Qiagen NV (QGEN) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining QIAGEN's conference to discuss the third quarter 2017 results. (Operator Instructions) Please be advised that this call is being recorded at QIAGEN's request, and will be available on their website. (Operator Instructions) At this time I would like introduce your host, John Gilardi, Vice President of Corporate Communications and Investor Relations at QIAGEN. Please go ahead, sir.

Thank you very much, and we appreciate you all taking the time to join us today for this 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 from our IR team.

On Slide 2, you will see the safe harbor statement explaining that the discussion and responses to your questions on this call reflect management's views as of today, Tuesday, November 7, 2017. 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 U.S. Securities and Exchange Commission. We will also 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 in the press release in the presentation for this call, that is on our website.

With that, I'd like to now hand over to Peer.

Well, thank you, John, and I would like to welcome all of you to this conference call. We are pleased with a solid performance for the third quarter of 2017. This is further confirmation of our confidence in achieving the full year goals for market share gains, adjusted net sales growth and a double-digit increase in adjusted earnings per share. Our teams executed very well to deliver these results. We are determined more than ever to capitalize on the performance to date in 2017, and create greater value from our Sample to Insight portfolio for molecular testing.

I have these key messages for you today. First, the results for the third quarter were in line with our targets. Adjusted net sales rose 7% at constant exchange rates, and this was in line with our outlook for about 7% CER growth.

Adjusted earnings were $0.32 per share at constant exchange rates and also in line with the outlook for about $0.32 to $0.33, excluding the restructuring charge, which was less than $0.01 for the quarter. Second, our Sample to Insight portfolio is building momentum. Among the highlights in the third quarter was the QuantiFERON-TB test continuing to grow above the 25% CER target we have set for the year. Our teams also recently launched the fourth generation of this test in the United States, and we are pleased with our contributions towards global TB control. The trends are also very positive for the QIAsymphony automation system. We are set to soon achieve the 2,000th placement and continue to see ongoing solid growth in related consumables. We will have more information for you on this topic at the upcoming Association for Molecular Pathology Meeting.

As another highlight, we have reached an important milestone with more than 25 master collaboration agreements now in place with leading Pharma and Biotech companies to develop novel companion diagnostics for their targeted cancer therapies.

And as a last point, we announced some new bioinformatics collaborations, and these are helping to strengthen our engagement in next-generation sequencing. We have seen dynamic growth in our universal NGS solutions that can be used with any sequencer.

On the topic of the GeneReader NGS system, we are experiencing rapid acceptance of this unique Sample to Insight workflow as our teams further took share in placements for use in oncology gene panel testing, and we are making exciting progress on placements around the world. Our new joint venture with Maccura in China is also taking shape, and we are also looking forward to expansion in this very important market.

We also announced in October a novel use for GeneReader in forensics at the International Committee for Missing Persons in The Hague. Third, we are reaffirming our outlook for adjusted EPS of about $1.25 to $1.27 per share at constant exchange rates. And this is a significant improvement from the underlying adjusted EPS of $1.11 per share in 2016.

As you saw in the press release, we have launched a new project in China to increase investments in high-growth areas, while at the same time also streamlining our portfolio. We will be putting more resources towards areas such as the great opportunities for QuantiFERON-TB test, the very promising new Mac-GEN joint venture for the GeneReader, as well as our Life Science portfolio, which has one of the highest market shares in China of any country in the world and a great potential as well.

As we enhance our focus on the growth portfolio in China, we have proactively decided to stop the production and sales of some non-core diagnostic PCR tests and to divest the distribution of our financially less attractive HPV franchise in this country to a third-party aggregator distributor. We decided that this new structure would be the best way to go forward in China, which also removes uncertainty related to how HPV testing will evolve in China.

While this decision is not expected to have any material impact on adjusted earnings per share, it will change revenue recognition of these sales. And also the comparison of total sales results for the fourth quarter and full year 2017. And Roland will be sharing a full overview and further details on this later in this call.

Excluding this impact, we expect about 7% CER growth in adjusted net sales for the full year. As a further item, I'd like to mention 2 changes in the QIAGEN Executive Committee, which we announced in this press release as well. First, after 12 years with QIAGEN, Doug Liu is retiring from his role as Senior Vice President, Global Operations. Doug has successfully ensured reliable product supplies and the growth of QIAGEN's portfolio. He did this while also ensuring the successful integration of many companies and also was responsible for our regulatory team, which oversaw a significant number of clearances and approvals in the U.S. and globally, including the landmark FDA approvals for our therascreen companion diagnostic test. His successor is Mark Gladwell, who recently joint QIAGEN with over 20 years of industry experience and was most recently Senior Vice President of Global Operations at Alere. In the 2 years prior to the acquisition by Abbott, Mark had successfully taken on the significant task of improving the operations and simplifying an extremely complex and very challenged company organization. We also announced that Laura Furmanski has decided to resign and return to a regional role in management consulting. During her 3 years at QIAGEN, she and her global team have successfully grown the bioinformatics business, while incorporating our industry-leading portfolio into the QIAGEN ecosystem and deeply enriching the competitive advantages of our Sample to Insight solutions. The search for Laura's successor is in advanced stage. On behalf of my colleagues and the Executive Committee, I would like to wish Laura and Doug all the best for their future endeavors.

