Qiagen NV

NYSE:QGEN

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thanks for joining QIAGEN's Conference to discuss the Q2 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, sir.

[John Gilardi, QIAGEN NV]

So, thank you, Emma, and welcome all of you to our conference call today. The speakers 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 on the Investors section of our website at www.qiagen.com. A copy of the press release is also available in the same section.

Before we begin, let me cover as usual our Safe Harbor statement. The discussions and responses to your questions on this call reflect management's views as of today, Wednesday, August 1, 2018. We will be making statements and providing responsibilities 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 visit our filings with the SEC. 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 the call.

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

[Peer Michael Schatz, QIAGEN NV]

Well, thank you, John, and thank you to all of you for joining us for this call. We're quite pleased with our results for the second quarter of 2018. These results show a solid performance and further progression towards achieving the goals we have set for another exciting year of growth. We are on track to achieve our targets for higher sales and adjusted earnings, and are building momentum as our growth opportunities across our Sample to Insight portfolio continues to create value.

I have these key messages for you today. First, QIAGEN achieved the sales target set for the second quarter of 2018 and exceeded our goal set for profitability. Total net sales were $377.2 million, rising a solid 6% at constant exchange rates and at the high end of our guidance for 5% to 6% CER growth.

As was the case in the first quarter, these results include a modestly negative impact from the disposals of several product portfolios announced in the second half of 2017. Total growth was 8% at actual rates due to 2% points of currency tailwinds.

We were particularly pleased with the improved profitability as the adjusted operating income margin rose 2.2 percentage points at constant exchange rates and was 27% of sales. Adjusted EPS was $0.33 per share; and at the same time, at constant exchange rates, ahead of our guidance for $0.31 to $0.32 CER.

Second, we are advancing our Sample to Insight portfolio to address growth opportunities across the continuum from basic Life Science research to routine clinical healthcare. Among the highlights were the QuantiFERON-TB test maintaining a dynamic double-digit CER pace at 20%, and we are on track with our target for $300 million of annual sales in 2020.

We saw very strong expansion in the United States and in Europe, as we move towards completing the transition to the fourth generation of this test. At the same time, the comparison in the Asia-Pacific region reflects the significant contributions in 2017 from tenders in South Korea.

We have recently announced an important new partnership with Hamilton, which will further improve pre-analytical automation of the new single tube blood collection option and we are also moving ahead towards the start of our partnership with DiaSorin and embedding the readout of a QFT test on more than 7,000 LIAISON systems worldwide. With these two solutions, we have a complete and powerful automation workflow for QuantiFERON-TB.

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. We're seeing further placements of the GeneReader NGS System along with ongoing solid growth of our universal solutions for use with any sequencer. The already optimal utility of the GeneReader System was further expanded for use into a range of hereditary diseases and we saw a number of studies highlighting our liquid biopsy and tissue biopsy solutions on GeneReader at the American Society of Clinical Oncology Meeting in June.

We are also moving ahead with new placements of the QIAsymphony automation platform and have full confidence that we can reach more than 2,300 cumulative placements by the end of this year. We're seeing double-digit CER growth in related consumables used on this system, which has become the most highly versatile and modular automation platform.

Third, QIAstat-Dx is off to a very successful start in Europe and rapidly gaining recognition as the next-generation platform to provide insights into complex disease syndromes. The first two QIAstat-Dx tests are already launched in Europe, delivering Sample to Insight processing of highly multiplex PCR panels to evaluate respiratory and gastrointestinal syndromes. Teams are also working as planned, towards the U.S. regulatory submission of this system in 2019.

As a last point, we exhibited QIAstat-Dx at the ASCO conference to assess its potential for rapid interrogation of key oncology targets and we're very pleased with the feedback.

Fourth, we are reaffirming our guidance for 2018. 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 now assumes about 1 percentage point of headwind from reduced U.S. HPV test sales and also absorbs the adverse impact of the recent portfolio changes. For adjusted EPS, we continue to expect about $1.31 to $1.33 per share at constant exchange rates.

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 financial results for the second quarter of the year and later provide some updates on our perspectives on the guidance for 2018. This was a strong performance for the second quarter marked by solid sales growth of both instrument as well as consumables and further improvement in the adjusted operating income margins. And for the first half of the year, we also had a 35% increase in free cash flow to $123 million.

In terms of net sales, for the second quarter, we reached the high end of our target with 6% CER growth and net sales of $377.2 million, compared to $349 million in the second quarter of 2017. Total growth was not meaningfully influenced by the launch of QIAstat-Dx automation system, as we just launched the system in this quarter.

As an additional point, organic sales growth, excluding the business portfolio changes we announced in 2017 was modestly ahead of our total sales growth. These business portfolio changes reflects the divestment of a veterinary testing portfolio as well as structural changes in China, where we stopped commercialization of certain PCR-based tests and where we previously announced a transition to working with a distribution partner for HPV testing product.

The currency benefits were about 2 percentage points of tailwinds, resulting in 8% sales growth at actual rate. The currency contributions were at the low end of our expectations for about 2 percentage to 3 percentage points based on rates as of April 30 due to the strengthening of the U.S. dollar against the euro during the quarter.

Moving down the income statement. The adjusted gross profit margin improved by about 90 basis points to 71.5% of net sales from 70.6% in the second quarter of 2017. This was mainly due to product mix with a solid growth in consumables, particularly Molecular Diagnostics and also margin benefits from the strong growth in high-margin bioinformatic sales.

