Qiagen NV

NYSE:QGEN

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Emaiya chorus call operator. Welcome, and thanks for joining QIAGEN's Conference to discuss the Q4 Full Year 2017 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. [Operator Instructions].

At this time, I would like to introduce your host, John Gilardi, Vice President of Corporate Communications and Investor Relations at QIAGEN. Please go ahead, sir.

[John Gilardi]

Thank you Emaiya, and welcome 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. On slide 2, you'll see the Safe Harbor statement explaining that the discussions and responses to your questions on this call reflect management's views as of today, Thursday, February 1, 2018. We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations or predictions of the future, these constitute forward-looking statements for the purpose of the Safe Harbor provisions.

These statements involve risks and uncertainties that could cause actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For more information, please refer to our filings with the U.S. Securities and Exchange Commission. Also we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles. You can find a reconciliation of these figures to GAAP in the press release and the presentation for this call.

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

[Peer Michael Schatz, Chief Executive Officer]

Thank you, John. And also I would like to welcome you to this conference call. As you saw in the press release QIAGEN again had a solid performance in the fourth quarter of 2017. This helped us achieved our full year ambition from market share gains adjusted net sales growth and a double digit increase in adjusted earnings per share. Most importantly 2017 was a year in which we were able to record many achievements which built a strong foundation for 2018 and the years to come, giving further support to our build, to meet or exceed the medium term targets we set in late 2016 and reconfirmed also in our last quarterly conference call.

We want to build on this success in 2018 and have set new goals for further growth in sales and adjusted earnings. We see the New Year as very exciting for QIAGEN. These are key messages for you today; first, the results of the fourth quarter and full year 2017 were in line with our targets. For the full year, our adjusted net sales rose 7% at constant exchange rates when excluding sales affected by the business portfolio changes and this was in line with our outlook as well. Adjusted diluted earnings were $1.27 per share at the high-end of our guidance for a $1.25 to $1.27 per share. For the fourth quarter of 2017, adjusted net sales rose 6% on a CER basis excluding the business portfolio change that we announced last year and this was in line with our outlook.

Adjusted earnings per share were $0.43 per share and the head of the guidance for about $0.40 to $0.42. The adjusted earnings results excluded significant charges taken in the fourth quarter of 2017 and particularly as a result of the new U.S. tax legislation and to result the U.S. patent litigation related to QuantiFERON. Roland will come back to these topics during the presentation and details are available in the press release and presentation.

Second, our Sample to Insight portfolio is building momentum. The QuantiFERON-TB test grew about the in line with our goal and achieved 24% growth for the year. We began commercialization of the fourth generation QFT Gold Plus version in the United States during the fourth quarter and look forward to launching this version in Japan in 2018 after receiving clearance which is expected shortly.

As another highlight, we had the strongest year ever in 2018 in terms of placements for QIAsymphony automation system. We easily broke through 2000 cumulative placement and set a goal to end 2018 with more than 2300 cumulative placements. And for this to be complemented by double digit CER growth and related consumables for this gold standard system.

As you know we are shaping our Sample to Insight portfolio and this will involve the best-in-service smaller activity being to no longer be core. We announced in November 2017 plans to boost investments in China into high growth areas. We’re also deciding to streamline our portfolio. This also included the discontinuation of some non-core assets involving certain diagnostic PCR test.

In our Q3 conference call we also announced that we have decided to divest the R&D and commercialization of our HPV test in China along with the related employees and infrastructure to a local company and which we now have a minority stake. Earlier this year, we announced that this transaction had been completed. The sales affected by the portfolio changes were about $36 million in 2016 and about $25 million in 2017. For 2018, we expect about $7 million of sales from HPV components to the newly founded company.

Third, we have announced an exciting acquisition with STAT-Dx and plans to launch QIAstat-Dx in the second half of 2018. This marks our entry into the fastest growing and exciting PCR-based multiplex syndromic testing market. STAT-Dx has been a long standing collaboration partner of QIAGEN and offer significant market and technology synergies with our presence at for example in infectious diseases and oncology.

QIAstat-Dx represents the next generation of systems for syndromic testing providing customers with a new dimension of flexibility in terms asset design performance and cost efficiency. These features are intended to address the challenges of laboratories in today’s reimbursement landscape. While also offering customers a new level of accurate diagnosis with quantifiable results, design to better support outcomes for patients and healthcare systems. The system already has CE-IVD marking and we intend to launch it with two extensive respiratory and gastrointestinal panels later this year. Our teams are energized by this acquisition and the opportunity to drive the dissemination of molecular testing. We also see this transaction is having significant value creation opportunity.

Fourth, we are announcing our guidance for 2018. We are expecting about 6% to 7% CER net sales growth. This is based on about 6% to 7% organic growth in adjusted net sales and accelerating from 5% CER in 2017. This outlook even assumes about 1.5 percentage points of headwind from reduced U.S. HPV test sales, which are expected to decline from about $28 million in 2017 to about $10 million in 2018.

So this means the underlying growth that also excludes these last U.S. HPV headwinds is about 7% to 8% organic and this is well within our 2020 mid-term growth quarter. In terms of adjusted EPS, the underlying guidance is about $1.38 to $1.40 per share which represents a 9% to 10% increase from $1.27 per share in 2017.

However, this is reduced to about $1.31 to $1.33 per share due to the impact of three factors; a), higher adjusted tax rate due to U.S. tax reform; b), the dilution of about 5% for the U.S. - for the STAT-Dx acquisition; and c), the positive effect from our new $200 million share repurchase program.

As a further item, I would like to mention two new additions to the QIAGEN Executive Committee that we announced in the press release. First Dr. Annette Koch has joined QIAGEN as Chief Human Resources Officer and the member of the Executive Committee. She joins from Eppendorf AG, where she has been Vice President of Human Resources since 2013. Prior to that, she worked at Boehringer Ingelheim and at the Boston Consulting Group. Dr. Koch takes over this role from Dr. Thomas Schweins, who will now focus on his role as Head of our Life Science Business Area.