I would now like to hand over to Roland to review the financial performance.

Thank you, Peer. Good afternoon to those of you in Europe, and good morning to those of you in the U.S. I will review our financial performance for the third quarter of 2017, and later, provide you with more details on our outlook for the fourth quarter and to update for the full year.

As you saw in the press release, QIAGEN delivered another solid performance in the third quarter and we achieved our targets. Adjusted net sales was 8% to USD 364.4 million and they were up 7% at constant exchange rates. The weakening of the U.S. dollar during the third quarter, especially against the euro, led to the favorable currency impact. Adjusted net sales includes the full sales contribution from the OmicSoft acquisition, and this represent about 1 percentage point of CER sales growth, while about 6 percentage points came from the rest of the business.

Moving down the income statement, the adjusted cost margin was 70.9% of sales and was down about 50 basis points from 71.4% in the third quarter of 2016. The modest decline included the adverse impact of the double-digit CER increase in revenues from Pharma Master collaboration agreements. These revenues come with a gross margin usually in the 30% to 50% range, but provide benefits, which drops through to adjusted EBIT.

Adjusted operating income was USD 97.9 million before the pretax restructuring charge, which represents an 11% increase from $88.1 million in the third quarter of 2016. As a result, the adjusted operating income margin rose to 26.9% of sales compared to 26% of sales in the year-ago period. Sales and development expenses remained steady at 10.6% of sales compared to the same period of 2016. For the first 9 months of 2017, R&D expenses were lower compared to the third year [quarter] (sic) a year ago. This was mainly due to the efforts to increase investments into targeted growth opportunities, while also rationalization in the R&D portfolio, which included spinning off the Pharma QIAGEN side in Switzerland in late 2016.

Sales and marketing expenses were 26.6% of sales in the third quarter, down from 27.8% of sales. This shows the efficiency gains in our sales and marketing organization, even while ramping up new activities in the Middle East, South Africa and Asia.

General and administrative expenses were 7.4% of sales compared to 6.9% in the third quarter of 2016 as we made investments in our digitalization infrastructure. The third quarter pretax restructuring charge amounted to USD 1.8 million. So this did not have much impact on results. Based on our current plans, we continue to expect about $20 million of restructuring charges for the full year and that it’s for about $0.07 per share on an after tax basis.

Moving down the income statement, adjusted diluted earnings were $0.32 per share at both actual and constant exchange rates. And as I mentioned earlier, the pretax restructuring charge did not have a meaningful impact on adjusted EPS, but we continue to break this out in line with our adjustment policy. The adjusted tax rate was 18% of sales, which compares to our outlook for about 17% to 18%. The share count was about 233 million shares, which was slightly lower than our outlook for about 235 million.

I would like to now review the progress we are making to improve operational efficiency and profitability, along with the increase in sales growth. As you can see in the chart on Slide 6, we saw a steady increase in the adjusted operating income margin during 2016 when excluding the restructuring charge and are building on that progress during 2017. Our ambition remains for about 200 percentage points of improvement for the full year 2017 compared to the underlying adjusted operating income margin of 24.3% of sales in 2016. We have been updating you on our efficiency initiatives. Key areas include centralization more activities at our shared service centers to gain more flexibility and scalability, making our marketing activities more efficient and embracing digitalization trends to enhance sales growth, while also generating efficiencies.

As an update, we have now created our new shared service center in Manila, and look forward to expanding this site as we focus on operational improvements in the Asia-Pacific region.

Next, I will go over our results among the product categories and the 4 customer classes. Among the product categories, consumables and related revenues was 8% CER in the third quarter, maintaining the solid momentum from the second quarter of this year and representing about 88% of our total. After a sluggish performance in the first half of 2017, instrument sales improved in the third quarter and were up 2% CER over the same period in 2016 and represented 12% of sales.

Among the customer classes, we saw underlying positive trends in all 4 customer classes. The M&A contribution was about one percentage point from OmicSoft, which was acquired in January 2017.

In Molecular Diagnostics, sales were up 9% CER, and strengthened by the QuantiFERON latent TB test growing about our full year 25% CER target. Also supporting the performance were double-digit CER gains in QIAsymphony-related consumables and double-digit CER gains in revenues from companion diagnostic partnerships that underpin growth in personalized healthcare.

HPV test sales were very mixed in the third quarter. In the U.S., the sales were up 4% and represented about 2% of total sales. However, the year-to-date decline of 13% CER created about 1 percentage point of headwind on total company sales. We expect reduced U.S. HPV test sales in the fourth quarter of 2017 and for about 2 percentage points of headwind on total growth. We also faced lower HPV test sales in the rest of the world in the third quarter of 2017. This was primarily in Latin America due to the expected discontinuation of a tender. This means that HPV test sales outside the U.S. had an adverse impact of nearly 2 percentage points on total adjusted sales growth in the third quarter of 2017.

The Life Science customer classes grew 5% CER in the third quarter of 2017 and were again led by Applied Testing, which rose 15% CER for the third quarter and maintained its 16% CER growth trend for the first 9 months of the year. Here, we continue to see robust demand for our Human ID and forensic solutions, particularly in the EMEA and Americas region.

