Qiagen NV (QGEN) Q2 2011 Earnings Call July 26, 2011 9:30 AM ET
Executives
Dr. Solveigh Mähler – Director, IR
Peer Schatz – CEO
Roland Sackers – CFO
Analysts
Quintin Lai – Robert W. Baird
Bill Quirk – Piper Jaffray
Brigitte de Lima – Bank of America Merrill Lynch
Holger Blum – Deutsche Bank
Tycho Peterson – JP Morgan
Peter Welford – Jefferies
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the QIAGEN NV Investor and Analyst Conference Call on the Q2 Results 2011. Throughout today’s recorded presentation all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. (Operator Instructions)
I would now like to turn the conference over to Dr. Mähler, Director, Investor Relations. Please go ahead ma’am.
Dr. Solveigh Mähler
Yeah. Thank you very much, Jason; and hello, everybody. Welcome to QIAGEN’s second quarter 2011 earnings conference call. I am Solveigh Mähler, Director of Investor Relations at QIAGEN. With me on the call are QIAGEN’s CEO, Peer Schatz; and QIAGEN’s CFO, Roland Sackers.
We issued a press release last night announcing QIAGEN’s financial results for the second quarter ending June 30, 2011, describing the Company’s recent business highlights. A copy of this announcement, as well as the presentation we will be using during this conference call can be downloaded from the Investor Relations section of our homepage at www.qiagen.com. This conference call will cover 30-minutes presentation followed by a Q&A session. The time of the conference call is set at one hour. We, therefore, would like to ask you to please limit yourself to only two questions during the Q&A session. The call will be archived on our website.
Before I turn over to Peer Schatz, please keep in mind that the following discussion and the responses to your questions reflect management’s view as of today, July 26, 2011. As you listen to the call, I encourage you to have our press release and presentation in front of you, since our financial results and the detailed commentaries are included and will correspond to the discussion that follows.
As we share information today to help you better understand our business, it is important to keep in mind that we will make statements and provide responses in the course of this conference call that state our intentions, beliefs, expectations, or predictions of the future. These constitute forward-looking statements for the purpose of the Safe Harbor provision. These forward-looking statements involve certain risks and uncertainties that could cause QIAGEN’s actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements.
In addition, certain statements contained in this presentation are based on company assumptions including, but not limited to, revenue allocations based on business segments. For the description of such risks and uncertainties please refer to the discussions and reports that QIAGEN has filed with the U.S. Securities and Exchange Commission. Additionally, we will be discussing GAAP and non-GAAP measures. A full reconciliation of the non-GAAP measures to GAAP can be found in the press release on our website.
With this, I would like to hand over to Peer Schatz. Peer?
Peer Schatz
Yeah. Thank you, Solveigh. I would like to welcome all of you to our conference call and the opportunity to discuss our results for the second quarter 2011. The progress we’ve been making on our strategy and our perspectives on the second half of the year. As we outlined 2011 is a transition year with difficult comps. At the same time, it is also year for us to build up our portfolio of molecular content and rollout our new automation platforms that we believe will create substantial growth opportunities in 2012 and beyond.
As you saw in the press release issued last night, results in the second quarter improved over the second period of 2010. We delivered higher net sales and earnings along with the significant increase in our free cash flow. Those results were also an improvement on the soft start to the year that we saw in the first quarter. At the same time, we are clearly not growing at a level that we believe is satisfactory. However, we are making broad progress in our strategic initiatives to expand in 2011 in order to accelerate growth in 2012. This progress is reflected in the milestone that our teams have achieved. The global rollout is going well for QIAsymphony. We have now reached installed base of 475 systems worldwide.
QIAsymphony is a highly versatile, modular automation platform that we believe will play a key role in the dissemination of molecular technologies, and in particular will be the driving force for the expanding use of our molecular assays. Every placement creates an opportunity for annual consumable sales or so called pull-through of anywhere between 30,000 and $300,000.
Demand remains strong for the full QIAsymphony RGQ version. This was launched in late 2010 and incorporates the Rotor-Gene Q real-time PCR cycler along with the SP or sample preparation and AS for asset set of modules that were launched in recent years.
In personalized healthcare we reached an important milestone by completing the landmark regulatory submission of the KRAS biomarkers, a companion diagnostic paired with the anti-cancer medicine. This is the most significant achievement today from our more than 15 co-development projects underway with major pharmaceutical companies.
In fact we will complete our second separate PMA submission in the U.S. this week. It involves the use of KRAS biomarker with another anti-cancer medicine, also for patients with colorectal cancer. In addition, we are very actively expanding our projects of co-development projects and I’ll talk to that later.
We’re making progress in completing two important acquisitions both of which were announced in the second quarter. The Cellestis and Ipsogen both add important molecular content, in other words molecular test to the menu of our platforms. This will support QIAGEN and our ambition to be the world leader in molecular diagnostics. I will provide more insights on these acquisitions later on in our presentation.
In terms of expanding our geographic presence, our new direct operations in India are growing quickly. Another expansion step this year was our direct entry into Taiwan during the second quarter. We are looking at various options for other regions with the attractive growth potential.
As we noted in our release, 2011 is proving to be more challenging than anticipated at the start of the year given the continued weak economic conditions. Based on these factors and also to incorporate the Cellestis and Ipsogen acquisitions, we have updated expectations. We are expecting faster growth rates in the second half of the year compared to the first half of 2011 but had a more moderate rate than we have predicted earlier. We are expecting the most deviations to our forecast in the life sciences. This is also had an impact on our full year expectations.