Second, Jonathan Sheldon, Ph.D., has join QIAGEN as Senior Vice President, Head of the Bioinformatics Business Area and the member of the Executive Committee. He joins QIAGEN from Oracle’s Health Sciences Global Business Unit, which includes solutions for precision medicine, population health and the convergence with life sciences and previously at Roche. He replaces Laura Furmanski, who has you know left QIAGEN at the end of 2017. So as a quick summary, we are pleased with the performance in 2017 and are delivering on goals to drive the global expansion of our Sample to Insight portfolio.

We are looking to deliver another year of strong results with accelerating organic growth in 2018 and are on track to achieve our 2020 mid-term targets. I would now like to hand over to Roland.

[Roland Sackers, Chief Financial Officer]

Thank you, Peer. Good afternoon for those of you in Europe and good morning to those of you in the U.S. I will now review our financial performance for the fourth quarter and full year and later provide some perspectives on the guidance for our 2018. We achieved our goals for 2017 in terms of adjusted sales and adjusted earnings. Results for free cash flow showed a good underlying performance, but were reduced by cash restructuring payments and litigation settlements.

This results an important step toward achieving our mid-term targets and increasing returns and creating value. For the first quarter, adjusted net sales excluding the China portfolio change was 6% CER and we’re up 9% at extra wage due to the tailwinds created by the weakening of the U.S. against various currencies and in particular the euro.

Our growth for space on 5 percentage points of organic growth excluding the business of changes plus 1 percentage point from the OmicSoft acquisition in January 2017. On the full year basis adjusted net sales excluding the business portfolio changes were up 7% CER and this was comprised of 5% organic growth plus 2 percentage points of additional growth from the acquisition of AxiCon which was completed in June 2016 and OmicSoft which was acquired in January of 2017 and is now considered organic. This again was in line with our full year target.

Moving down to the income statement. For the fourth quarter of 2017, the adjusted cost of margin declined modestly to 70.6% of adjusted sales from 71.2% in the year ago quarter. This was due mainly to higher instrument sales and the significant increase in the lower margin revenues from pharma co-develop and partnerships which was 62% to US$18 million compared to the first quarter of 2016.

For the full year, the adjusted cost of margin was about 10 basis points of 70.7% of adjusted net sales and this was due to a higher gross margin for the QuantiFERON latent TB test and to overall higher consumable sales. As you know, there is in-sourced a lot of production for our QuantiFERON to our Maryland site from third-party companies and this raised the gross margin into the 70s percentage reach and above the QIAGEN average.

Adjusted operating income excluding restructuring charges was 8% to US$121.7 million in the fourth quarter of 2017 and to adjusted operating income margin was steady at 31% of adjusted sales compared to the same period in 2016.

For the full year, adjusted operating income rose 14% US$371.5 million and this was excluding the restructuring charge of $19.8 million taken for the efficiency program started in late 2016. The adjusted operating income margin also bought 220 basis points on the constant exchange rate basis, which was ahead of our outlook for about 200 basis points of improvement and also 26.2% of adjusted sales in 2017 compared to 24.3% in 2016 at extra wage.

We are clearly seeing the positive impact from the efficiency programs in the areas such as detestation of sales channels which generated 38% of total sales in 2017. We are also streamlining our back-office and service activities into centers of excellence and creating rate of scale with centers in Poland and for Philippines.

Moving down the income statement, adjusted diluted earnings for the fourth quarter of 2017 were $0.43 at both actual and constant exchange rates. Reported results short at net loss of $0.18 per share and this was due to the significant one-time charge that we have previously announced. The main factor was about $0.41 per share was a write-off related primarily to the New Year’s tax reform of which $0.32 per share involves non-cash items.

Another factor was the settlement of litigations met us, such as U.S. lawsuit involving our competitor of QuantiFERON-TB test. The adjusted tax rate was 17% for the fourth quarter which was in line with our guidance. For the full year adjusted diluted EPS was $1.27 at both constant exchange rates and actual rate, which was a significant 14% increase from $1.11 per share in 2016.

I would like to now review our results among the product categories and our four customer classes. These figures are not adjusted for the business portfolio changes. Among the portfolio of categories consumables and related revenues were 6% CER in the fourth quarter and delivered full year growth of 7% CER, thanks to the solid business expansion across all our portfolios. These sales represent 88% of adjusted sales for the year.

Instruments had a very strong performance in the fourth quarter of 2017, while the 6% CER compared to most largest strength earlier in the year. This supported that instrument sales rising 1% CER for the full year and representing 12% of adjusted sales. Here we saw a good placement of QIAsymphony and GeneReader system and this should support future consumable trend. On a full year basis, a), contributions from AxiCon and OmicSoft were about 2 percentage points and supported underlying growth in our customer classes.

In molecular diagnostics, sales for the first quarter of 2017 was 4% CER, but were up 6% CER excluding the business portfolio changes. These results also included about 1 percentage points of headwinds from lower U.S. HPV tests which was less than our expectations. But, still means underlying molecular diagnostics goal for 7% CER for the 2017 quarter. For the full year molecular diagnostic sales was 6% and represented 48% of adjusted sales and were up 8% excluding the business portfolio changes.

The life science customer classes grew 7% CER in the fourth quarter of 2017, led by applied testing and pharma both growing at 9% CER growth rate. In applied testing which was 14% CER for the full year and represented 10% of adjusted net sales demand remained strong for our human ID and forensic solution.

Pharma sales were supported by robust double-digit CER growth in consumables and to related revenues including solid growth in Bioinformatics that more than compensated for weaker instrument sales. For the full year pharma sales was 7% CER and provided 19% of sales adjusted.

Academia sales were up 5% CER in the fourth quarter and here we saw a double-digit CER gains in instruments and single-digit CER growth for consumables. We have seen improving customer sentiment in the U.S. and Europe during the year and we remained cautiously optimistic for 2018. At the same time, political uncertainty involves U.S. and Europe is not outfall. For 2017, Academia sales was 4% CER and were 23% of adjusted sales.

I would like to now review the performance among the three geographic regions. The Americas regions had the strongest growth for the fourth quarter of 2017 rising 7% constant exchange rates as solid results in the U.S. and Brazil offset a double-digit CER decline in Mexico due to the expected expiry of HPV tenders during the second half of this year.