In Pharma, sales were up 5% CER in the third quarter, thanks to single-digit CER gains in both consumables and instruments and better trends in Europe compared to earlier in the year. Academia sales were up 2% CER in the third quarter, and we saw single-digit CER growth in consumables, but faced a double-digit CER decline in instrument sales.

I would like to now review the performance among the 3 geographic regions. In the Europe, Middle East, Africa region, sales rose 15% CER and provided about 1/3 of the total. This performance was above the trends seen in the first half of the year. Here we saw solid growth in France, where we recently gained reimbursement for the QuantiFERON-TB test, as well as improved results in Turkey, United Kingdom, the Netherlands and South Africa. These countries more than offset weaker results in some Northern European countries as well as the Middle East, which is driven by the timing of tenders. In the Americas, sales were up 3% CER and represented about 47% of the total. The U.S. and Brazil provided single-digit CER growth, but Mexico sales declined at a double-digit CER rate due to the expected expiry of an HPV tender.

In the Asia-Pacific and Japan region, sales were up 7% CER and provided about 20% of total sales.

I would like to now provide an update on our financial position. We continue to have a very healthy balance sheet and remained committed to our disciplined capital allocation strategy. This involves strengthening our organic business, increasing returns to shareholders and focusing primarily on bolt on M&A transaction. As you saw in the press release, we completed our commitment to return $300 million to shareholders by the end of 2017. This was done through the open market with purchase of about $60 million of shares that was completed in mid-September and the synthetic share repurchase in January, with had a return of about $240 million [$245 million] (sic) . We have shareholder authorization to launch more repurchase programs and are reviewing our options.

Cash flow during 2017 has been affected by the cash restructuring payments related to the efficiency initiatives that we launched at the end of 2016 which have continued into this year. Free cash flow declined to $146.1 million compared to $186.7 million in the first 9 months of 2016. However, this included appropriately $41 million of cash restructuring payments and all the payments for PCR-related litigation settlements that we announced with the second quarter results. Adjusted for these factors, underlying free cash flow was at a high single digit rate in the first 9 months for 2017 compared to the same period in 2016. Leverage remains at about 1.5x net debt to adjusted EBITDA, and this is similar to the same 9-months period in 2016. You will also see that the shareholder equity level declined to 50% from 62% in the 2016 period. This was an outcome of 2 factors. First, the completion of our commitment to return $300 million to shareholders and second, our decision to take advantage of the current low interest environment to raise debt proceeds.

As you saw from our announcement during the third quarter, we issued about $400 million of cash sales 6-year convertible notes at a very attractive 0.5% annual interest rate and with an effective conversion price of $50.97 due to the entry into option transaction. This follows our decision to raise about $330 million via a German private placement earlier this year. We raised these funds to strengthen our balance sheet and also in anticipation of about $500 million of refinancing needs coming up in 2019.

I would like to now hand back to Peer for a strategy update.

Yes. Thank you, Roland. And I'm on Slide 10 now to update you on key developments in our Sample to Insight portfolio during the third quarter. I'd like to walk you through specific progress on QuantiFERON-TB, our next-generation sequencing offering and Personalized Healthcare, over the next few slides. But first, I'll touch briefly on QIAsymphony and Differentiated Technologies, both of which are continuing to show very solid growth.

QIAsymphony is a remarkable success story. New placements were strong again during the third quarter, and we are set to soon achieve the 2,000th cumulative placement, which we have set as a target for the end of this year. The system is adding value with an expanding menu of test content and also for front-end use for any downstream molecular testing, in particular for NGS workflows. Our broad portfolio of Differentiated Technology is providing innovative solutions in large and cutting [Ed] areas, such is Life Science research, include also the microbiome single cell and liquid biopsies, and these continue to create great excitement, brand value and right growth. Our workflows for forensics are industry-leading, and we were certified recently as meeting state-of-the-art ISO standards for purity and quality, which are absolutely critical in these products. Liquid biopsies are disseminating rapidly as our solutions progress from research into the clinical arena. In the third quarter, the latest advance was a partnership with Clinical Genomics, a private company integrating our PAXgene blood sample solution for collection and processing of cell-free circulating DNA into their novel assay for recurrence testing colorectal cancer.

And now let me review the progress on those first 3 growth drivers in further detail. I'm now on Slide 11 to review key developments for QuantiFERON-TB, the world's leading blood test for providing highest accuracy and sensitivity in the detection of latent tuberculosis. We estimate this is a $1 billion addressable market, with promising opportunities for the QuantiFERON-TB test. Third quarter sales continue to solidly trend above the 25% annual growth target we have set for the year. We reached an important milestone in the third quarter with the launch of QuantiFERON-TB Gold Plus, the fourth-generation version of the test in the United States. Our U.S. introduction of QuantiFERON-TB Gold Plus started after the test gained U.S. FDA approval in June of this year and follows adoption in more than 75 countries across Europe, the Middle East, Africa, Asia and Latin America. Commercialization of the fourth-generation test in the United States is ramping up as we speak and will support an even faster rate of conversion of the latent TB testing market from the 120-year-old tuberculin skin test to our QuantiFERON technology. QuantiFERON-TB offers a number of significant clinical advantages over the skin test and the fourth-generation QuantiFERON-TB Plus sets a new benchmark in TB testing. Our innovative TB-specific antigen, CD4+ and CD8+, directly interrogate the immune memory and enable unmatched sensitivity as well as potentially improving risk stratification of latent infections developing into active disease. QuantiFERON-TB Gold Plus is currently the only blood test for latent TB detection on the pathway to evaluation by the World Health Organization for its global campaign to eradicate TB.