Adjusted operating income rose 15% to $101 million, growing at a much faster pace than net sales, thanks to the contributions of our efficiency and effective new programs. The adjusted operating income margin rose about 220 basis points at constant exchange rates and was up about 160 basis points at actual rates to 26.8% of sales compared to 25.2% in the year-ago period.

Along with the increase in the adjusted gross margin, the efficiency programs and prudent cost actions are making an impact, and we had lower levels of research and development, sales and marketing, and general and administration expenses as a percentage of sales compared to the second quarter of 2017.

As we have said, we expect about 100 basis points of improvement in the adjusted operating income margin for full-year 2018 compared to 26.2% in 2017, which takes into consideration that we reinvest a significant portion of the gain into the development and commercialization of QIAstat-Dx.

Moving down the income statement, adjusted diluted earnings rose $0.33 per share for the second quarter of 2018. The adjusted tax rate was 20% for the second quarter, which was in line with the rate for the first quarter of the year and also reached our target for about 20 percentage points to 21 percentage points for the second quarter.

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 6% CER to $333 million in the second quarter and represented 88% of total sales on solid business volume expansion in the Molecular Diagnostics, Pharma, and Academia customer classes.

Instrument and related sales were up 7% CER for the second quarter of 2018 providing 12% of total sales and delivering a significant improvement over the 1% CER year-on-year growth rate in the first quarter. Here, we saw an impact from a shift in the instrument revenue mix, providing significantly lower contributions from third-party service contract, but demonstrating underlying instrument sales growth of 19% CER.

As mentioned earlier, we are pleased with the commercial start of the QIAstat-Dx system, but revenues in the second quarter of 2018 from this acquisition were not yet meaningful and we expect about $7 million in sales for the full-year.

Molecular Diagnostics led the performance among our customer classes, rising 10% CER to $187 million and provided 49% of total sales. This came on a combination of robust double-digit CER growth in instrument sales along with high single-digit CER gains in consumables.

Highlights includes a QuantiFERON-TB test, QIAsymphony consumables and co-development revenues on companion diagnostic agreements, which were up 81% CER in the 2018 quarter compared to $14 million.

The Life Science customer classes provided 51% of total sales and rose 3% CER in the second quarter of 2018. Applied Testing sales declined 3% CER, but rose at a modest single-digit rate, when excluding the divestment of our veterinary testing portfolio earlier this year. Applied Testing is also facing a tough comparison during 2018, due to the extremely strong performance in 2017 as well as some larger tenders. We expect sales in this customer class to be under pressure as well in the third quarter of 2018, but to show modest improvement in the fourth quarter as we put the divestment behind us.

On the other hand, the Pharma and Academia customer classes had ongoing strong growth rates. In Pharma, where sales was 4% CER, the highest growth rate was in the Americas region and overall sales growth came in from consumables. Academia sales also was 4% CER in the second quarter of 2018 on the back of 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 three geographic regions. You saw similar trends as in the first quarter of this year across the regions. The Americas had the strongest year-on-year growth in the second quarter, rising 10% CER to $180 million and providing 48% of total sales. This came on the back of double-digit CER gains in the U.S., Brazil, and Mexico, and in particular from sales in Molecular Diagnostics.

The Europe, Middle East, Africa region again delivered 4% CER growth in the second quarter, with sales of $120 million, representing 32% of total sales. We saw improving trends in the United Kingdom, Italy, Turkey, the Netherlands, and Switzerland, but encountered modestly weaker sales in France and Germany.

The Asia-Pacific/Japan region grew 1% CER in the second quarter, providing $77 million of sales and about 20% of the total. However, sales were up 5% CER for the region, excluding very tough comparison against a national QuantiFERON-TB tender in South Korea in 2017. In China, we saw a very positive impact of the expansion program we announced last year, and here sales was about 20% CER outside the business portfolio changes.

I would like to now give you an update on our financial position. Thanks to the strong business expansion, combined with operational discipline, net cash provided by operating activities was 28% to $166.2 million in the first half of 2018 compared to $129.5 million in the year-ago period. The results for 2018 even includes a $30 million payment for prepaid royalties to Natera for the GeneReader partnership, showing the underlying strength of our business to generate cash flow.

Property, plant, and equipment expenditures were $42.9 million in the first half of 2018, representing less than 6% of total sales and growing at a slightly slower rate as a percentage of sales than expenditures in the same period of 2017. As a result, free cash flow was 35% in the first half of 2017.

Cash flow for the first half of 2018 included payments for the QIAstat-Dx acquisition and also approximately $21 million so far for the first tranche of our current commitment to return $200 million to shareholders. Even taking this amount into consideration, our leverage ratio stood at 1.7 times net-debt-to-EBITDA, only slightly higher than the 1.6 times level for the same period in 2017. We continue to have a healthy balance sheet and are maintaining our disciplined capital allocation strategy focused on value creation through targeted M&A deals and returns to shareholders.

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

[Peer Michael Schatz, QIAGEN NV]

Yeah. Thank you, Roland. I'm now on slide 9 to give you an overview of key developments in our Sample to Insight portfolio. Our flagship QIAsymphony automation platform continues to show very 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.

Now let me go into more detail on the other four areas; including QIAstat-Dx, QuantiFERON-TB, next-generation sequencing with the Universal NGS solutions; and the GeneReader NGS System and our Personalized Healthcare franchise.

I'm now on slide 10 to discuss QIAstat-Dx, our next-generation platform offering syndromic insights for a broad range of applications and a flexible range of near-patient settings. The syndromic testing market has been growing rapidly based on the clear clinical benefits of highly multiplex testing as a more efficient way to diagnose a complex syndrome compared to running one single test after another.