For the full year sales in the Americas was 4% CER and grew up 6% CER excluding U.S. HPV test sales and represented 46% of sales. In the Europe, Middle East, Africa region sales grew up 6% CER in the fourth quarter and also at a fast 9% CER pace for the full year and provided about one third of total sales.

In the Asia Pacific and Japan region sales was 1% CER for the fourth quarter, but were up 5% CER excluding the China portfolio changes. On the full year basis, sales were up 7% CER, but at a fast about 12% CER rate excluding the change based on much faster underlying growth in China. Among other countries South Korea and India supported this underlying strong performance and partially offset by lower sales in Japan.

I would like to now provide an update on our financial position. QIAGEN ended 2017 with a very healthy balance sheet. As for major financing needs in 2018 and leverage, we anticipated being able to fund the acquisition of STAT-Dx as the new share repurchase program while it still being able to end this year with a healthy balance sheet and similar leverage to where we ended 2017 at about 1.5 times net debt to EBITDA.

Cash grew for 2017 was affected by the cash restructuring payments related to the efficiency initiatives launched at the end of 2016 and also the settlement cost for various litigations. For the full year, free cash flow declined through $196.7 million compared to $267.1 million in 2016. This included approximately $48 million of cash restructuring payments and about $41 million for litigation settlements. One of this was the payment for the U.S. patent litigation involving QuantiFERON-TB.

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

[Peer Michael Schatz, Chief Executive Officer]

Yes thank you, Roland. I would like to give you an overview of key developments in our Sample to Insight portfolio and highlight areas that involve are offering now universal next-generation sequencing solutions for any lab as well as the GeneReader NGS system. The QuantiFERON franchise of pre-molecular test and led by our latent TB test. The QIAsymphony automation platform with more than 2000 cumulative placements, our personalized healthcare franchise which includes our industry leading 25 master collaboration agreements and differentiated technologies which encompasses franchises like liquid biopsy and microbiome that are hard research areas.

And now let me review the progress on our growth drivers in further detail. I’m now on slide 10 to review progress made on QuantiFERON-TB the monitoring Gold standard for latent tuberculosis protection. We’re moving ahead to penetrate this billion dollar market opportunity and have even strong conviction in achieving our 2020 goal for $300 million of sales. Driven by the significant clinical benefits we have maintained a strong conversion rate against the 120 year old tuberculin skin test to our modern blood base test and estimate global convergence is still only about 15% to 20% of the total addressable market of conservatively estimated about 65 million tests a year.

Tests from milestones the U.S. commercialization of the fourth generation test was started in the fourth quarter of 2017 and we will also soon launch this version in Japan, the world’s second largest market of TB testing. Another important milestone in our new partnership with DiaSorin that provides is our new partnership with DiaSorin that provides a full state-of-the-art automation option for QuantiFERON-TB plus on the more than 7,000 LIAISON platforms worldwide. The EU launch is planned for later this year.

Our decision to embed the QuantiFERON-TB test into the QIALIA’s own system with a versatile read out kit and to be followed by other QuantiFERON test in the future was due to DiaSorin in having a broad and highly synergistic assay menu. This option will be a significant automation improvement for our customers and strengthen our competitive advantages.

We consider this a win-win situation for both companies based on the high target customer correlation and see it as an elegant and strategic partnership that removes any possible uncertainty about QuantiFERON automation and menu options in the future.

I would now like to update you on key developments in our NGS portfolio which are designed to serve clinical research customers with our Sample to Insight team with our NGS system as well as all NGS customers with our comprehensive universal NGS portfolio. We signed an important joint venture in China with Maccura in 2017 that expands our global reach for the GeneReader NGS system and accelerates local adoption in the Chinese market more forcefully than we could have done by ourselves.

We built up good momentum in 2017 for the GeneReader NGS system as well as our platform agnostic universal NGS solutions. We also announced recently that we exceeded a $115 million of NGS sales in 2017 with double-digit CER growth. And for 2018 we are targeting more than a $140 million in NGS-related sales.

We are adding a range of new products and service enhancements to our NGS portfolio for universal solutions as well as for the GeneReader NGS system. In particular we have created a new unit enterprise genomic service to outreach synergies in our offering of customized and validated panel options to customers along the continuing from basic research to clinical healthcare.

This removes significant hurdles for customers in the adoption of next-generation sequencing. We also expect a strong growth trend for GeneReader in terms of placements in re-ageing pull-through and performance enhancements from new chemistries and menu expansion over the course of 2018 and we are reaffirming our mid-term target for more than 20% share of the oncology bench top sequencing market.

We’d like to now give you an update on our personalized healthcare activities. We have now more than 25 master collaboration agreements in place with leading pharmaceutical and biotech companies. In 2017, we’ve reached a ground breaking partnership with Bristol Myers Squib to develop the first NGS-based companion diagnostics for their immune-oncology therapies and we are now working with several other pharma companies on this topic as well.

We see 2018 continuing to be an exciting year and in particular we expect up to 5 U.S. FDA submissions under clearances for companion diagnostic tests. Already this year we have announced new FDA clearances for our JAK2 test for using blood disorders and an FDA approval for the expansion of our EGFR Kit for use in non-small cell lung cancer.

Now I would like to review the progress of the QIAsymphony automation system, our flagship instrument that has become a gold standard for molecular sample processing, as well as delivering complete Sample to Insight workflows and labs around the world. We allow, announced in November 2017 that we had exceeded our 2017 target for more than 2000 cumulative placements. In fact we ended the year well above that level and we have the strongest year of annual placements.

We have applied a very successful regionalization strategy based on the broader U.S. focus on lab develop test and targeted assays and a higher demand for application variety in Europe where we offer one as a largest regulated test menus available. For 2018, our goal is to reach more than 2,300 cumulative total placements which is based on our latest forecast and an increase from the 2,250 placement goal we announced earlier this month.

I would like to now update you on the progress of our portfolio of differentiated technologies, which are collection of Sample to Insight solutions for customers in the life sciences. This is on slide 14. These differentiated technologies represented about 4% of total sales in 2017 and they grew at double-digit CER rate. In 2017, we identified new opportunities in highly promising areas including new applications and liquid biopsy and microbiome where we already have strong market shares.

