good effect starting now in the third quarter. August and September were record months against the strong prior year period, and we see that there is a very strong outlook for this franchise for the periods to come. In particular, the United States and Europe, we've seen a very good uptake of a 4G product due to some of these efforts, and we're also very encouraged by the uptake in China. So that is an area where we've applied a specialized sales channel. Where we beefed up the sales channel is in the advanced genomics and informatics areas. These are areas that we're investing in heavily, also anticipation and broadening our activities in next-generation sequencing, the portfolio that we will make available there. So there are significant investments that we're making and in preparation of faster growth while we are currently seeing the last phases of depressed topline or headwinds on the topline. And so, this is what you currently see in some of the numbers.

Tycho Peterson, JP Morgan.

I'm wondering if you could just elaborate a little bit more on the molecular softness. You've mentioned some of that pharma co-development. Can you maybe just talk into some of the underlying issues there, obviously some of the geographies in China as you just mentioned, but what gives you conviction that this is a transitory issue?

So I might have been spoken but the pharma co-development franchise is actually one which is going to see a record year in 2015. We're seeing record income of new partnerships and co-development activities never been stronger. You saw us had more of these master collaboration agreements that are these umbrellas under which we've individual projects. We have 12 publicly announced deals. So, this is really moving ahead very aggressively. Our MDx franchise, to answer your question directly, is global and results are often based on a number of factors and one of them is the timing of tenders and this involves different types of products within the business portfolio and also regions. What we saw in 2014 were that there were a number of infectious disease tenders that were related to outbreaks and I think you will be able to see which ones they were that gave us a significant uptake and at the same time, in the third and fourth quarter, we had a significant delay on tenders that were probably pushed now into 2016 and hence we're seeing a softness in Q3 and Q4 that we are partly able to compensate, but are not necessarily in any way related to underlying long-term trends or anything beyond more temporal volatility. So the nine-month 2015 trends even with these impacts excluding HPV were 8% and this underscores our overall confidence. Our team is working hard to push up that growth rate even higher in 2016 and beyond. This reflects also the level of excitement we have with the portfolio that we are building and how we're putting it together.

The most important thing here is that QIAGEN has multiple different growth drivers across the portfolio and while there always will be is this lumpiness especially if you are in national tenders, we were able to nicely mitigate that with a very strong quarter in the life sciences which by the way is also seeing a very good trajectory at the moment and we're quite excited about some of the opportunities that we have in this area going forward.

Steve Beuchaw, Morgan Stanley.

First one is actually on HPV. So nice to see that continuing to track [towards] expectation for this year. Can you give us a sense though for how we're thinking about the trends from here, sequential trends in HPV particularly in the US into 2016. Should we think about that as roughly flat or is there a small moderation embedded and then maybe a broader question on HPV. I mean how did you see HPV internationally track in the quarter and how you are thinking about that going forward?

Sure, HPV is a very valuable franchise for us and one that takes us into many important discussions with customers and also governments. Unfortunately as we all know we've discussed this many times, we've seen pricing pressures in the US against however the ability that we have to actually maintain a market-leading position, a significant market leading position in the United States and the pricing impact has been brutal frankly. It's been far, far in excess of what anyone would have expected.

Our market share on the other side is far higher than I think anybody would have expected a few years ago. So this is a different picture, but a similar outcome, but the situation in the US will continue to be one which is going to see a slight negative impact on the overall numbers next year, but not one that we would want to call out or make a big deal about and hence we think that this is now the last year in which this will be an impact. Might be a few million dollars next year but against the size of the overall Company, this would start getting non-material. So the non-US HPV was up actually double-digit in the first half of the year. There were some lumpiness also due to some of the timings of national tenders and this was primarily now also in Latin America that we saw some weakness in the third quarter, but we expect the HPV franchise actually to be a growth contributor in 2016 even with some of the continued weakness in the United States. So from that perspective, an interesting phenomena for our discussions moving into 2016, but obviously on a very, very small revenue base now in the meantime, you know 3 percentage points, 4 percentage points, including 3 percentage points US on an annualized basis for this year and it will clearly go down as a percentage of sales for the US in 2016, but non-US will move up and we're seeing a lot of encouraging trends for the use of this portfolio.

Doug Schenkel, Cowen & Company.

So I guess the first question is really just on the change in operating margin guidance. I think originally you guys had guided to 50 basis points of operating margin expansion this year. You've changed that to, I believe about flat. Could you just walk through kind of the latter or the waterfall that kind of gets us there? Essentially where you are investing more and how does this change so much this late in the year?

