Qiagen NV (QGEN) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I am Patrick Wright, your Chorus Call operator. Welcome and thank you for joining QIAGEN's conference call to discuss the results of the first quarter 2016. (Operator Instructions). Please be advised that this call is being recorded at QIAGEN's request and will be made available on their Internet site. (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 welcome, all of you, to our conference call.

Our speakers today are Peer Schatz, the Chief Executive Officer of QIAGEN, and Roland Sackers, the Chief Financial Officer. Also joining us today is Dr. Sarah Fakih, member of our IR team.

On slide two, you see the customary safe harbor statements explaining that the discussion and responses to your questions on this call reflect management's views as of today, April 28th, 2016. 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.

Also during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles. You can find a reconciliation of these figures to GAAP measures in the press release and the presentation for this call.

With that, I would like to now hand over to Peer.

Thank you, John. And I would like to welcome you all to this conference call.

As you saw in our press release, QIAGEN is moving ahead on initiatives to accelerate growth and drive further innovation in our Sample to Insights portfolio. And we saw those efforts reflected in our performance for the first quarter of 2016.

Let me go through the key messages. First, we achieved our targets for the first quarter. Adjusted net sales rose 2% at constant exchange rates. But, they were unchanged at about $298 million at actual rates. And this was due to 2 percentage points of currency headwinds.

Instruments rebounded after a weaker performance in the fourth quarter of 2015 with now 6% growth at constant exchange rates for the first quarter. Sales from consumables and related revenues rose 2% on a constant exchange rate basis and provided about 88% of sales.

Adjusted diluted earnings per share were $0.19 at both actual and constant exchange rates compared to $0.22 in the first quarter of last year. And our results were in line with the target we had set for $0.19 to $0.20 per share at constant exchange rates.

Adjusted operating income also declined in the first quarter. And this was due to the expected investments.

Second, we are moving ahead with our transformation. This was another quarter where you see the power of our growth drivers, which now represent about 35% of sales and continue to grow at a double-digit constant exchange rate pace.

Our strategy is to leverage our Sample to Insight portfolio and continue to build our leadership in providing a range of molecular testing solutions that enable customers to gain valuable insights.

One of our advantages is the ability to leverage this portfolio across the continuum from basic research and the life sciences through to clinical care and molecular diagnostics.

At the same time, our growth has been offset to some degree in recent years by declining revenues in the US for HPV tests used for cervical cancer screening.

For the first quarter of 2016, and as expected, we saw a headwind of about 2 percentage points. And a similar trend is anticipated for the second quarter. However, we expect the headwinds to abate in the second half of the year and to be only about 1 to 2 points on a full-year basis.

Third, we have announced plans for a fourth $100 million share repurchase program. This is a signal of our commitment to disciplined capital allocation, which also includes targeted, value-creating acquisitions, such as with Enzymatics and MO BIO and a public tender offer to acquire Exiqon.

And as a final point, we are reaffirming our full-year targets for 2016. As we announced in January adjusted net sales are expected to rise about 6% on a constant exchange rate basis with about 1 percentage point for MO BIO and about 5 percentage points coming from the rest of our portfolio, even when absorbing the US HPV headwinds. These targets do not include contributions from the pending Exiqon acquisition.

I'm now on slide 5 to review some of the achievements for the first quarter. We have a very strong position in the core area of sample technologies. And the addition of MO BIO's products fit very well and have allowed us to accelerate and broaden our Sample to Insight portfolio for microbiome and metagenomics applications.

Another area of sample technologies receiving a lot of attention in liquid biopsy, where QIAGEN products have already enabled hundreds of peer-reviewed journal articles. In fact, a recent JAMA oncology article detailed how a study at the Dana-Farber Cancer Center on liquid biopsy in non-small cell lung cancer patients has prompted the hospital to begin offering a liquid biopsy-based test to all non-small lung cancer patients at that institution.

In personalized healthcare, we saw single-digit growth and slightly higher revenues from our companion diagnostic partnerships. One announced highlight was the announcement of a new master collaboration agreement with Mirati Therapeutics and their targeted therapy glesatinib as the first project. Our companion diagnostic will guide treatment decisions based on analysis of RNA biomarkers produced by a mutation of the MET gene.

Placements of the QIAsymphony automation system have a solid quarter as our teams achieved more than 50 new placements. We are on track to achieve the 2016 target for more than 1,750 cumulative placements compared to more than 1,500 at the end of 2015.

I'm now on slide 6 to review the progress being made with the QuantiFERON latent TB test, especially with the rollout of the fourth generation QuantiFERON-TB Gold-Plus version that has been launched in select markets.

Among the key developments, two independent studies were recently presented that reaffirmed the clinical performance and value of the fourth generation test. One study in the European Respiratory Journal showed it had an even higher sensitivity than the tuberculin test as well as earlier QuantiFERON generations, while a study presented at ECCMID confirmed the superior performance of QuantiFERON-TB Gold-Plus to the tuberculin skin test and the other IGRA test in high-risk dialysis patients. This is an important group that has a 10 to 25 times higher risk of contracting TB than general population.

Another important milestone was the draft B rating recently issued by the US Preventive Service Task Force, which is a panel of experts in primary care that develop guidelines. This positive rating validates the existing targeted CDC guidelines for TB and will help in the implementation of more latent TB screening in the primary care setting.

This is very positive as QuantiFERON will be recommended as an alternative to the skin test and will be preferred in patients who have received the BCG vaccine and also those who are unlikely to return for the second visit required by the skin test. And this can often involve half of all patients.

