Qiagen NV (QGEN) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining QIAGEN's conference call to discuss the Q3 2018 results. (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, sir.

Thank you, Emma, and welcome to our conference call today. The speakers today are Peer Schatz, the Chief Executive Officer of QIAGEN; and Roland Sackers, the Chief Financial Officer. Also joining us is Dr. Sarah Fakih from our IR team.

Please note that this call is being webcast live and will be archived in the Investors section of our website at www.qiagen.com. A copy of the press release is also available on the same section.

Before we begin, let me cover our safe harbor statement. The discussions and responses to your questions on this call reflect management's views as of today, Tuesday, October 30, 2018. We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the safe harbor provisions.

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 the reconciliation of these figures to GAAP in the press release and to the presentation for this call.

With that, I now turn it over to Peer.

Yes. Thank you, John, and thank you to all for joining us for this call today. Our results for the third quarter of 2018 confirm the solid performance our teams are delivering during an exciting year of growth. They also show the progress we are making on building a unique and differentiated portfolio of Sample to Insight molecular testing solutions across the continuum of customer needs from basic research to clinical health care. We are on track to achieve our targets for higher sales and adjusted earnings in 2018, along with a significant increase in cash flow.

I have these key messages for you today. First, QIAGEN exceeded the targets set for the third quarter of 2018. Total net sales were $377.9 million, rising a solid 6.5% at constant exchange rates and above the target we had set for about 6% CER growth.

Adjusted earnings per share were $0.35 on a reported basis and they were $0.36 at constant exchange rates. This was ahead of our outlook for about $0.33 to $0.34 per share on a CER basis and reflect the significant efficiency gains our teams have achieved.

The improved profitability was also reflected in the adjusted operating income margin, which rose 1.5 percentage points on a CER basis and was 28% of sales on an adjusted basis.

Second, we are advancing our Sample to Insight portfolio to address opportunities across the continuum from basic Life Sciences research to routine clinical health care. Among the highlights, sales of the QuantiFERON-TB test grew at a solid mid-teen CER rate, achieving the target we had set for QuantiFERON growth. A key development during the third quarter was the European launch of our strategic collaboration with DiaSorin and the new automation option for customers to use the LIAISON system for their test readout. We believe this partnership, along with the new pre-analytical workflow option with Hamilton, will enhance growth and give us additional confidence in achieving the 2020 target of more than $300 million in annual sales.

As another highlight, our teams are establishing a European footprint for the QIAstat-Dx system, which is gaining recognition as the next-generation solution for providing accurate insights into complex disease syndromes, such as respiratory and gastrointestinal conditions. We are on track for the U.S. regulatory submission and market entry next year in time for the fall 2019 respiratory season.

We are also moving ahead with new placements of the QIAsymphony automation platform and are set to soon reach more than 2,300 cumulative placements during the fourth quarter.

QIAsymphony has become the most highly versatile and modular automation platform in our industry. And we continue to look forward to a solid placement rate in the coming years, along with solid growth for the related consumables.

In next-generation sequencing, we are on track to achieve our goal this year of more than $140 million from this portfolio, up from about $115 million in 2017. QIAGEN recently launched a breakthrough technology for RNA sequencing on any platform. Meanwhile, the GeneReader NGS System is growing in placements and consumable sales, and we are launching new assays, further expanding the available menu.

Third, QIAGEN is emerging with the leading portfolio of disruptive new molecular diagnostic technologies addressing very large market opportunities. The strategic partnership with NeuMoDx announced in September added 2 new fully integrated testing platforms. NeuMoDx is a highly synergistic platform with our portfolio and shares the sales channels with QIAstat-Dx and QIAsymphony. This new partnership will enable us to offer the ease of clinical chemistry testing automation now to molecular diagnostic laboratories. I will come back to this topic later.

Fourth, based on the solid performance in the first 9 months of the year, we are reaffirming our sales guidance for 2018, while raising the target for adjusted EPS. We continue to expect about 6% to 7% CER total net sales growth. This outlook includes about $7 million of first-time sales from QIAstat-Dx weighted into Q4. It also assumes about 1 percentage point of headwind from reduced U.S. HPV test sales and also absorbs the adverse impact of the recent product portfolio changes.

For adjusted EPS, we have raised our outlook to $1.33 to $1.34. This is an increase from the prior range of $1.31 to $1.33 per share at constant exchange rates.

So as a quick summary, we are pleased with the progress QIAGEN has made in 2018 and the progress we are making toward our midterm 2020 targets.

I would now like to hand over to Roland.

Thank you, Peer. Good afternoon to those of you in Europe, and good morning to those of you in the U.S. We will first review the financial results for the third quarter of 2018 and later provide you with an update on our guidance for the fourth quarter and full year.

As you saw in our press release, we had another strong performance in the third quarter as we exceeded the targets set for sales and adjusted EPS. Furthermore, free cash flow for the first 9 months of 2018 was up 21% to $176.7 million, and this was after taking into account the $30 million of prepaid royalties for the Natera partnership announced earlier this year.

The net sales growth of 6.5% CER exceeded our target for about 6% CER growth. On a reported basis, net sales rose 3.8% to $377.9 million, and this includes adverse currency headwinds compared to $364 million in the year-ago quarter. As expected, the launch of the QIAstat-Dx system provided initial revenues amounting to less than 1 point of incremental growth.

The rest of the portfolio showed solid organic gains, and this was particularly impressive given that the results absorbed the negative impact from the disposals of several product portfolios. These changes included the divestment of a veterinary testing portfolio announced in early 2018 as well as the structural change in China announced in late 2017 to sharpen our focus.

After 2 quarters of currency tailwinds, we saw a sharp reversal in the third quarter and a headwind of 2.7 percentage points. This was due to the weakening of several emerging market currencies during the third quarter against U.S. dollar.

