Qiagen NV

NYSE:QGEN

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Jasmine, your Chorus Call operator. Welcome, and thank you for joining QIAGEN's Conference Call to discuss the Q1 2018 Results. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded at QIAGEN's request and will be made available on their Internet site. The presentation will be followed by a question-and-answer session.

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.

[John Gilardi, QIAGEN NV]

Thank you, and welcome to our conference call today. The speakers are Peer Schatz, Chief Executive Officer of QIAGEN and Roland Sackers, 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 on the investors section of our website at www.qiagen.com. Copy of the press release is also available in the same section.

Before we begin, let me cover our Safe Harbor statement, the discussion and responses to your questions on this call reflect management's views as of today, Thursday, May 3, 2018. We will be making statements and providing response 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 a reconciliation of these figures to GAAP in the press release and the presentation for this call.

So with that, I would like to now hand over to Peer.

[Peer Michael Schatz, QIAGEN NV]

Well, thank you, John and thank you to all for joining us for this call. Our results for the first quarter have launched QIAGEN into an exciting year of growth for 2018. Our portfolio, Sample to Insight solutions shows good momentum across a broad range of molecular testing needs, including new initiatives that offer significant potential for adding to future growth.

Our teams executed well to deliver the strong performance and we are well positioned to meet our goals for the year. I have these key messages for you today. First, QIAGEN exceeded the target set for the first quarter of 2018. Total net sales rose a solid 6% at constant exchange rates and beat our target for about 5% CER growth. These results even include a modestly negative impact from the changes in our business portfolio announced in the second half of 2017. Adjusted diluted EPS was $0.26 per share and $0.25 at constant exchange rates and this was ahead of our target for about $0.23 to $0.24 at CER, thanks to the solid sales growth and positive benefits from our efficiency and effectiveness programs

Second, our Sample to Insight portfolio is advancing as we target growth opportunities across the continuum from basic life science research to routine clinical healthcare. Among the highlights were the QuantiFERON-TB tests growing at a double-digit CER pace and in line with our target for over $300 million of sales in 2020.

We saw very strong growth in the United States and Europe, while our underlying growth in the Asia-Pacific region was more than offset by a very tough comparison to 2017 results and the tenders in South Korea. We also saw a robust growth in placements of our flagship QIAsymphony automation platform even in light of 2017 having been the strongest year ever in terms of annual placements. We are on track to achieve our goal for more than 2,300 cumulative placements at the end of this year.

Another highlight was the improving growth trends from our portfolio of universal next-generation sequencing solutions for use with any sequencer. This includes the business expansion in liquid biopsy and microbiome technologies where QIAGEN kits and automation are considered to be the gold standards to obtain and evaluate biological targets.

At the recent American Association for Cancer Research Conference, we launched two new liquid biopsy panels for the evaluation of circulating tumor cells, including the AdnaTest Prostate Cancer Panel and the AdnaTest LungCancer Panel. Our footprint in NGS is expanding rapidly and we are on track to achieve our goal for more than a $140 million of sales in 2018 compared to about $115 million in 2017. The GeneReader NGS System is a key driver for this expansion. This complete Sample to Insight system offers customers an integrated solution for high throughput gene panel testing.

During the first quarter, we announced plans to further expand the GeneReader menu through a new partnership with Natera. We intend to jointly develop cutting-edge cell-free DNA assays including pre-natal screening for use on GeneReader by hospitals and laboratories around the world.

Third, we had a successful European launch of QIAstat-Dx, a next-generation platform for syndromic insights. As you know, we announced in January our plans to acquire STAT-Dx which has been a long-standing collaboration partner of QIAGEN. This acquisition has now been closed and we just launched QIAstat-Dx at the recent ECCMID Conference in Madrid. The customer response has been very positive, since this powerful modular system can provide one-step fully integrated molecular analysis of common syndromes. We are on track for commercialization in the U.S. in 2019 and are developing a deep pipeline of assays in a broad range of applications.

Fourth, we are reaffirming our guidance for 2018 and expect about 6% to 7% CER total net sales growth. This outlook includes about $7 million of revenues from the launch of QIAstat-Dx in terms of first time sales. This outlook also continues to assume about 1 percentage point to 2 percentage points of headwind from reduced U.S. HPV test sales and it also absorbs the adverse impact of the recent portfolio changes.

For adjusted EPS, we continue to expect about $1.31 per share to $1.33 per share at constant exchange rates. Based on exchange rates, as of April 30, we expect results for both sales and adjusted EPS to be higher at actual rates due to the positive currency movements against the U.S. dollar.

So as a quick summary, we are pleased with the strong start into 2018 and are excited about the opportunities for the New Year and the progress we are making towards our mid-term 2020 targets.

I would now like to hand over to Roland.

[Roland Sackers, QIAGEN NV]

Thank you, Peer. Good afternoon to those of you in Europe and good morning to those of you in the U.S. I will first review the financials for the first quarter and later provide some perspectives on the guidance for 2018. We exceeded our targets for the first quarter of 2018 in terms of total net sales going 6% CER to $343.6 million and that compares to total net sales of $307.7 million in the same period of 2017. Given that we have annualized the OmicSoft bioinformatics acquisition, we've returned to focusing on growth in total net sales rather than adjusted net sales, which was relevant in 2017 due to the accounting practice for software-related acquisition.

The sales performance was about 1 percentage point ahead of our target for 5% CER growth. Total sales growth was essentially all organic since only a few weeks of sales from the OmicSoft acquisition were included in the quarter. As an additional point, organic sales growth excluding the business portfolio changes that we announced in 2017 was modestly ahead of the 6% total net sales growth. The currency benefits were significant, amounting to about 6 percentage point on a rounded basis and led to a 12% sales growth at actual rates.