Yes. It's Roland. I guess like I tried to say on the call is what we are seeing quite early actually in the quarter is that we could achieve our EPS expectation for the third quarter especially because we had a very good one on the non-operational side, on the interest side as well as on the tax side and what we discussed on the management level is that we should use this additional proceeds and invest especially as we said also in sales and marketing activities, because we see here nice opportunities to even drive growth going forward. And so, at the same time, there was a active decision more or less short-term trade off against long-term growth and that is seeing a nice opportunity continue to drive the growth in QuantiFERON vis-a-vis more sales growth, more geographic expansion, [center] also investigating in NGS and for example sequence universal solutions also the bioinformatics side and again, that is all something what we believe was a good investment strategy, at the same time being able to keep our guidance as it is.

If we look back over the last few years, I mean EPS growth was I think 6% in 2014. It looks like EPS growth this year is going to be well under 10% and yet if we adjust for the charge you took in Q4 of last year, which made the base of comparison more favorable, I guess growth this year is again to be pretty nominal. As you just described, you're making a decision I think to increase investment from recent levels pursuant to your growth opportunities, which do appear to be promising.

Is this the right way to be thinking about our models heading into 2016 that we're in a prolonged period of investment. That's really the first question and then I guess the second part would be recognizing growth this year excluding US HPV, FX, M&A seems to be tracking to just over 5% given the investments you've made and the enhanced level of investment you're describing here, shouldn't that start to translate into some acceleration from those levels at some point soon, meaning next year. Thank you.

Doug, I'll take the second question first and then hand over to Roland. Well it's interesting because I think that the summary of a lot of the things we've been saying here over the course of the last two calls, at least is that we are clearly seeing an inflection point coming in a way that the headwinds from the HPV franchise are dissipating and we are seeing a significant improvement coming forward towards us which is going to be the underlying growth rate that we've seen now for the past 10 quarters, which is always between 5% and 7%.

So there's a quarter where its 5%. There were times where it was 9%. On average, I think it was between 6% to 7% -- around 6% and this is like a baseline that we've seen and on top of that we clearly did a lot of work to create new franchises that could have further impact on the topline in particular the growth areas that now represents a third of our sales growing at high double-digits that are increasingly impacting our overall profile of the Company. So yes, our key focus is now to transition into an acceleration phase into 2016 and what you are currently seeing right now is a company that is investing to actually accelerate, but still absorbing the hit on the topline -- the headwind on the topline from the HPV franchise. I think what few people appreciate is that we were able to absorb that hit on the topline while reinvesting in growth engines that are now about to shine through and we're not talking now quarters or years for this to happen, but we've made it very clear that we think 2016 is going to be substantially better simply based on the math of the headwind dissipating.

So from that perspective, we're kind of in a very tight spot right now because we were investing already for a company targeting higher growth but at the same time, we're still seeing a very significant headwind, which we expect to dissipate later in this year. Now the third quarter was clearly one where we saw some volatility on some of these national tenants. I don't attribute anything in terms of long-term nature to this. This is just normal course of business doing business with countries and this kind of hit us a little bit on the margin side, making the annual margin more difficult, but these investments that we're doing right now, they will definitely also allow an inflection on the -- or an improvement on the operating margin level to come in 2016.

Yes. And back to your question, Doug. Also just a thing we have to see things in perspective and if we adjusted for -- last year EPS was (inaudible) so that's $1.08. Guidance for this year as you know is $1.16 on the constant exchange rate side. So what you're seeing here is again Company overall growth rate including a significant headwind on HPV, let's say 4% for the year at the same time, EPS growth rate somewhere 7% to 8%. So I think that is still something what we should do better. I could agree but I think is still also something what is bad and assuming now what Peer was just referring to that the HPV headwind is moving away, growth rate going up, I think the likelihood on being also here seeing some margin improvement and therefore EPS improvements above that level in 2016 is something what we're working hard on.

Jack Meehan, Barclays.

I wanted to ask one more on the personalized healthcare portfolio and just in the release, talking about some of the slower growth trends for the companion diagnostic assays. I was wondering if you could just provide a little bit more color on that and whether just the level of conviction in the 4Q and beyond for that business.

Sure. Well, personalized healthcare is a very long-term trend for us and it is very real. As we now, it's a $100 million franchise for us. So it is definitely important. I often see statements, this is a potential future business for us but this is actually here today and generating profitability. It is exposed to some volatility and in particular due to anxieties around reimbursements and restructurings that are related to accommodate for that.