Moving down the income statement. The adjusted gross profit margin was 71.5% of sales in the third quarter of 2018, showing an improvement of about 50 basis point from the third quarter of 2017 and was supported by efficiency gains, despite an adverse mix in the product portfolio and higher instrument sales.

Adjusted operating income rose 8% to $105.6 million. This led to the adjusted operating income margin rising about 150 basis points at constant exchange rates and rising about 100 basis points on a reported basis to 27.9% of sales compared to 26.9% in the year-ago period.

We have been able to realize more gains than initially planned for the efficiency program that we launched in recent years. A key focus area has been realizing the benefit of our shared service centers in Poland and the Philippines. We also achieved this result while making significant investment in the launch of the QIAstat-Dx system and also funding our growth drivers.

Along with the increase in the adjusted gross margin and the benefits of the efficiency programs, we have been managing costs in other areas. You can see this by the lower levels of sales and marketing and general and administration expenses as a percentage of sales compared to the third quarter of 2017. For the full year, we continue to expect about 100 basis points of improvement in the adjusted operating income margin compared to 26.2% in 2017, and this includes the QIAstat-Dx investment.

Moving down the income statement. Adjusted diluted earnings were $0.35 per share on a reported basis for the third quarter of 2018 and were $0.36 at constant exchange rates. This was ahead of our outlook for about $0.33 to $0.34 at constant exchange rates. The adjusted tax rate was 19% for the third quarter, while the outlook for the fourth quarter and full year 2018 is 20%.

I would like to now review our sales results for the product categories in our 4 customer classes. Among the product categories, instrument sales were up 11% to $46 million and provided 12% of total sales, advancing on higher sales of the QIAsymphony, GeneReader NGS and QIAcube platforms, along with first-time contributions from the recent launch of QIAstat-Dx platform.

Underlying instrument sales growth was about 24% CER when excluding revenues from instrument service contracts. This has been under pressure during 2018 due to shifting from third-party contracts to QIAGEN instruments.

Consumables and related revenues rose 6% CER to $331 million in the third quarter, continuing the same trend from the second quarter of the year and representing 88% of total sales. Here, we saw solid business expansion of the Molecular Diagnostics, Pharma and Academia customer classes, along with underlying low single-digit CER growth in Applied Testing when excluding the veterinary testing portfolio divestment earlier this year.

As mentioned earlier, we are pleased with the commercial start of the QIAstat-Dx system, but revenues are expected to be most heavily weighted for this year to the fourth quarter when we expect about $5 million of incremental revenues.

Molecular Diagnostics led the performance, rising 9% CER to $189 million and provided 50% of total sales. This came on the combination of robust double-digit CER growth in instrument sales, along with high single-digit CER gains in consumables.

The Life Science customer classes provided 50% of total sales and rose 4% CER on a combined basis in the third quarter of 2018.

As mentioned earlier, Applied Testing sales trends in 2018 have been impacted by the divestment of some veterinary testing assays with sales in the third quarter up 1% CER to $35 million. However, we continue to see solid trends in our Human ID and Forensics business.

The Pharma and Academia customer classes maintained solid growth rates in the third quarter and consistent with trends over the past -- over the first 9 months of 2018. Pharma sales rose 5% CER to $71 million on a mix of mid-single-digit CER growth in consumables and largely unchanged instrument sales. Academia sales also rose 5% CER in the third quarter of 2018, thanks to double-digit CER growth in instrument sales and modest single-digit CER growth in consumables.

I would like to now review the performance among our 3 geographic regions. The Americas region continued to have the strongest growth rate, rising 9% CER to $186 million and representing 49% of sales, thanks to ongoing double-digit CER gains in the U.S. and Mexico, along with solid single-digit CER growth in Brazil and Canada. We have seen positive trends in both Molecular Diagnostics and Life Sciences, including the U.S. Academia market.

The Europe/Middle East/Africa region grew 1% CER in the third quarter with sales of $111 million and providing 30% of sales. This was below the trends seen earlier in 2018 and due mainly to the timing of national tenders in 2017. Furthermore, the divestment of the veterinary assay business was primarily focused on Europe. We saw improving trends in Germany, Switzerland and Italy against weaker trends in France, Benelux region and the Middle East.

Sales on a constant exchange rate basis rose at a double-digit pace in Turkey, but were significantly reduced by the adverse currency movements.

The Asia-Pacific/Japan region grew 11% CER in the third quarter with sales of $80 million that represented 21% of total sales. Sales rose at an even faster 90% CER rate when excluding sales of the QuantiFERON latent TB test in South Korea, which enhanced results in 2017. We saw sales growth in China at a double-digit CER pace and also a return to growth in Japan after a period of challenges in this country.

I would like to now give you an update on our balance sheet and cash flow. QIAGEN has a very healthy balance sheet, and the strong cash flow trends during 2018 have enabled us to continue with our capital allocation policy, focus on targeted acquisitions and increasing returns to shareholders.

Net cash provided by operating activities rose 18% to $249 million in the first 9 months of 2018, and this includes the payment of $30 million for prepaid royalties to Natera for the genetic screening partnership.

Property, plant and equipment expenditures were about 7% of sales and in line with recent trends for QIAGEN and amounted to $72.3 million for the 2018 period. As a result, free cash flow rose 21% in the first 9 months to $176.7 million.

Our leverage ratio stood at 1.6x net debt-to-EBITDA at the end of the third quarter of 2018, which remained stable compared to the level of 1.5x at the end of 2017. This is even taking into account the cash payments for the QIAstat-Dx acquisition and share repurchases as part of the current $200 million return commitment. We continue to rule our shares as being undervalued and completed the second $50 million repurchase tranche in October.

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

Yes. Thank you, Roland. I'm now on Slide 9 to give you an overview of key developments in our Sample to Insight portfolio. In the intro, I mentioned our QIAstat-Dx system for syndromic testing, which we discussed in detail during our last quarterly call. We are rapidly expanding our placements in Europe, Asia and Africa. In addition to our focus on placements, we are also working on a long-term plan for a significant menu expansion, and as part of this plan, recently added a new very comprehensive gastrointestinal panel.