As shown here, QIAstat-Dx is a highly flexible modular system, which makes it easily scalable for a broad range of clinical and laboratory settings and sample throughput needs. Each test kit is comprised of a self-contained cartridge capable of detecting up to 48 molecular biomarkers, so the lab can run one test to go home on the specific pathogen, guiding the clinicians for a more precise and efficient treatment.

The system is a true one-step fully integrated Sample to Insight solution delivering to customers what they have been looking for, a solution which allows them to focus on the results and not the workflow. Ease of use with less than one minute of hands-on time is a key advantage that resonates strongly with our customers.

Following our launch in late April along with CE-IVD marked panels for respiratory and gastrointestinal syndromes, we have achieved strong initial placements in Europe. Our first customers are now up and running already in routine testing mode.

We envision a deep pipeline of applications, which will add to the value of QIAstat-Dx instruments for hospitals and labs. We expect to have meningitis, positive blood culture and pneumonia panels, and we are also already working on the implementation of a comprehensive oncology menu as well as the capability of running immunoassays.

QIAstat-Dx is a strategic addition to QIAGEN's portfolio of core molecular platforms, a third Sample to Insight system along with QIAsymphony RGQ, the GeneReader NGS System. We look forward to reporting further progress in the coming quarters.

I'm now on slide 11, to give you an overview of key developments for QuantiFERON-TB, the market-leading test for detecting latent tuberculosis from blood samples. The substantial $1 billion market opportunity is still only barely 20% converted from the 120-year-old skin test, which is more time consuming for healthcare providers and less accurate than modern lab-based blood tests. In other words, there is a very large opportunity ahead of us.

A number of recent guideline changes by national as well as global health authorities, such as the WHO or CDC, have reinforced the mandate for blood-based diagnostics for latent TB screening, particularly around issues with migration in many cases, such as IPPA recommending the use of QuantiFERON-TB specifically.

In the second quarter, the International Organization for Migration, the United Nations' Migration Agency specifically endorsed QuantiFERON-TB Gold Plus and adopted the test as the only blood test for the screening of migrants in a tender that covers 16 countries in Africa, Asia and the Middle East. This is part of IOM's five-year global plan to end TB from 2016 to 2020.

To further serve the growing demand from national and global latent TB screening initiatives, we recently announced a new partnership with Hamilton Robotics to further improve workflow automation and scalability for TB control programs. The collaboration adds Hamilton's Microlab STAR automated liquid handling workstation to the QuantiFERON-TB Gold Plus workflow to fully automate pipetting steps following single-tube blood collection.

These steps are upstream to the readout automation for which we provide solutions, most notably through our partnership with DiaSorin. The advanced single-tube blood draw option is a unique feature of the fourth generation test and represents a key driver for QFT-Plus adoption in large-scale screening programs. This is especially helpful for countries also with high testing consolidation such as the United States, China and Japan.

The additional automation, which will be available to customers in August already will, first, reduce overall hands-on time by at least 50%; and second, provide greater ease of use; and third, ensure consistency and standardization also integrating seamlessly with the automated test readout currently being established on DiaSorin's LIAISON-family analyzers.

I'm now on slide 12 to review the progress on our next-generation sequencing portfolio. We are positioned to provide solutions for all segments of the NGS market with our Sample to Insight GeneReader NGS System and our platform-agnostic Universal NGS solutions.

Over the last few years, we've created a strong NGS franchise, which is well on track to achieve the $140 million set out as a goal for 2018 based on superior digital NGS technology integrated into unique, comprehensive and highly differentiated menu, spanning Life Sciences and clinical research as well as customized panel development services offering customers almost unlimited content.

We are building up critical mass with GeneReader and successfully began the integration of non-invasive prenatal testing solutions on the basis of the partnership with Natera, which was announced in Q1 2018. We have now announced the further expansion of the GeneReader platform into customized hereditary disease panels based on the human genome mutation database, the gold standard resource for human inherited disease mutations, which forms a part of our industry-leading knowledge base and which is integrated into QIAGEN Clinical Insights or QCI.

Our Universal NGS portfolio supporting the entire installed base of third-party NGS instruments continue to produce strong double-digit CER sales growth in the second quarter of 2018. A recent joint publication between the Mayo Clinic and QIAGEN to assess the prevalence of germline mutations among patients with pancreatic cancer is only one example of how our Universal NGS portfolio enables breakthroughs in clinical research.

On slide 13, I would like to update you on our Personalized Healthcare franchise. QIAGEN is a trusted partner to more than 25 leading pharm and biotech companies that rely on us to develop companion diagnostics for efficient patient stratification. We further expanded the number of master collaboration agreements and saw significant increases in companion diagnostic development activities across NGS and PCR technologies now further complemented by QIAstat.

We have just entered into a new partnership with SRL, the large clinical testing laboratory in Japan, to enable simultaneous introduction of new drugs and corresponding companion diagnostics. The goal is to close the time gap between drug approvals and diagnostic testing providing day one availability of personalized therapies.

At the May ASCO Conference, we also announced a new partnership with Freenome to accelerate the development of command in diagnostics and immuno-oncology. Freenome's unique artificial intelligence platform enables novel approaches to find new biological targets for precision oncology. The partnership will focus on a next-generation liquid biopsy assay to test for a patient's level of tumor mutation burden, a highly complex biomarker that critically determines drug response rate in immuno-oncology.

On a separate note, our careHPV test, a unique assay to screen women in low-resource settings for prevention of cervical cancer has just been added to the World Health Organization's list of prequalified in-vitro diagnostics. We already market careHPV in China for rural or undeveloped areas, and the WHO endorsement should open up opportunities for additional sales to governments and NGOs active in many other emerging markets.