Moving down the income statement, the adjusted cost profit margin declined about 60 basis points to 70% from 70.5% of total net sales in the first quarter of 2017. This was mainly due to higher revenues from companion diagnostic co-development project with pharma companies which have the significant lower gross margin than our consumable at about 75% and also our instruments at about 30% to 50%. However, we saw margin benefits from higher bioinformatics sales and also further incremental gains from higher sales of QuantiFERON-TB test and the recent in-sourcing to our site in Maryland from third-party manufacturers.

Adjusted operating income rose a strong 21% to $77.2 million. That is a far faster pace than net sales growth as we saw the benefits from the solid business expansion as well as the efficiency and effectiveness programs we have included opening a second QIAGEN Business Services Center, Manila to build on the success of our first QBS Center in Poland. As a result, the adjusted operating income margin was about 180 basis points to 22.5% of total net sales compared to 20.7% in the same period of 2017. Against the decline in the adjusted gross margin, we saw lower expenditures in Research & Development, Sales & Marketing and General & Administration as a percentage of sales in a year-on-year comparison. Furthermore, the underlying margin improvement was about 280 basis points at constant exchange rates.

We are clearly seeing the positive impact from the efficiency programs, which includes areas such as the digitization of sales channel. For the full year, we anticipate an underlying improvement in the adjusted operating income margin of about 100 basis points compared to 26.2% in 2017, but for this to be reinvested to a large part into the commercialization and development of QIAstat-Dx product.

Moving down the income statement, adjusted diluted earnings were $0.26 per share for the first quarter of 2018. The adjusted tax rate was 20% for the first quarter, which was due mainly to the new U.S. tax law and in line with our guidance.

I would like to now review our sales results for the product categories and our four customer classes. Among the product categories, consumables and related revenues was 7% CER to $307 million in the first quarter of 2018, and provided 89% of total sales. This was due to good volume gains across all product portfolios. After a very strong performance in the fourth quarter of 2017, instrument sales started the year with 1% CER growth and represented 11% of total sales. We saw solid placement of the QIAsymphony system, but had lower instrument service revenues than in the same period of 2017.

For the first quarter, M&A contributions were immaterial since we had only few weeks of sales from the OmicSoft acquisition made in January 2017.

Molecular Diagnostics led the performance among our customer classes, rising 9% CER to $161 million and provided 47% of total sales. As noted earlier, the QuantiFERON-TB test showed strong double-digit CER growth for the quarter and was complemented by solid gains in Personalized Healthcare and higher sales of infectious disease testing products. The Life Science customer classes provided 53% of total sales and grew 44% CER in the first quarter of 2018. Pharma led the performance, rising 8% CER to $71 million and representing 21% of total sales. We saw high-single digit CER gains in sales of both consumables and instruments, led by double-digit CER growth in the Americas region.

In Applied Testing, first quarter 2018 sales were unchanged at constant exchange rates with $31 million and representing 9% of total sales. We had a very tough comparison with 21% CER growth in the first quarter of 2017. The Americas region grew at a double-digit CER pace, thanks to growing demand for the new forensic product we launched in late 2016. However, sales in Europe showed a tangible drop-off due to a tough comparison to a very strong Q1 2017 and the expiration of a national tender.

Sales in Asia-Pacific were also lower compared to the first quarter of 2017. We have said before that Applied Testing sales can be volatile on a quarterly basis, but we continue to expect good growth on a full-year basis.

Academia sales were up 3% CER in the first quarter to $81 million and provided 23% of total sales. We saw double-digit CER gains in instrument sales that were supported by low single-digit CER growth in consumables. The Asia-Pacific region benefited from improving trends in China. The U.S. showed modestly improving trends given the funding improvements that will have favorable impact for the second half of 2018 and into 2019. We are more cautious of Europe, however, given the more challenging funding trends there.

I would like to now review the performance among our three geographic regions. The Americas led the performance with 11% CER growth to $159 million and provided 46% of total sales. We were particularly pleased with the U.S. growing at an even faster pace due to business expansions across all of our customer classes and this was supported by important contributions from Canada, against unchanged sales in Mexico and a modest decline in Brazil.

The Europe, Middle East, Africa region delivered 4% CER growth to $160 million which represented 34% of total sales. Here we saw single-digit CER growth in Germany, Italy, and Switzerland whereas the United Kingdom also was at a single-digit CER rate due mainly to solid molecular diagnostic trends. This came against weaker results in France and the Nordic region.

The Asia-Pacific, Japan region had $68 million for the first quarter of 2018 which was unchanged from the same period of 2017 at constant exchange rates and represented 20% of our total sales. In this region, we saw the very tough comparison against the significant contributions in 2017 from the national QuantiFERON-TB tenders in South Korea, while another factor was a sales decline in Japan. At the same time, we saw double-digit CER gains in Australia and India along with China rising at a single-digit CER rate due to solid improvements in the life science market.

Now I would like to give you an update on our financial position. Net cash provided by operating activities was $48.2 million in the first three months of 2018 and an important point is that this includes a payment of $30 million of prepaid royalties to Natera for the new GeneReader partnership. On an underlying basis, this was a nice improvement over the $60.2 million of operating cash flows in the first three months of 2017.

Property, plant and equipment expenditures were $18.9 million or about 6% of total net sales compared to about 5% of sales during the same period of 2017. We see the 6% level as an ongoing consideration going forward and note this includes capitalized software expenses as well.