In summary, QIAGEN is making broad progress on our strategic initiatives and are committed to achieving our updated expectations. We are intensifying our focus on growth and innovation and are confident that QIAGEN is well positioned for sustained business expansion.
Before we get into more depth, I’d like to handover to Roland for a discussion on the financials. Roland?
Roland Sackers
Yes. Thank you, Peer, and good afternoon to everyone in Europe and good morning to those joining from the U.S.
The second quarter of 2011 for QIAGEN came in largely as expected, delivering improved performance and solid gains in free cash flow. Recapping the key numbers, net sales for the second quarter rose 7% plus 1% at constant exchange rate or to US$282 million from the second quarter of 2010. Consumables contributed solid net sales growth, which was partially offset by lower sales of instruments.
Adjusted gross profit was up 9% over the second quarter of 2010. This was in part due to product mix related sectors for consumables with higher HPV sales in North America. Sales to marketing expenditure increased by 15% over the second quarter of 2010. Increased promotional activities supportive to QIAsymphony rollout going direct in India and Taiwan, as well as investing in direct sales channels activities were the key drivers of the percentage increase in the year-over-year result. We continued to increase our efficiencies and have those economies up-scaled thereby driving down G&A expenditure by 5% over the second quarter 2010. Overall, therefore, SG&A expenditure was up 9% over the same period last year.
We are maintaining our profitability by keeping margins steady in comparison to the second quarter 2010. This is reflected in the 8% growth in adjusted operating income to US$78.7 million and the adjusted operating income margin remaining at 28%. It is also worthwhile to keep in mind that this is happening alongside strong investments in R&D and an aggressive push to further expand a new geographic region.
We are expecting to further enhance productivity and improve the value of our business operations by reducing the cost of routine operations. Performance oriented workforce management and reallocation of resources to grow initiatives are anticipated to provide additional benefits for our adjusted operating income margin as we move through the remainder of 2011.
Moving to our adjusted diluting earnings per share, this rose to $0.23 in the second quarter from $0.22 in the same period of 2010. In terms of non-operating factors, we have told you in the past about the sustainable benefits that would come, be coming from our tax optimization strategy.
Free cash flow in the second quarter improved 31% to US$37.8 million over the year ago period. Effective working capital management remains to be an important focus for us. Our free cash flow adjusted for building investment increased 24%.
Capital expenditures over the past two years in R&D and production facilities have been quite substantial, particularly from major construction activities at our sites in Germany and Maryland. DSOs were 65 days at the end of the second quarter compared to 68 days for the first quarter and level with 65 days a year ago.
So, overall our results in the second quarter of 2011 showed our ability to deliver year-over-year growth while preserving our profitability and achieving our adjusted EPS target and meet continued challenging market conditions.
I am now on slide Six. In terms of geographic results, in the Americas we had net sales growth of 5% at constant exchange rate. We are seeing some solid trends in the U.S. HPV market. Mainly we believe conversion is the critical component as unemployment rate in the U.S. remains high and IMS data confirms that doctor visits are still down.
Uncertainty over the NIH budget as part of the discretionary budget cuts in the U.S. is having an effect on grant funding grades, which had an all-time low. We believe this is having a direct impact on some of our customers in the U.S.
In Europe, the Middle East and Africa, sales dipped by 5% at constant exchange rate. Although QIAsymphony demand remains strong and sales from molecular products are performing well. We have a number of forces working against us in Southern Europe, particularly Italy.
In addition, timing of certain companion diagnostic development milestones and also the impact of measures we have recently taken to transition several sales channels weighted on the results this past quarter.
The Asia-Pacific, Japan region where we saw a significant impact from disruptive event in the first quarter has recovered nicely. Product in life science in China as well as the general market recovery in Japan contributed to grow fast in these countries. We continue to support the recovery of Japan and are collaborating with government agencies in terms of human identification and infectious disease testing product.
On the other hand one of the disappointments of the second quarter has been the sales growth in Molecular Diagnostics, China. This is a market where we had traditionally very high growth rate. However, we encountered slower than anticipated sales results following the ramp-up of our clinical sales channel in this country. We significantly increased this channel in 2010 and had high hopes already for the first half of 2011. Despite this delay in the anticipated boost per sales, we believe this slowdown is only of a temporary nature.
Moving on to slide seven, I would like to provide some comments on our financial position for the first half year 2011. Highlighting our strong liquidity position is our equity ratio of 65%. We have provided some pro forma data to incorporate upcoming completion of Cellestis and Ipsogen acquisitions. And this shows a ratio of 64%. Our net debt to adjusted EBITDA ratio is currently at minus 0.2 times, but will rise to 1.1 times after completion of these acquisitions on a pro forma basis.
Our cash flow proposition allows us to pursue growth in investment plan without depending on unstated credit markets and with limited exposure to interest rate development.
Both operating and free cash flow has continued to increase steadily. For the six months period ended June 30, 2011, we generated net cash from operating activities of US$106.1 million. Free cash flow excluding developed investments in building for the first half 2011 was US$86.2 million. Capital expenditures in recent years have been rather significant as we invested in underpinned future growth.
In June, we largely completed construction of new R&D and production facilities in Germany. Notable here is that preparation for the transfer of production activities, we increased inventories to allow for higher sales destock.
I would now like to hand back to Peer for strategy update.
Peer Schatz
Yeah. Thank you, Roland and we are now on slide nine. I’d like to provide some perspectives on the performance of our four customer classes. Molecular diagnostics, which represented 46% of net sales in the quarter rose 2% on constant exchange rates; solid single-digit growth and consumables was reduced by lower reported sales of instruments.