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

[Roland Sackers, QIAGEN NV]

Thank you, Peer. I would like to now review our targets for the third quarter and reaffirm our outlook for 2018. For the full-year, we continued to expect total net sales growth of about 6% to 7% CER. This is based on the broad business expansion continuing into second half of the year, along with about $7 million of first-time contributions from the launch of QIAstat-Dx that are 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 the recent divestment of our veterinary testing portfolio, and also about 1 percentage points of headwind from the reduced U.S. HPV sales.

For 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 the investment in the launch of QIAstat-Dx, as well as benefits of about $0.01 from the new share repurchase program.

As for currencies, we saw a significant strengthening of the dollar during the second quarter and primarily against the euro. So based on rates as of July 30, 2018, we expect the currency tailwinds for the full-year 2018 of up to about 1 percentage point, and this compares to our earlier estimate for about 2 percentage points to 3 percentage points of tailwind.

As for the adjusted EPS for the full-year 2018, we now expect a currency headwind of up to $0.01 for the full-year compared to earlier estimate of about $0.02 of tailwind.

For the third quarter, our guidance is for total net sales growth of about 6% CER and includes rounded of (27:40) 1 percentage point of M&A contributions from QIAstat-Dx. However, the contributions from QIAstat-Dx are essentially being offset by the revenues lost from the recent divestment of our veterinary testing portfolio.

The guidance also takes into account expectations for sales of QuantiFERON-TB test to grow at a modestly slower rate than usual due to the year-on-year comparison against the South Korea tender as well as lower contributions from companion diagnostics co-development deals.

Adjusted EPS is expected to be about $0.33 to $0.34 per share, also at constant exchange rates. In terms of currency impact based on rates as of July 30, 2018, we expect currency headwinds of about 2 percentage points on net sales and up to $0.01 of headwind on the official CER guidance for adjusted EPS.

In terms of adjustments, for the full-year, we expect charges on operating income for the amortization of purchased intangibles to be about $104 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 $30 million, and this includes the QIAstat-Dx acquisition. As for the adjusted tax rate, we continued to expect about 20% to 21% for 2018.

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

[Peer Michael Schatz, QIAGEN NV]

Yeah. Thank you, Roland. Here's a quick summary before we move into Q&A. Let me review what we have announced.

First, we had a second consecutive quarter of solid 6% CER growth with adjusted operating income growing at a much faster rate than sales and leading to an adjusted EPS of $0.33 per share, which was above our target.

Second, we are advancing our Sample to Insight portfolio across the continuum of basic research to routine clinical healthcare and delivering double-digit CER growth from our top products like QuantiFERON-TB, our QIAsymphony automation system and differentiated technologies like liquid biopsy, microbiome and NGS solutions.

Third, customer response has been very positive on the start of commercialization for the new QIAstat-Dx platform, which marks a new generation of syndromic testing insight and is set to become an important growth driver.

Finally, we are on track to achieve the goals we have set for 2018 and are sharpening our focus on achieving the mid-term targets we have set for 2020.

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

[John Gilardi, QIAGEN NV]

So, thank you very much, Peer. Emma, I think you're going to try again with the star 1 to open up the Q&A queue. We're having a technical issue to get people into the queue. So, if you'd like to ask a question, please send me an e-mail and I'll put you on the list. But I'll hand it over now to Emma to start the Q&A with the names we already have.

[Operator]

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. The first question comes from the line of Tycho Peterson with JPMorgan. Please go ahead. Mr. Peterson, your line is open. Please go ahead.

[John Gilardi, QIAGEN NV]

Emma, let's move to Daniel Wendorff then. We'll come back to Tycho.

[Operator]

The next question is from the line of Daniel Wendorff with Commerzbank. Please go ahead.

[Daniel Wendorff, Commerzbank AG]

Yes. Thanks for taking my question, and I hope you can hear me. I have a question potentially more of a top-down in nature. When I look at your constant exchange growth rates you achieved in 2017, what you guided for 2018, and when I then have in mind what you said at your Analyst Day at the end of 2016, the 7% to 9% sales growth CAGR, how should we think of this in light of the next year and also 2020, and is the high end more likely, is low end more likely, so how should we think of this?

And maybe a small follow-up question, in looking at your QIAstat-Dx launch and the positive customer feedback you talked about, what are – so who are these customers? Are these big labs, small labs? Or any more color you can give us, it would be much appreciated. Thank you.

[Peer Michael Schatz, QIAGEN NV]

Roland, do you want to take the first? I'll take the second.

[Roland Sackers, QIAGEN NV]

Sure. Long and short answer, of course, range is a range, Daniel, right. And then, of course, we will update you on guidance for 2019, when we give our Q4 results and the full-year results probably next year.

Nevertheless, I think what is fair to say is we feel quite comfortable right now moving to 2018. You have seen that they were able now two quarters coming out even slightly ahead of our own expectations at the end of the day in terms of (33:28), in terms of revenues, but also in terms of profitability.

Particularly on profitability, I think we have seen a very nice step-up and now of course also the positive feedback from customers on QIAstat-Dx gives us clearly a good feeling also moving into its overall budget process for 2018.

So, I would say, outside any larger macro event, which I would say are clearly not QIAGEN-specific, I think we feel very well on track to also, again, confirming our midterm guidance early next year, and I think that is where we are today.

[Peer Michael Schatz, QIAGEN NV]

So, Daniel, the QIAstat platform has a whole range of different target customers, and they include customers that benefit from the near patient testing, availability i.e., hospitals. They also include laboratories that want to be able to offer the syndromic diagnostic testing as well.