Our leverage at the end of the first quarter of 2018 was 1.4 times net debt-to-EBITDA. However, this would be about 1.8 times when including the STAT-Dx acquisition which was completed in the second quarter of this year. Even with this expenditures, QIAGEN continues to have a healthy balance sheet. We are maintaining our disciplined capital allocation strategy focused on value creation.

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

[Peer Michael Schatz, QIAGEN NV]

Well, thank you, Roland. I'm now on slide 9 to give you an overview of key developments in our Sample to Insight portfolio. As a first point, the QIAsymphony automation system is seeing ongoing strong placements and we are well on track for our goal of 2,300 cumulative placements by the end of 2018. A new CE-marked test for Trichomonas vaginalis was recently added to our infectious disease portfolio, further adding to the largest fully automated PCR test menu available in Europe.

QIAGEN remains the leading company for differentiated molecular technologies, especially to solve sample challenges like liquid biopsy and microbiome testing. Our new portfolio of power kits for microbiome testing has gained strong momentum and has grown above 30% on a CER basis in the first quarter of 2018, further expanding our already very strong number one market share position.

I would like to now review the progress our teams have made in following four areas, QIAstat-Dx, QuantiFERON-TB, next-generation sequencing, which includes our GeneReader NGS System and universal NGS solutions and our Personalized Healthcare franchise.

I'm now on slide 10 to give you an overview of QIAstat-Dx, a next-generation platform offering syndromic insights for a broad range of applications. We just launched QIAstat-Dx in Europe. The syndromic testing market has seen tremendous uptake in recent years based on the idea that testing a battery of markers 10, 20, 30 at a time is a better way to diagnose a complex syndrome, such as a respiratory gastrointestinal infection instead of testing single markers. What makes QIAstat-Dx unique is that, such a complex workflow has been integrated into a completely self-contained cartridge, even including a sample loading bay. This makes the operation of this system very safe and simple with hands-on time of less than one minute. In fact, lab technicians can be trained to use QIAstat-Dx in probably less than 20 minutes. Our initial focus is on respiratory and gastrointestinal applications and this represents a current market size of about $1.3 billion. New applications, however such as oncology and immune response monitoring are attractive market expansion opportunities.

QIAstat-Dx is a unique opportunity that is based on quantitative real-time PCR technology. It is highly complementary to our existing portfolio and also builds on a very large footprint QIAGEN has already established in real-time PCR Molecular Diagnostics across a broad range of applications. As mentioned, we recently launched QIAstat-Dx along with two CE-IVD-marked respiratory and gastrointestinal diagnostic panels at the European Congress of Clinical Microbiology and Infectious Diseases in Madrid. The response was very positive and we are building momentum based on more than 300 customer demonstrations at this meeting alone.

QIAstat-Dx offers a number of key features that include first ease-of-use. As I mentioned earlier, QIAstat-Dx is a one-step fully integrated platform. Second, powerful sample processing capabilities, QIAstat-Dx is based on proven QIAGEN chemistries for liquid sample processing as well as the new and unique dry swabs sample options. Third, proven real-time PCR technology, QIAstat-Dx can be used for up to 48-plex molecular testing and is differentiated as it is also quantifying the targets.

Fourth, scalability, QIAstat-Dx can be expanded for up to eight modules while offering random access to process eight samples individually. To this versatility, we intend to add immunoassay capabilities to QIAstat-Dx which will greatly increase the utility of the system to labs.

Now, this is a strategic and highly synergetic addition to QIAGEN's portfolio of core molecular platforms which include, QIAsymphony RGQ, GeneReader NGS, and now, QIAstat-Dx. Together, they represent an impressive line-up of Sample to Insight solutions for customers that really no other company can offer.

I would like to now review the progress and growth of QuantiFERON-TB from slide number 11, the modern gold standard for latent tuberculosis detection from blood samples. QuantiFERON-TB again showed strong double-digit sales growth based on broad market share gains against the tuberculin skin test in the United States and Europe. We are in the process of rolling out the fourth generation of this test in more than 75 countries around the world. The most recent country is Japan which received regulatory approval in 2018, not long after U.S. FDA approval in 2017.

We are committed to reducing the burden of TB around the world and patient groups that are at risk from this potentially deadly bacterial infection. In recent months, QuantiFERON-TB has earned endorsements from important national and global health authorities, which are involved in TB control and we are also setting new standards in identification testing. These endorsements have come from organizations including the World Health Organization, the U.S. Centers for Disease Control and the International Panel Physicians Association.

The evolving guidelines have led to an expansion of the overall annual market for latent TB testing and this is now at about 70 million tests compared to our prior estimate of about 65 million tests. These clinical guidelines are creating a lot of awareness about the importance of latent TB testing and get support to our annual mid-term target of over $300 million of annual sales in 2020.

I'm now on slide 12 to update you on our next-generation sequencing offering which includes the GeneReader NGS System as well as our portfolio of Universal NGS solutions that can be used with any sequencer. Our NGS presence is rapidly expanding among customers at the American Association of Cancer Research Conference held in Chicago in April more than 40 abstracts were presented that involves key QIAGEN products. These included liquid biopsy studies on GeneReader as well as reviewing the power of the proprietary digital NGS panel technology which achieves the highest level of accuracy.

Our portfolio of Universal NGS solutions produced strong double-digit CER sales growth in the first quarter of 2018. We continue to address emerging needs with novel solutions. For example, research has shown the importance of tumor mutation burden or TMB. This is a highly complex biomarker for oncology and more specifically for immuno-oncology and detection of TMB needs to be standardized for routine clinical use in oncology patients.