Instrument sales again reflected the shift towards reagent rental agreements, in which we place an instrument at the customer sight in return for a guaranteed annual purchase of consumables. Revenue is then recognized over the term of the multi-year contract.
In prevention, we’ve recorded growth in HPV sales in the U.S. Our market conversion initiatives were up about 10% in the quarter and penetration of available market is approaching 45%. Our conversion efforts more than offset effects from reduced patient visits and pricing. On the other hand, we are seeing data that patient visits are down sequentially from the first quarter of the year. This was expected and it is being confirmed by other industry participants. It was one of the reasons for our conservative outlook for overall 2011 that we gave earlier this year.
Like our competitors, we still face economic headwinds. The U.S. unemployment rate has not improved much, and this is reflected in enrollment trends for managed care programs. We had expected improving trends based on economic forecasts. Based on the current environment, it is difficult to make predictions for the second half of the year.
We are obviously asked about our views on the entry of competitors on the U.S. HPV market. Will there eventually be an impact? Yes. This is to be expected when you have new competitors in the market, but it is clear that none of the competitor assays are anywhere close to being validated to the extent of Qiagen’s assay, and none have superior data.
We’re using this to our advantage and are pleased that customers recognize this value. Our focus is on expanding the market, growing it ourselves and for ourselves, and for our customers. Applied testing, which is currently 7% of net sales, delivered solid growth in consumables. Here, too, results were reduced by softer instrument sales.
Qiagen is a key supplier of human identification products to the Japanese Government as part of the recovery efforts after the disasters in March. Also, in Japan, Qiagen recently won a very important national tender to deliver forensic products to the country police. This again underscores the highly competitive position of our human identification portfolio.
Pharma was 21% of net sales and largely unchanged overall. On one side we are benefiting from sustained demand from molecular technologies to support team-based drug development activities. Among top performing product lines is also the certain portfolio. This is a new asset portfolio that runs on QIAsymphony and is used to test for residual DNA during manufacturing processes. However in pharma R&D, the R side remains challenging, mid industry consolidation and cost containment measures.
Academia which was 26% of net sales is pacing increasing pressure in key markets. We are seeing substantial increased caution in purchasing behavior due to uncertainty about budgetary restrictions, in particular in the United States. Net sales were up 1% at constant exchange rates and again the key issue was the decline in instrument sales.
In light of the changing market environment, which is being accelerated by budgetary constraints, we are stepping up expansion of our direct marketing channels and electronic touch points to customers.
Moving to the next slide, we’re making broad progress on many of our key initiatives. All of these are supporting our objective to leverage our leadership in Sample & Assay Technologies across our four customer classes.
QIAsymphony RGQ is our flagship platform. It offers unprecedented flexibility in automation to customers requiring a broad menu in processing from 1 to 300 samples per shift. Our top priority remains to increase placements around the world and to continue to expand the Assay menu.
We have achieved about one-third of our placement target for 2011. Given the long selling process for these types of systems, we’ve been saying that the majority of placements are anticipated in the second half of the year. Related to that, as most of you know, the majority of the placements will involve reagent rental agreements. While the impact of placements will not be immediately recognized in our reported sales, trends on pull-through of consumables are encouraging and bode very well for driving growth in the coming years.
In May, we announced the comprehensive update of the QIAensemble suite of automation platforms. QIAensemble Evolution which was initiated in 2011, caused for the addition of modules to improve the automation for the current Rapid Capture System. The Decapper units, level of which are already in the field are on track for full launch in the fourth quarter and feedback from customer field testing has been extremely positive. QIAensemble Revolution program intense to build on the proven core components from QIAsymphony and this will enhance the computability of the two platforms in our testing menus.
I’d like to spend more time now providing you some insights into the strategic initiatives of first adding molecular content to our automation platforms, and number two strengthening our leadership in personal healthcare as well as create, expanding our geographic presence.
Moving to the first topic, adding molecular content on slide 11, our latest two acquisition Cellestis and Ipsogen fully support our strategic initiative to add molecular content to our novel platforms. We’re moving towards completion of the acquisition process for Cellestis, an Australian diagnostic company. Shareholder meeting is now planned for early August and closing is expected later in the month.
As you know, QIAGEN amended its proposal for Cellestis in early July with the aim of securing a rapid completion of this transaction. The current Cellestis share price and the shareholder voting trends confirmed that this transaction should receive very strong approval. Cellestis is a profitable publically listed company with two marketed product QuantiFERON-TB for detection of latent TB and QuantiFERON-CMV for the detection of cytomegalovirus, which is a threat in solid organ transplantation.
This slide show shows how we believe the combination of Cellestis and QIAGEN can generate greater results for QIAGEN. Cellestis will provide us with exclusive access to QuantiFERON assay technology. As a next generation proprietary technology, it is capable of acquiring a previously untapped information source in the human body.
QuantiFERON is considered pre-molecular testing technology, because it has the capability to provide diagnostic information far earlier than DNA based molecular tests. As a result, test based on the technology can provide information on latent infections, in other words hiding infections, when DNA based tests cannot, because of the lower amount of pathogens present in the infection.
Because of this ability, QuantiFERON can complement our portfolio of molecular diagnostics by guiding and driving the use of DNA and RNA based molecular tests. We believe that Cellestis as part of QIAGEN will enhance our molecular diagnostics offering from pre-molecular through prevention, profiling personalized healthcare and point-of-need testing.