Our flagship QIAsymphony automation platform continues to show robust placement rates and solid consumable pull-through. Our leadership in differentiated technologies continues to produce growth in areas like processing samples for microbiome research or in liquid biopsy.

Now let me go into more detail on the other 4 areas, including NeuMoDx, our newest molecular platform technology, QuantiFERON-TB, next-generation sequencing with our GeneReader NGS System and universal NGS solutions and our personalized health care franchise.

I'm now on Slide 10 to give you an overview of QIAGEN's comprehensive portfolio of automation systems, how it addresses the majority of the Molecular Diagnostics market and how NeuMoDx fits into this portfolio and complements our overall platform and technology offering.

On this slide, we want to show how significantly our footprint changed since 2015. The graphic shows you the 2018 Molecular Diagnostics market. On the outer ring, you can see how QIAGEN today is positioned to address almost all of the key segments of the MDx market with a broad portfolio of synergistic and highly complementary platforms. This compares to the inner ring of the graphic showing our competitive profile in 2015.

Only 3 years ago, QIAsymphony RGQ was our only automation system. And while QIAsymphony continues to be the leading platform with a high market share in the modular MDx market segment, this is only a small part of the overall MDx market.

Building a full suite of automation platforms over the past 3 years was critical for us to ensure the best scaling of our technologies and, in particular, sales channels. We are very pleased that we have been able to create this platform footprint, but also that we now have emerged as being very uniquely positioned, with an unparalleled footprint across the market's key testing segments, and in many aspects, also with quite disruptive new platform technologies and systems. Our focus in MDx is now shifting to building the menu as rapidly as possible.

In more detail, in addition to QIAsymphony RGQ, which continues to have a strong position as a leading platform in modular testing and an unrivaled position as the solution of choice for all sample processing needs in MDx, we have today a very attractive platform for clinical NGS with the GeneReader.

Early this year, we added a next-generation solution for syndromic testing with QIAstat-Dx, and now we have added the NeuMoDx technology, which has the promise to be a disruptive solution for the largest market segment in Molecular Diagnostics, fully integrated clinical testing.

With NeuMoDx, we can now offer scalable platforms from medium to highest throughputs with full menu compatibility across systems as the core modules as well as the consumables are identical.

I'm now on Slide 11 to give you an update on the strategic partnership and distribution agreement with NeuMoDx that we announced in mid-September. As already highlighted on the previous slide, NeuMoDx present -- represents not only the latest addition to our automation portfolio, but it forms an integral part of our unique footprint in Molecular Diagnostics.

With the NeuMoDx partnership, QIAGEN gained access to a disruptive, microfluidic-based technology for integrated PCR that is applied in a similar way also in QIAstat-Dx and is implemented as a compact and fully integrated microfluidic consumable that can be scaled across all throughput subsegments of this very large laboratory MDx testing market segment.

We have been working for years together with QIAstat, NeuMoDx and others on microfluidic-based methods for Molecular Diagnostics. These methods have evolved significantly and now offer important advantages over traditional methods.

The microchannel architecture not only allows more flexible and economical test set up due to strongly reduced sampling chemistry input, but also gives much tighter control of critical reaction conditions. A larger surface-to-volume ratio enables more immediate heat conduction, faster temperature cycling and much faster PCR detection times. Most systems in the market and also those currently in the pipelines simply use an automated liquid handling approach using standard size consumables, but replicating manual steps creates higher automation complexity and slows down the overall process.

On the other side, using a fully integrated, microfluidic approach for both sample technologies and assay technologies in 1 cartridge is novel in this space and has very significant performance advantages. For example, NeuMoDx systems show dramatically faster time-to-result performance, with time as short as 40 minutes compared to existing platforms in the market taking around 3 to 4 hours. Improved time-to-result is crucial as it allows labs to achieve much faster sample turnaround and to deliver many more results to physicians in a much shorter time and many more results within the same day.

Platforms powered by NeuMoDx technology also offer true random access, meaning the possibility to load and process any sample at any time and in any order. While this is often claimed for other integrated lab systems, they really are batching due to limitations in terms of assays that can be run concurrently, often only 3 to 4 assays at a time.

With NeuMoDx, a first true random access solution is introduced as up to 30 different assays can be stored on the instruments and run in any combination. Also onboard stability of all assay chemistries excludes the need to load assays from a refrigerated storage and allows many more assays to be preloaded onto the system.

As you can see from these mentioned features and there are many more, the workflow features of NeuMoDx are best-in-class for labs and Molecular Diagnostics. We have been in this market for 20 years and have worked with NeuMoDx for about 4 years. We have chosen to back this platform after a thorough analysis and have come a way very excited, in particular after the first customer demos, and we believe this is not only a unique platform technology, but one that allows disruptive performance features. We are still in early phases of the rollout of both NeuMoDx instruments, but we'll keep you updated on our progress.

I'm now on Slide 12 to give you an overview of key developments for QuantiFERON-TB, the gold standard test for detecting latent tuberculosis directly from blood samples. The growing awareness around latent tuberculosis and the increasing rate of market conversion from the 120-year-old skin test to molecular blood-based diagnostics have increased the demand for more streamlined workflows to allow for even faster and more scalable latent TB testing.

To satisfy the constantly increasing testing demand of small- to large-scale TB screening programs, we have focused on highly efficient automation solutions and have built up key strategic collaborations with Hamilton and DiaSorin. The resulting workflow that you see on the left sets new standards for economical latent TB testing, covering all sample throughputs. We just launched a CE-marked DiaSorin automation solution in Europe to use the LIAISON system for the test readout and launch in the U.S. is on track for 2019.