As a last point, QuantiFERON was also chosen in national TB tenders in South Korea and Taiwan. And this comes after the recent public tender win in the United Kingdom. These were very visible processes due to their size and scope. So, we are very pleased that the value and the performance of our solutions were recognized.

I'm now on slide 7 to give you an update on our bioinformatics and universal NGS solutions. We had some important new product launches and developments in the first quarter that have further advanced and expanded our overall offering.

As a first point, QIAGEN has won a prestigious award for the second consecutive year at the recent Critical Assessment of Genome Interpretation, or CAGI. This conference poses a series of complex challenges to assess computational methods for predicting the effects of certain genomic variations. QIAGEN was once again recognized as having the most accurate solutions for solving clinical heredity disease cases.

RNA-seq Explorer is also an important new product launch that brings together Ingenuity pathway analysis, the CLC biomedical genomics workbench, and our liquid biopsy kits to analyze and interpret RNA sequencing data. We are very pleased with customer feedback to the launch at the recent American Association for Cancer Research meeting.

Furthermore, we expanded our universal NGS portfolio with the launch of more than 170 new QIAseq targeted RNA panels for NGS-based gene expression and profiling. These are based on a novel panel design and provide a powerful solution for RNA sequencing and analysis on any NGS sequencer, thanks to the integration of our RNA sample technologies with Ingenuity bioinformatics.

Another highlight was our new collaboration with 10X Genomics that we announced at AGBT in February. We are pleased that our relationship with 10X covers both co-marketing as well as product harmonization. And we are seeking to ensure the optimal utility of bringing together solutions from both companies.

We see significant potential for combining 10X Genomics technologies with QIAGEN's portfolio in the field of single-cell analysis and also to align these technologies for use on the GeneReader NGS system to enable customers to gain access to valuable insights.

As a last point, the acquisition of Exiqon would add a top player in the field of non-coding RNA, which is a hot research area and a synergistic portfolio in RNA analysis and bioinformatics. We believe our offer will create value for the shareholders of both companies and look forward to completing this transaction during 2016.

I'm now on slide 8 to update you on the GeneReader NGS system and the progress we are making to commercializing the truly first complete Sample to Insight NGS workflow.

Our top priority in 2016 is to develop this opportunity and secure system placements. And we are targeting to gain a double-digit share of the benchtop sequencing market for targeted panels, primarily in cancer clinical research.

Following the start of commercialization at the AMP conference in November, we have seen a broad and strong response from customers to this offering. And we've surpassed our placement goal for the first quarter of this year.

We see that GeneReader's hit the right nerve for customers and clinical research and diagnostics who are looking for a complete and flexible solution which provides high utility insights at attractive costs, can scale as volumes grow, and is embedded within a strong service and support network that addresses the highest standards.

The positive customer response has been driven by the utility, robustness, and reliability of our first gene panel test, the QIAact Actionable Insights Tumor Panel. To further increase ease of use and reduce barriers to entry for customers new to the NGS technology, we have no incorporated a set of oncology standards from Horizon Discovery of the United Kingdom, addressing this previously only poorly met need in a way clinical customers would truly expect.

The GeneReader NGS system is now fully compatible with Horizon standards. And this achievement provides critical control data to guide and monitor overall system performance. We chose Horizon cell line derived reference standards due to their clinical relevance and the widespread commercial availability.

Internal quality controls are a standard component in many other technologies, such as real-time PCR, and aligning these clinically relevant standards to the GeneReader NGS system represents an essential quality control step and will allow to advance the use of NGS in this rapidly growing segment.

Also on this slide, you'll see how we're segmenting the market. This is a complete system design to meet and manage the needs of clinical customers wanting to use the NGS technology for gene panel analysis. And this is the future of driving NGS adoption beyond the current focus on the life sciences.

Indeed, our view is that many labs offering NGS are processing only about 10 samples on average per week for gene panels. But, the anticipated growth in GeneReader is optimally designed to help them prepare and absorb the demand.

GeneReader has significant utility for even larger and higher volume labs seeking to create high flexibility, yet very robust workflows that can generate insights from actionable panels.

However, all of the target accounts for GeneReader NGS systems involve labs focused on the utility of the insights. They're not willing to face the challenges of managing complex and cumbersome workflows that require a dozen or more vendors and service providers. And this is especially true for those entering next-generation sequencing and those who want to ensure that they can manage this technology at an acceptable cost.

The positive feedback to our offering is building momentum. And this is based on the attributes that we see as being unmatched by others. We're offering a truly complete workflow from a single vendor.

GeneReader provides a way to generate valuable and actionable clinical insights to guide treatment decisions. And we offer high system flexibility and scalability to address variable lab processing demands.

QIAGEN is the only company to offer a transparent and flexible pricing model, what we call price per insight, that is designed to meet the business needs of the labs. And the clinical customers trust our global service network to support them in operating a complete NGS system along with other QIAGEN workflows in their lab.

Moving to slide 9, I'd like to give you a more detailed overview of the QIAGEN GeneReader NGS system development roadmap and our ambitions for the next 12 months. We have a robust development plan that builds on the foundation of the QIAact Actionable Insights Tumor Panel. We're going to expand the content offering with new multigene panels. And this involves creating new content to enable actionable insights into breast and lung cancer.

For example, the QIAact breast cancer panel will offer coverage and for detection of [BRCA-ness] tumors. These are tumors that share molecular features with BRCA mutant tumors and may respond to similar treatment approaches.

Also in development is the QIAact multigene lung cancer panel, which will be launched for detection and analysis of genetic copy number variations or -- this panel will be complemented by a second lung cancer panel designed to detect specific gene fusions on a chromosome level.