Just as one example we estimate today that QIAGEN has an over 80% market share in microbiome sample technologies and this is due to our powerful solutions designed to get DNA and RNA out of complex microbiome samples. We are convinced there is a lot more to come in these exciting areas especially as we integrate new bioinformatics solutions into these workflows.

Moving to slide 15 now, as I mentioned at the start, the acquisition of STAT-Dx marks our entry into very attractive fast growing market for syndromic testing with the system that represents the next-generation of molecular multiplex testing. This market has seen several first generation entries for markets and in particular reimbursement and clinical needs have involved significantly.

This has changed the required specifications and created new customer needs. We believe QIAstat-Dx represents a very unique answer to these new needs and target specifications and that it represents the next generation of solutions to address this market segment. We plan to launch QIAstat-Dx in Europe in the second half of 2018 and in the U.S. in 2019 with two extensive panels covering difficult to diagnose respiratory infections and gastrointestinal syndromes. But this is really only the beginning in infectious diseases and we plan to develop a range of very differentiated and high value panels for additional areas such as immune response monitoring oncology and companion diagnostics.

The QIAstat system has powerful advantages as they’re cost effective flexible approach diagnosing common syndrome, so we expect to see a very rapid uptick. We set a sales goal for about $7 million in 2018 and for at least $30 million in 2019 if not more.

We did a lot of due-diligence over the years in the sector and looked at all the players and felt that QIAstat-Dx represented the best solution to create the next-generation of multiplex testing platforms. We see the following key advantages; first the system offers powerful technology capabilities since it is based on our QIAGEN sample and assay technologies, QIAstat-Dx can offer true Sample to Insight processing of even the most challenging samples. And this opens up opportunities in areas previously not possible with the current systems.

QIAstat-Dx can process even tissues samples from pathology liquid samples or difficult to handle prudent samples with the direct on-board swab processing. Furthermore, we are offering a flexible approach to customization. The proprietary workflow design enables last to take a tailwind approach to the selective analysis and reporting of test with molecular targets.

We are offering a flexible design instead of the rigid one size fits all approach offered by competitors. QIAstat-Dx makes responding to the new needs of reimbursement significantly easier. As a third point, this is a highly efficient system and we have significantly lower manufacturing cost compared to other systems. This should allow for even broader utilization and there is a significant benefit and that dynamically changing reimbursement landscape.

Another advantage is that QIAstat-Dx is the only system of its kind that is based on real-time PCR technology that can also process up to 48 targets simultaneously. It is also being designed with the additional capability to process immuno assays. And this means we have a system with features that can create unmatched target and application versatility as well as a new dimension of cost efficiency and disease management options.

In many ways on slide 16, the QIAstat-Dx system and the cartridges based on QIAGEN consumables fit perfectly into the paradigm both our customers want to need. We heard from many customers in the segment about their dissatisfaction with the current range of consumable forms including the needs for handling pouches.

Simplicity is a key characteristic with a one step Sample to Insight process that requires only about a minute of hands on time and delivers detailed answers on an hour. We are launching with two assays for very common syndromes and we will expand the panels to give customers a platform with increasing value and versatility.

Another important point is connectivity. QIAstat-Dx has a bidirectional interface into hospital and laboratory information systems which is essential for efficiency and critical for getting patient test done as fast as possible and the results to physicians. QIAstat-Dx is a very strategic addition to our full portfolio of core molecular platforms. These include QIAsymphony PCR, GeneReader NGS and now QIAstat-Dx together there represent our core molecular platforms and all have a great runway in front of them.

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

[Roland Sackers, Chief Financial Officer]

Thank you, Peer. I would like to review our order for 2018 starting with our plans for adjusted net sales growth of about 6% to 7% CER. To the space on an increase in organic growth for about 6% to 7% CER for 2018 compared to 5% CER in 2017 and this excludes changes in the business portfolio for both years as well as [audio gap] is largely offset by the first time contributions from the STAT-Dx acquisition. A reconciliation for the business change sales for 2016 and 2017 can be found in the appendix to this presentation.

For adjusted EPS, our underlying assumption is for about $1.38 to $1.40. This is reduced however, by the combination of the adverse impact of the higher tax rate as a result of the U.S. tax reform and dilution of about $0.05 from the STAT-Dx acquisition. But includes benefits of about $0.01 from the new share repurchase.

So as this leads to our guidance for $1.31 to $1.33 of adjusted EPS for 2018 at constant exchange rates. For the currencies based on rates as of January 30, 2018, we expect a positive impact of about 3 to 4 percentage points on full year sales growth and for a positive impact of about $0.02 on full year adjusted EPS.

For the first quarter, we are expecting adjusted net sales grow to about $0.05 CER and this is also the targeted organic grow rate since our no contributions from acquisitions. Adjusted EPS is expected to be $0.23 to $0.24 per share also at constant exchange rates.

I would like to now provide some detailed information on our outlook for the full year and for the fourth quarter. We expect charges in operating income for the amortization of purchased intangibles to decline for 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 $60 million in this STAT-Dx acquisition. For the adjusted tax rate we saw that we announced in December after the U.S. tax reform was passed that we anticipated a tax rate of about 20% to 21% for 2018 and that is our outlook. This compares to the mid-term guidance we gave it at our Investor Day in 2016 for an adjusted tax rate of about $0.19 to $0.20 from 2018 to 2020. We are looking into mitigation actions on how to reduce the rate.

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

[Peer Michael Schatz, Chief Executive Officer]

Yes thank you, Roland. Here is a quick summary before we move into Q&A. Let me review that we just announced, first we achieved our targets for the full year and fourth quarter 2017 with solid adjusted net sales growth and adjusted earnings at the high-end of our guidance and growing 14%.

Second our Sample to Insight portfolio is building momentum and enables us to achieve our mid-term goals we have set out for 2020. Third, we are very excited about entering into the growing market for syndromic testing with the launch of our first two QIAstat-Dx panels in mid 2018.

Fourth, we will continue to focus on increasing returns for shareholders and have announced a new $200 million repurchase program.