During the third quarter, the test gained further support from the International Panel Physicians Association, a nonprofit network of panel physicians who advise and educate governments on immigration, as well as performing immigration screening. The IPPA has committed to endorse QuantiFERON-TB Gold Plus for their panel physicians network, which will further establish the test as a global driver for the elimination of this deadly epidemic.

I'm now on Slide 12 to update you on developments for our next-generation sequencing portfolio; including the GeneReader NGS system, our fully integrated Sample to Insight solution for clinical research panel testing as well as our platform agnostic universal NGS portfolio for Life Sciences research. GeneReader is rapidly gaining acceptance with the focus on clinical bench top oncology testing, and we are placing fully integrated NGS workflows around the world. Purpose built to meet all critical demands of the clinical research market, the GeneReader system offers broad flexibility and technical specifications and sample throughput. This customer-centric, yet flexible design has opened up a lot of interest in applications also beyond clinical research. For example, a full GeneReader NGS workflow was recently installed at the newly opened DNA Lab of the International Commission of Missing Persons in The Hague for human identification purposes. We will also have more news at GeneReader at the upcoming AMP meeting with customer abstracts, underscoring the exciting value and broad utility of GeneReader. A central challenge in next-generation sequencing regardless of the platform, remains the strong demand for highly efficient and accurate workflows to extract actionable and reliable insights from the vast amount of genomic data that is being generated.

Our market-leading position in bioinformatics for research as well as clinical applications was strongly supported at the recent ASHG conference in Orlando by a number of studies from prestigious institutions. Among them, a study by the Mayo Clinic emphasized the high accuracy of our bioinformatics software solutions in the detection of small genetic variations. Additionally, a study by Counsyl reported on the strong curation efficiency of the QIAGEN clinical insight platform, QCI, including improvements in genetic data interpretation and a time reduction of approximately 75% in the search process for clinical data references. A significant amount of time is being spent by labs in creation, and this study highlights the quality improvements and cost reductions of using QCI. Based on these findings, Counsyl has entered into a collaboration with QIAGEN to fully implement QCI for interpretation of genetic variant curation. Taking advantage of the time and efficiency gains will allow Counsyl to significantly increase the capacity of their genetic testing business.

QIAGEN also entered into a collaboration with CENTOGENE, a German company focusing on hereditary rare diseases for the integration of CENTOGENE's rare disease variant database into both the QIAGEN knowledgebase and QCI. By combining our highly curated databases, we can strengthen our footprint in the analysis and interpretation of rare diseases. Together, we can deliver even more powerful insights for researchers and clinicians to help patients.

I'm now on Slide 13 to give you an overview of our personalized healthcare franchise. And 2017 has been a very successful year so far in this area as we have been able to further leverage our know-how, experience and development expertise in the creation of molecular tools to guide medical decision-making based on individualized genomic insights. We have surpassed a milestone of 25 master collaboration agreements with pharmaceutical companies, and have launched a record number of 15 new companion diagnostic projects with existing pharma partners, each bearing potential for advanced tools and clinical patient stratification. Companion diagnostic's co-development revenues are growing at a double-digit CER pace for 2017. We laid a solid foundation for future growth in the third quarter by initiating 5 new submissions for FDA premarket approval applications, pointing to several potential product launches in 2018 with so far non-disclosed partners. We have broadened the range of indications as well as a number of technology platform -- as well as the number of technology platforms in our companion diagnostic deals. A notable area of activity involves immuno-oncology, which is a highly promising and fast-growing area in cancer therapy that requires modern diagnostics and unleashes the power of NGS. We announced a groundbreaking agreement with Bristol-Myers Squibb in June at ASCO to develop the first NGS-based companion diagnostic solutions for use with I-O therapies, and in the meantime, we have significantly expanded our footprint in this area. During the third quarter, we were able to add a further NGS-based collaboration, this one with an undisclosed pharmaceutical company that builds on the BMS collaboration and our I-O platform. Our value proposition of offering multiple technology solutions to our partners is paying off by enabling QIAGEN to act in a truly consultative manner and identify the best solutions that meet the specific needs of a partner and not just push a technology solutions for its own sake.

And with that, I'd like to hand over to Roland.

Thank you, Peer. I would like to review our outlook for 2017, starting with adjusted net sales growth of about 7% CER. This excludes the 2016 and 2017 revenues related to our decision to streamline the China portfolio as part of the new initiative. This outlook continues to include about 5 to 6 percentage points of organic growth and about 1 to 2 percentage points from acquisitions. As we discussed on the call for the second quarter results, the contributions from acquisitions is in the middle between 1 and 2 percentage points and could round up or down. A reconciliation can be found in the appendix to this presentation. In terms of adjusted earnings, we continue to expect about $1.25 to $1.27 per share. This is at constant exchange rate and excluding the restructuring charge, which is expected to be about $0.07 on a full year basis. The results for 2017 show a significant increase compared to this underlying $1.11 per share in 2016.