We are also going to expand the types of samples that can be processed on GeneReader beyond the current ability to process [FFP] samples. The most important will be the addition of liquid biopsy. And we will also expand the system for fresh and frozen tissue samples.

Updates on the bioinformatics interpretation capabilities are also planned to further improve the overall workflow. We will keep you updated on our progress. And the next opportunity will be the upcoming ASCO meeting in Chicago.

I'm now on slide 10 to show you how we are making progress on putting together the various technologies in our Sample to Insight portfolio to create more valuable integrated solutions, especially those that address hot areas of life sciences research and are bound to make their way into molecular diagnostics at the same time.

Just one example are the advances being made with liquid biopsy toward becoming part of clinical healthcare. Another hot area involves microbiome research. We're able to drive growth in both fields based on our comprehensive sample technologies offering.

We are addressing the needs of customers for even greater sensitivity for liquid biopsy applications and clinical healthcare with new products in our QIAact portfolio. And we have successfully implemented technologies from MO BIO into other QIAGEN products to upgrade our offerings for use in highly demanding sample types required for microbiome applications.

As I mentioned earlier, our strategy is to leverage this portfolio and continue to build our leadership in providing a range of molecular testing solutions that enable customers to gain valuable insights. The efforts we are making today in these hot research areas will translate into additional commercial opportunities in the future as we leverage the portfolio beyond the current scientific focus on basic research in the life sciences and accompany the transition into clinical care.

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

Thank you, Peer. Good afternoon to everyone in Europe, and good morning to those of you joining from the US. I am now on slide 11 to review our financial performance for the first quarter of 2016 as well as our outlook for the second quarter and the full year.

As Peer mentioned earlier, we achieved our targets for adjusted net sales and adjusted EPS for the quarter. The adjusted net sales growth of 2% at constant exchange rates was made up of 1 percentage point from the late 2015 acquisition of MO BIO while the rest of the portfolio provided the second percentage point.

In line with our expectations, total constant exchange rate growth had to absorb about 2 percentage points of headwind from lower US HPV test sales. At actual rates, adjusted net sales were unchanged at $298 million based on the 2 points of currency headwinds.

Moving down the income statement, the year-on-year decline of 21% in adjusted operating income to $53 million reflected the impact of the slower start to the year in regard to sales growth and also the investments to enhance our mid- to long-term growth prospects.

As a result, the adjusted operating income margin declined to 18% of sales from 22% for the same period in 2015.

As for specifics on margin development, the adjusted gross margin declined 3 percentage points to 70% of sales. Although this was below the trend for the adjusted gross margin in recent quarters, we continue to expect a full-year level of at least 70% for 2016.

The result for the first quarter of 2016 was due to a mix of factors. And these included a lower gross margin from revenues related to companion diagnostic partnerships compared to the first quarter of 2015 as well as costs to centralize some manufacturing to our European production hub in Hilden, Germany.

At the same time, we saw some positive margin contributions from the growth of QuantiFERON. But, we also have costs to insource the third-party manufacturing for this product to our US production hub in Maryland, US.

Another factor creating margin pressure for the first quarter was our decision to step up investments in sales and marketing. And this reduced the adjusted operating income margin by about 2 percentage points.

Key investment areas include significantly stepping up commercialization resources, particular behind the QuantiFERON-TB test, where we have seen some results in the US, as well as behind our portfolio for life science customers.

Other investment areas include bolstering our e-commerce channels and expanding our presence in markets such as the Middle East and Asia.

On the other hand, thanks to efficiency gains and cost containment measures, general and administration costs were lower as a percentage of sales in the quarter, while R&D investments were slightly higher as a percentage of sales as we freed up resources to redeploy to projects such as content menu on the GeneReader NGS system.

Moving further down in the income statement, adjusted earnings per share were $0.19. And this was in line with the target for $0.19 to $0.20. We had higher net interest income in the first quarter of 2016. And we also saw other income expense [bringing to] a positive contribution in the first quarter of 2016 due to a mix of factors.

The adjusted tax rate was about 15% for the first quarter of 2016. And this was below the target for 17%. We were able to generate some incremental tax benefits during the first quarter that enabled us to expand the full-year target to a range of about 16% to 17%. The weighted average shares outstanding were 237 million, which was in line with our outlook for about 238 million shares.

Moving to slide 12, I would like to provide you with an overview of the customer classes. As noted earlier, these include a contribution from the acquisition of MO BIO in late 2015 over -- spread across all customer classes.

In molecular diagnostics, the mix trends for 2015 continued into 2016. On the one hand side, we saw underlying sales growth of 6% constant exchange rate. But, this was overshadowed, as expected, by headwinds from lower US HPV test sales. As a result, total sales to these customers rose 2% at constant exchange rates and provided 48% of sales.

After [first] sales in the fourth quarter, instrument sales rose at a double-digit constant exchange rate pace, while consumables grew at a single-digit constant exchange rate. Another topic from the fourth quarter was the timing of revenue recognitions from companion diagnostic co-development projects. And these revenues were modestly higher than in the first quarter of 2015.

Moving to the life science, the performance in applied testing was challenging, as sales declined 5% constant exchange rate against a strong performance in the first quarter of 2015. Instrument sales were particularly weaker in the first quarter of 2016. And as we have said in the past, this customer class can be volatile on a quarterly basis. Our outlook remains for full-year sales growth at a higher single-digit constant exchange rate and for better consumable trends.

A positive area for the first quarter of 2016 involved the pharma customer class, where sales up 7% constant exchange rate for the first quarter of 2016. We see some improving demand trends with rising R&D budgets on one side, but also face adverse trends of consolidation and construction projects.