With the DiaSorin partnership, we significantly raised the bar on automated TB testing and are providing not only the current market-leading screening test for latent TB, but also, by far, the best-in-class automation solution. The value of this offering is increased by the comprehensive menu of around 120 assays available for the LIAISON platform, opening up a dedicated content in more than 25 different application areas for users of QuantiFERON-TB.

As of today, we have proven that we not only have the best-in-class assay, but also the best-in-class automation and give customers the best-in-class menu with this automation.

TB control is getting more and more attention. The latest move from the public sector comes from the world leaders meeting at the UN, the first summit focused on eradication of tuberculosis. The heads of state committed to invest $13 billion a year in TB prevention and care by 2022, which will give a further boost to program screening for latent TB.

Also you might have read about GlaxoSmithKline's therapeutic vaccine for tuberculosis, a clinical trial for the first vaccine showing efficacy in the treatment of latent TB infection reported in The New England Journal of Medicine, relied heavily on QuantiFERON-TB as the gold standard screening test to accurately identify patients with the latent TB infection.

We are excited about the progress made in treating latent TB as improved treatments will also be a great benefit for latent TB screening.

I'm now on Slide 13 to review the progress on our next-generation sequencing portfolio. We want to touch on our platform agnostic universal NGS solutions as well as on our Sample to Insight GeneReader NGS automation system, both of which contribute to the $140 million we have reaffirmed as a sales goal for 2018. This week, we will be attending the Association for Molecular Pathology meeting, AMP 2018, and launching multiple new NGS products. AMP is one of our high-profile opportunities to meet experts and customers as they gather from around the world.

In our differentiated universal NGS portfolio, we will have built an industry-leading offering for RNA sequencing.

Two weeks after -- 2 weeks ago at ASHG, we launched our new QIAseq FastSelect RNA Removal Kit, a breakthrough technology in library preparation for RNA sequencing, which is a key segment of the NGS research market. This novel solution addresses a major bottleneck in RNA sequencing, namely the efficient removal of highly abundant but scientifically irrelevant RNAs. These so-called contaminating RNAs make up more than 90% of the overall cellular RNA content and only most efficient removal enables the preparation of RNA-Seq libraries that contain only RNAs of primary interest such as messenger RNA or long non-coding RNA. The QIAseq FastSelect technology is compatible with virtually any library preparation kit and reduces the mandatory depletion procedure from about 2 hours to as little as 20 minutes with only one single pipetting step.

We also have news on the GeneReader NGS system, which continues to build critical mass. At the AMP meeting this week, we are launching 2 new panels for the GeneReader, a broad panel covering 30 genes and detecting more than 850 variants in major cancer types and a more focused panel for profiling gene variants involved in breast and ovarian cancers. Both panels are based on QIAGEN's proprietary digital NGS technology.

On Slide 14, I would like to update you on our personalized health care franchise. Let's start with immuno-oncology, an exciting emerging area in cancer treatment. I-O, as people call it, was in the news recently when the Nobel Prize in Medicine was awarded to 2 pioneers and discoveries -- for discoveries in the field.

At AMP, we are launching an exciting new QIAseq panel to analyze the key biomarkers that indicate the likelihood that a patient will respond to immuno-oncology drugs. This assay measures tumor mutational burden and microsatellite instability as well as single nucleotide variances and insertions and deletions. The QIAseq TMB panel is designed to run on any NGS platform.

QIAGEN provides key biomarkers in novel gene expression profiles for I-O research, and we are partnering with Pharma companies to provide companion diagnostics for these I-O drugs. We're also launching enhancements to QIAGEN Clinical Insight, our bioinformatics solutions to interpret sequencing data, showing patients biomarkers for I-O response.

In an established companion diagnostic, we recently received our third FDA approval for the therascreen EGFR kit that runs on QIAsymphony this time to guide for the use of Pfizer's new lung cancer drug, Vizimpro. This is our first FDA-approved companion diagnostic paired with a Pfizer drug. As you know, QIAGEN is a trusted partner to more than 25 leading Pharma and biotech companies that rely on us to develop companion diagnostics for patient stratification.

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

Thank you, Peer. I would like to now review our targets for the fourth quarter and our updated outlook for 2018. For the full year, we continue to expect total net sales growth of about 6% to 7% CER. This is based on the broad business expansion continuing into the second half of the year, along with about $7 million of first-time M&A contributions from the launch of QIAstat-Dx. This outlook also absorbs the change to our business portfolio and also about 1 percentage point of headwind from reduced U.S. HPV sales.

For adjusted EPS at constant exchange rates, we have we raised our outlook of about $1.33 to $1.34, and this compares to the prior range of $1.31 to $1.33. This is due to the significant efficiency gains we have been able to realize, while at the same time making significant investments in the launch of QIAstat-Dx.

As for currencies, based on rates as of October 26, 2018, in terms of net sales, we expect a currency headwind of about 1 percentage point on resulted reported rate. For adjusted EPS for the full year 2018, we now expect a currency headwind of about -- of up to $0.02. For the fourth quarter, our guidance is for total net sales growth of about 6% to 7% CER, and this includes about $5 million of M&A contributions from QIAstat-Dx.

This outlook also absorbs the sales loss to recent portfolio changes. Adjusted EPS at constant exchange rates is expected to be about $0.39 to $0.40 per share, also at constant exchange rates. This compares to $0.43 in the first quarter of 2017, but the 2018 outlook includes a significant investment in QIAstat-Dx commercializations and the development for entry into the U.S. market.

In terms of currency impact, based on rates as of October 26, 2018, we expect currency headwinds of about 4 percentage points on net sales and $0.01 of headwind under official CER guidance for adjusted EPS.

In terms of adjustments for the full year, we expect charges in operating income for the amortization of purchased intangibles to be about USD 97 million in 2018. We also expect restructuring related items to continue to be about $9 million as we have completed the efficiency programs started in late 2016. Business integration costs are expected to remain at our prior outlook of about $30 million, and this also includes the QIAstat-Dx acquisition. And we expect a full-year tax rate of about 20% for 2018.