As for currencies, based on rates as of November 3, we now expect a negative impact of about 1 percentage point on full year CER sales growth for movements against the U.S. dollar and a negative impact of about $0.01 on a full year adjusted EPS at CER rates.

I would like to now provide some detailed information on our outlook for the first quarter and also the assumption for the full year.

For the fourth quarter, our outlook for adjusted net sales is for growth of about 5% to 6% CER. This is also adjusted for the changes in the China business. This guidance is based on approximately 4 to 5 percentage points of organic growth, against a strong Q4 2016 and includes about 2 percentage points of U.S. HPV headwinds. This also includes about 1 percentage points from the OmicSoft acquisition. Our outlook for adjusted diluted EPS in the fourth quarter of 2017 is for about $0.41 to $0.42 per share at constant exchange rates, and this excludes an anticipated $0.01 of after-tax restructuring charges for the efficiency initiatives. The adjusted tax rate assumption for the fourth quarter is for 16% to 17% and about 234 million shares outstanding.

In terms of expected currency movements against U.S. dollar for the fourth quarter and based on rates as of November 3, 2017, we expect a tailwind of about 2 percentage points on adjusted net sales and a neutral impact on adjusted diluted EPS. With that, I would like to hand back to Peer.

Yes. Thank you, Roland. I would now like to provide a quick summary before we move into Q&A. Now let me review what we have announced. First, we achieved our targets for the third quarter of 2017 with adjusted net sales growth of 7% CER and adjusted earnings of $0.32 per share. Second, our Sample to Insight portfolio continues to build momentum. Among the highlights was the ongoing growth of the QuantiFERON latent TB test, along with double-digit CER gains in companion diagnostics and QIAsymphony related consumables. And third, we are on track to deliver market share gains, solid adjusted net sales growth and a double-digit increase in adjusted earnings per share for 2017. This gives us renewed confidence in our growth phase to excel towards 2020. And with that, I'd like to hand back to John and the operator for the Q&A session. Thank you.

(Operator Instructions) First question comes from the line of Steve Beuchaw with Morgan Stanley.

I'd ask just one with a little bit of detail in it, I thought it would be interesting given that we're here at almost at the 1 year anniversary of the introduction of your long-range plan to investors in November of last year. If you could just tell us, what do you think are the 2 or 3 things that you've learned this year that are the most important, that help you to refine your thinking on the long-term plan and how you think that evolves over the next 2 or 3 years? And then within that, it would be helpful if you could give us just a couple of details on things that are merged here -- instrument number was a little stronger, should we think about instruments being a little bit better from here? And then on HPV, post the fourth quarter, how are we thinking on HPV going forward?

Sure. Well, first question, Steve, thanks for that. The long-range plan, we are progressing very well on it. As you know, it is something that the management team is also incentivized against and we are moving very well ahead on that path. The best thing about having a long-range plan, it builds confidence to an organization, and it also allows great stability and at the same time agility. Clearly, we are able to address opportunities that emerge in a very swift way and this is also something we've been seeing over the course of the year. So the long-term plan is fully intact, and we are executing towards it. The instrumentation changes come from the fact that we highlighted this, I think it was in the First Quarter Conference Call that we were not satisfied with how we were managing the pipeline in terms of instrumentation. We significantly revamped that. What you are starting to see is some of the benefits there. The growth that we saw in the third quarter is not good enough. We think we have more potential also beyond that. And we are working hard to get there. In terms of the HPV portfolio, this is, in the meantime, a very small percentage of our sales, but obviously, very volatile. The majority of the sales are now also a bit tender related and related to several larger partnerships. And I think what you saw now in the third quarter was a very proactive move to change the way we're approaching the Chinese market, which is the second largest market for us in the world and restructure the way we are selling this product by contributing into a distributor aggregator that can create a broader portfolio in a more focused and more targeted approach towards the woman's health markets, while we can focus on the tuberculosis and the pathology markets and the fascinating opportunities of the Mac-Gen joint venture that we're very pleased with, that is lifting off as we speak. So this is going to become -- HPV is definitely a much smaller percentage of our revenue base now going forward.

The next question comes from the line of Tycho Peterson of JPMorgan.

I want to focus on the fourth quarter guide here. I understand you maintained the organic growth guide by removing the China business, but you did reduce on an apples-to-apples basis compared to the last quarter guidance. So a couple of things to just to ask on here. Why is this the case when you're selling off slower growing assets? Why did the divested and discontinued businesses have such an outsized impact when, as you say, they're only 1% to 2% of revenues? And then HPV, it's a small piece of the business as you just highlighted, but -- so how is it a 2% headwind when it's only 5% of revenues or so in the fourth quarter?

Thanks, Tycho. Yes, I'll hand off to Roland. But first, to note the -- when I said that HPV is a smaller percentage of our sales, I said going forward, because now the Chinese -- the second largest market is now substantially reduced in terms of its exposure to QIAGEN. And so from that perspective, I was talking going forward. But Roland, do you want to take the other questions?