In academia, total net sales rose 2% for the first quarter. Although the growth rate was below that seen in recent quarters, we anticipate a better trend during the year, in particular amid signs of scientists in key markets taking a more positive midterm perspective on funding.

I'm now on slide 13 to review our sales on a geographic basis. We saw improving trends across all regions. And a highlight was the top seven emerging markets rising 90% at constant exchange rates and providing 13% of total sales.

The Europe, Middle East, Africa region led to overall performance with sales up 7% constant exchange rate and providing about one-third of sales. The core markets of the United Kingdom, France, and Germany all showed good single-digit constant exchange rate growth, while Italy had weaker trends.

The molecular diagnostics and pharma customer classes more than overcame weaker trends in applied testing.

Growth in the Americas came primarily from the United States and Mexico. In Brazil, we saw weaker growth trends than in 2015. And this is something you have heard from other companies. When you exclude US HPV test sales, the Americas delivered 5% constant exchange rate growth for the quarter.

In the Asia-Pacific, Japan region, we saw two different trends. On the one hand, we saw a significant double-digit constant exchange rate drop in Japan, which continues to be a challenging macro environment. However, the rest of this region grew about 15% CER. The leading country remains China, where sales grew about 10% constant exchange rate. We also saw important contributions from South Korea, Australia, and Singapore.

As a last point, sales in the rest of the world were down about $2 million compared to the first quarter of 2015.

Moving to slide 14, I would like to give you an update on our balance sheet and cash flows and also some news on the new -- about our $400 million share repurchase program. This new program is being initiated after the authorization for the third $100 million program recently expired.

We completed about $70 million of repurchase in that program. We see these programs as a signal of our commitment to disciplined capital deployment. And we intend to continue them while also supporting the business expansion through strategically important bolt-on acquisitions.

In terms of liquidity and leverage, the net debt to adjusted EBITDA ratio remains favorable at about 1.5 turns. The new share repurchase program and the completion of the Exiqon acquisition, which is expected to cost about $100 million, are not expected to have a material impact on leverage, as we expect this outflow to be offset by cash generation.

I'm now on slide 15 to review our adjusted net sales and adjusted EPS targets for the full year. As announced in January, our target is for adjusted net sales growth of about 6% constant exchange rate. This outlook is based on about 1 percentage point of growth from the MO BIO acquisition that was completed in late 2015 and about 5 percentage points from the rest of the business.

As we mentioned earlier, this does not take into account the proposal to acquire Exiqon. And we will provide an update once the transaction is completed. This target also includes about 1 percentage point of headwind from lower sales of US HPV tests.

Moving to adjusted EPS, our guidance remains for growth largely in line with sales at a constant exchange rate. And this implies about $1.10 to $1.11 per share on a full-year basis for 2016. This guidance also reflects our plan to continue the pace of investments into targeted growth opportunities during the second quarter.

What is interesting to note is that we are anticipating a distribution of sales between the first and second half of 2016 that is not materially different than what we had last year. And that is for about 47% to 48% in the first half and about 52% to 53% in the second half.

However, the expense distribution is different. And they are more weighted to the first half of 2016 than in 2015. This was due to our decision to accelerate operating expenditures significantly faster than sales growth in this period. This involve plans such as step-down commercialization -- step-up commercialization initiatives, such as for GeneReader and QuantiFERON, as well as to expand our regional presence.

You see about roughly half of these investments as being one-time costs. So, we expect the growth in operating expenditures to be significantly slower in the second half of the year and to be lower than the sales growth rate. This is why the profit acceleration in the second half is more tied to the acceleration of expenses and cost management since the sales distribution is largely in line with previous years.

Our guidance is based on constant exchange rates. But, we also provide estimates of potential currency impact. Based on rates as of April 1st, we expect slightly less headwind than in January. So, in terms of adjusted net sales, we now expect pressure of about 2 percentage points on the full-year guidance for about 6% constant exchange rate sales growth.

For adjusted EPS, we now expect currency pressure of about $0.02 per share on the full-year CEI guidance of about $1.10 to $1.11 per share.

Moving to slide 16, I would like to provide some more details and assumptions for our outlook for the second quarter of 2016 and the full year. For the second quarter, our target is for adjusted net sales growth of 4% at constant exchange rates. This takes into account about 2 percentage points of headwind from declining US HPV test sales. So, the underlying sales growth target is 6% constant exchange rate.

In terms of adjusted EPS, we have set a target for about $0.22 per share at constant exchange rates. And this compares to $0.26 in the second quarter of 2015. This reflects investments we discussed in our last call on which we are making to enhance growth and for adjusted earnings growth to accelerate in the second half of 2016.

This slide also contains the adjustment assumptions for the second quarter and the full year. As I mentioned earlier, the adjusted tax rate for the second quarter is expected to be 16%. And we have set a new range for the full year of 16% to 17%.

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

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

Let me review what we have announced. First, we achieved our targets for the first quarter for adjusted net sales growth at 2% constant exchange rate growth and adjusted earnings per share at $0.19, while moving ahead on initiatives to accelerate growth and drive further innovation.

Second, we are moving ahead on initiatives to transform QIAGEN. And we are demonstrating success in areas with solid growth prospects. The benefits of these efforts will become even more apparent during 2016, a year with important catalysts.

Third, we have announced our fourth $100 million share repurchase program. And this is a signal of our commitment to disciplined capital allocation. We will continue to strengthen our portfolio with targeted acquisitions and look forward to completing the Exiqon transaction.

And as a last point, we have reaffirmed our full-year guidance for higher adjusted net sales and earnings per share at constant exchange rates, as QIAGEN prepares for an even stronger performance in 2017 and the coming years.