Now, QIAGEN is very well positioned to offer complete workflow solutions that integrate digital NGS technology and best-in-class bioinformatics in clinical as well as life science research to give labs the opportunity to standardize the use of a whole range of biomarkers relevant for immuno-oncology therapy selection, dosing and therapeutic monitoring. We're actually working with leading clinical networks in the U.S. and Europe and are on top of this preparing a very exciting new immuno-oncology panel based on digital NGS technology that includes TMB, microsatellite and stability as well as a range of other proprietary biomarkers.

We are planning to launch this panel as a true next-generation option in about a year. Also, the GeneReader NGS workflow is getting steady uptake to further add value to the platform. We recently announced a partnership with Natera, a leader in non-invasive prenatal testing with the best-in-class NIPT test from blood samples.

Moving to slide 13, our initial focus with the GeneReader NGS System has been oncology. At the same time, we have been evaluating the opportunities in non-invasive prenatal testing for some time as a way to expand the scope of this complete NGS solution. We have now partnered with Natera to jointly develop cutting-edge cell-free DNA-based genetic tests for GeneReader and the resulting solutions will be integrated with the cloud-based bioinformatics of Natera Constellation platforms and QIAGEN Clinical Insight.

This means, we will be able to offer a complete end-to-end workflow on GeneReader that can be disseminated to any lab around the world wanting to adopt in-house NIPT and genetic testing. The opportunity is to expand access to Natera's genetic screening assay by providing an easy-to-use Sample to Insight solution based on NGS technology. This is the same value proposition behind our offering to labs for gene panel testing in oncology, but targeting a much larger market opportunity in prenatal testing.

I'm now on slide 14 to provide more detail about the market opportunity in non-invasive prenatal testing and the expertise that each company brings to the table to make this partnership a real win-win situation. Adding NIPT to GeneReader significantly strengthens our value proposition and represents a step change in the market opportunity since 40% of the Molecular Diagnostics market testing volume is expected to shift to NGS driven by NIPT, oncology and rare diseases. For Natera, it allows Natera to leverage QIAGEN's global reach and the power of NGS globally to make NIPT assays along with the Constellation software available on the GeneReader NGS System and thereby accessible to almost every customer.

We are reviewing additional ways to expand the utility of GeneReader and this partnership provides a very good framework to add further innovative test content and a broader menu for GeneReader customers.

I'm now on slide 15 to give you an overview of Personalized Healthcare. QIAGEN is a trusted partner to more than 25 leading pharma and biotech companies that rely on us to develop companion diagnostics as part of regulatory approval processes and to then commercialize tests around the world for use in helping to guide clinical decision making processes.

Among the highlights in the first quarter of 2018 were double-digit CER growth in the ipsogen range of PCR-based tests for use on wide range of leukemias and other blood cancers along with double-digit CER gains and revenues from companion diagnostics co-development deals.

In terms of new product launches, we are excited about the European launch of QIAGEN's first epigenetic breast cancer test. The PITX2 therascreen PCR kit is a DNA methylation assay that adds predictive insights for the treatment of high-risk breast cancer. This launch also strengthens our comprehensive portfolio of therascreen tests for use in solid tumors. Methylation patterns are challenging to be determined using NGS technology, so this PCR-based test is a good example of the strong synergies in our offering of both PCR and NGS technologies for use in clinical decision making.

Also in the first quarter of 2018, a new AdnaTest kit was introduced based on the AR-V7 biomarker that was obtained for diagnostic use through an exclusive worldwide license from the Johns Hopkins University. This kit is designed for use in prostate cancer and is based on selective isolation of circulating tumor cells. Meanwhile, we also added a new partnership in the first quarter with Pangea Oncology, a Spanish company focusing on multiplex liquid biopsy tests for NGS-based precision medicine for the GeneReader NGS System.

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

[Roland Sackers, QIAGEN NV]

Thank you, Peer. I would like to review the outlook for 2018 that we have reaffirmed along with our targets for the second quarter of the year. We continue to expect total net sales growth of about 6% to 7% CER. This is based on a broad business expansion across all of our customer classes and includes about $7 million of first-time contribution from the launch of QIAstat-Dx that I considered as an M&A contribution. This outlook also absorbs the changes announced in the second half of 2017 to our business portfolio as well as a recent divestment of our veterinary testing portfolio and about 1 percentage point to 2 percentage points of headwind from reduced U.S. HPV sales.

For the adjusted EPS, we continue to expect about $1.31 to about $1.33. This includes our previous forecast for dilution of about $0.05 per share from investment in the launch of QIAstat-Dx as well as benefits of about $0.01 from the new share repurchase program announced in January.

As for currencies, based on rates as of April 30, 2018, we now expect a positive impact for full year 2018 of about 2 percentage points to 3 percentage points on total net sales growth and for a positive impact of about $0.02 on full year adjusted EPS. For the second quarter, we expect the net sales growth of about 5% to 6% CER and this is also essentially the targeted organic growth rate since the tangible sales contributions from the launch of QIAstat-Dx are expected to begin in the second half of the year. Adjusted EPS is expected to be $0.31 to $0.32 per share, also at constant exchange rate.

In terms of currency impact, based on rates as of April 30, 2018, we expect net sales to benefit by about 2 percentage points to 3 percentage points and for adjusted EPS to benefit by up to about $0.01 on top of the official CER guidance.

In terms of adjustments, we expect charges on operating income for the amortization of purchased intangibles to remain at about $100 million in 2018 from $112 million in 2017. We also expect restructuring-related items to be considerably lower at about $9 million as we have completed the efficiency program started in late 2016. Business integration costs are expected to be about $16 million and this includes the QIAstat-Dx acquisition. As for the adjusted tax rate, we continue to expect about 20% to 21% for 2018.