Yes, Tycho. I think you really have to take it by the pieces here. And first of all, I think if you look into the China, what Peer just also presented, one of the strategic opportunities we see is that, first of all, again, you have to recall that we clearly discontinued certain PCR-related products, and of course, if we would have produced in the fourth quarter, we would have met our guidance with or without that. So I think it's just only fair to say that, again, as a producer, did not produce, but again, if you wouldn't have stopped it, we would have made our guidance. But of course, we do need this capacity to bring new product into China where we believe midterm we get even, not only a better growth, but even more important, a better profitability contribution from anything that is expect -- what you're expecting from management to do this kind of business-related decision. On the HPV side, I think the reason why we're excluding them, we're in the middle of setting up the structure as Peers said before. It's not fully clear yet, and therefore, we, more or less for the time being, exclude it from our guidance. If it will end into a, for example, a joint venture, it will end in a distribution, it will end in a partnership, which, of course, all has very different revenue conditions/accounting consequences. And I think it's hard for us right now to guide for that. So I would say, that's the right way to take it out. And so again, I only can say what we said before, for us that is a clear consequences of driving efficiency all over the world and taking the opportunities and if it requires for ramping up some other stuff to stop certain things, which don't deliver, I would say, needed profitability then it also has the right consequence.

Your next question comes from the line of Daniel Wendorff from Commerzbank.

My key question would be, Peer, you mentioned that your NGS workflow as placing pretty well also on a fully integrated basis. And my question there would be, can you potentially tell or give an indication what the level of payment or reimbursement. And if you would receive the best results here, which is that – some feeling here. And second follow-up question would be on your Pharma customer growth in third quarter, this has been pretty good, actually, over the last few quarters, even though you caution the market a bit that it can be good in 1 quarter and not too good in the next quarter. So currently we haven't really seen this. Is the 5% a good indication going forward now as well?

Yes. Thanks. So I will talk about the second one, first. The Pharma markets are indeed quite attractive. And I'd say we're doing okay in the Pharma markets. I see more potential there and we are discussing opportunities to further increase our presence and also our penetration into that market. The pharmaceutical industry has dramatically changed the way they're purchasing over the last 10 years, and these are things that provide opportunities for companies like ours. So many Pharma companies are moving away from feet on the ground approaches to more digital integration approaches, and that provides a lot of benefits for us as we have a, in the meantime, quite leading position in the digital commercialization arena. Number two is in terms of the GeneReader, the majority of the placements are in the clinical bench top oncology sequencing area, and we have several customers already up and running and full throughputs. And remember, we have up to summer only had really one panel that we had fully validated and we're promoting just to control also the comparisons, make sure they're apples-to-apples. We have several customers running north of 150,000 in terms of consumable throughput on the system. And we have others in later stage of validation. And on top of that, we talked about in our last conference call we're expanding the menu significantly with quite a unique new lung panel and with further other hereditary cancer panels. And the uptake is quite good. And if you just look at the region where you come from, Daniel, is this is a region where we have a quite a dominant market share in terms of cancer panel testing. And we are starting to see a lot of regions further adopting this high-throughput cancer panel testing approach on the GeneReader very successfully.

Your next question comes from the line of Brian Weinstein of William Blair.

Question for you in companion diagnostics. I mean, you talked a lot about it, you have a lot of master agreements, and what not. But can you -- is there any way to really help us dial in on what's really important for '18? How should we measure the progress there? Specifically, any of the collaborations that you think are more important than others or in terms of opportunity to drive revenue next year or will be more high profile than others.

Sure, Brian. Excellent question. And there the market really changed, let's say, in the first few years of companion diagnostics. It was very late stage products and the opportunity to create a diagnostic test and generate revenues from it was quite high. And we have a substantial double-digit million dollar number from tests like that, that are being used around the world very successfully. And including also a handful of FDA approvals in the United States. And this business remains very attractive. And there was a period where we saw a lot of Pharma companies go very early into the pipeline, and then with higher risks associated with it, we saw quite a bit of attrition between the years 2013 and '16, let's say, but ever since about 12, 18 months ago, this is also partly due to a very deliberate focus of the team we have created a very nice balance between very long-term super exciting projects and near-term revenue opportunities. And the one thing I'm most proud about is that we are actually looking at a whole series of new product launches potentially in 2018 if the drug makes it over the finish line. And that obviously, is what we're really after, it's the kit sales. It's nice to have the development revenues, but what we're really after is a recurring kit sale. And the most exciting ones this year, no question, is -- are the companion diagnostic deals around immuno-oncology. And they're really piling up. It's a great opportunity for us and a perfect fit for GeneReader.

Your next question comes from the line of Scott Bardo with Berenberg.

First question just relates to GeneReader. I think it's quite difficult to track progress of GeneReader apart from some, qualitative comments. So I just wondered if you could talk a little bit about how the instruments are placing as compared to last year? And perhaps, share a little bit about the geographic expansion opportunity? I think you did something like 55 or 60 outside of the U.S. last year. And can just talk about how that's now opened up? I have a follow-up as well after.

Sure. Well last year was obviously a little bit more complex in terms of marketing due to the fact that we really started marketing the system in Q1 of this year in the United States. But we've seen a substantial increase of placements in the United States, and I appreciate that this is still a system, and I'd call it protective mode, and we're building critical mass of the system and we'll certainly provide then clarity around some of the details. I would point to customer events like the AMP, but also others, where you'll see numerous posters and also use cases and also presentations on GeneReader showing the use case for the system. This is really a very customer-centric value proposition that is resonating extremely well with pathologists looking for bench top sequencing systems.

The next question comes from the line of Dan Arias of Citi Bank.