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

(Operator Instructions). Daniel Arias, Citigroup.

Yes, good morning. Can you guys hear me?

Yes, good morning, Daniel. How are you?

Okay. Thanks. Doing well. Roland, on the expense structure, how confident are you in the budget that you have here at this point for your growth initiatives? Obviously, between the GeneReader and QuantiFERON and liquid biopsies, a good deal of market development to be done. So, as you push into these opportunities, I'm just curious what the error bands look like at this point in terms of the investment levels that you've baked in.

I think we have our hands very well around our explained structures because there's always a reason we -- I think we are very upfront in explaining them in early -- or in January this year when we gave guidance. And we delivered exactly what we were planning for the first quarter.

If you look on the areas we decided -- where we invest in, it's a -- this is a very focused activity as we can track them down quite well. And if you look on the bigger spectrum now on the allocation the second, third, and fourth quarter, just take the first quarter run rate. And if you would use this as a kind of a basis for the fourth quarter, assuming for the next three quarters, assuming still that there is a certain pickup in the second quarter, you will see that, with expected revenue increase, we will do quite nicely our guidance.

So, I guess there is a lot of execution required. Nevertheless, we are very focused around that and therefore feel quite strong.

Bill Quirk, Piper Jaffray.

Great. Thank you. Good afternoon. I've got one question and a quick follow up. So, first off, and it's somewhat related to Dan's question. So, Roland, thinking about the plant consolidation that hurt you in the first quarter, presumably, this should help you in future periods. If so, can you just help us think about the magnitude of that? And then, again, I have a follow up. Thanks.

Yes, good question. I think what we just spelled out here in the first quarter is that we are still trying to consolidate as many production sites into our larger regional hubs here in Germany as well in Maryland in the US. And clearly, this is quite helpful for our overall leverage at the end of the day.

And if you assume for a second that our gross margin in the first quarter was roughly 100 basis points below the, I would say, average run rate of the last three quarters, half of that was really one-time impact. And therefore, we feel quite confident that, also, over the next three quarters, the gross margin is rather growing above 70% and even a larger share in the third and fourth quarter.

Okay. Great. Thank you. And then just on o-US HPV, it's obviously been a nice growth driver for you in the past. Looks like it slowed down here this quarter. We didn't pick up anything in the competitive results. And so, I'm curious. Was this just you have a lack of tenders in the quarter, or is perhaps the market slowing outside the US? Thank you.

Yes.

Sure. You're absolutely right on that one. That -- Bill, the -- that business is a tender business typically ex-US. And therefore, it is a little bit lumpier. And you will see more volatility in that growth rate. But, we remain incredibly well positioned competitively and are seeing competitive wins pretty much continually.

Tycho Peterson, JPMorgan.

Hey, thanks. Two quick ones. First, on GeneReader, trying to understand how you're managing the reimbursement dynamic with your customers, with the 5- to 50-gene reimbursement down around $600, it seems like a lot of labs are having a hard time making a profit. So, just wondering how active you are in helping with some of the reimbursement discussions.

And then separately, Peer, I'm trying to get a better comfort in the guidance for the year. By our math, you need to do about 7% to 8% organic in the back half. And you're coming off 2% in the first quarter, 4% in the second quarter. So, maybe just get us comfortable with what's really going to drive that revenue reacceleration in the back half of the year. I know you do have easier comps.

Sure. Okay. So, the first question, obviously, we are moving through and preparing also the appropriate regulatory processes to be able to position these systems adequately. If you look at the system and also the QIAact panel as it is designed today, it's designed for very attractive economics. And we're one of the few providers who can actually provide a positive value contribution to laboratories and allow laboratories to create a profit.

Once you actually take all of the components and all of the services required to do a next-generation sequencing run together, this often is not one or two suppliers, but this is often more than a dozen that come together for a complete workflow.

Cost are much higher than most labs normally would think. And looking at a price per insight model, where we actually are able to integrate everything from the primary sample through to the report and create a very, very reliable and price per insight for that, that is actually in a range that allows a very attractive margin, even under these new reduced panel rates. That is something that is driving a lot of customers to look at this and see this as a really viable option.

It's different in different countries around the world. And -- but, the economics of -- is not really just the economics of the sequencing reaction. That's actually a small fraction of it. The majority of the economics or the cost of the workflow are in the very steps around the sequencing reaction upfront and downstream. And we have created a fully integrated system that takes care of that.

In terms of the revenue distribution, I'll hand over to Roland in a minute. But, I guess one statement that he made in his comments was very important that we're pretty much comparable in terms of the revenue distribution we're guiding for this year to what we saw last year.

The revenue distribution last year was something like 48%/52% of the full-year revenue target. And this year, it's -- depending on what number you use, it would be about 47% to 53%. So, it's not really materially different. And considering that we're seeing these strong growth rates in key product areas, such as QuantiFERON and others that are doing very well now moving into the second quarter, we feel quite good about that revenue target.

The issue with the profits accelerating in the second half of the year is not a revenue story. It is a cost-management story because we accelerated expenses in the first half that we are confident will show a nice benefit in the second half and, therefore, would allow us to slow down expense growth.

Isaac Ro, Goldman Sachs.

Good morning, guys. Thank you for taking the question. I wanted to focus on slide 9 with your GeneReader roadmap and appreciate there's probably a lot of detail you don't want to offer today. But, I was hoping you could maybe comment on two items.

First was, in the sample type expansion comment, where you're looking to add liquid biopsy, does that related specifically to liquid biopsy samples for research work, or would it be actually clinical diagnostics doing liquid biopsy on GeneReader?