So the customers recruit themselves from – everything from even smaller physician practices that have the ability to run these types of tests up to very high-volume, large commercial labs or large central teaching hospitals that are running high volumes of these syndromic tests. So the range of benefits, as we highlighted in Q1, is really very broad. And therefore, the ability to flex the platform into different throughput settings but also into different types of versatility settings or user demands is very high.

The current customer base recruits from all of those segments. There's clearly a heavy weighting in terms of number of placements into hospitals versus the larger routine laboratories. They are typically looking at multiple placements. We have placements, which include – most of them are obviously one module, but we also have placements that are between 5 modules and 10 modules in an integrated fashion to create very high throughput. So, it's really too early and it's more anecdotal at this stage. We'll probably have better information in a few months from today.

[Operator]

The next question comes from the line of Tycho Peterson with JPMorgan. Please go ahead. Mr. Peterson, your line is open. Please go ahead.

[John Gilardi, QIAGEN NV]

It's not working. Let's move to Patrick Donnelly.

[Operator]

Mr. Donnelly [Goldman Sachs], please go ahead. Your line is open.

[Patrick Donnelly, Goldman Sachs & Co. LLC]

Yep. Can you guys hear me?

[Peer Michael Schatz, QIAGEN NV]

Yeah, Patrick. Hello.

[Patrick Donnelly, Goldman Sachs & Co. LLC]

Great. Thanks. Maybe just one on QuantiFERON, you obviously continues to be a healthy growth driver, another quarter of 20% growth. Not surprisingly, I know you guys have been talking about a step-down the back half for a while, but is that just purely due to comps? Anything else to call out there?

And then can you also just talk through what you're seeing in the different geographies, any change to the competitive landscape? And then I have a quick follow-up.

[Peer Michael Schatz, QIAGEN NV]

Sure. Well, QuantiFERON is a very long-term strong growth dynamic that we are executing on. And as we highlighted in our intro, this is further being confirmed almost on a monthly basis to be a vast market opportunity, and we are replacing the skin test as the primary competitor as we address these also new areas of testing that are being supported by recommendations, guidelines or national screening programs.

So, yes, the Q3 and Q4 numbers, they are somewhat impacted by the significant shipments to Korea last year. If you look at the underlying growth, it is always in the mid-teens. We always said that that would be something like a core growth and that there would be implementations and tenders that we would add on top of those. That is a little bit more difficult to plan and hence, us now more guiding towards that core growth now for the second half of the year. But as you see from the recommendations and also that or the timeline that we shared with you on that one slide, there is a lot happening around the world in the area of latent TB and we're driving that with medical teams in a very significant way.

And so, as these opportunities open up, it takes some time to prepare the screening standards and the infrastructure, and that then, over time, then leads into more concrete screening programs and that goes through a political system. So it takes some time.

But, therefore, we point to things like the national guidelines and the support here. And if you just look at the national guidelines the last four months or five months, you see Australia, Tunisia, China, New Zealand, Japan, Mexico, all coming out with national guidelines, where now latent TB testing is integrated and often specifically mentioned, QuantiFERON-TB. So, the long-term growth trajectory is fully intact also in Q3 and Q4, where it's more difficult to plan for these tenders when they come into the numbers, and that's obviously something we'll benefit from.

[Patrick Donnelly, Goldman Sachs & Co. LLC]

Very helpful. Thanks. And then maybe just a quick one on the Freenome announcement yesterday. Maybe just a bit more color. It sounds like an interesting opportunity on TMB side. But just a trajectory of when we could see that be meaningful for you guys and just the rationale behind the partnership would be great. Thank you.

[Peer Michael Schatz, QIAGEN NV]

Sure. So, as we all know, immuno-oncology is one of the hottest topics currently in the area of cancer testing. And you've all seen our announcements about a year ago with a massive partnership with cornerstone partner, BMS. But also others have now joined, and we are developing a next-generation immuno-oncology portfolio of tests that are much broader than what is being done today.

But for that purpose, liquid biopsy will always be a key aspect as immuno-oncology will probably call for recurring treatments and, therefore, also recurring testing where liquid biopsy obviously has to come to play.

So we have been very successful already today with our pan-cancer panels. We have a very interesting TMB product also that will come out near-term. But what we're much more interested in is a more long – the long-term play that is much more comprehensive than TMB and MSI and others. And I think this is something our Pharma partners are very excited about and we're working intensely toward.

Freenome allows us to apply some of their AI to some of the findings that we have from these large pools of data that we're generating to see if we can further improve the selection of the targets that we're using in the liquid biopsy assays to provide even better insights from these liquid biopsy assays.

[Operator]

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

[Daniel Arias, Citigroup Global Markets, Inc.]

Hi. Good morning. Thank you, guys. Peer or Roland, the co-development payments for Pharma continue to be pretty lumpy here. So, just given the healthy contribution there this quarter, can you help us with what we should think about for contributions in 3Q and 4Q? And then I got to ask a follow-up. Peer, I'm just curious what the plan is for just increasing general penetration of the GeneReader in the U.S. market? Thanks.

[Roland Sackers, QIAGEN NV]

Yeah, I'll probably take the first one. As you said, it's clearly a good success for QIAGEN in 2018, and that is driven by, I would say, the great performance well into – in 2017 and entering a new contract on companion diagnostics. And you also have seen now even today, there's new announcements coming in, so I think it also was a business which will be quite successful for us on the midterm.