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

Yes. Thank you, Roland. Here's a quick summary before we move into Q&A. Let me review what we announced. First, we had the third consecutive quarter of solid 6% CER growth in 2018, with adjusted operating income continuing to grow at a faster rate than sales and leading to adjusted EPS of $0.35 per share, which was above our target. Second, we are advancing our Sample to Insight portfolio across the continuum from basic research to routine clinical health care. We continue to deliver double-digit CER growth from our top products, like the QuantiFERON-TB test, QIAsymphony automation system and differentiated technologies like liquid biopsy, microbiomes and NGS solutions.

We are also excited about the European footprint we are establishing for the new QIAstat-Dx platform and the growth potential in syndromic testing.

Third, QIAGEN is emerging with the leading portfolio of disruptive new molecular diagnostic platform technologies addressing very large market opportunities. The strategic partnership announced in September with NeuMoDx, bringing us 2 new fully integrated testing platforms, is highly synergistic with our portfolio, channel and footprint.

Finally, as a last point, we are on track to achieve the sales outlook we have set for 2018, and have raised our outlook for adjusted EPS due to the significant efficiency gains our teams have achieved. We feel very good about our 2018, and are looking forward to executing on our strategy in 2019 as well.

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 Patrick Donnelly with Goldman Sachs.

Peer, maybe just recognizing you're not guiding for 2019, but it feels like a lot of investor focus has shifted that way. And you guys are uniquely positioned and most are actually expecting an acceleration in growth for next year. So maybe just with HPV coming in, maybe not as big of a headwind as originally anticipated this year, QuantiFERON, nice stable growth backdrop, can you just walk through some of the moving parts and upside drivers at a high level for next year relative to 2018?

Sure. Thanks, Patrick. So no, we are indeed quite pleased with the progress we are seeing towards our ambitions for faster growth. And if you look at the recent years, we have consistently been delivering -- or overdelivering on our targets. For 2019, we will provide our formal outlook, as usual, in January when we provide a wrap-up of 2018 and give formal guidance. As we look into the new year, it's clear that there are -- it has the potential to be quite an exciting year for us. In terms of sales growth, we are looking for continued expansion of our portfolio, which is currently on track for 6% to 7% growth. And clearly, also with good growth in QIAstat-Dx, which we guided for about $30 million of sales in 2019 versus $7 million in '18. NeuMoDx will take a little bit longer to ramp because the lead times are a little bit longer on that one. So that's more a 2020 impact. But indeed, we are looking quite positively into 2019 for that matter also into 2020 and '21, and there is a pretty good trajectory from the foundation that we've created in 2018. But again, formal guidance will be given in January. That will also allow us to have the benefit of the additional ramp, for instance, in QIAstat in the fourth quarter and we'll be able to give a little bit more detail in around some of these growth trajectories that we expect for 2019.

Your next question comes from the line of Tycho Peterson with JPMorgan.

Peer, I'll start with NeuMoDx. I just want to understand a little bit more the strategy here. The automated PCR space is fairly crowded with some entrenched players. So can you maybe just talk a little bit more about how you think the platform is truly differentiated? Are you expecting any cannibalization around QIAsymphony given some overlapping applications? And then how much incremental R&D is going to be required to clear the assays in development? And then, as a follow-up, just on guidance, I'm just trying to understand for the fourth quarter as well, is there anything baked in, I mean, you are guiding EPS a bit below the Street. Anything baked in, in terms of QuantiFERON? You have had some competitive moves in terms of Quest acquiring Oxford's lab business. So is there anything there you're factoring in? And then anything on Palmetto -- the final LDT for QIAstat?

Sure. So first on the -- I'll take the 3 strategic questions, and then I will hand over to Roland for the guidance. So first, on NeuMoDx, integrated real-time PCR testing is by far the largest segment of Molecular Diagnostics, and it's a market segment where we are actually in those laboratories on a daily basis with our offerings. With QIAsymphony, we have a fantastic offering, which will continue for many years to show good growth. But it is more the modular PCR market, which is a smaller subsegment of Molecular Diagnostics. I showed that one chart with the 2 rings. We have a very high market share in that segment that will continue to exist. But the integrated PCR testing market has been -- is not a market that we've really played in. And while we were in those -- in those laboratories and are in those laboratories on a daily basis, while we have very good relationships with these laboratory directors, we have not addressed the more integrated PCR segment. And so it was a strategic imperative for us to have a solution in that market to ensure the efficient scale of our sales channel and also the ability to address all kinds of a more integrated disease management solutions, real-time PCR and a high volume testing is absolutely critical for that to happen. If you look at the systems that are in the market today, they replicate manual processes. I gave a few examples in my prepared remarks on why the NeuMoDx technology really sets a completely new standard in terms of many specifications that are important to our customers. And if you look at the platforms that are currently in the market, they are basically based on 10-year-old designs, at least 10-year-old designs. So we -- it's interesting also those in the pipeline are very often based on more traditional approaches to this workflow. With the NeuMoDX technology, we truly have a -- quite some disruption opportunity, and I just gave you the one stat -- to have a test run in 40 minutes versus 3.5 hours. That is a real game changer, and for many testing segments, a critical need that is currently unanswered. So we feel very comfortable that we have the footprint and the segment that we have the channel capabilities, the technology synergy with the other application areas, again the technology is very similar to the QIAstat and with the QIAsymphony assay portfolio, and therefore, this represents a very interesting option for us. We do have a staggered approach, so we have not fully acquired the company as you know, we took on distribution rights and we will update you in the coming quarters on the progress, probably towards mid-year it will become visible on how the ramp is happening. The feedback from the first customer meetings was fantastic. We showed it in Athens, we will be showing it at AMP. And some of you will be there. And I think the stats and also the simplicity speak for themselves, and looking forward to the feedback. The second is on the QIAstat technology and Palmetto. One of the reasons why we like the QIAstat technology is that it has this tremendous flexibility. It does not basically encase the assay into a very rigid cartridge, but it has a high degree of flexibility of tailoring the assays to the needs, in particular, the reimbursement needs of specific sub-segments. This is a feature that we detailed in the first quarter conference call. And this is something we could apply should there be broader application of this Palmetto approach into other segments. However, currently, would only represent a single digit maybe teens market share segment of our current business case going forward due to the limited space where this would apply. So we feel, in terms of technology, very comfortable, and this is not really changing our business case. And it was also visible that there would be changes to this area of reimbursement already some time ago when we also highlighted this already in the first quarter of this year. In terms of QuantiFERON, we continue to grow and we're taking share primarily against the skin test, but also against other commercial competitors. And one such competitor was acquired by Quest, and Quest is a very close collaborator, with QIAGEN, is promoting also QuantiFERON. It is by far the larger piece of their TB franchise. And Quest has assured us that QuantiFERON will continue to be a part of the portfolio going forward. It is simply the better test, and one that increasingly now is very evident that it has, by far, the better automation solution. It's very difficult to replicate the workflow that we have been able to create, and Quest is also a large DiaSorin customer. It's also announced by DiaSorin previously. So this is something that we'll see how it pans out. As you know, that one asset that was acquired by Quest had several different product areas. And also other quite exciting assays that were showing much faster growth, and not like in TB, not losing market share, right? And we can't speak for Quest and their motivation, but there could be many reasons for this acquisition.