Sure. Well, so, the liquid biopsy sample technology solutions we have today are very widely used. We're selling millions of these every year. And we also have announced to the market that we are going to launch new versions that also will have clinical claims attached to them.

So, the GeneReader NGS system is a system targeting clinical research and diagnostics. And therefore, the liquid biopsy solutions that we will bringing onto the system will be solutions that will be portable over into clinical workflows as well.

The system, as you know, the frontend system, the QIAcube, is today already automating the clinical sample -- the cell free DNA liquid biopsy solutions that are registered with FDA. And this would therefore be an integration for already of very robust and highly validated system.

Jack Meehan, Barclays.

Thanks. Good morning. Had two somewhat related questions with the QuantiFERON. Nice to see the salesforce investment is starting to pay off. I'm curious. Do you think this is the new norm of the way to think about the growth rates and maybe what you're seeing here in the US in terms of growth?

And then just in the appendix of the deck, some of the headcount numbers, do you think you feel like you're where you need to be now in terms of the sales and marketing headcount? Is there where we should think about it through the rest of the year? Thanks.

Sure. If you look at the 3/31 numbers, they already reflect a steep increase and in particular the QuantiFERON lab and clinical sales channel that we created. There is an overlap with the dental sales channel that we have, certainly in the laboratories. But, we decided to create a focused approach that is now targeting particularly the QuantiFERON portfolio.

And that was increased substantially over the last 12 months. And we're not talking 20%, 30%. We're talking tripling and -- or even quadrupling. And this is already reflected in the headcount numbers in the first quarter. So, as these people are coming on and being trained, and this happened over the last six months, so partly even in March of this year, we're expecting to see the effect in particular in the second half of the year.

We've seen and tracked and monitored regions where we have implemented these additional resource, and we've seen very positive effects. And so, we're looking forward to also see that with the resources that have also more recently come onboard.

In other words, yes, so we expect also a -- this would further underscore what Roland had in his comments in terms of us having more accelerated investments into areas that have higher growth. And we expect that to see -- we expect to see payoff in the second half of the year.

Scott Bardo, Berenberg Bank.

Yes, thanks very much for taking my questions. I have two, please. Firstly, understand clearly that you have relatively good management on some of the operating costs, be it SG&A and administrative and R&D costs. I think, historically, one of the surprises has been some volatility in gross margin.

And so, what I just wanted a bit to come back to, please, is your constants in gross margin. And is there any chance of any volatility in [TDX] contracts that you saw last year? Perhaps you can describe some of these dynamics as to manufacturing, product consolidation, transfer of production, when the benefits come there, please, just so we can get some comfort that gross margin will be delivered.

And second question, please, just relates to GeneReader. Obviously, some encouraging commentary about initial uptake. I know you're still due to place your targets and to the market. Can you give us a flavor of how demand is tracking in so far as, are you just seeing a near-term blitz and the loyal sort of historic QIAGEN customers, or is the pace of interest accelerating, or do you expect linear placements going forward? Just give us some sense of dynamic for the placement power of GeneReader and also when you expect some of these new panels to come to market. Thank you.

Yes, let me kick it off with the gross margin question. I think, Scott, you're pointing to a very important point. And the gross margin I would say in QIAGEN, especially if you look at our instrumentation and our consumer business, is actually quite stable and even slightly improving.

So, volatility comes always with two factors. One is we talked about in the past is with this companion diagnostic deals or where we developed products for pharma partners. They first of all have a quite significant quarterly volatility. And of course, you come in with a quite significantly lower gross margin. And that is clearly something what is not helpful from time to time for the overall gross margin. And that is, again, the one part of the impact you have seen in the first quarter as well.

And the other one is, as you know, we stopped some time ago to adjust for certain restructuring costs. And therefore, we had to float to our overall cost of sales, something what we actually should review that point that out going forward more precise. That is better I think, something what you can put easy in your models.

Nevertheless, it clearly is important to emphasize such underlying consumable trends in terms of profitability as well as everything around the Symphony is actually quite intact and helpful and solid for QIAGEN. And therefore, we confirm our gross margin at 70-plus percent, probably even again also here a certain acceleration from the second, third, into the fourth quarter.

And, Scott, to the first question, this is a system that is going into accounts clinical research diagnostics that would not necessarily buy something just off the shelf, even with the QIAGEN logo. It clearly goes a long way. Most of these customers that are around the world, by the way, they certainly are QIAGEN customers. As we said before, almost every pathology lab or any clinical research lab around the world is a customer of ours. And so, we do have relationships. And there is a recognition of the brand equity.

So, that said, the first ones who came in are ones that had a very pressing need and, in many cases, a frustration with the complexity of the current workflows that are much more complex than typically one is led to believe and in particular in routine testing.

And so, the -- by creating the simplicity or allowing the simplicity and the pathway to profitable economics for a laboratory to be visible, this has allowed people that I wouldn't even call early adopters, but people who were just in the right phase in their decision-making process to step in.

We expect this to accelerate going forward. And in particularly, when you see more data coming out, which looks very good, and we have been getting great feedback in the meantime from many test accounts and many early adopters already. And we're looking forward to put more data out and also more studies.

And the -- so, it's not a blip. It is the beginning of a trajectory and one that we feel very confident about. And the message is resonating. And in particular, QIAGEN is very welcomed into this market with the approach that we are taking.

Steve Beuchaw, Morgan Stanley.

Hi, good morning and good afternoon.

Good morning, Steve.

Two questions from me. One is I wonder if we could just get a little bit more comfort around the applied line. Are there any trends you could point to with regard to orders, the backlog that give you what is clearly a very high level of confidence in the growth profile in the applied line over the balance of the year?