As a sample in assay technology just like our other products, we plan to migrate it to QIAGEN Instruments. QuantiFERON TB is already being commercialized in a number of markets, particularly in the United States and Europe and Japan. A very significant untapped market potential, and QIAGEN sales and marketing operations around the world will be instrumental in driving this expansion.
We’re planning to make large investments in sales capabilities and R&D initiatives to integrate the latent TB test on the QIAGEN platforms. This acquisition will be supportive to sales growth and be accretive to adjusted EPS starting in 2012.
Turning to the next slide, our Cellestis acquisition has a technology focus, but the current TB products also have a very attractive market profile.
In combination with our molecular diagnostics for TB, we’re creating the leading next generation position in TB. QIAGEN already has a wide range of molecular assays. An example for our capabilities here was the recent announcement that the Mayo Clinic has licensed patent rights from QIAGEN that will allow Mayo to offer a test for M. tuberculosis complex speciation.
We’re also looking at ways to migrate our TB test to point of need devices. To understand the TB testing market, it is critical to understand the two different types of TB status; number one, active TB, which is basically full-blown disease with symptoms, and latent TB, where the patient has no symptoms but the disease can flare up at any point to threaten the patient and cause potential spreading of tuberculosis.
In the developed world; United States, Europe and other developed countries, latent TB is far more important as a testing franchise than active TB. Latent TB tests are critical for identifying those at risk and immediately treading them, thereby reducing the disease burden and the potential spreading of TB.
People undergoing routine testing include healthcare workers, college students, people in prisons and military. TB testing is also useful for immigration. We also see implication such as companion diagnostics, given that an increasing number of medicines require latent TB testing prior to first dosing.
Regulatory clearances, reimbursement and guidelines are complete in most countries. So we’re going to work on global expansion. We were particularly pleased to see Germany adapt QuantiFERON-TB as the new standard shortly after we announced this acquisition.
Turning to the next slide, I would like to offer some insights on Ipsogen and how the combination with QIAGEN will create significant opportunities.
Ipsogen has a very competitive portfolio in blood cancer testing with assays covering more than 15 biomarkers including BCR-ABL and JAK2 for patient profiling and monitoring. The company also has several very interesting IP positions on content including the exclusive worldwide license for JAK2 V617F, the key mutation in the Janus 2 kinase.
Portfolio is used to classify blood cancers into the various categories. There are four major classes and dozens of subclasses. Ipsogen assays set a strong standard for this classification worldwide.
In addition, several of the biomarkers are being targeted by pharma companies for a range of blood cancers, is include BCR-ABL and in particular JAK2. So this deal is similar to what we did with B-Raf 3 Kinase in terms of gaining key intellectual property rights for important biomarkers, and with JAK2 we get a marketing product.
Any of Ipsogen’s assays have significant potential as companion diagnostics to guide treatment decisions and personalized healthcare. We have the capabilities to offer a complete companion diagnostic solution to pharma companies and with these assays, we can extend our range of partnerships.
The addition of Ipsogen has strengthened QIAGEN’s leadership and molecular diagnostics expanding both are profiling and personalized healthcare portfolios.
As you know our position is driven by more than 20 molecular diagnostic assays available in selected regions of the world, as well as more than 15 personalized healthcare projects underway with pharmaceutical companies. This acquisition will support our sales growth in the second half of 2011, and be accretive to adjust EPS starting in 2013.
Turning to slide 14, we are making dynamic progress in Personalized Healthcare, where QIAGEN is helping to match the right patients with the right drug, by offering companion diagnostics. We have built up by far the leading industry position with a portfolio of biomarkers to address needs for both solid and hematological cancers.
As we announced on the last conference call, we are moving far beyond cancer to work on companion diagnostics for many other therapeutic areas. Among the more than 15 projects underway with major pharmaceutical companies, some of our partnerships are shared and thereby leveraged into multiple applications, which leads to more companion diagnostics in the pipeline. We should anticipate more co-development agreements being reached in the second half of 2011 as well.
And in terms of regulatory submissions, after the filings for KRAS we are on track for other U.S. submissions, including the assay for the EGFR mutations in 2012, which will be its first submissions submitted for using combination with anti-cancer medicine for treatment of patients with the non-small cell lung cancer.
I would now like to hand back to Roland. Roland?
Roland Sackers
Sure. Based on the completion of the Cellestis and Ipsogen acquisitions this year and to ongoing challenging market conditions, we have updated our expectations for 2011. For the second half of 2011, QIAGEN expect total sales growth of approximately 7% constant exchange rate of which approximately half is expected to come from organic growth.
For the full year 2011, QIAGEN now expect total sales growth of approximately 3% with contributions from organic sales and acquisitions calculated using constant exchange rate. One of the factors to consider for the revenue distribution between the third and fourth quarter is that we have an unusual revenue allocation between these two periods.
As you might recall, we have won several large HPV tenders global. Typically, the revenue from this these tenders are spread equally over the year. In the third quarter this will not be the case, but therefore we will increase significantly in the fourth quarter.
Adjusted diluting earning per share are expected to be approximately $0.96 for 2011, which includes previously announced expectation for the dilution of approximately $0.03 per share related to planned sales and R&D investments as part of the acquisition of Cellestis and Ipsogen.
Turning to the next slide, in terms of adjustments to operating income, we expect equity based compensation of U.S. $5 million for each of the next two periods. Amortization of acquired IP of approximately 27 million next quarter and approximately 29 million in the fourth quarter, business integration, acquisition and restructuring of 12 to 14 million in third and 3 to 4 million in the fourth quarter. This is a significant increase due to transaction cost for Ipsogen and Cellestis.