And in terms of -- just to follow on the last question on Q4. I think it's quite obvious that we also expect for the fourth quarter overall adjusted EBITDA margin improvement, nevertheless have in mind the 2 things are going to happen, as we said before. We clearly do have an incremental dilution from the QIAstat-Dx acquisition due to the commercialization efforts but also to the preparation in terms of R&D activities for the U.S. launch so that clearly has any particular impact on the fourth quarter, and therefore, brings down EPS, as I said before. Nevertheless, the second topic to have in mind that took the fourth quarter overall gross margin is slightly lower than average, just is a quite usual product mix. Nevertheless, if you add up, you'll see as we announced today, we have upped our own guidance, therefore, increase our full year guidance.

The next question comes from the line of with Ross Muken with Evercore ISI.

This is Luke on for Ross today. Just 2 quick ones following up on Tycho's with QuantiFERON. You talked about it in your presentation about the vaccine test and how it's associated with that. Can you give us an idea of the timing and the sizing of this? And how that would change the outlook for the overall market size for you guys? And then I guess on the second one would be on the NGS portfolio. Solid growth there, but can you unpack any of that where you're seeing the majority of the growth from a product perspective, a geography or a specific application you talked about the RNA seq, et cetera?

Great. So the treatment of latent TB is antibiotic regimen, which takes a few months. There are several approaches to take it down to a few weeks. But it is still a longer process that a patient has to go through. It is obviously much more attractive to address the latent pool in eradicating TB, than going after the actives. When it's typically too late, they already have become contagious and are infecting more people. So the Holy Grail is obviously to have a treatment that would be very easy to administer and you could then administer them broadly. And this is why there are a lot of activities in this space to improve treatments. Now that we can detect latent TB reliably, and this is not something that has been around for a long time, this is now, these new blood tests have only been around for some time in QuantiFERON a little bit more than 10 years. And so if you have the ability to treat, it becomes much more attractive to do large space screening programs if the treatment can be done immediately and without a long treatment cycle. So this is why we are partnering with a lot of Pharma companies and pairing up QuantiFERON with the therapeutic. The second question is around NGS, the $140 million. The fast-growing pieces in there are definitely the panel technologies that we have. We're taking a lot of share in that space. The digital NGS technology provides a very unique level of sensitivity and specificity, of NGS panels. And we have now entered the library preparation space and more for us, in particular the RNA library preparation area, which is a multi-hundred million dollars market, and this is also why we are featuring it, we are moving into that market with some quite interesting products. So panels, I would say the largest segment of growth in that space, and, obviously, GeneReader is growing very rapidly as well. But this is in terms of the overall revenue size, we're seeing a very sizable panel business.

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

First off, Peer, can you help us think a little bit about the risk elements to the NeuMoDx story? If memory is correct, they were able to develop the system in a fraction of the time of most of the instruments on the market. So I'm wondering what's left to do here before you get to commercialization? Also, maybe a word on the initial menu, certainly some of their science to date would suggest they are heavily focused on the viral load space. And then lastly, just some color on the U.S. TB testing trends, just kind of excluding the whole Quest status?

Sure. Well, the latter, let's start with that first. I saw a commentary on that, the interesting thing is the U.S. is growing very rapidly in QuantiFERON. We are seeing north of 20% growth, and QuantiFERON North America, we are aggressively expanding also our channel in this space, and pushing very hard into this market. The 2019 DiaSorin option is very attractive. The front-end Hamilton systems here in Maryland we had several accounts yesterday looking at the complete workflow automation. And it's a real game changer in terms of what we had previously and now the new level of automation. So that's a trajectory that we expect will also continue into '19 and thereafter. So the $300 million target that we have for 2020 sounded like a pretty bold statement a few -- couple of years ago when we put it out, and if you look at where we are today, we're getting very -- it's very likely that we will be able to make that target. In terms of the NeuMoDx technology, just a note, the system is already FDA cleared. So it is not in a research stage or a lot of hurdles. It is already being applied in laboratories, and first customers are already using it. You will see some customer presentations also at AMP, and the system will be available for visits and we are already taking orders for the system in Europe. So this is not a development stage technology. We've been minority investor for quite a few years. Just like in QIAstat and when we saw the technology pass certain hurdles, we acquired it. The reason why the development timelines are shorter is because the core technology is really a shoebox sized module that integrates all the micro fluidic processing, and that is placed on standard liquid handling instruments that have the robustness of systems of which thousands have already been in place. So you actually have a significantly easier development time line. This is why 2 systems are now launched concurrently with the very good mean time before failure rates, systems that are extremely reliable and have been tested for years in the market. So the menu is going to expand all across what you would expect in this area, and obviously, the viral load is part of that plan also going forward. But the first assays that are in the market are in the area of -- at women's health, and we'll also see them transplant. And the interesting is you can also random access LDTs into it in an unprecedented way, not a separate channel, but completely integrated. So it has a very fast pathway to a broader menu, including also LDTs.