And then second for me relates actually the repurchase announcement. The 100 is similar to what you've done in prior years. Why is 100 the right number? Given that the stock is off of its recent highs and we have confidence in acceleration over the back half of the year, why not think about a more aggressive deployment of capital or return of capital to shareholders? Thanks.

So, I'll take the first question. The second I'll leave for Roland. The applied testing portfolio, I'd say it's a smaller part of our revenue basis and sometimes a little bit more volatile. There are also tenders in there that -- in particular ex-US that can impact volatility.

That said, the first quarter was primarily impacted by a lower instrument purchase trend that we -- our team expects to here see accelerate now over the course of the year. And we believe that the applied testing revenue will meet its targets that we set for this year.

The business is going actually very well on the consumables side. We had some very high-profile wins also in the US following the entry into that market with assays. As you know, we've been in the market for 25 years now with the sample technologies and have an extremely strong position in that area. But, entered last year with the assays, very attractive, also nine-digit market size.

And we are seeing our first highly competitive wins against incumbents with what we think is a very attractive alternative. And that is still early, but it is on a long-term trajectory, as this is typically a very conservative market.

Roland?

Yes, on the share buyback, I think what we want to do here is a very balanced approach that is clearly something also what we rather see mid and long term. And if we see certain situations where we want to accelerate it, there might be different tools to do so. Just to remind -- just would like to remind you what we did, for example, early last year, where we bought out an outstanding convertible bond at that time, which [generally] was returning another $250 million.

So, for us, share buybacks is rather something what we see as a general part of our capital allocation policy. And that includes on the one hand side share buybacks. But, it also clearly includes also bolt-on acquisitions.

Daniel Wendorff, Commerzbank.

Yes, thanks for taking my questions. One main question and then a follow up, please. Main question, taking into account what you've said on the tracking of costs during the year of 2016, how should we think of the EBIT margin adjusted going forward into Q2 and then also in the second half? Is it that Q2 is like similar to what we observed in the first quarter, and then a jump in the second half? Any more color there would be helpful.

And second question is also relating to your NGS portfolio now with the GeneReader on the market. Can you potentially comment on the number of early adopters you're currently working with and the eventual number of like targeted adopters, target clinical laboratories? Any comment there would also be helpful. Thank you.

Yes, Daniel, let me take the first part. Yes, I think, as we tried to lay out in the call is that we do expect an acceleration here and improvement, not only in terms of revenue growth, but especially also in terms of profitability over the course of the year.

And that probably goes from, let's say, around 20% adjusted EBIT margin in the second quarter into an area which is probably at 30-plus percent in the fourth quarter and somewhere in the middle then for the third quarter.

So, I think you clearly can expect a similar pattern we have seen in the past. This just again -- if you look at the absolute dollar numbers that we front-loaded some of these expenses into the first and second quarter for targeting investments, as we said, around launch activities, around QuantiFERON sales specialists and regional expansion and half of this cost fading away. So, the profitability should shine through again with also good margin improvements in the third and fourth quarter.

The first question, Daniel, was on the GeneReader. We will -- we said we would give further color on the success and the progress in this area later in the year. We said that the uptake is much broader and much faster than what we initially had anticipated and put in our plan. We expect that trend to continue.

The size of the market is very much a function of the content. There was a good question on the call today also on that. And the QIAact Actionable Tumor Panel, that actually addresses one of the largest applications, but it's in most of these laboratories. But, we're going to expand from there with additional features and modalities and also different indications as well.

So, if you take the narrow definition, we're not talking of a market size of dozens of systems. This is hundreds of systems a year. And this we said also in our commentary. We're targeting a double-digit market share in the first year out, which I think is quite remarkable for a solution like this and one that is the beginning of a more long-term trajectory.

Doug Schenkel, Cowen & Co.

Hi. Thank you for taking the questions. First topic is, I guess, really a quick one, just a guidance clarification. Excluding FX, you reiterated EPS guidance for the year. You also reiterated gross margin guidance. You lowered tax rate for the year. I just want to make sure that, logically, we are appropriate in concluding that the offset here is all increased operating spend, which based on other commentary, you would expect to be heavily weighted towards Q2.

And then the second topic is again GeneReader. There's been lots of qualitative commentary on placements exceeding expectations and demand exceeding expectations and how well you're doing here. You've spent considerable time on this again today. You clearly have a lot of excitement about this initiative.

That said, in the absence of really anything qualitative -- I'm sorry, quantitative, it's really hard for us to know how meaningful this initiative is. I believe you have nothing in guidance for GeneReader revenue contributions this year. I guess it would be helpful if you could provide anything quantifiable.

You mentioned, Peer, that you expect to have double-digit market share in the first year of the launch. There are several thousand next-gen sequencing instruments out there. Is that how you're defining the market? And in terms of in Q1 exceeding expectations, you said you expect to have hundreds out there, not dozens. Do you have more than a dozen instruments out there? And are they in production? Thank you.

Let me start with your question on tax. I think the adjustments we made here to the tax guidance is really to cover the performance from the first quarter, where we came in at 15%. I don't expect any change on the overall mix for the second, third, and fourth quarter, therefore, only a slight improvement from 17% to 16% to 17% for the year.

Doug, there were many questions. So, I'll try to address that. So, we shared a lot. And we shared our positioning. Our positioning is definitely not addressing the thousands of sequencers that are out there. We were very clear -- this is what we also put into this presentation as a slide --that we're targeting a subsegment of the market that is targeting panel testing in clinical research and diagnostics. And that immediately takes your thousands down to hundreds, as I said before.