This quarter our adjusted tax rate was 23%, thus lower than the comparable quarter last year with 25%. And going forward, this third quarter, we believe this to be in the range between 24 and 26%, thereafter for the fourth quarter in the range of 22 to 24%. The weighted average number of fully diluted shares outstanding will be around 240 million shares.
Peer?
Peer Schatz
Thanks Roland. I’m now on slide 17 to provide a quick summary before we move into Q&A.
As mentioned at the start, the challenging economic environment is more persistent than we had anticipated. In Q2 our market continued to be soft. We achieved some growth, but it is hard to predict how much improvement we will see in the second half.
Against the backdrop of the underlying business performance, it is important to see the progress we are making on our strategic initiatives. We are creating a foundation for future growth. We are pleased with the progress we are making to deliver on some of these strategic goals. The global roll-out of the QIAsymphony RGQ is progressing well and the installed base is now exceeded at 475 systems.
Our companion diagnostic projects in Personalized Healthcare reached to an important milestone with the first U.S. submission for a TheraScreen KRAS biomarker. A second submission is coming within a few days and look from more developments in this area.
We are adding molecular content with the addition of Cellestis and Ipsogen, and we are moving ahead with the development of new assays and potential submissions in 2011. And we are expanding our geographic presence in emerging regions of the world.
We have updated our full-year guidance to give you the clearest view possible, and also to incorporate the pending acquisitions. As a result of actions to implement our strategies we are well positioned to expand in 2011 and to further accelerate growth into 2012.
With that, I would like to hand back to Solveigh to open up the Q&A session. Solveigh?
Dr. Solveigh Mähler
Yeah. Thank you very much, Peer. We are now looking forward to discussing your questions. I would like to open the Q&A session by handing over the operator. Jason?
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) The first question comes from Mr. Lai. Please state your name, company name followed by your question.
Quintin Lai – Robert W. Baird
Hi, good morning. This is Quintin Lai from Robert W. Baird. We –
Peer Schatz
Good morning, Quintin.
Quintin Lai – Robert W. Baird
Looking at the – putting together kind of your comments of about the outlook and then looking at the back half of the year guidance, maybe give us a little bit more color on the visibility that you have. I mean, obviously Q3 looks flat relative to kind of Q2 and Q4 picks up. Now Q4 does haven’t looks like an easier year-over-year comp, but you also mentioned visibility in some tenders, is that all this baked into guidance or Peer are you expecting a pick-up in the overall end markets in the fourth quarter?
Peer Schatz
Yeah. Thanks for the question, Quintin. I think it’s important to say that we are basically expecting a very similar underlying performance in the second half of the year, as we’ve seen in the first half of the year. So we are not expecting any changes in the economic environment, which was the original outlook that we had given in early in the year, I think and good company with many other participants in this space that there would be a reduction in unemployment, improvement in the healthcare markets, and we see an improving market outlook in the second half of the year.
This is now being taken out of the underlying business expectations for the second half of the year. So is similar performance for the second half of the year as we’ve seen in the first half of the year. The one twist to that is that with our several larger development milestones and from the companion diagnostic partnerships and also the – some very significant national tenders that will lead to revenue recognition in the fourth quarter versus the third. And these dates are typically set well in advance and it so happens that revenue recognition for those that fall into the fourth quarter versus the third. But if you take those one time kind of like this more, these two allocations of revenue into the fourth quarter out of the picture, the underlying base is now pretty much assuming the same environment as we have seen in the first-half of the year.
Quintin Lai – Robert W. Baird
Okay. And then kind of as a follow-up question here. QIAsymphony placements were again a good quarter understand reagent rental. As we look forward, the reagent rental model usually means that we start to see revenues, start to become a recurring item here over the next quarters. Those systems that you are placing, can we assume that they are on the upper end of the $330,000 to $300,000 reagent fulfill rate?
Peer Schatz
It’s difficult to call a trend right now because the RGQ system with the corresponding assays have been rolling out now over the last nine months basically, and the encouraging news is that we have many accounts that are actually pushing the height limit of this number. And this, if you calculate the throughput of the system and the potential pull through, it’s actually much higher than $300,000 a year, but we are seeing a number of customers pull this very, already pushing this very high numbers. So I wouldn’t call this a trend yet. I would take the average lower than that, might be in the range of 150 right now. But this could be – this could simply be an early indication of where everything is going as the menu expands.
In diagnostics, the game is always the same. You basically create a platform. You aggressively roll that out. That’s the phase we are right now and at the same time you expand your menu which we’re also doing. We talked about companion diagnostics, APSI gen and some of the virology assays and transplant panels that we already have, that already passed the regulatory hurdles are being submitted and that creates an exponential sale after that. Once we have a critical mass menu in the regions, also in Asia and the United States, I think you’ll have a much clearer picture but the number is very encouraging and it’s on the high end currently.
Quintin Lai – Robert W. Baird
Thanks.
Operator
The next question comes from Mr. Quirk. Please state your name, company name followed by your question.
Bill Quirk – Piper Jaffray
Bill Quirk from Piper Jaffray. Good afternoon, everybody.
Peer Schatz
Good morning, Bill.
Bill Quirk – Piper Jaffray
So, a couple of questions here I guess just to – I guess take Quintin’s question and dig a little deeper here, in terms of the delta on the timing for the recognition of the tenders in the third and fourth quarter, is there any way to just quantify that and just to make this I guess a little more obvious to tease the two out.
Peer Schatz
Yeah. Roland, do you want to take that one.