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

[Peer Michael Schatz, QIAGEN NV]

Yeah. Thanks, Roland. Here's a quick summary before we move into Q&A. Let me review what we just announced. First, we exceeded our targets for the first quarter of 2018 with a solid 6% CER growth in total net sales and adjusted operating income growing at a significantly faster 21% pace and adjusted EPS of $0.26 per share.

Second, our Sample to Insight portfolio is advancing and is strengthened by the QuantiFERON-TB test growing at a double-digit CER pace, robust placements of the QIAsymphony system and business expansion of our differentiated technologies in NGS, liquid biopsy and microbiomes as some examples.

Third, and in what we see as a highlight of this call, we are very excited with the start of commercialization of the new QIAstat-Dx as a platform, marking a new generation of syndromic testing insights.

Finally, we have reaffirmed our guidance for the year and we'll continue to focus on increasing returns for shareholders on the path to achieving the mid-term targets we have set for 2020.

And with that, I'd like to hand back to John and the operator for the Q&A session. Thanks.

[Operator]

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. To ensure we can accommodate as many people as possible, please limit yourself to only one question and if necessary one follow-up. The first question comes from the line of Ross Muken of Evercore ISI. Please go ahead.

[Ross Muken, Evercore ISI]

Good morning, guys, and congrats.

[Peer Michael Schatz, QIAGEN NV]

Good morning, Ross.

[Ross Muken, Evercore ISI]

So maybe, Peer, let's start first on STAT-Dx, I mean, you talked quite a bit about it, but I just wanted to get a sense now that you've got the business in-house and you've started to get some progress on the regulatory front in Europe and you've had some chance to get feedback from the field, from the sales force, and customers, how are you just thinking about sort of the level of excitement for this box and where it's fitting in and where it will fit in competitively versus some of the peer group there that exists today? And then, it feels like Europe came a little bit sooner maybe than we were looking for, how should we think about sort of the rollout into U.S. and maybe other regions?

[Peer Michael Schatz, QIAGEN NV]

Yeah. Thanks, Ross. Yeah. We were excited to be able to share with you some of the pretty much hot off the press highlights from the recent conferences. By the way, also came from the AMP Europe Conference, a smaller version of AMP that was held this week in Rotterdam and also here the uptake in the pathology markets, in particular for solid, but also liquid tumors is very exciting. So we wanted to share with you that initial enthusiasm that we're experiencing in the field.

We have our case in our guidance that we gave for the year which is about $7 million in sales that we would add this year, and next year, it goes up to $30 million. And I think the first feedback that we are getting from the market is that this is a very solid assumption today, and so we feel good about these numbers. It was an important confirmation.

So the product is getting a very positive response, pretty much exactly due to the features and the benefits that we outlined in January and also in April, so it was a nice confirmation of what we saw as it qualifying for a next-generation system, and the data that was presented, in particular at ECCMID comparing our panels to alternatives has shown we have a very strong offering also in terms of the analytical performance on top of that. So we probably will see the ramp start in the third quarter, fourth quarter. We've already seen some sizable orders come in. But I think the August, latest in November update should not only confirm the outlook going forward, but potentially allow us to see a little bit more in terms of the individual assays and the indications turning into numbers.

So I would just like to send a message. We feel good about it now. The competitive advantages are working. They're resonating extremely well. Our team said this was probably one of the best launches they ever experienced in terms of customer feedback, and we are excited. But there is a lot to do and we are fully cognizant that this is just a start.

In terms of number upgrades or further elucidating our roadmap, I would refer to August and probably more November where we then have three months, six months of data under our belt that we can share.

[Operator]

The next question comes from the line of Bill Quirk of Piper Jaffray. Please go ahead.

[William R. Quirk, Piper Jaffray & Co.]

Great. Thanks. Good afternoon.

[Peer Michael Schatz, QIAGEN NV]

Hi, Bill.

[William R. Quirk, Piper Jaffray & Co.]

Peer, I'd like to stay on the QIAstat-Dx here for a moment. You spoke to both oncology as well as immune response testing in your prepared comments. So is that what we should think of as the next logical menu expansions or are you considering going after, I guess, some of the more commonly targeted syndromic panels such as blood culture? And then, second part to the question is just thinking about the menu expansion, one to two assays per year a good run rate? Thank you.

[Peer Michael Schatz, QIAGEN NV]

Yeah, thanks, Bill. Well, I would probably want to put the focus on some of the more obvious targets, because those are existing larger market opportunities and we will address those because customers expect them to be addressed, to have a full menu and these are existing, valid and in many cases also in terms of reimbursement, well-established markets. So we want to make sure that we create also the financial utility for the system with these larger opportunities.

But as you know, it is always quite differentiating, if you also have flanking assays as part of the menu offering that others could not necessarily replicate. Again, the power of the sample processing is really quite unique and the ability to go from FFPE into liquid biopsies, dry swabs, these are really quite unique capabilities that significantly broaden the dynamic range of the system in terms of applications.

So this is what we're doing, partly alone, partly in partnership and we are already seeing a very high degree of interest in our companion diagnostic partners to use this as a flanking product to, for instance, next-generation sequencing to have a one-hour turnaround is very different to have a five-day turnaround that you have in NGS. And there are certain applications that can benefit from a package where you have fast turnaround in your patient and then more comprehensive reflex or full resolution testing coming later. So we're not excluding these larger opportunities, this is flanking.

[William R. Quirk, Piper Jaffray & Co.]

Okay, got it. Thank you. And then, just a quick question on TB, recognizing there's some puts and takes with the tender in South Korea, but just could you help us think a little bit about what strong double-digit means? Is that still close to 20%? Did it dip below 20%, because of South Korea? Just trying to sort the model out. Thank you, Peer.