Roland, on the instruments business, would you be willing to parse out growth there, excluding QIAsymphony contributions? And then maybe on TB, Peer, just wondering if you might want to touch on litigation and what you see as the likely outcome there? I know you don't get too detailed on the legal stuff. But it does look like the last round went to Oxford, so I'm just wondering how you would see the likelihood of royalty injunction, et cetera, for those that are looking to handicap things there?

Yes, let me just kick it off. I think on the instrumentation side, it's quite obvious that GeneReader as well as Symphony actually have been very helpful in terms of instrumentation growth. I would say we have on the software part, it's around Instruments' service and a few (inaudible) instruments but mainly just actually the services was softer this quarter.

Right. So regarding litigation. As you know, Oxford filed a motion for preliminary injunction, blocking upcoming launch of the fourth-generation version of QuantiFERON-TB. This motion, as you know, was denied with -- we have further trial dates set, but we're not really going to speculate where this goes. And I would like to remind everybody, this is on a -- this is around a patent that is expiring in 2019, and we clearly see that we have freedom to operate in this area. We understand we are -- it's a very important product for us and growing very rapidly. But this is something that we were -- an area where we believe where we have a clear freedom to operate going forward.

Your next question comes from the line of Jack Meehan with Barclays.

So I wanted to continue the theme reflecting on last year's Investor Day. I had 2 questions for you on that. First, with QuantiFERON, great growth this year, but can you talk about the durability of the trajectory, still a sizable conversion opportunity. But is it tougher to find the win? And then just looking at the total company, you laid out a longer-term target of 7% to 9% CER growth. What would it take to get in that range next year?

Sure. I'll ask Roland to give more details on that number range. But just simply removing, for instance, the slower growing HPV China franchise, is definitely going to also provide us a benefit and in terms of the overall growth profile. And so we’re very actively -- proactively looking at our portfolio to maximize the growth opportunities, and at the same time, ensure that we can follow through with the earnings per share targets that we have that are for a 12 plus range over that 4-year CAGR that we gave back then. The growth range that -- what for tuberculosis, the penetration is still in extremely low rates. We assume that the market (technical difficulty) depending on how it is described, actually increased quite considerably over the last 18 months due to a number of markets opening up, and we're seeing, as you also saw in some of the announcements that even high prevalence countries are now routinely running large scale studies to consider latent TB as the appropriate test to be used versus active TB to contain the disease. It is scientifically, clinically, I think, it's pretty clear that's the right to do, but it has to be further validated. And that is happening. So we're literally talking about minimum of 55 million tests, skin tests being performed and depending on what number people want to use today, it could be 75 million, it could be 80 million tests as a potential market opportunity with the -- multiplied by the test price and we're still at a very low penetration rate. So there is several years to grow, many years to grow in this area until we reach saturations that would make it more difficult. And on top of that, we're also expanding actively the menu in this area. I think we'll see more on that also in the year 2018.

Jack, and just to add on, I think looking a little bit forward into '18 and beyond, and again also what we have seen this year so far. So if you look in 2017 so far and also look in what we guided for the fourth quarter, you can see that again, if you exclude the HPV franchise, which clearly has a certain volatility as you know, the last 2 quarters actually quite positive. So the fourth quarter now will be again a little bit more negative again because it has a difficult period and also addressing, I think, the China portfolio changes. Again if you just look at this both factors and exclude that on 2017 we would have every quarter or we do have actually in every quarter a 7% to 8% growth rate. So I think we're moving in the right direction. We both know that HPV in the U.S., again, still creates some volatility, but clearly it gets smaller in terms of size every quarter. And therefore, I think that it's moving the right direction as well. And the HPV stuff is part of some of the work we do with -- because we believe there is more growth in it for QIAGEN midterm so we (inaudible) now bringing the portfolio in that direction and our distribution structure in that direction, but we also can even larger participate on that.

Your next question comes from the line of Bill Quirk with Piper Jaffray.

A couple of questions. First off, just on 4Q guidance. Roland, maybe you can help us think about this a little bit. I mean you had a tough comp in the third quarter, we have a tough comp in the fourth quarter. CER growth forecast is down a little. Is this having pretty much everything to do with the tender expiration? I guess that's the first question. And then secondly, just on U.S. TB growth, obviously, your competitor had some challenges with respect to some of the immigration policies. But just curious, kind of where that business is growing in the states and how are you thinking about the sustainable numbers in the U.S.? I appreciate your international comments a couple of questions ago.

And let me start it. I think just to be very clear on the fourth quarter. Again, I think it's something what is, again, important to understand. Again, if you would do a core acquisition, you clearly want us to add something to the guidance. But if you stop to produce product and sell the product, it has an impact as well, right? And again we stopped a couple million in terms of dollars revenue, production, products for China, right? And that clearly is something, what you have to consider as well, right? And so I would say, all of -- that is the single biggest factor. TB probably Peer can talk about that, but we have seen not only for the -- 9 months period in north of 25% growth, but also have seen it for the last 3 months. So I think it is clearly a very strong success factor for us as well. Peer?