And if you look at the market shares in the hundreds and then look at double-digit market share, you don't get hundreds of thousands of systems that we are targeting. But, it is a very doable number for us. And yes, we are on that trajectory. And we feel very confident also that the pipeline and the commitments and also the indications that we are receiving will allow us to get there.

So, the question is also here how that subsegment of the market, again, panel testing in clinical research and diagnostics, how that will expand with further indications going forward. And that's why we gave you some of the panel roadmap that would allow further indications and further utility and also a broader audience to be open to the GeneReader system.

The reason why we're excited about this is because this has been a significant investment phase. It's an important product for us. And the first feedback is very positive. And I'm sure you appreciate that this is therefore also important feedback for you that we feel very confident that this has been a good investment that we did over the last few years.

Jon Groberg, UBS.

Great. Thanks a million. There's just a couple questions for me that we're getting from clients. One, Roland, can you maybe just clarify why currency isn't more favorable than what you're laying it out to be? Most every other company has reported the currency having improved. They're laying out, I would say, a more favorable outlook, both from a revenue and an EPS standpoint. It doesn't seem like you're really changing the EPS impact.

And then second, would you be willing to quantify kind of anything around Exiqon in terms of what it could mean for -- what you think it means for the business from an accretion to margins, EPS it's expected to close? Thanks.

Do you want to start with the second one, or -- ?

-- Why don't you take this?

Okay. So, start with the second one, Exiqon. Again, I think it's (inaudible) I also would [as append indeed], I would just refer to what we said in terms of our press release. And again, I don't want to be too aggressive right now because it is not closed yet.

Nevertheless, I would say we clearly said there is a lot of synergies clearly for us in terms of, again, focus and fitting into our company portfolio. And profitability contribution is also quite clear that it doesn't contribute to profitability in 2016 and 2017.

On the FX question, of course, I can't comment on other companies. It, therefore, is a little bit difficult. What, again, I would like to refer to is we do have quite detailed breakdown in our appendix on where we have our currency movements.

And I think the one thing you should have in mind is, of course, if you look at our mix, the volatility for us comes -- especially on the profitability side -- comes always out of the countries where we do not have any cost basis. So, it's not typically dollar-euro. There we do actually have a -- I would say a good natural hedge.

It is rather in countries where we don't have any larger cost base. And this is typically the emerging markets where we have just a salesforce typically. And therefore, any swings here is hurting us more than probably other companies who have a larger local presence or even production locally.

Vijay Kumar, Evercore ISI.

Hey, guys. Thanks for squeezing me in. So, I had a two-part question, one on the financial side, and one big picture for Peer. So, maybe on the financial side, going back to the guidance, sort of sequential ramp, 4% CER revenue growth in Q2, so as you think about the back half sort of high singles, right, so we understand HPV goes away. So, that adds 100, 200 bps.

And I think I heard you say guidance doesn't bake anything -- any contribution from GeneReader. So, what gives you comfort? Is this sort of applied markets normalizing or something happening within diagnostics or even sort of academia that gives you the confidence?

And the big picture question for Peer was, what are you seeing, Peer, from a big picture perspective on sequencing landscape? Obviously, your -- one of your larger competitors, and they've had some issues on the high end of the market. And clearly, you guys think the opportunity is at the low end of the market, right, the big box versus the small box.

And I'm just curious if you're seeing anything, just given that QIAGEN is the largest stock in a sample prep provider. And you guys are probably more likely to see trends in that market before we see it. Thanks.

Yes, hi, Vijay. I always like to hear that I'm only responsible for the fine print and not for the big picture. But, having said that, I think it's a fair question. But, I think, as said before, it's clearly driven by the ramp up, mainly in our growth drivers, but also academic markets moving in the right direction. So, it's a general growth [spurt].

Have in mind also -- and I think that's something what I would like to remind you is that, of course, the prior-year dynamics are also important to factor in. Last year, in the first and second quarter, we had high single-digit ex-US HPV growth rates that was clearly different in the third and fourth quarter. So, also, comps are important to include in your calculations.

So, I think, if you factor that all in and also, again, having in mind just what we said before, 47%/53% allocation H1/H2, I think that should be doable.

So, Vijay, what we basically see and what you also see in the market right now is that the high-end markets, they're a little bit more volatile. That said, I would say that the competition is actually doing a great job in serving that market. And the demand will continue to increase going forward. It is a fundamental technology that will clearly have a very long-term trajectory also in terms of the market development.

And that said, we -- and that's a very important differentiation where QIAGEN fits in. I also saw some of the surveys and studies done. We are not going to labs that are typically running five sequences already or more. We're going to labs that are typically the -- using these technologies for everyday use and to create utility in particular in clinical research and diagnostics. And that's a totally different ballgame.

The value proposition to the high-end labs that you will get from those labs is very different to the labs who are actually using this as a tool. They don't want to cobble together these workflows. They don't want to add the newest reagent or instrument to the workflow. They want to have something that works and works very reliably and creates utility for them.

And that's something that our solutions cater to. It is a new value proposition and one that is resonating very well with a different market segment than the ones that were traditionally very focused on in terms of seeing trends and also understanding demand profiles and sequencing.

This is a newly emerging area, one that is -- has partly also already bene doing sequencing, but in many cases is frustrated. Many of the sequencers are not productive in these areas. And people are looking for a way to actually be able to generate economics and value for their patients. And that is a market that we think is new and emerging and one that is resonating well to our value proposition. But, I think sequencing overall is a long-term trajectory. And again, I applaud many of the efforts also from competitors to drive this technology forward.

With that, I would like to end this call and thank all of you for your participation today. If you have any questions or comments, please do not hesitate to give me a call or send me an e-mail. Thank you very much.

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