[Peer Michael Schatz, QIAGEN NV]

Sure. Well, Q1 was above 20%, but I would more point to the overall, but I would more point to the annual target. And so, we feel very good about the annual target being in the range. We said 15% to 20% in that range and obviously of a big base and this is – I'd say the momentum is very good in Q1 and we're definitely seeing a big conversion trend as you saw also from some of the guidelines that not only point to latent TB, but interestingly enough some of them specifically pointed to QuantiFERON as the product of choice for the conversion that point to the immigration testing as an example. So we're definitely seeing momentum across many fronts in TB that we're supporting. It's obviously a major initiative here.

[Operator]

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

[Tycho W. Peterson, JPMorgan Securities LLC]

Thanks. Peer, on the Personalized Healthcare front, curious as to whether your view on the companion diagnostics opportunities changed at all based on some of the data we've seen around AACR from Merck, around the lack of – a need for biomarkers. So just curious as to whether that is something other – any of your other partners have brought up and if that has changed your view on that opportunity.

And then, separately, can you maybe give us just an update on where you see GeneReader utilization trending? Should we still be assuming about 190,000 (00:42:05) per box or will that pick up in proportion (00:42:07) here? Thanks.

[Peer Michael Schatz, QIAGEN NV]

So I think the data I recently shared at AACR was definitely points to IO being an extremely complex field and it's not as easy as just throwing a TMB or MSI assay at the problem. We're actually working as you know in a consortium with several pharma companies – there are – that to develop the next-generation version of an IO test. And what I can definitely share is that, it's not going to be as simple as just adding the TMB and the microsatellite instability. We'll also have to include several other functions and we're also looking at it from different areas. As you also saw we license in the number of proprietary biomarkers and partly pool that. So this is a big initiative that we have ongoing. And also, here I would say it's probably not going to be solved with one assay alone, but as we look at IO, it's really turning cancer almost into a chronic – management of a chronic disease, so we will require several interventions maybe even different assays.

So I'd like to keep this a little bit vague. We're very deep in this topic with a consortium with several pharma companies for a next-generation version or a few stop-gaps at the moment now in the market that are being used, but there is a very clear need for a next-generation solution and that's what we're working on in a growing consortium of already several pharmas that are pooling some of the activity.

In terms of GeneReader utilization, yes, we also hear it coming directly from an AMP. We've seen that GeneReader utilization has increased considerably, the pull through of the existing phase, but most notably of the customized assays. And now, if you pull the posters from AMP, you'll see that two-thirds are actually working in the meantime on customized assays, where we supply them with assays based on their specification. And so, that immediately increases the utilization and we've seen numbers actually trend up from the 120 (00:44:27) and not down.

[Operator]

Next question comes from the line of Doug Schenkel of Cowen. Please go ahead.

[Doug Schenkel, Cowen & Co. LLC]

Hi. Good afternoon. I have a guidance question and then I want to come back and ask about longer term gross margin targets. There's a few more moving parts in guidance than normal. You maintained your 6% to 7% constant currency revenue growth target for the year. What's unclear at least to me is how this treats, China changes. So more specifically, when you initiated guidance originally coming into this year, you were excluding the 1% to 1.5% headwind to growth, associated with the China divestiture. Is this no longer the case? And regarding the newly disclosed $7 million divestiture in the context of constant currency guidance is that divestiture, is the impact of that divestiture now excluded from the base in the guidance calculation?

[Roland Sackers, QIAGEN NV]

Hi, Doug. Let me try to clarify that. First of all, the 5% to 6% is a all-in number. It includes everything. And that means, if you then transfer to, for example, to an organic number, of course, you have to add back. For example, the portfolio headwind is probably out of China is probably about slightly above 100 basis points. What we said – again, not organic, but in addition to that, we said also for the full year, we clearly have still some headwind on the U.S. HPV side, also slightly north of 100 basis points, even bigger as we just said on the call for the second quarter 150 bps.

And so, one thing which of course, I think shows actually how comfortable we feel with the guidance right now for 2018 is that we decided now the divestiture of our vet asset (00:46:31) business, which we just announced yesterday, which has an impact. Last year revenue was about $7 million for QIAGEN more or less to each set. So we are not going to increase the guidance by that, but rather say we are able to compensate that by other growth coming from other products.

[Doug Schenkel, Cowen & Co. LLC]

Okay, that's helpful. Still lots of moving parts, but I'll think through that and we can follow-up after if I'm still unclear. On gross margin, you guys are at 70.7% in 2017, that was essentially flat with 2016 levels and we're modeling gross margin to remain at that level again in 2018. Roland, is that what you're expecting? And then, looking beyond 2018, is it fair to assume that gross margin will start to improve more meaningfully? I ask this because it seems like your evolving mix especially via continued robust growth from QuantiFERON, could start to drive some more notable gross margin improvement in the years to come.

[Roland Sackers, QIAGEN NV]

I would say in general, as you said, before a couple of moving parts and let me again help you to take them apart for a second. First of all, I would say generally for the gross margin for this year, I think the first quarter was a good indication and we might see a slight improvement from quarter-to-quarter. Biggest driver here actually in terms of gross margin not being, I would say, significantly larger than what we see and have seen in the first quarter as well is actually our strong companion diagnostic business, which as you know, comes in with a 30% gross margin in average.

And by the same time, of course, it translate also in the 30% EBIT margin, so dilutive to gross margin, but accretive to EBIT margin, because there's nothing in between of that. I think in general, very positive. Our gross margin is – QuantiFERON is clearly a product with a very good gross margins for us and also in general MDx, I would say in average has a slightly better gross margin than most life science products, because at the end of the day you want to get reimbursed also for the additional validation steps you have to do.