Yes, so in terms of QuantiFERON it's several quarters in a row where we are gaining significant market share, not only against the skin test, but also against an already substantially smaller other commercial competitor. And so I think it just shows the strong position we have in QuantiFERON, especially now augmented with the QuantiFERON-TB Gold Plus product. We are seeing growth in all segments. It's never easy to make a healthcare institution convert to a new technology and adopt that. It requires education, it requires also support in the transition process. But we have substantial resources on it and also a great track record and the numbers speak for themselves. So we expect North America to continue to grow very well and especially also with the new opportunities outside the U.S., in particular also in Europe even though some exciting opportunities that are emerging that will allow us to continue growth for many years to come. But there's a lot more to happen in QuantiFERON and in TB, in general, at QIAGEN, and so we recognize the responsibility we have as a leader in this space and I think you'll see some quite exciting things in this area coming from us over the course of '18.

And Bill, just a final word from my side, we actually added a new slide into the presentation, you might find it in the appendix on 23, where we actually guide you on the different layouts of our guidance for the fourth quarter versus as well for the full year.

Your next question comes from the line of Gunnar Romer from Deutsche Bank.

The first one would be on outlook again. Fully appreciate your decision to streamline the China operations but nonetheless I'm a bit surprised to see that for the fourth quarter you're guiding organic growth ex China. From that slide, down to 45% from 7% in the third quarter despite what I believe is in fact a slightly softer comp. And therefore, would kindly ask you to elaborate a bit further on this expectation and to what extent it includes an element of conservatism if at all?

And then in this context, as well, if you can put this fourth quarter guidance into perspective off the 7% to 9% growth target, through to 2020. And whether the guided slowdown in the fourth quarter points to a 2018 that may fall short of that corridor?

And then just a quick follow-up. On Japan, I've noticed a slight decline here in the third quarter. Curious, what has driven that and whether that's a new structure that we should bear in mind?

Roland, do you want to take the first 2 and I take Japan?

Yes. Sure. I think Gunnar, as you said before, it's what you said before is pointing the right direction, nevertheless again, just don't want to repeat myself, is we're clearly against -- stop to sell products in China because again we have to free up capacity to implement other stuff and it just takes revenues out of the system, at least for a quarter, I think that's very straightforward. Other thing of course, which I think we're also pointing to in the call is we clearly and you -- the numbers are public as we release them every quarter as well as we actually have very -- much tougher comps in the fourth quarter when it comes to U.S. HPV test sales. U.S. HPV test sales has actually have been (inaudible) 200 basis points in the fourth quarter. Again, if you normalize for that, you are back to the 8%, which you had in the first quarter we have in the second quarter, which we had in the third quarter. Most likely, we will have between 7% and 8% in the fourth quarter. So all in, I feel quite confident that we -- nothing really has changed within QIAGEN, and also feel on track if you look towards 2018, especially again on just and to reemphasize as well, what we’re doing in China is because we do want to accelerate our business there. We see more opportunities. We do believe with a stronger HPV partner, we have a larger footprint, we can reach more in an increasing market opportunity and we are working here more, not only in absolute dollars, but also hopefully in absolute profitability and return.

And Gunnar, Japan, as you probably heard from many other companies in this area, remains an extremely troubled market now for quite a few years. And we look at our growth rates there, and they are typically below the average of the company. But what is quite remarkable is that all market-research shows that we are gaining market share in these markets. And the market is definitely a very important one for us going forward. We're are also just able to add a new President of China after the retirement of the previous President. And so have been able to attract an excellent leader in this area that is working already to drive growth further. There is more opportunity in China even beyond the market share gains that we're currently recognizing.

The next question comes from the line of Derik De Bruin of Bank of America Merrill Lynch.

A couple of questions. Just any sort of initial thoughts from some of your customers in the states on PMA and just some of the regulatory changes there? Are you noticing any sort of hesitation in terms of spending as people sort of evaluate that? And also just on the regulatory front, we're also starting to see in China some -- starting to look at national tenders for certain medical devices. I'm just wondering how does that sort of lower your exposure in the diagnostics realm? Is that something that could potentially come over in the future?

Sure. Well, PMA is clearly something that is creating confusion, immense confusion at the moment. And the guidance that came out a few weeks ago and the increased clarity was definitely helpful. Even though it still leaves many questions open. And so if you look at our portfolio, for instance, take in the U.S., our big product, which is QuantiFERON, the majority of the sales are not reimbursed sales, but they are a cost to the healthcare system to ensure the -- a TB-free work environment, i.e., healthcare worker screening. And so that takes a big chunk out of that. But obviously, we do also sell a range of products that are and can be exposed to PMA. What you might have noticed is that there is --pathology was to a much lesser degree impacted by this and also some of the more high-end cancer testing areas, which is an area that we also have a strong approval area in. There was a reduction in the rates for HPV testing. But as we’ve talked about before, that is 1.5% of our sales. So it's not going to push the needle too much. So while there's not really a huge flank of exposure out there. But I would like to say that the market is definitely, as you absolutely pointed out before, nervous and thinking this through and looking at overall cost savings, especially for labs that are more impacted by it. I think there will be a strategic solution to all of this that some of you have already implied in your notes that will provide further clarity on this going forward. But at the moment, until we really have this implemented and clarity around it, the confusion is the biggest enemy at the moment.

So with that Peer and Roland, I would like to end the call, and thank all of you for your participation today. If you have any questions or follow up topics you would like to address, please don't hesitate to give us a call. Thank you very much.

Thank you.

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