Roland Sackers
Yeah, sure. I think I stressed that before we – in the past we won a couple of these large HPV tenders and also seen that coming in as well and so what we see here is that normally we have this equally spreaded over the quarter and especially one tender is something where we – as first said before expect more revenue recognition in fourth quarter, as well as the third quarter and partially also in the second quarter. And that gives clearly for the fourth quarter just out of that low double-digit million U.S. dollar amount.
And in addition to that we clearly pushed ahead quite significantly for the last couple of weeks with our KRAS filings. And therefore, of course, we expect other milestone related – development milestone related revenues more for the fourth quarter than for the third quarter.
Peer Schatz
Okay. Yeah, that clearly both together gives an – I would say dysfunctional allocation between the third and fourth quarter. Normally should spread more under both quarters quite equally. Definitely we pulled it out very detailed for the third and fourth quarter.
Roland Sackers
Okay. Very good. Thanks for the extra color there. Appreciate that. And then secondly, Peer, just to talk a little bit, I guess, dig a little deeper into the academic market, you mentioned that obviously condition in Southern Europe remain challenging that there appears to be a bit hesitation among some of the U.S. customers as people waited to do it, (inaudible) supposed to check out. To what extent can you comment on just shifting priorities from the customer base to like modalities sequencing, for example, is this playing a role in what you are seeing in the underlying business? Thanks.
Peer Schatz
Yeah. Good question, Bill. There is definitely a shift right now in some of the spending, which probably is temporary and caused by the ARRA ending continuing. So there is still rollout of the number of stimulus moneys that are being allocated typically towards larger ticket CapEx items.
The underlying growth of the academic markets is currently very soft and the discussion around potential budget cuts in the national institutes of health budgets, but also in other budgets around the world is definitely not creating a lot of certainty and a positive momentum. So there is a great caution right now in lot of these markets.
I think the allocation of funds out of the ARRA and other areas is much easier to do and they are allocated more towards noble big ticket items. But going forward, this will definitely be more difficult.
If you look at the overall markets, the academic markets worldwide, now you are talking of 50, $60 billion market or so. And so even if you assume that there is a net impact capital decreases down and next generation sequencing up, but a few hundred million maybe and up to a couple of billion dollars. At some point in time, this is not a huge enough unlike allocation to really change the momentum of these markets.
We are interpreting the majority of this impact right now to budget uncertainties that are not associated with one-time longer plan, larger capital equipment investments.
Bill Quirk – Piper Jaffray
Got it. Thank you very much.
Peer Schatz
I’d like to maybe highlight if you look at our underlying growth, it this pretty much the industry. There are a number of other players in this industry. They are showing very similar performance in this area, and in particular, in the molecular technologies that (inaudible) showing premium run rates in this space and have gone to a very conservative overall growth in the first half of this year.
Bill Quirk – Piper Jaffray
Got it. Thanks, Peer.
Peer Schatz
Thanks.
Operator
Your next question is from Ms. De Lima. Please state your name, company name, followed by your question.
Brigitte de Lima – Bank of America Merrill Lynch
Good afternoon. Brigitte de Lima from Bank of America Merrill Lynch. I’ve got two questions with a few sub-questions in between. The first one is on Cellestis. You talked about some significant investments to migrate the Cellestis test into the Qiagen platform.
Does this in any shape or form comprise your original targets achieved on adjusted operating profit margin of around 31% by the end of 2013? Are you now finding that you’re having to invest more than you anticipated? And then a second question is again on the QIAsymphony.
How do the 475 placements i.e. around 75 traditional placements in the second quarter compare to your original internal expectations? And also, could you provide any color as to what the split is between placements in Europe versus other countries like the U.S.?
Peer Schatz
Sure. Thanks for clarifying the statements I made around the Cellestis or giving me the opportunity to clarify them. We had already planned for the transition of the Cellestis assays onto our platforms when we gave the outlook for investments and expenditures and accretion from this transaction in April. So, these expectations are fully baked and the programs are well underway.
In particular, also we’ve added the point-of-need testing platforms, which are seeing significant interest now to have the latent TB test is part of the testing menu for them. So that is rolling out fully in plan and there’s no change to our forecast in terms of expenditures and accretion and timeline.
The second question was in terms of the roll-out of the systems. If you look at the numbers as they’re rolling out for these very complex systems and the menu that is unfolding, the numbers are good for this second quarter, as well. If you annualize that, you get to good numbers. And we feel very good about the outlook and the funnel.
We can’t give the internal estimates here. We always want more, but we’re building a very good funnel. And as we discussed before, the pull-through of assays is actually very good as well. It’s probably even higher than what we originally expected. The allocation geographically reflects the availability of menu.
So we have substantially more placements currently in Europe than we have in the United States. But the United States numbers are ramping up very quickly and the pipeline is actually very fairly weighted. So we expect to see assays become available for the QIAsymphony RGQ system.
There are a number of reagents and ASRs and other products that customers are using in various ways. But as we are clearing more menu going forward, we have a number of submissions in the foreseeable future now for this system as well, there will be a very similar ramp up of the – or the weighting will become very similar and also the consumables pull through will become more similar as well.
In Europe, we’re offering the full menu, and where we are extremely strong is actually in the blood virals, hepatitis and HIV in addition to some of the esoteric testing panels that we are very well known for and we expect a similar picture to emerge in the United States as these assays become available.
And would like to add to that, Cellestis will be for 2011, again, just to reconfirm that accretive by 2 to $0.03 on adjusted EPS, so we see there significant pick up in profitability once we have migrated them to our platform. 2012.