We've seen continued anxiety in the United States in particular in reimbursement and that has started to improve a little bit, but it has still been more challenging than we would have thought. Certain parts of the portfolio are in good double-digit growth rates. I'd like to point out, in particular, the leukemia franchise where we have a market-leading position and in the solid tumor area, it has been a little bit more lumpy due to, in particular, large customers moving in various phases on that portfolio, but it is not something where I would say that there is a trend that would deviate in any way from what we see as a long-term trend in personalized healthcare and it is also a broad portfolio.

So we're selling targeted sequencing panels, we're selling next-gen panels, we're selling real-time PCR assays and one of the impacts that we saw in the third quarter was actually a softness in the Pyrosequencing portfolio in the third quarter, which is one of the products that is used wisely, for instance, also in Asia. So there are some trends there that move in one direction and then in the next quarter the other. I wouldn't attribute too much to that on the near-term as a franchise.

Jon Groberg, UBS.

Just two quick clarifications on my questions. So one, Peer, can you just remind us as a part of your revenues, how much is the total HPV franchise in US, both international as we end Q3 or what you think it's going to be as we end 2015? And then just wanted to clarify in China is the flat, is that a local currency number or is that including currency? And then my question is, on the next-gen GeneReader, you said you're still set for a fourth quarter on the GeneReader still set for the fourth quarter release. We are here in the fourth quarter, so what can we expect around announcements for that? Thanks.

So I'll leave the China question to Roland. In terms of the GeneReader launch, we said it would be started here now in the fourth quarter of this year and we further confirmed that date now three times in the last [three] calls and yes, we are nearing the end of the year and yes we're confident that we will be launching this year and the one thing I can promise you'll be the first to know. This is something that we are clearly preparing and we want to do this right and make sure that you have all information available to also see the power of what we can bring forward. Roland would you want to answer the China question.

Yeah. China is clearly something where again we also have seen on the local basis because especially on the molecular business especially on the instrumentation side. So I guess it's something for the whole what we probably see should be different in 2016. If you just following all the discussions in China I would say there is no mid or long-term change in direction. You either see it as something what I would probably call as a temporary volatility. So currently its not part of that.

Brian Weinstein, William Blair.

Hi, this is [Matt Laroux], in for Brian today. Just wanted to ask for Bioinformatics here. Peer, if you could update us on the current size of that business and then thoughts on the business model moving forward particularly now that you're going to be launching GeneReader here starting in the fourth quarter and how that business model evolves from here? Thanks.

So the revenues attributed to the bioinformatics franchise are in the range of 4% of our sales base and growing at a healthy double-digit clip. They are primarily subscription fees, license fees and this per use of the interpretation engines or license fees for the analytical software packages that we have. The example for instance of the Intel relationship is a nice one, where we've created interesting options for users of, in this case, it was a [mixed] environment to dramatically reduce the cost of the analytical processing of -- in this case whole-genome sequencing data and in addition to that, we have a whole suite of reagents and consumables and wherever applicable also assays including also the sample technologies that are required. So sample technology, sample preparation and analytics and interpretation that we are seeing is an interesting package for these customers.

So there is a direct revenue component. In addition to that, there is the ability to create very nice packages around certain themes and we're applying that to third-party, so platform independent packages. We are also applying it to our own Sample to Insight solutions and clearly, we think this is a powerful view to take.

We believe a lot of these next-generation platforms, they should become much more software-centric than what they are today. It's more plumbing and the hardware that is in the focus. We think the software, what to do with that data and how to design experiments and what backwards, what reagents to use and how to best create a workflow is a really unique expertise that we have and this is putting us in a very good position and also one of the reasons why we're seeing good growth in the life sciences at the moment are next-generation sequencing reagents and panel franchises is also doing quite well.

Scott Bardo, Berenberg.

Yes. Thanks very much for taking my question.

Okay. He must have withdrawn the question or hung up. (Operator Instructions) Isaac Ro, Goldman Sachs.

Just another one on GeneReader. I think you guys have talked here about being on track for the instrumentation launch, and I'm curious to know a little bit more about the incremental investment that you think you might need to do to tie together the equipment with the informatics. You obviously have a pretty broad informatics portfolio already on the market. So, I'm just trying to think through the investment for integration between the two platforms.