Nevertheless, I think Q2 was, clearly in terms of milestone achievement, a very good one. Our plan was on average for the full-year is for growth rate around 20%. So, I would say, the third quarter typically comes in a little bit lower. It's also the reason why it is slightly different. In the third quarter and Q4 typically, and again, it goes up a bit. So, I think we have a good opportunity here to be a bit better on the full-year than we expected earlier. But around 20% is probably a good selling point.

[Peer Michael Schatz, QIAGEN NV]

Right. And to the second question, the uptake of GeneReader around the world continues to be quite exciting. The United States, as we highlighted in previous calls, is about six months to nine months behind the curve due to the fact that marketing really only started in late 2016, early 2017. And as many of you know, we've announced a new version of the chemistry that was launched in early 2018, which many customers were waiting for. So our goal was – and clearly, we had some hurdles that we had to overcome in the U.S. due to the unfortunate decisions around the marketing that we had to manage.

But the important thing is now if you look at the GeneReader as it stands today – and that was the key thing for us to do is to expand its capabilities – it is a pretty lean, a pretty high-throughput panel machine that is increasingly being recognized for its high versatility and throughput for these very targeted panels, which expanded the capabilities into hereditary.

We also further improved some of the workflow aspects. We added the customization panel service, providing unlimited menu to the GeneReader. And there's also a healthy pipeline of further – more validated assays that we will be bringing to market on GeneReader.

And so this is something that has been well recognized by the pathology community, had some very interesting sessions at AMP Europe, but also at ASCO in Chicago with very positive feedback from the user groups and the target pathology segments.

And the GeneReader scores very highly for listening to the needs of the pathologists and not just putting machines into laboratories, but actually comprehensive solutions that focus on the value of the information that they can provide and report to their internal or external customers. And so this is a marketing effort and one that we will continue and which is also showing some very good ramps.

[Operator]

The next question comes from the line of Gunnar Romer with Deutsche Bank. Please go ahead.

[Gunnar Romer, Deutsche Bank AG]

Good afternoon, everyone. Gunnar Romer, Deutsche Bank. Thanks for taking my questions. The first one would be on the IOM tender for QuantiFERON, just wondering whether you can talk to the significance and phasing of that tender a little bit?

And then, second question would be on your instruments business. And I think, Roland, you made a comment that the placement of hardware has been growing strongly at 19%. Can you help us understand what the split here is in terms of real hardware within the instruments franchise and related services and what so – what kind of third-party contribution you have? Thanks.

[Peer Michael Schatz, QIAGEN NV]

Sure. Roland, do you want to take the second one first? Okay. Then I'll take the first one.

[Roland Sackers, QIAGEN NV]

Yeah. I'm happy to do so. Sorry.

[Peer Michael Schatz, QIAGEN NV]

Okay.

[Roland Sackers, QIAGEN NV]

So as I said, it's a good question, Gunnar. Thanks for bringing it up. Because overall consumables – sorry instrument revenues were up 7%, where instruments, just focusing (46:39) was up 19%. And the difference is, as you recall, we also have quite a meaningful instrument service business, which we entered into to get also a better utilization of our own instrumentation service groups.

But now with having more and more instruments from QIAGEN now, in particular, around GeneReader, around (46:59) preparing for the QIAstat rollout, at the end of the day, we are reducing the third-party instrument service providing to third-party customers to a certain extent. And therefore, of course, we have slightly negative revenue numbers in instrumentation service and that lowers overall instrument revenues to 7%.

So, just look on the sales numbers coming from straight instrument sales of QIAGEN instruments that, for this quarter, are around 19%, and that is more or less of – which I think we should draw your attention to is that we have seen, of course, now a nice tick-up in hardware sales.

It is the first time that it's such different on a quarterly basis, typically service and instrument sales, in general, move quite in the same direction, but now with us probably also with the next few quarters, focusing more on ramping up sales activities around our own instruments and doing less instrument service for third-party providers I think is worthwhile to note that.

[Peer Michael Schatz, QIAGEN NV]

To the first question, this tender is indeed quite interesting, because two things I'd like to highlight. First of all, the screening of migrants is a topic we pointed to already a few years ago and some of you in Europe might have seen some press around donations that we made to the first wave of fugitives coming in and providing screening. There's obviously a high prevalence of latent TB in these populations. And what was very quickly recognized is that using QuantiFERON versus the skin test you get a much faster result, so you don't need two visits, i.e., the administration substantially easier.

And the second thing is the quality of the information is significantly better as well, because of partly vaccinated populations that provide obviously a false positive result. So, QuantiFERON has shown a very significant improvement and also an efficiency and effectiveness in this population.

Now, the UN has recognized that, and this puts us into a different dimension. And we all know that there are tens of millions of people that are fugitives or migrants in many different definitions. Now, obviously only a small fraction of that will be tested and will take some time to move this in.

So, I just book this into one of the many segments that have recognized that even in high prevalence populations, it makes much more sense to use QuantiFERON than a latent TB skin test. And this is something that we've been working on for two years.

And if we see a six-digit or maybe even seven-digit numbers of tests coming in at some point in time in three years, four years, five years from today, that would be nice. But it's one of many of these types of initiatives that we're pursuing.

[Operator]

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

[Tycho W. Peterson, JPMorgan Securities LLC]

All right. Can you guys hear me now?

[Peer Michael Schatz, QIAGEN NV]

Hey, Tycho. Perfect. Sorry about that.

[Tycho W. Peterson, JPMorgan Securities LLC]

All right. Great. Perfect. Thanks. Sorry about that earlier. So, a couple of quick ones here. On QuantiFERON, I want to understand the importance of the Hamilton launch. I think you said you're launching it now in August. Is it a global launch? How important do you think this is? And given that your competitor are also launching automated solutions that you talked about yesterday, I'm just curious about how you think you are differentiated there?