Brigitte de Lima – Bank of America Merrill Lynch
Thanks again.
Peer Schatz
2012, Roland.
Brigitte de Lima – Bank of America Merrill Lynch
Yes 2012, yeah.
Operator
The next question is from Mr. Blum. Please state your name, your company name followed by your question.
Holger Blum – Deutsche Bank
Hi. Holger Blum from Deutsche Bank. Just three questions. First one on clarification on the HPV tender. Did you win the tender already or are they still to come?
Second question would be on the reagent rental contract. Maybe you can give us some background here, what is the proportion of these kind of contracts today? And maybe you can say how that was two years ago and how it might be in two years’ time from now? And maybe if you can also from your perspective, share your thoughts on the MPV and these new contracts. Is it overall MPV neutral or if you have later on maybe high margins on the consumables. Or is it maybe still more negative or any kind of guidance there would be appreciated.
Third question would be just on the – an update on the Abbott’s HIV Hepatitis C tests, when do you expect the launch there? How is a transformation progressing there? Thank you.
Peer Schatz
Yeah, thanks. Okay. The first question was regarding the tenders. Yeah, we don’t want to highlight any specific tender or give too much detail on. These are obviously competitive situations. But we were constantly winning tenders and also large ones and we wouldn’t be putting them in if there wouldn’t be a very high certainty that we have them or that we already have them. So we feel very confident in these projections.
Holger Blum – Deutsche Bank
Okay.
Peer Schatz
Number two is the reagent rental distribution. The reagent rentals were almost zero two years ago. We had very few reagent rentals. Today, on the QIAsymphony it’s more than half, it’s probably approaching three quarters. And at some point in time, I would say in two years out that number will probably go even higher. As I said in the last quarter, the reagent rentals are very good sign, because this means that the laboratory is actually willing to commit their own revenue stream to using this platform. If they just buy the system to play around with it, it’s a different story. If they buy the system and commit to using our assays, that means they are shifting their own revenue generation or services in other words to relying on our assays as well. But we’re very pleased with this pickup, and the NPVF this is very positive. So we’re putting in very conservative financial metrics getting quick paybacks of these systems and the consumables have a high degree of profitability. So these systems pay very quickly for themselves.
Holger Blum – Deutsche Bank
Okay. Last question was on your arrangement with Abbott and the HPV launch timeline?
Peer Schatz
Yeah. There is really nothing new to say on that. We’re in development right now on these assays and are moving forward to bring them forward to the market. We wanted to once we have the development plan fully laid out and also the regulatory pathway cleared. These assays are little more complex. We will come out with that on that, but I assume this would be – around our Analyst Day we’d be happy to give details on that. But it – definitely it remains a very important cornerstone of our assay portfolio that we see for the foreseeable future.
Holger Blum – Deutsche Bank
Okay. Good. Well, maybe last question, although it’s maybe a bit early for you to comment on it, would you dare to provide any kind of organic growth projection for 2012 or that’s too early at this stage, or do what you think is feasible?
Peer Schatz
I’d probably like to answer it this way that the current underlying performance is definitely not satisfactory and we are adapting the company to achieve also with the underlying business a better performance. We were talking about changes that we made to the channels, changes that we made to emerging regions, changes that we made to also some allocation of resources among the various customer classes.
But what we’re doing on top of that while still a smaller percentage of our overall sales is moving ahead very nicely and I’d like to highlight the companion, our personalized medicine initiatives that we have and QIAsymphony rollout, and also the progress of our QIAensemble development program, which is moving on very nicely now in its new format, and going forward we think even further increase our competitiveness here.
So a lot of things that are adding growth, inflection points now over the course of 2012 that we’re looking forward to generate. We had the first landmark submissions of KRAS as a companion diagnostic as I said before. You can expect a second one this week as well, and these things will hopefully provide a very good increased visibility of the growth opportunities that we have for 2012 that we will put into numbers when we give guidance for the full year.
Holger Blum – Deutsche Bank
Okay. Thank you.
Peer Schatz
Thank you.
Operator
The next question comes from Mr. Peterson. Please state your name, company name, followed by your question.
Tycho Peterson – JP Morgan
Yeah, it’s Tycho Peterson from JP Morgan. Peer, on your comments before the academic market, I think you also talked about accelerating your direct sales channels. Can you just talk a little bit more about what that entails?
Peer Schatz
Yeah. Thanks, Tycho. That definitely is an important trend. What we’re seeing right now is that we have to aware in the academic markets that the majority of the academic customers, I’d say 80% or so probably never even see a sales person. And even largest players in the space have only a limited reach or touch points into their effective customers. So what most people are exploring right now and we’ve really taken a very strong and may be in some cases call it a leading position and is exploring how to increase the number of touch points into academic customers using novel techniques, it’s not only electronic, it’s also using call centers and similar.
And these services are being received very positively by our customers. And we started that much more actively last year and we always had an insight sales activities much more refined and mandate. And we started that early this year and are continuing ramp it up as we see the market shifting. And there is definitely a shift in the academic markets and it needs a change in response and this is – we’re responding to it.
Tycho Peterson – JP Morgan
And then on may be just shifting over to QIAsymphony are you able to talk it all about what percentage of the systems that are out there have been competitive wins? Or alternatively upgrades to existing instruments it’s got to be one or the other presumably?
Roland Sackers
Yeah, I’d say almost all of them are competitive because they typically are dense retenders and or at least to a comparative process. And so I think, it’d be very rare to say that there is – we obviously have many extremely loyal clients and customers who are extremely valuable often to us where we’ve been – would have a natural upgrade. But the majority are clearly looking at whatever might be considered a competitive system in the marketplace, but we have been providing very, very clear wins.