And our outlook for 2018 reflects continued confidence in the growth trends for sales and adjusted earnings. And with that, I would like to hand back to John and the operator for the Q&A session. Thank you.

[Operator]

[Operator Instructions] First question comes from the line of Tycho Peterson with JPMorgan. Please go ahead.

[Tycho Peterson, JPMorgan]

Hey thanks. Peer, I want to start with STAT-Dx not surprisingly, you know as you noted it’s not an uncontested field, there are obviously number of first generation systems out there that have has got some momentum. You know I guess as we think about why this is a differentiated assay you had real-time PCR in quantitative, but I’m curious if you note the strategy here to really compete on price and can you comment all on thoughts and timing around clear wavier and reimbursement as well in respiratory and gastro two areas we’re - is going after fairly aggressively, so just curious, your thoughts there? And then on follow-up on QuantiFERON, I’m just trying to understand the rationale for the DiaSorin partnership given that you are touching a lot of the same customer any way. So, what’s the rationale for doing that? Thanks.

[Peer Michael Schatz, Chief Executive Officer]

Sure, thanks Tycho. So, first we’re excited about QIAstat-Dx, it opens up an opportunity for QIAGEN trend to remark which is fast approaching and billion dollars in size and growing quite dynamically. There is an increasing magnum for syndromic testing which means that multiple different, multiple targets are tested at the same time, and QIAstat offers a number of different features of which, include the ones you mentioned, but primarily outside that the benefit of having this very powerful sample processing allows samples such as dry swabs up to FFPs to be processed on one platform. This is very difficult to do on most platforms to achieve that type of breadth to even there are some times design for FFP or the design for infectious diseases. But the breadth that we can cover is truly unique also the fact that you can stick in a swab and therefore have a true pathway to clear waving of dry swab capability.

So, it’s the breadth of the application that is truly unique and powered by strong sample processing capabilities. On top of that, it is the scalability, while we are increasingly seeing is that, these very rigid assay designs are difficult to tailor to regional reimbursement needs. So on some reimbursement settings it would be preferential to only have a five plaques versus our 10 plaques versus a 25 plaques and other settings you might want to go higher than that. And so the ability to flexibly tailor that is given by the cartridge design, if you look at the cartridge it is injection modeled veer, very sleek micro fluidic technology that was implemented there and that allows a very low cost here at the same time scalable and adaptable design of the panels.

The ability to include real-time PCR allows us to leverage a vast portfolio of real-time PCR technology that we have here internally and now combined it into highly multiplex panels. And this is also a further uniqueness. So there is range of capabilities that you might see available on one feature on this platform, another feature on that platform, but we’ve been looking at this market for many years and this is the first time we see this combined into a setting like this. And so, coupled with low manufacturing cost allows us to scale very rapidly and also have the ability to enter into more market segments than the rest of the market. This is a very large market Tycho, it just started to get penetrated over the years and really just emerged three, four years ago and we now have the opportunity to represent the next-generation of entrants and done early phase of market penetration.

The second question was around the DiaSorin partnership, Tycho this is an extremely strategic partnership for us and there are three things that are required in diagnostics to be successful. One is a clinically valuable assay, the second is the good automation solution and number three is, a menu availability that allows you to platform to be amortized rapidly and to provide highest customer utility. With QuantiFERON we have a phenomenal test which is from in the two in which the blood sample is collected. So the detection of the assays is a very generic read out kit that laboratories are currently performing on open systems and the processes FDA approved and they validate them on their own read out system. Having now the ability to include that read out kit on a state-of-the-art random access continuous load platform that is at the same time also offering a wide range in Europe about a 130 tests about a third of that in the U.S. But very, very relevant content the LIAISON transplant, the women’s health very related content. And with placements in high overlap with our target markets allows us to offer all three leg of stool namely the best-in-class assay, best-in-class automation and a very powerful menu for highest customer value creation. And this is, we could have done it ourselves it’s a very crowded market, that’s a crowded market and the immunized area and there is a very successful player that as carved out of niche and is growing very dynamically and that’s DiaSorin. And we decided to partner with them on that detection kit. We will continue to sell the QuantiFERON assay which is the collection device, the two of the blood collection. That’s a core QIAGEN product and that will be continued to be available through QIAGEN it’s the detection kit, which is by the way generic all QuantiFERON and assays also the other ones available in Europe and coming to the U.S. they will all be able to leverage off that read out kit.

[Operator]

The next question comes from the line of Scott Bardo with Joh. Berenberg. Please go ahead

[Scott Bardo, Joh. Berenberg]

Yes, thanks very much for taking my questions, actually similarly I have few questions. So, just on the collaboration with DiaSorin and for QuantiFERON, I think you mentioned historically the pod of the raising for the demise of U.S. HPV was the concentration risk if you like all the additional price power that large reference laboratories had. So, I just wondered if you could share some thoughts as to increasing your automation capabilities with the LIAISON, it is still very restructuring not to sell QuantiFERON in reference laboratories or has that changed? And follow-up question please, just on STAT-Dx, I just wanted to get, become clear. Do you expect price cuts related to the [indiscernible] draft or is the fact that you deploy capital here signal that you are pretty relaxed about this and you don’t expect any price cuts, if you could just be specific about it, I would appreciate it? Thank you.

[Peer Michael Schatz, Chief Executive Officer]

Sure on the first question Scott, the question we sometimes get from investors is, are there any parallels between what we saw with HPV and QuantiFERON. And there are 1000 reasons why the assays are different, very fragmented market and all these differences compared to HPV and I won’t go into that. But one of the key issues that we had is that in 2011 we decided to pull the plug on a next-generation platform because we saw prices not allowing us to make any money on very expensive market entry with the new generation automation solution and then problem the menu in these test areas that are seeing significant cost compression.

Therefore, if you look at what we had between 2011 and 2017 or today, we basically have a great assay which to-date is still showing clinical superiority over any new entrant into this market. But at the same time our automation had workload disadvantages to liquid cytology processing and we didn’t have menu on the platform. So going back to the three conditions that have to be met for a successful franchise, great assay, automation and menu, two of these were missing. And this is one of the reasons why the pricing pressure of the new entrants was something that we were exposed to over this time.