Well, as we said some time ago, we see the integration of all of the components and the capabilities of QIAGEN is critical to be differentiating and this is something we invested in heavily over the last two years. And the ability to take every strength that QIAGEN has and to integrate it into something, integrate it and unique and unified is one of the value propositions that we've proven in many, many products over the history of QIAGEN and for us, this is other than it is a larger and more complex project to many, it's nothing very different. So in this case, the informatics however are a more important component than they have been in previous areas and so that's why informatics is for us and we've always said that ever since we built this franchise, which we're very proud of and which is going very well.

Ever since we entered into this area, we've made it very clear that there is a stand-alone business franchise with certain revenue base and by itself can also justify the investment and generate a good return, but in addition to that we think going forward, every consumable, every instrument, every thing that every service even that QIAGEN sells has a smart component around it that is benefited by having the informatics, and that's something we hope we will also be able to show and as you've seen from the previous meetings just take the hereditary package.

You know I went over this very quickly but every time we get feedback and we get tons of feedback from physicians or a geneticist where they say they have patients in front of them who've gone from doctor to doctor to doctor using all next-gen sequencing and all other capabilities are available to the laboratories providing the services to these physicians. They have not been able to get a result and using the informatics that we have, they not only can get diagnosis rates of 99%, which is absolutely phenomenal, it sounds like a number but behind every one of these cases there is a kid, very often children, pediatric cases where you have very complex genetic diseases that previously were not solvable, and so this is just a big differentiator for us and one that we're making available to the world, but we're also making use of for our own Sample to Insight solutions.

Scott Bardo, Berenberg.

Just firstly, you mentioned a little bit of lumpiness, volatility in national tenders for molecular. Just wondering if you could elaborate on that a little bit and I understand infectious disease is quite price competitive. I wonder whether you're seeing any price pressure here or failed to get on certain tenders or whether this really is just a case of delays in anticipated tenders for which you expect to partake. I just have one follow-up after that. Thanks.

Sure. Very valid question Scott. I think if you look at the infectious disease area, it's a very broad portfolio of tests and now there is an extraordinary focus typically on the United States, but we should never forget Europe which is a third of the world and there we have the broadest portfolio of any company currently in the market with the most flexible and advanced platforms. So and by the way, in Europe, many customers actually prefer a two room strategy. Hence the ability for us to have the cycle in one room and the sample preparation and assay set up in the other. This is very often recommended and even required by public guidelines.

So we have a very good franchise there and there the battle is typically on individual assays where somebody will come in with a competitive offering let's say in transplantation biology and we fight that battle there. We have a strong franchise there, but then the blood virals are used to balance that out and it's very difficult to see trends overall in individual areas. We are clearly seeing trends and pricing move down overall in molecular testing. They are by the way, a fraction of what we have in the United States. So prices are much more competitive in Europe than they are in the United States. We have a very strong position in Europe and also a cost benefit in Europe.

And so, I wouldn't point to any specific assay other than this has been a trajectory we've been on for a very long time and every time you have a new assay, you can price it at a premium, it's the old game. So there is nothing new and nothing really to look to. If you ask me for a question and answer to the lumpiness we had in the third quarter, we highlighted that there were big infectious disease, screening programs. We had good double-digit sales, if you remember last year in the infectious disease area, high-double digit sales, also QIAsymphony related and we just didn't have an outbreak this year in that region of the world and that was timed last year in the third quarter.

And these are millions of dollars typically of shipments and this year also, we had a tender that basically evaporated due to administrative reasons as they always do, but this was a larger one in Q3 and Q4 and hence you have a baseline issue, but at the same time, this year's numbers had an impact.

Both together, I'm not really attributing on lot of -- I'm much more focused right now on preparing what Doug Schenkel mentioned initially for 2016 for us to move in there with maximum momentum and as you see from all of the numbers, we're doing everything to prepare that while still trying everything to make sure that we make the guidance that we said earlier in this year and we were able to do that so far up to the third quarter.

Got it. Thanks. And just the quick follow-up please. Just on your current pipeline, specifically GeneReader. Can you just remind us what we're likely to see at the upcoming AMP meeting and when QIAGEN will call its next Capital Market Day to set some financial targets for the Company and pipeline? Thank you.

Sure, I'll refer to John for the Capital Markets Day discussions. AMP is an important meeting for us and I know we'll be seeing a lot of you there next week as well. It is always an important meeting for us. It is always the meeting where exploratory molecular pathology is discussed and trends are being set going forward and it's a group of people that we have known for many, many years and have been very closely associated with because this is where molecular testing very often sees its roots and we will be there with a broad suite of products, novel real-time PCR assays, the ModaPlex platform will be shown, we'll be showing some also developments on our GeneReader related portfolio. So it's going to really interesting to see the update and for 2016 as we all know, a lot of trends start at AMP in this space and we look forward to having this discussion.