Next question comes from the line of Doug Schenkel with Callan.

Just starting on Companion Diagnostics. You had another really strong quarter with co-development payments. Can you talk about what's driven the strength this year? How are you thinking about Q4? And how we should think about 2019 for co-development payments given the result of your strength this year is a tough comparison?

Thanks, Doug. It's indeed a franchise, which is doing very well. We always said that our goal was to keep that number pretty stable. But we've seen remarkable inflow of new partnerships, in particular around immuno-oncology, and we hope to be coming forward soon with some next-generation immuno-oncology testing solutions. So it's difficult for us to model these things, it's milestones based, and we are running dozens of programs. But our goal would be to keep this pretty stable at this level that it is. And we're running somewhere in the -- we detailed it once somewhere between $35 million and $40 million. It's a little bit more than that now. But that's about the level that we would be continuing going forward. This is just reimbursement for research and development expenses. And that's probably our best assumption for now. We're a little bit above that in 2018. But it could very well be that this continues, it's just very difficult to predict.

Next question comes from the line of Scott Bardo with Berenberg.

Obviously, a very strategic year in molecular. And you've given some exclusive targets for QIAstat-Dx. I think you've seen a couple of million thus far and expectations for a major step up towards $30 million or so next year. So I just wonder if you could give us some comfort around achieving this. What needs to happen from a manufacturing, regulatory and commercial perspective? And following up from this, I think you you've valued the NeuMoDx business some 50% higher than you paid for QIAstat-Dx. So I wonder if this is a reflection of expectations for even higher revenues and profits? Or is it a better gross asset? Perhaps you could give us some sense of what we should expect from this business from a contribution perspective.

Yes. Thanks Scott. So the valuations are also in some way a function of what the hurdle is to get into this business, and the investments to develop a platform for the integrated market is very high and especially it's a scalable technology where we're really acquiring a distribution rights now in the first phase to 2 systems. There, obviously, could scale even further than that. But the module development was indeed quite expensive to do, and that was now achieved successfully. And so that is also partly reflected in that. But the market size is also larger. As we all know, the syndromic testing market is about $800 million in size. We're looking at it substantially 3x the size more than that in the integrated segment. And so from that perspective, I think we do have expectations. But these take -- this is not an easy -- a fast cycle like we would have with the QIAstat where we literally have trade shows, customers basically purchased pretty much there. We are definitely going to look at 6-month cycle there and increasing also validation required, also third-party validation. In terms of the QIAstat ramp up, yes, definitely the manufacturing. The menu expansion phasing this all into the QIAGEN processes is a big challenge, but we kind of like this model of going in, in a stepwise approach, and actually having had a good piece of equity and also a discussion years before we entered into the transaction with QIAstat was a benefit. We also have a good stake in NeuMoDx today. And if we trigger the acquisition, then that would be a very similar process to what we sold QIAstat.

The next question comes from the line of Daniel Wendorff with Commerzbank.

Two if I may. The first one is on your actually quite good adjusted EBITDA margin expansion. We have observed to find the first 9 months of 2018. If you think of what has contribute to that, has there been some kind of push forward effect already? So the question underlying this is, I mean, do we have to worry about the further margin expansion beyond the first 9 months? And the second question would be a follow-up question on the QuantiFERON-TB test in your 2020 targets. How important is China in your projections going into 2020 with the targets?

Roland, do you want to take the financial question first?

Yes, sure. I think, Daniel, you're absolutely right. We have seen a very strong margin improvement this year. And we are clearly also a little bit ahead of what we thought we are. Nevertheless, I think this is a very good news in general, because I think all the drivers on all the leverage we were able to achieve over the last few months are also drivers we believe who are going to stay and continue also going forward. And again, I'm not going to repeat what I said before. So overall, I think it's sustainable profitability and we do have a midterm goal to overall EPS growth, and that is something we're aiming to.

Good. And the first question was around QuantiFERON in China. So it's a little bit of a wildcard. It obviously, presents a very large market opportunity. There are rumors of several dozen million skin tests being performed in China. And just to remind you, we see the global markets somewhere in the range of 80 million skin tests at the moment or latent TB tests, of which, by far, the majority of skin tests also. But obviously, the system is a little bit more tiered in China. And so we are currently already approved in China where our product is being widely used and we are, however, primarily targeting centralized screening centers and some of the Tier 3 hospitals that are at higher levels of health care standards and quality. And so it will be important to see the importance of TB eradication move up. And with that, we would then scale stronger into the broader health care market in China, and this is obviously what we are working with Chinese agencies towards. So it represents a little bit of a wildcard. It's not a yes, no, for us to be able to make our target market if you look at where we are today and the momentum we're showing, the trajectory clearly points at $300 million, and China would be a nice wildcard. But it's not a necessary big bang that has to require -- is required there.

And the next question comes from the line of Steve Beuchaw with Morgan Stanley.

One quick one for Roland and one quick one for Peer. Roland, you gave currency guidance top line, bottom line for the fourth quarter. Is that a reasonable barometer for what we should expect for the first 2, 3 quarters of 2019? And then, Peer, I wonder if you could speak just about prospectively your expectations for the moving parts in the Applied business? I know human ID and forensics has been very strong. Seems like you're gaining share there in the U.S. But then there are a couple of other parts of the business that haven't been growing as quickly. And I wonder if you could just help us understand the puts and takes there and how you're thinking about that going forward?