QIAstat is clearly one factor we have to consider in as well. If you see what Peer just mentioned that we feel very positive about the launch and probably also a nice activation in 2019 that might have an impact on gross margin as well. Nevertheless, I would agree that all factors in mid-terms of gross margins should go up.

[Doug Schenkel, Cowen & Co. LLC]

Okay. Thank you very much. I appreciate it.

[Operator]

Next question comes from the line of Daniel Wendorff of Commerzbank. Please go ahead.

[Daniel Wendorff, Commerzbank AG]

Yes. Hi, everybody, and thanks for taking my questions.

[Peer Michael Schatz, QIAGEN NV]

Hi, Daniel.

[Daniel Wendorff, Commerzbank AG]

The first is on the QIAsymphony. You mentioned that it's still placing really well. My question would be why is that the case? Who are you placing to? And can you may be comment on what the average consumer consumption per year is for machine placed already for more than a year?

And my follow-up question would be on your NGS product offering and the guidance you've given us for 2018, what is actually driving this increase year-on-year 2018 versus 2017? Thank you.

[Peer Michael Schatz, QIAGEN NV]

Sure. Well, I think that the answer to the first question, Daniel, is quite straightforward. The QIAsymphony had a record year last year and I think that is – and also the broad uptake of the system is a testament to unparalleled capabilities that this platform has. We're talking about literally hundreds of protocols being available on QIAsymphony, some of them in a very regulated and validated way. We're talking about the "simple automation capabilities" that include primary tube handling, include the full (00:50:49) continuous loading of the sample processing, multiple chemistries being able to be loaded on deck, and the ability to process things like liquid biopsies, integrating with our pre-analytics workflows, the ability to serve a clinical laboratory as a front-end that can drive downstream next-gen or infectious disease or basically anything laboratories want in a very integrated and continuous loading random access way. These are really big benefits and word of mouth certainly helps. The platform was really was launched in late 2009, but we've really started seeing uptake in 2011, 2012 with a concerted boost around it. So we're not super late into the cycle, I would say. We're probably mid-range in and it's surprising to see these growth rates maybe as a headline, but it's not unusual at this stage in the life of a system which still has many years of life in front of it. And we will continue, I wouldn't be surprised if we talk about QIAsymphony in 5 years maybe even 10 years from today. This is a very broadly applicable system.

In terms of the NGS and in Europe, by the way, I'd just like to emphasize sometimes they're – in the U.S. the application is different. What is very often forgotten is that, we have the biggest menu in Europe and this includes almost every major virus or bacteria or a genetic target that people are routinely testing for and be it blood virals, be it the microbiology assays or genetic targets. So menu is definitely in Europe a big driver of this and we'll continue to be going forward. And that's also the reason why we, for instance, now added a really interesting new trick assay that complements our quite sizable CT-GC and also HPV menu.

In addition to that, on NGS, the reason why we feel very comfortable with this $140 million target is we're seeing very high growth on, in particular the gene panel, so the Digital NGS technology that we have, for those who have been monitoring some of the posters at events or – we just had the ABRF which is the largest core facility, a group of core facility managers, they just elected this technology as the highest performance NGS panel technology, in this case now for microRNA applications. We're just getting tremendous feedback from the market how that panel technology is working.

So that's one that is eating into a $200 million, $300 million – $250 million market and taking share from the incumbents and on top of that, we have seen strong growth. Clearly, GeneReader is also an area where we are seeing that the message is resonating very well and as those of you who probably had access to some of the AMP posters, it was really one of the most prominent platforms there. A lot of studies on – also comparisons with other platforms where we in many cases just hands down beat the performance metrics set out by alternatives. So we're seeing continued uptake and are very pleased to see the support.

[Daniel Wendorff, Commerzbank AG]

Okay. Thank you.

[Operator]

Next question comes from the line of Patrick Donnelly of Goldman Sachs. Please go ahead.

[Charles Steinman, Goldman Sachs & Co. LLC]

Hey, guys. This is Charlie on for Patrick. Thanks for all the color on the Natera partnership. I guess just sticking with GeneReader, should we be kind of looking out for similar partnerships in the future as you kind of look to broaden the range of applications for that system? And if so, where is kind of your next area of focus going to be? And then, I guess, just for a quick follow-up, if you could talk at a high level just around your penetration on the oncology bench-top sequencing market and kind of what you're hearing out of that marketplace. Thanks.

[Peer Michael Schatz, QIAGEN NV]

Excellent. So the first – it's a good question. The first is I think visible from the slide that we showed on the market sizes. So we clearly wanted to have presences where we can get critical mass as quickly as possible. Now, we have a strong footprint in NIPT labs. We have a strong footprint in oncology labs. These were the obvious two targets. But as you know, the second – not only the absolute market size opportunity, the second one is the ability to integrate or flank or complement existing assays that we have.

So if you look at our franchises around the world, we have strong positions in areas like infectious diseases, also in areas such as genetics, and these are areas that we want to further explore. I think the model that Natera and QIAGEN now showcased is one that has received a lot of positive feedback from other innovative content companies that typically start out providing a CLIA service and then are looking for a more global presence, and porting their assays onto our platform gives them a great opportunity to do that.

In terms of the bench-top sequencing area, I think the market is bifurcating a little bit. We've traditionally seen next-gen as something that required a very high level of expertise and also capabilities within a laboratory and resources. And the advent of the GeneReader made it extremely easy. We showed data at AMP – a customer showed show data at AMP that they actually brought up the system to routine use in a month which is just, if you would have said that two years ago, it would have been a shocker and nobody would have believed it that this is a highly powerful system that is actually in this case running thousands of samples in that laboratory and that had this one poster and was brought up in the month.