And the win rate has been very impressive. This is also reflected, if you look at some of the numbers of these systems out there. They are typically – after five years, 10 years or so to be in the several hundred maybe a little bit over thousand. And we in a very short period of time are now approaching 500 systems, it just shows that there is a significant adoption that we’re getting here and it definitely is a sweet spot in the market. What we need now is, for the assay pull-through to come through for the money to expand on these systems and that will generate very substantial returns for them. But we’re currently in investment phase of this rollout.
Tycho Peterson – JP Morgan
Okay. And then the comments on China were a little bit surprising around the molecular diagnostic business. Can you just elaborate on – I know it’s a nascent market for you, but what the underlying dynamics are there?
Roland Sackers
Yeah. While we have a very strong activity in China and the market is definitely growing, but we had more hopes for the Chinese market because we made substantial investments in 2010 to create a clinical sales channel. The clinical sales channel very comparable to what we have here in the United States is creating demand for in particular HPV testing. But also other assays that we have in the portfolio we have a number of SAP approved assays in China. Just expanded the portfolio actually in the first half of the year again quite considerably. So there was a hope that this clinical sales channel, which would provide similar gross stimuli to the underlying business then we’ve seen here in the United States typically have effect. And this was a little bit slower. It has to do with the way that the Chinese market works. It was absolutely the right decision to do. And we expect to reap the benefits of this clinical sales channel, future period, but it didn’t come as fast as we originally thought. And then the focus and attention that we put on to this distracted it from other areas made the growth a little bit more subdued in the MDx market. So we didn’t typically see the 30, 40% growth than we typically see in this market. We saw similar in the life sciences, but in the MDx area we see what – seeing what we think is a temporary dip in that growth rate, which would – should reemerge.
Tycho Peterson – JP Morgan
Okay. Then last one on HPV, I understand you don’t want to give a lot of color on the tenders. But is there any change in kind of dynamic around pricing terms, duration of contracts, technology out clauses, other aspects that you’re hearing about the market?
Roland Sackers
Sure. Well, the market – actually our revenues HPV grew in the North America in the second quarter. So it came from very soft performance in the first quarter into growth in the second quarter. We have actually been very successful in the full light of a – of competitive products from strong companies, been able to climb and extend and expand dozens of contracts again in the first half of this year. And we see a very strong competitive profile increasingly emerging.
Now this is helped by a number of things. First of all our platform expansions, so called QIAensemble, the evolution program, which I think is a little bit underestimated in public view, but I think if you talk to laboratories you see that the addition of these modules that we put on to the existing Rapid Capture system make this a very, very competitive workflow. And the – and that going forward is creating a good opportunity for us to continue our very strong competitive position.
There is one thing that I’d like to highlight as well, you know, we had some recent very important announcements last week on the IOM, that decided to add HPV testing to a Preventive Services Task Force list. And this basically would remove co-payment, or in other words significantly reduce or eliminate the link to economic trends. But I don’t want to overplay, but this is an extremely important decision that was made by the IOM, obviously an extremely important body that decided to come out to support this.
So going forward starting 2013, when this will affect the co-payments, we’ll probably even start early as insurance companies are starting to move over to accept these new standards. We’ll remove co-payment from HPV testing detaching it then from economic trends and making it a much more robust and independent and reliable revenue stream.
The interesting thing is that the focused areas on negative predicted value, which really only QIAGEN can prove in long-term studies. And it focuses on HPV DNA based testing and clearly also limiting a technology that has been applied. So, there are a number of very important trends that are working for us here and we’re actively also shaping this market.
Tycho Peterson – JP Morgan
Okay. Thank you.
Roland Sackers
Thanks, Tycho.
Operator
The next question is from Mr. Welford. Please state your name, company name and your question.
Peter Welford – Jefferies
Hi, it’s Peter Welford from Jefferies. Two questions. Firstly, just going to the applied testing, as interestingly you comment about weak instrument sales, I wanted to give us some more visibility on why in particular applied testing you think you’re seeing a slowdown in instrument placements there.
And then, perhaps secondly then, just looking at the reagent rental agreements, do you put in place for these agreements minimum purchase requirements for the customers and how do they – how do you, I guess lock in the customers for those agreements, or is it a moment relatively flexible given the early stage of the roll-out of these products. Thank you.
Peer Schatz
Thanks. Good questions. Second one is the minimum number of sales. Yes there is a contractual commitment that the client gives in terms of assay or consumable pull-through or revenue pull-through to Qiagen. So that is the underlying dream that we use for our financial analysis and it’s based on commitments.
Number two is the applied testing automation growth that I would attribute more to timing and to year-over-year effect. The applied testing team is moving ahead very nicely. We’re seeing very good trends in this space and we expect them to make or exceed their target. So this also includes the instrumentation components that are working very nicely for them, as they are also leveraging the QIAsymphony, RGQ and components.
Peter Welford – Jefferies
That’s great, thank you.
Peer Schatz
Thanks.
Dr. Solveigh Mähler
And with this I would like to close the conference call by thanking you all for participating. We hope to welcome you again to our third quarter 2011 earnings conference call on Thursday, November 03, 2011. If you have any additional questions, please do not hesitate to contact us. Again, thank you very much and have a nice day. Bye, bye.
Operator
Ladies and gentlemen, this concludes the Q2 Investor and Analysts Conference Call of QIAGEN NV. Thank you for participating. You may now disconnect.