And we are definitely also selling to reference laboratories, the availability of QuantiFERON assay on the LIAISON is definitely an opportunity for us to have a much strong value proposition partnership with great automation and menu to any type of customer going forward.

And second question is on QIAstat. While, as the reimbursement system there is a as we all know rolled outside the United States and reimbursement outside the United States has been very, very challenging in certain areas and in particular was difficult to penetrate because of the high cost of some of the alternative technologies that are looking at syndromic testing and we have a very attractive answer to that and can scale and tailor to these different types of reimbursement settings. Now there is rumbling in the United States what should be done, what shouldn’t be done, I think the syndromic test provide value at the level they are reaping reimburse today. But we’ve all experienced significant changes in the past that we’re not expected. But we are prepared for and this is something I think very good to know is a new entrant; we have an interesting new option that will allow customers to have a strong value proposition allow us to continue to invest even in a changing reimbursement environment.

[Operator]

The next question comes from the line of Steve Beuchaw with Morgan Stanley. Please go ahead.

[Steve Beuchaw, Morgan Stanley]

Good afternoon and thanks for taking the questions. One for Peer and one for Roland, first for Peer on the QIAsymphony it seems like in the last several months material step up in your enthusiasm with regard to the placements trend there, can you give us some color on what’s behind that where is it what’s new, how should we think about the sustainability of that trend? And then for Roland, there are two important revenue drivers that you’ve called for 2018 in sequencing and in personalized healthcare where we have some of the CDx deals, particularly in the CDx deals these payments can be lumpy and on the sequencing side, I know we have a ramp up going on with regard to consumables. So, I wonder if you could help us understand that the progression over the course of the year in terms of how those contribute to organic growth that might help us understand the progression of overall organic growth through the course of the year? Thank you so much.

[Peer Michael Schatz, Chief Executive Officer]

Great, thanks Steve I’ll take the first one, if you recall in the first half of the year we had mentioned in at least one call that we are spending a lot of time and looking at instrumentation pipeline management and have created some targeted actions around that and what you are starting to see not only with QIAsymphony but also with some of the other automation initiatives Roland mentioned we had strong growth in automation sales also the life sciences in Q4 we are starting to see pretty good traction on some of these initiatives and that I think the answer to your question is certainly be a focus and dedication, dedicated team actually managing that pipeline in a very disciplined way. Roland do you want to take the second one?

[Roland Sackers, Chief Financial Officer]

Yes sure, hi Steve, I think overall actually 2018 in terms of allocation they are not very much different than what they have seen in 2017 and you can see there also with some more detailed guidance we have given on Q1. So I think it’s really driven by, I would say overall and very strong underlying acceleration of organic growth rate and as I said that is happening more or less on the same kind of quarterly split up what we have seen before. Clearly the one thing which is not fully on our control is that, is first that healthcare business again has over certainly milestone components which can move from a quarter to another quarter. Nevertheless, I don’t think on a yearly basis as we have seen in the past it should make too much of a difference, but if you all to know we break it out very detailed in a press release as well as in the documents in a PowerPoint. So that should be easy also to follow on what is in brackets underlying consumable instrumentation growth rate and how much is driven by good placement has healthcare side.

[Operator]

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

[Brian Weinstein, William Blair]

Hi guys thanks for taking the questions. A couple on STAT-Dx first at CE mark now, so just curious why that hasn’t been launched by them yet or why you’re going to be more in the second half of the year or you just validating manufacturing scale offers or something else? And then on the data, can you talk about what data you’ve seen there on respiratory GI and oncology, I haven’t seen any of that did yet and I’m just curious what you’ve seen and then on the U.S. launch timing is that going to be do you think ahead of the respiratory season?

[Peer Michael Schatz, Chief Executive Officer]

Yeah thanks Brian, so first is the reason why lot of this data has not been out there is also a result of a long standing relationship that we have again the QIAstat cartridge audit includes a lot of the, a lot of QIAGEN chemistry and enzymes and assay technologies and sample technologies. And so we were clearly impressed with the progress and had been contributing some of this technology and we, now there was a CE mark, but that was CE mark was done as a standalone company, we are not transferring this into our quality systems and we’ll then redo the CE mark in the QIAGEN format. And that is time we want to take to make sure that complies also with our highest internal standards.

So that, in terms of data we will probably release data there is indeed, there have been quite some studies done and we will be releasing that closer to launch which, there is several meetings coming up and they will provide, I think a great platform for dissemination that there is indeed very limited information out there. We obviously had access to it and we were very excited about what we saw.

[Operator]

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

[Patrick Donnelly, Goldman Sachs]

Hey guys thanks, maybe one more on the STAT-Dx front, can you just talk through how comfortably you are at U.S. approval process given you already got through CE mark at least and then the timing of the clearance your revenue estimates begin, how much of that $30 million in res next year is tied to U.S. approval?

[Peer Michael Schatz, Chief Executive Officer]

So we feel comfortable with the system there are few milestones that so has to be achieved, that represent the final closing conditions that can be waived on our side, but we feel very comfortable with the progress that we are seeing so far. The ability to move into the respective regulatory process for the U.S. is seen as very likelihood. We are not sure if we’re going, the what the timing of that submission will be that is something we will announce in probably around the launch in Europe. But we definitely see the launch in 2019. And the likelihood of that moving forward is seen as very high bios. Again we’ve had the opportunity to do extensive due-diligence over the years and also help prepare for this event.

[Operator]

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

[Doug Schenkel, Cowen]

Good day, good morning. Starting with two things on STAT-Dx first, what commercial structure do you have in place and what you need to build up to support both the EU and U.S. launch? I guess what I’m trying to get at very specifically is what you need to do in the U.S. to support the 2019 launch? And then the second on STAT-Dx is keeping in mind you provided multi-year revenue targets, do you expect any revenue from your 2019 and 2020 STAT-Dx products to come from transitioning legacy QIAGEN products from repair and infectious disease and transplant assays particularly in Europe where you’ve had more success with them? And then I guess beyond STAT-Dx on companion diagnostics you expect more than 5 FDA submissions or U.S. launches in 2018. Will each of these have an accompanying milestone payment and if so is that reflected in guidance? Thank you.