And so, we're starting to see this bifurcation of routine use now in search for these very integrated and easy to implement system, but yet with a very high level of accuracy and reliability and this is exactly what GeneReader provides.

The other market is going into the more exploratory part of the diagnostic market. And this is one that continues to see a lot of work being done in this area and continues to grow, but we're starting to see some very nice shift into routine panel testing where labs just want to offload that to something that is reliable and manageable.

[Operator]

The next question comes from the line of Daniel Arias of Citigroup. Please go ahead.

[Daniel Arias, Citigroup Global Markets, Inc.]

Yeah, good morning. Thanks for the question. Sorry about the cold here. Roland, just to follow up on the margins, if I heard you right, I think you said you're looking for the 100 bps of margin expansion this year to be used for QIAstat investment, is that correct? And if so, what do you think op margins do this year once all is said and done? What is the all-in outlook for op margins?

[Roland Sackers, QIAGEN NV]

Yeah. Before I come to that question, I just want to clarify one thing because I just realized that at least some of you might have not really closed the picture on that. Again, have in mind that we had if you look on our 2017 numbers, our underlying organic growth rate for last year was 5%. And we guide this year, all-in, all-in 6% to 7%, that means organic will be higher than that, just to again to refer to that.

Going back to your question on margin, as you said correctly, we guided for this year an overall margin expect is (00:59:10) around 100 basis points, more likely probably even slightly better. But you recall that the – this acquisition of QIAstat-Dx, we also said it has a one-time impact from roughly $0.05 EPS in 2018 mainly due to investment into sales and marketing and development activities. If you translate that back into margin impact for this year, it's probably in the area around 18 basis points. So we will see a slight improvement most likely in the operating margin. That is also only I would say an impact for this year. It's more important, I think also going forward that also here we expect for 2019 to go back to this 100 basis points margin improvement, what we said is our mid-term target per year. I think there is even upside potential for next year in particular, again given because of the QIAstat investments which will have a quick turnaround.

[Operator]

The next question comes from the line of Derik de Bruin of Bank of America. Please go ahead.

[Derik de Bruin, Bank of America Merrill Lynch]

Hi. Good morning. Thank you for squeezing me in, I really appreciate it. Hey, couple of questions. The first one being, could you talk a little bit more about what you were seeing sort of the European academic and government markets, I mean, you called out some softness and just was wondering, was that more related to the Easter holiday and or the timing of that and just wondering sort of what the trends are there and also just academic in general sort of that, I would say that some of your peers reported little bit better trends?

And then, the math question for Roland, some clients asking about the calculation for net interest expense and just sort of like what for net interest income and other is sort of like you embedded in your model for 2018 and sort of where do you see net interest expense in the out years in terms of talking about de-leveraging? Thanks.

[Peer Michael Schatz, QIAGEN NV]

Hey, Derik. Thanks for the question. So the first is on the European government funding. As you correctly point out, it is indeed quite positive or at least promising I'd just put it this way. We have seen, you know the German government with the new government just having been established come out with some very bold also growth assumptions for research funding over the next few years and we see a high likelihood of that actually happening. Now administratively we have not really seen that shine through even though we've seen good performance here in Germany. We are currently attributing this more to, I think very good execution by the team and some new go-to-market approaches that we implemented in Europe.

And the outlook, I would say, is quite positive. Largest market is Germany followed by the UK. And in the UK, despite Brexit, we've actually seen some positive trends and a lot of support from government. So it is still – I'd say it's challenging to see through especially due to the fact that we didn't have a government in Germany for six months. We don't have a government in Italy at the moment. It's a temporary government, so you see some of the larger market. Italy is the second largest market in Europe, very often for many products. So you have in diagnostics, so you have a lot of, I'd say political complexity and that's what Roland was referring to.

I'd say the medium term outlook in Germany is quite solid, the UK is a little bit of a question mark, but cautiously optimistic if the government can implement their changes. And Italy is obviously a big question mark as we all know. France seems to have been stabilizing, but is not flowing through the system yet. But in general, I'd say, it's a more positive environment than it was a couple of years ago even though the complexity increased.

[Roland Sackers, QIAGEN NV]

And in terms of interest expense, of course, there is a couple of moving parts as well. First of all, you know that we announced $200 million share buyback for this year which is going to happen. Then, of course, we on the other side have a very strong cash flow and free cash flow generation. Again, also the first quarter was, I would say, also a very good free cash flow quarter as well. I have in mind that we had here this more or less royalty payment to Natera of $30 million which is a multimedia payment. So if you adjust for that, I would say there is again little doubt that also free cash flow is still moving in the right direction.

On the other hand, it's also well known that we have roughly a refinancing obligation in 2019 from about $500 million. So all in, I would say again M&A is always something where we said, we stick to our capital allocation policy meaning again fair combination between capital allocation back to shareholders and our board on accretive transaction. So I would say, all-in, I would say there this is clearly an opportunity for us to particularly in a rising interest environment to limit our financial expenses going forward as well. We haven't seen larger changes in the last quarters. So I would say it is probably also a right way to move and to see that moving forward upside any larger funds action.

[John Gilardi, QIAGEN NV]

So with that, I would like to close the conference call and thank all of you for your participation. And if you have any questions or comments, please do not hesitate to contact Sarah or me. Thank you very much.

[Peer Michael Schatz, QIAGEN NV]

Thanks for joining us.

[Operator]

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