[Peer Michael Schatz, QIAGEN NV]

Sure. We've been obviously working on automation for quite some time, and with the addition of the automation solution now announced yesterday, combining that also with the DiaSorin platform, we really have quite an amazing lineup that takes our customers from primary through to detection. And on the detection platform with 130 other assays that can be run concurrently in random access continuous load. And I'm referring now to the LIAISON downstream. The automation is – that was the one piece that we still wanted to add, which is primarily targeted to single-tube customers.

As you know, there are two ways of processing QuantiFERON. You can use a single tube or you can use the multiple tube collection. The more concentrated testing sites like the U.S., Japan and China, they typically use the single tube. Also some of these national screening programs, they have concentrated sites and they are very pleased with the single tube process. That single tube collection requires (51:58), requires to set up the assay, and that is done in a liquid handling step with a few other features attached to it.

Now, I'm not aware of any other automated latent TB test. I've seen some announcements on new reagents being announced that make automation a little bit easier, but this is an instrument that you actually plug in and a downstream clinical diagnostic testing platform that has been placed thousands of times that we are linking into. So, this is really hard core IVD automation. And the reductions, in the hands-on time of the reductions also in cost and increases in efficiency I referred to before are quite significant.

So, customers who have been running this have been very pleased with the performance and we look forward to now starting to place this. And it's nice that it is also concurrent in Europe with the launch over the next few weeks of the DiaSorin relationship Q3 and Q4 and now also with the ability to run a full automation of Hamilton upfront.

[Tycho W. Peterson, JPMorgan Securities LLC]

Okay. And then on QIAstat, can you talk on what the selling cycle is like in Europe and competitive wins, how much of these are swapping out competitive platforms?

[Peer Michael Schatz, QIAGEN NV]

They're all competitive or highly competitive in terms – there are obviously a few very obvious competitors and there are incumbents and some smaller plays. And from that perspective, it was nice to see the platform immediately taking share. And I'd say half of them are swap-outs of existing users and half of them are people entering into this market. So, it's a very nice mix.

It's actually a larger percentage of swap-outs of existing placements than we originally had projected. But again, these numbers are small and still a little bit anecdotal, so I'd like to put a little bit of caution to it, and we'll give more numbers in a few months.

[Operator]

The next question comes from the line of Romain Zana with Exane BNP Paribas. Please go ahead.

[Romain Zana, Exane BNP Paribas]

Yes. Thank you for taking my questions. I have first question on QuantiFERON. How should we think about the greater guideline dynamics? I mean, do you think that it will bring incremental growth for QuantiFERON, or are you looking at it rather as something supporting the 20% plus growth rate that we should extrapolate looking forward? And I have a follow-up on cash flow, if I may.

[Peer Michael Schatz, QIAGEN NV]

Sure. Romain, it's Peer. We've been obviously announcing a number of these things, and the timeline summarizes a few of them. And this is only a small fraction of what we're working on, so there's a heavy team by – our medical officers around the world to demonstrate the value of latent TB testing in many different settings. What we are trying to do with each of these also announcements is some of them are actually financially also meaningful.

In addition to that, we also see a great value of putting further comfort into the projections that we have. We are very excited about the long-term growth opportunity in the ranges you just described before. We reaffirmed the $300 million number, and this makes us one of the biggest diagnostic products in the world.

And I think to further improve the support and the appreciation of this opportunity, we're demonstrating that there are dozens of guidelines, dozens of decision-making bodies that are coming out in support of this, and it's really around the world, many, many segment effort.

[Romain Zana, Exane BNP Paribas]

Yeah. Thank you. And maybe, if I may, for maybe rather for Roland, the cash conversion has improved materially over the past six months. Can you give us just a bit more color about the underlying dynamics?

I'm thinking particularly about the working cap management and also tax payments because, if I'm right, it decreased over the past six months despite the higher tax rate. So, how is it sustainable looking forward, and then how should we extrapolate the cash conversion?

[Roland Sackers, QIAGEN NV]

Yeah. Thanks, Romain, for the question. I think, overall, I think you know that we have a midterm goal out for cash flow as well, and we are doing quite well on track on our way to achieve that also by 2020. Particularly this quarter, (56:43) nice improvement within working capital, particularly around DSO.

We clearly have seen a nice step-down around day sales outstanding. And it has also to do, on the one-hand side, this ramping up our shared service center activities. You recall that we were – still to some extent, are in the middle of setting up shared service center activities that clearly had some, again, transition topics to address, focusing now where things are getting more and more in routine businesses. Also, that number came out quite dramatically. I think there's a long – more way to go.

And the second big driver, I think, probably more into 2019, we see a larger positive impact eventually around inventory days as well. So, having that said, I do believe cash flow generation, particularly from working capital improvement will be a positive surprise for us within the next couple of quarters as well.

[Operator]

Next question comes from the line of Ross Muken with Evercore. Please go ahead.

[Luke Sergott, Evercore Group LLC]

Hey, guys. This is Luke on for Ross.

[Peer Michael Schatz, QIAGEN NV]

Hello.

[Luke Sergott, Evercore Group LLC]

Just kind of start off, I guess on the – Hi, John. So the next-generation sequencing portfolio, some really good color on that. Can you just break out where you're seeing most of the growth out of the – on that slide 12 that you gave us? Any sizing of those individual buckets, anything to help us look at this going forward?