[Peer Michael Schatz, Chief Executive Officer]

Yes thanks. First question is, the multiplex syndromic testing systems of the first generation, they are very often standing very close to the QIAsymphony and other platforms that we have in the mid range area, there is clearly also more disseminated use of that technology, but the high throughput segments are very often and very close proximity to our core. On top of that, we have a strong hospital franchise remember the QuantiFERON portfolio actually is to a significant degree placed in hospital. So there is a strong franchise commercial channel already in place. What we have included in the ramp is a specialization team we will focus to have a specialized group focusing on QIAstat during the first years of launch and giving it a maximum boost, coming out of the box. So, it’s basically a specialization ramp up, but these are customers where we typically already today or already have reaching to and so, a molecular testing system with the QIAGEN label on it, I think is a very natural addition in the eyes of the customers and something that we look forward also to bring to them.

The second is revenue cannibalization, the answer is no, so we have very limited exposure to the infectious disease testing markets and while we have ideas in transplantation this is a market where we have a [audio gap] market share, but also here the complex testing market would be a different segment, so minimal cannibalization if at all. And third is the PHC milestones, Roland do you want to take that one?

[Roland Sackers, Chief Financial Officer]

In terms of overall, not sure that.

[Peer Michael Schatz, Chief Executive Officer]

So the question was, are the, in the submissions that we are seeing are the approvals in 2018, the answer is yes Doug, the milestones that would be related to that are baked into the guidance. But, I think we have quite a good experience in assessing that, it’s always risk adjusted, we’re running 25 partnerships right now, I think this is five times more than anybody else, I don’t know if it’s even 10 times more we have a within every one of the partnerships several programs running. And so, there is a pretty good statistic to be able to average out the likelihood of these milestones coming in. And so that, that’s something I think we feel quite comfortable including into the guidance in a risk adjusted way.

[Operator]

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

[Ross Muken, Evercore]

Good morning guys. So just thinking about sort of the STAT-Dx deal it seems pretty intriguing in the context of kind of the long-term plan. If I think about sort of the CER acceleration this year and then, the rolling off eventually of the HPV headwinds and then I add in sort of the implied organic we’ll get some stat. It seems like that, of itself to get you well within your 2020 range, I mean I guess as we think about this and even what you are doing on the NGS side, do you feel like now with where the portfolio is that, sort of goal you’ve set out there is quite readily sort of achievable is just now a matter of executing against kind of the timeframe?

[Peer Michael Schatz, Chief Executive Officer]

Yes Ross, I think we feel quite good about those mid-term targets, we reiterated them again and as we when we gave them a couple of years ago or 15 months ago they were, we define them as being organic. So obviously now a rocket like QIAstat-Dx which we hope turns out to be a very strong growth driver would be a very nice upside to that. But, even without that, you see the organic growth rate also this year already well within the corridor of that 7% to 9% and moving up here by almost 200 basis points this year.

So, we’ve 15 months ago, there was a feeling that this was a stretch I would say the, year 2017 and also now they are, we are out for 2018 and the underlying growth makes us feel pretty good about this and something like in QIAstat-Dx is just a further boost to the upside.

[Operator]

Next question comes from the line of Derik de Bruin with Bank of America Merrill Lynch. Please go ahead.

[Derik de Bruin, Bank of America Merrill Lynch]

Hi good morning. A couple of questions, I guess the first one being, can you just sort of, and this is sort of more of a math question like, can you sort of breakout what in terms of [audio gap] appendix were actually all three years for 2016, 2017 and 2018. So you can do your modeling in terms of impact organic growth rate. In the way we calculated it of course we adjusted in all three years it’s end of a day, because it is only where that you can come to and after comparison. Just to be more precise on your question as we said before there was couple of components in it and the number of products we discontinued they are probably a couple of millions on a quarterly basis lower 7 digit numbers on a quarterly basis, the remaining part is HPV.

[Peer Michael Schatz, Chief Executive Officer]

So Derik, the first question on the manufacturing cost, you know the, if you look at the cartridge it’s a simple injection molded systems, so there is not a significant complexity and the protection units are actually reusable. So, you have a significantly lower cost of the cartridges and actually can leverage some of the existing infrastructure that we have for manufacturing of that and we manufacture millions and millions of assay a year and that can layer on top of that. So there is synergy but also the design as is a very sleek and smart design, happy to show it to you at some point, the way the fluidics are done it’s a very simple, but at same time very elegant way of designing fluidics and that’s what really excited us about this is that. We all know that diagnostics pricing to go as one direction unfortunately, but that’s nowadays it goes down over time and for the ability to have a system that can benefit from a very, very long lifetime by starting out with a very attractive cost profile and a design to cost that is a big benefit. And so this is one we expect to be around for very long time.

[Operator]

Your next question comes from line of Dan Arias with Citi. Please go ahead.

[Dan Arias, Citigroup]

Hey good morning guys thank you. Peer, Roland on bioinformatics, first of all congrats on the higher there. Just wondering what kind of growth you are looking for out of that business this year? And then on TB, can you just touch on the quarter obviously 24% growth of the year is pretty close to 25%, but if I just go back and look at some of your 3Q comments, it sounds like you are actually bringing about something north of 30% at one point. So, maybe just the way the 4Q unfolded and finished and then on the outlook there what’s the great growth range your seeing about for this year, I think something 20% gets you to $300 million by 2020. So I’m just kind of curious on how you are thinking about the trajectory there?

[Peer Michael Schatz, Chief Executive Officer]

Right, the first question was once again Dan?

[Dan Arias, Citigroup]

On bioinformatics…

[Peer Michael Schatz, Chief Executive Officer]

Bioinformatics, okay. Let me just quickly start, the bioinformatics team did an remarkable job last year and they’ve exceeded their targets the OmicSoft acquisition small was very, very well received by our customers primarily in pharma, now increasingly in clinical. So, this is not coming together and I’m very excited to be working with Jonathan, who is well known in the industry and there is a lot of things that we want to do and that comes on a foundation which is very stable and one that we can now take forward aggressively. Roland do you want to add the numbers?