Let me kick it off. We said for the first quarter there was about 4 percentage points of that in terms of net sales and about $0.01 for EPS. Again, if you know a lot of impact are going to reverse next year because they kicked in over the, more or less, the middle of this year sometime in the second quarter, particularly in Turkey. So clearly we will have sometime next year a certain annualization. So I don't think that is what you see in the quarter is something what you see [4x] next year is the lower than that on a full year basis.

In Applied Testing, the big piece of the 9% of our sales is indeed human ID, as we call it, or forensics. And we are taking share there in that segment, in particular, on the assays that we launched a few years ago, and that are doing very well. But we're also seeing now GeneReader placements with some of the protocols that we also discussed in previous calls, SAP and other protocols. We're seeing the first placements there. So what we are really doing here as a company, we are focusing on areas where we can create the highest degree of synergy and scale. And this is also why, an example for the NeuMoDx and QIAstat transactions, we're in these laboratories, those same laboratories, already there with footprints and we are now able to scale into this channel. In Applied Testing, it's a little bit different. If you're talking about food, if you're talking about environmental testing, you're very often targeting about very, very fragmented small markets. And so while we have offerings in those, they're not priority A segments. I think the best example for that was that we divested our veterinary testing assays last year, that's simply because, while it is an attractive market and growing, we just didn't want to afford a dedicated sales channel into that market, which really would have been required. So this is a sign of the focus that we are currently taking. And HID clearly has focused resources and also dedicated channels.

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

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Portfolios addition you've had, how do you feel about the durability of the QIAsymphony placements and consumables growth from here? And then for Roland on the margin front, as you think about balancing some of those investments in molecular against the cost initiatives you have underway, do you think 75 to 100 basis points margin expansion is still a good run rate from here?

Well, the first question is on QIAsymphony, which, as we said before, will probably break through its target now in the fourth quarter. We feel pretty good about that. Placements are expanding. There are 2 applications of QIAsymphony. One is as the portal through which samples move into molecular testings. So we can -- with hundreds of protocols on the QIAsymphony, we can process any type of primary sample for any type of downstream testing pretty much. And that in a very high quality. And that is something that is increasingly growing. And liquid biopsies, one such example, but many other, such segments exists. That will lead to continued growth of QIAsymphony also in the future. It's a -- there's still tremendous opportunity out there as customers are today using smaller systems and they're scaling up into higher throughputs. The European market had much more focus on integrated workflows, where people were doing HIV and hepatitis and that was very little visible in the U.S. So if people went to U.S. labs only, they didn't see that. But if you went to European labs, that's where you saw very large laboratories doing blood vials, doing Chlamydia, HPV and other thing actually on the QIAsymphony workflows. And we had whole national screening programs, blood vials and everything going on. At the Symphony, we'll continue to have a real place there as a modular system as many customers actually want to have modularity and many countries actually want to have 2-room strategies where detection is separated from preparation. It's a different approach and different standards that you see different markets. Part of that might see a benefit of going integrated over time, but we don't necessarily see that influencing the position of QIAsymphony as a very strong pillar and also a growth contributor over the next few years. We clearly are positioning these 2 as I showed on that one pie chart as being in 2 different segments, one is a more modular testing segment, the other one is the very lockdown integrated segment.

And in terms of the margin expansion for the cost, we are very pleased with the performance we have on margins now since more or less a couple of quarters. At the same thing, I think we also feel very comfortable looking forward that there's still a lot of things, which we believe we can improve, which are already kicked off, but in no ways we have reaped in all the benefits. So I have less doubt that we are able to expand our margin also going forward, particularly on the constant exchange rate basis. And I think it's also an opportunity we're having right now, as Peer said before, we have a couple of incremental growth drivers for '19 and '20, which is clearly QIAstat-Dx in the short term and the midterm, incrementally NeuMoDx is kicking in. So yes, there are some investments to make, nevertheless, I think the direction is very straightforward for us.

And the next question comes from the line of Dan Arias with Citigroup.

This is [Katerina Santiesteban] On for Dan. What is the status of the development of the liquid biopsy assay for the GeneReader?

Thanks, [Katerina]. I think what is unique is that all of our assays have on GeneReader have 2 uses. They can be used with solid tumors or they can also be used with liquid biopsies. We made sure that -- there's panel compatibility and informatics compatibility for the 2 different uses. So as such, all of the panels that you see here already are prepped and are being used for liquid biopsy in addition to solid tumors.

The final question is from the line of Derik De Bruin with Bank of America.

One of my questions have been answered, but let me ask the following. On the consumables business in Academia and Pharma, up modest single digits in Academia, mid-single-digit in Pharma. A little bit lower than some of the peers. I'm just wondering can you sort of talk about some of the trends going on there in the research markets? Is there, I mean, I know -- you've seen some pickup in your Academic business, just curious can talk about any incremental headwinds or anything interesting that's different?

Yes, Derik. Indeed, we are on an upward path in terms of growth in the Academia and Pharma areas. As we detailed earlier this year, we made significant shifts in the commercial channels, we created dedicated sales channels into Academia. And Pharma, we for instance created also hotspot coverage, for instance, at NIH where we are now growing well in the double digits. Following these changes and we're also supporting these initiatives with strong digital firepower in terms of preparation follow up and also marketing support. So the performances I outlined in a few conference calls already between 2015 and 2017 in Academia and Pharma was okay, but it was not really where we would like to see it, where we think it deserves to be and where we put in place a number of initiatives and a lot of focus. There was also leadership change in this space, and we are now starting to see this move up again. And hopefully, at '19, we'll start seeing this -- put this more to numbers.

Okay, thank you, Peer, and thank you Roland. And with that, I'd like to close out the call, and appreciate all of you and your time. If you have any questions, please do not hesitate to contact us. Bye-bye.

Thank you.

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