[Peer Michael Schatz, QIAGEN NV]

Right. So, if you look at the absolute largest piece, it is clearly the panels that we are selling in the Universal NGS test panels that can be run on any sequencer. They are getting rave reviews and there's significant uptake visible in the market.

In terms of growth, it is clearly GeneReader is still a smaller percentage of sales. But we're seeing overall, let's say, there's some softer growth in areas where we are heavily penetrated which are the NGS-specific sample preparation. So, we have some specific sample preparation products targeted for NGS that – certain artifact removal capabilities that are only applicable to NGS.

So, this is that franchise that we sum up there. So that is probably – the sample preparation is a little bit slower growing some of the informatics products are somewhat slower growing as we already have high penetration there as well. And GeneReader, which is still coming from a low market share and moving in terms of growth, probably the highest but the biggest dollar contributor to growth are clearly NGS panels.

[Luke Sergott, Evercore Group LLC]

Okay. Great. That's helpful. And I guess one for Roland on margins. Can you just help us unpack a little bit about all the moving pieces that you had in the quarter and kind of what your expectations are for that 100 bps at the – for the full-year for the remainder part of the year?

[Roland Sackers, QIAGEN NV]

Yeah. Let me move over the path for a second and then put together to give you a complete picture. I think if you – as you recall, as we moved into the year, we were guiding for roughly 100 basis points margin improvement for the full-year. And then we announced acquisition of QIAstat-Dx, where we said it more or less comes with a dilution of $0.05 EPS, which translates somewhere between a 60% to 70% overall margin dilution for 2018.

I think the good news is we see that we make much faster progress with our efficiency program. So that's – actually, we do believe right now, while we still have this dilution of 60 bps coming from the QIAstat acquisition in 2018, that the gross efficiency program is probably delivering somewhere between 140 basis points and 160 basis points on improvement. So, net distance than the impact in total. So again, the gross efficiency programs are doing quite well.

[Luke Sergott, Evercore Group LLC]

Okay. Great. Thanks.

[Operator]

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

[Derik de Bruin, Bank of America Merrill Lynch]

Hello. Good morning. Can you hear me?

[Peer Michael Schatz, QIAGEN NV]

Hey, Derik. Good morning.

[Derik de Bruin, Bank of America Merrill Lynch]

Great. Thanks. So two quick ones. I guess, what was the net contribution from acquisitions and divestitures in the second quarter? And secondly, if I heard you correctly, reduce the HPV headwind by 50 bps and yet you're maintaining the constant currency growth. What's the offset in the rest of the business to this? And is this – and then just curious, is it directly tied to the fact that the sample portfolio seems to be a little bit softer? Thanks.

[Peer Michael Schatz, QIAGEN NV]

So, thanks for the question. So, the sample technologies are actually showing quite resilient growth overall. I was comparing this – the statement I made before is the statement within the NGS portfolio, where the growth is 30%. Here, we have a different – if you look at the sample technologies overall they are still very resilient, and actually in many cases, gaining share even off 60%, 70% base market shares. So, that's important to note.

The overall growth that we are seeing is a little bit softer in the Life Sciences markets overall. So, that is a market that is showing improving trends and we've been working hard on our go-to market and commercialization initiatives this year and a broad-based initiative here at QIAGEN revisiting and completely renewing our go-to market and commercial resource allocation, and that is starting to show some very promising trends.

And so this is something that, however, in the first quarter was still – the second quarter was still dilutive to the overall growth and is now moving into more neutral, maybe even at some point on a quarterly basis and even into the accretion. So, this is a big initiative we have ongoing here on the Life Sciences side.

In terms of the acquisition and organic, Roland, do you want to comment on that?

[Roland Sackers, QIAGEN NV]

Yeah. Sure. As I said, for the (01:03:40) we really like to point on the total growth rate. I think that is clearly something, what is at the end of the day, most important. Nevertheless, we clearly had also in the second quarter some negative impacts out of the divestitures we made, in particular, announced last year. So, actually the overall organic growth rate was slightly better than the total growth rate.

[Operator]

The next question comes from the line of Brian Weinstein with William Blair. Please go ahead.

[Brian David Weinstein, William Blair & Co. LLC]

Hey, guys. Thanks for sneaking me in here. It sounds like you guys are hitting on all cylinders whether it's financially or operationally. But, Peer, I'm wondering, is there anything that's not going as well as you would have like right now? Where are you spending your time maybe to improve operations somewhere, because it doesn't really seem, based off your comments that there's a whole lot going wrong right now?

[Peer Michael Schatz, QIAGEN NV]

Well, we're quite pleased with the performance in the first half of the year. We're very pleased with the strategic footprint we now have in Molecular Diagnostics. There is a very good momentum there and as you have seen from some of the discussion very long-term exciting growth in front of us.

We're entering into market taking share. We have new opportunities emerging. So, this is a very dynamic part of our business. The focus on the Life Sciences is very much on the go-to-market execution. In addition to some adding further innovation sizzle to some of the portfolio, it's also picking up very nicely.

It's a lot of hard work right now, Brian. This is something we're very proud to see obviously when the numbers come in, and we are exceeding our targets and our budgets here internally, and so this is gratification. But it's – these are milestones on a path to towards our 2020 targets. And so, we're really doubling down now, feeling the responsibility that things are working and seeing some very nice opportunities in front of us.

[John Gilardi, QIAGEN NV]

So, thank you, Peer. And with that, I'd like to thank all of you for your participation today and appreciate your patience for the Q&A issues that we had. And if you have any questions or comments, please don't hesitate to reach out to Sarah and me. Thank you very much.

[Operator]

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.