So, Scott, to your question about Capital Markets Day, we're looking at holding an event in the spring of 2016 and we'll be putting out more information about that either later this year or early January to give you guys a time and the date on where we're going to meet and give you guys an update on the business and how we're looking forward to 2016 and then probably out to about 2020.

Vijay Kumar, Evercore ISI.

I had one clarification and a follow-up. So just on the guidance for 2015, so the revenue at CER was reiterated but we're now coming in at the lower-end on the EPS. Tax rate came in a little bit lighter. In light of our third quarter OpEx being pretty phenomenal, I'm just wondering what the moving part was. Is it just a conservatism or like you said this is increased OpEx expenses related to your sales force build out?

Yes, I think what we clearly see, what we've seen is short quarter and also what we have seen -- what I expect for the fourth quarter is that we have beneficial and non-operational expense situation on the interest side, on the tax side and the decision was taken that we reinvest some of this additional proceeds into sales and marketing activities to support some of the activities we referred to earlier by still maintaining the guidance.

Jeff Elliott, Robert W. Baird.

Hi, this is Catherine Ramsey in for Jeff. One question on instruments and then a follow-up on GeneReader. You talked about some of the older legacy instruments being soft this quarter. Is there something you have in mind to fix that like product refreshes or something like that to recalibrate the growth or was it just a one quarter transient blip?

We don't see that as a significant topic for us. It was rather what we've seen as a Q3 development. If you look at the pipeline development for year-end but also going forward there's nothing really that [concerns us] not only the symphony doing quite well again also in certain areas like Europe, for example, like the US, instrumentation and general was quite strong. So it has to do a little bit with some specific situation we have seen in Japan, China and to a certain extent in Latin America, again nothing what we see as a long-term trend change.

Dan Arias, Citigroup.

Maybe one on liquid biopsy Peer, obviously a lot of activity in the market there. So I guess, as we talk through the idea of you guys investing in the important growth areas, how are you thinking about your liquid biopsy portfolio just with respect to sort of organic solutions versus building out through collaborations or acquisitions. Just kind of curious about internal versus more of a business development strategy there.

Sure, thanks for asking that question. It's a very confusing to understand what people are referring to when they talk about liquid biopsy. We have two ways of looking at it. Number one is in terms of sample technologies, meaning the collection, the stabilization, the extraction, the purification, and the preparation of nucleic acids for downstream liquid biopsy use. This is a very, very challenging step that can be done with many tools but can be done well.

We think that's an area we excel and studies show that again and again and again. Hence, our market share in this space is huge not only in the prenatal testing area, but in particular also in the cancer area where this is even more challenging. Sometimes we have extremely high market share, 80%, 90% plus, meaning that every time you read about these liquid biopsy applications, new labs emerging, new tests emerging, you can almost be sure that the front-end is a QIAGEN solution and that's something we're aggressively investing in. It's a top priority area for us and we have a quite a broad portfolio.

In the meantime, spanning cell-free DNA, spanning [exazones] and spanning circulating tumor cells. The second way of looking at liquid biopsy is looking at the horizontal meaning the solution from a sample through to a report. And in certain areas, we have selectively also taken this forward ourselves. We were the first to introduce a liquid biopsy companion diagnostic earlier this year that was CE marked in Europe and that is doing very well and we're also active in many such programs.

Most of our pharma partners, some of them are even coming to us exactly for this capability because we have the ability to not only have the collection and extraction techniques, but even also the preparation and what is very important is also the informatics, back to Isaac's question as well. It's very, very important to have this integral offering from Sample to Insight as we call. And so this is how we look at this holistically and some of these assays we will be taking forward to ourselves as we're already doing, in particular, in cancer and companion diagnostics and in many areas, we will partner and make our technology available to others. And this because of our very strong position in companion diagnostics, this is well accepted and in some cases even laboratories are giving us the ability to distribute these assays that they have developed. Ex-US for instance, which is still 50% of the world and at the same time, supply them for US coverage.

So thank you, Peer. And with that question, I'd like to end the call here. We've gone a bit long today. I appreciate your time and interest in QIAGEN. If you have any follow-up questions, please let me know and for those of you going to AMP in Austin next week, please also let me know if you'll be there so that we have a chance to talk and meet in person. Thank you very much.