[Roland Sackers, Chief Financial Officer]

Yes and bioinformatics still continue on a very good growth sign. I think the reason why we don’t bring it out anymore is, as what Peer said before its much more the way we sell it is not in the Sample to Insight approach. So it is in many cases and integrated approach way what the sellers as a package draw the customers nevertheless, if you just look to understand long deals which we doing is well, it’s still a very significant double-digit growth rate and of course the one thing what we are also enjoying is also coming with a very nice and high gross margin.

In terms of TB, I think in general that is also as you said is a very strong development over the course of the years, one thing that you should have in mind of course that we had in fourth quarter 2016 base effective was some of larger tenders coming in, I think that is going to wash out already quite soon here, was in the first quarter in the start of 2018. So, I think growth rates probably are going to be still very attractive for us and continue to be one of the single highest growth rates for QIAGEN in 2018 and beyond.

[Operator]

Next question comes from the line of Hugo Solvet with Bryan Garnier. Please go ahead.

[Hugo Solvet, Bryan Garnier]

Hi, hello thanks for taking my question. Just on the respiratory panel, I assume you might be willing to buy the system at the very beginning of the second half of the year, would you be able to rollout the system earlier, compared to launch more in the H2 which is the timing you pointed out to. And could you give us an indication of the footprint of the QIAstat-Dx compared to what you see at your competitors? And last question would be following the acquisition of STAT-Dx do you anticipate to accelerate the review of your portfolio and potentially divest additional non-core assets in regions, outside of Asia Pacific to maybe further focus on your growth driver and benefits from their restricted growth? Thank you.

[Roland Sackers, Chief Financial Officer]

I probably can kick off the second part of your question.

[Peer Michael Schatz, Chief Executive Officer]

Yes. If you could take the third.

[Roland Sackers, Chief Financial Officer]

Yes. I think there is clearly something where again we feel very comfortable result before, see we made it very clear that what we have seen here what we have done in China was something what we believed is in the best interest as we see even increased opportunities past China to bring the growth rate even closer to the 20% kind of growth rate. So, I think we are not really seeing any larger needs for the opportunities coming up that might be a different story. But, right now we feel obviously very comfortable, its all, it’s a portfolio of growth drivers to have in hand and being focusing and being be able to focus on them.

[Peer Michael Schatz, Chief Executive Officer]

The first question was on timing, well it’s an interesting question which you are driving at. We will, we certainly announced further details and availability probably in the next quarterly conference call or then shortly thereafter, where we feel pretty good with launch date and there is still few things due but, we feel pretty good about the timing. The question was before will be able to get the U.S. flu season, it depends on when we submit, that’s obviously as you know the timings this has not really been baked into the forecast however to take or into the guidance that we need the U.S. flu season next year. So if we get it would be a nice upside if we don’t that is a more conservative case.

In terms of the footprint it is slightly smaller in terms of the footprint and the existing systems and more unique scalability as you probably saw some of the pictures the individual modules it can be stacked and you can stack eight of these modules on to a master module and that can therefore fit into the different types of environments and throughput needs.

[Operator]

Last question comes from the line of Romain Zana with Exane BNP. Please go ahead.

[Romain Zana, Exane BNP]

Yes. Thanks for squeezing me in and sorry if I missed some questions. The first one, I would be interested to have more granularity on the organic growth on the MDx division once excluding the QuantiFERON contribution, if I might be correct, I mean it should be 2% to 3% and there was curious about the most challenging segments. Second question will be a follow-up question on the mid-term target plan, if I might be correct again that the 7% to 9% annual growth targeted overall to 2020 or it implies something around 10% in 19 20, so should we see upside with link to the acquisition STAT-Dx and the entry in multiplexing and marginally that this plan includes further both on acquisition or rather requires strategic move to support the growth guided? And a very quick one for Roland, if you can give me an idea of the adjusted EBIT margin for 2018?

[Roland Sackers, Chief Financial Officer]

So let me start from the back and Peer probably going for the first question. I think as we said before we have seen now 2017 and 220 basis points constant exchange range margin improvements or a significant step forward in terms of improving margins and getting more efficiency into the company. We also expect to continue the trend in 2018, so if you do the math or look in our EPS guidance you probably come to a conclusion that our ex-currency or constant currency growth rate margin on the adjusted side is improving by 100 basis points. So it’s a year again with quite significant margin improvement expected for 2018 as well. In terms of the other question in terms of mid-term expectations, our CAGR was from 2016 to 2020 and as I said, we, I think we made quite significant process this is now 2017, 2018 guidance is out for us is clearly something where we believe an acceleration is coming in. If you talked about strong on the line trends again to have in minds that our organic growth rate is improving from 5% to 6% or 7% including a 150 basis points of U.S. which is clearly fading away because people are down from $28 million to $9 million in 2018. So there is well a nice push coming in putting in STAT-Dx was second on the side. So there is clearly a nice driver and I think it’s a portfolio of different post that we are having is QuantiFERON, this companion diagnostic with you talk about bioinformatics, this applied testing is still being a nice double digit growth driver. I think there is a lot of opportunities for us within that is well, where we feel quite comfortable.

And if you look at 2017, on MDx, I think actually MDx had a very strong year, I think if you adjusted for I would say all this you have to look adjust for both, but you have to take all of it if you want, on the one side the QuantiFERON within MDx but also on the other side HPV business which is a challenging of OmicSoft. It is still delivering a highest single digit growth rate also for 2017 and that is probably we feel quite comfortable with.

[Peer Michael Schatz, Chief Executive Officer]

You know Romain, just to close out the guidance that we gave for the medium term outlook that we gave in 2016 and reiterated several times over the last year and that was based on organic growth and so, the organic growth in 2017 is now, in 2018 is now well within the corridor already, and with additional growth coming from other activities that we layer on top of that. We’re definitely moving into very attractive growth profile with lot of legs to it. All of these growth engines that Roland just referred to there in early stages is a cycle. And our growth engine that should accompany us for many years in a very diversified, but quite powerful way.

[John Gilardi]

Okay and with that, I would like to end the conference call and thank all of you for your participation. If you have any questions or comments please don’t hesitate to contact the QIAGEN Investor Relations team.

[Operator]

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