QIAGEN's CEO Discusses Q3 2011 Results - Earnings Call Transcript

 |  About: Qiagen N.V. (QGEN)
by: SA Transcripts

Solveigh Mähler

Welcome to the QIAGEN Conference Call to discuss our results for the Third Quarter and first nine months of 2011. A copy of the corresponding announcement and the presentation for this conference call can be downloaded from the Investor Relations section of our homepage at www.qiagen.com.

I would like to take this opportunity to remind you of our Investor Event on November 17, which will be held at the Association for Molecular Pathology 2011 Annual Meeting in Dallas at the Gaylord Texan Hotel and Convention Center. This event will also be webcasted live and accessible on our web page.

Before I turn over to Peer Schatz, please keep in mind that the following discussion and the responses to our questions reflect management’s view as of today, November 3rd, 2011.

As we share information to help you better understand our business, we will make statements and provide responses 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.

For the description of risks and uncertainties please refer to the discussions and reports QIAGEN has filed with the U.S. Securities and Exchange Commission.

With this, I would now like to hand over to Peer Schatz. Thank you. 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 third quarter of 2011 and also for the first nine months of the year.

As you saw in our release last night, we delivered moderate sales growth in the third quarter, however fully in line with our targets. And we also exceeded our goal for adjusted EPS. We achieved these results against the backdrop of the expected challenging business environment one that has not improved so far during the course of 2011.

We have reaffirmed our sales expectation for 2011 and expanded our adjusted EPS target. Achieving our sales target is important for us to be able to accelerate full year sales growth in 2012, compared to 2011.

Our sales in the third quarter were up 1% at a constant exchange rate and rose 5% on a reported basis. We were particularly pleased with the double-digit growth in Europe, Asia Pacific, and Japan. The first time consolidation of Cellestis and Ipsogen also supported our performance.

Instrument sales were up 8% on a constant exchange rate basis. This was driven by targeted initiatives across our broad portfolio. A key focus is obviously, the ongoing global rollout of QIAsymphony and the demand from customers for this modular platform that is setting new standards for automation. For QIAsymphony, we are starting to see more of the positive impact from the shift to reagent rental agreements.

Our revenues are recognized on a pro rata basis over the time of these multiyear contracts that began earlier this year. While this is not fully reflected in sales for the current period, it increases sales in future periods.

So, we are very pleased with the rollout, which we have said involves a long selling cycle. We are on track to reach more than 550 installed systems by the end of 2011, and we are only in the early years of this decade long product cycle.

Among the customer classes, the strongest contributions came from Academia and Pharma. Now this may seem surprising given industry commentary on the uncertain academic funding environment and Pharma industry cost cutting, while we saw major benefits from various marketing and sales efforts.

In Molecular Diagnostics, in addition to contributions from QIAsymphony, higher sales were achieved in profiling, where our products are used for instance viral load testing and personalized healthcare where we are strengthening our leadership position in companion diagnostics.

Prevention sales were down. And as we said on our last call due in part to the timing of a national tender deliver for HPV test. This tender is now confirmed for the first fourth quarter of 2011. So Molecular Diagnostics should see a stronger growth in the last quarter this year.

HPV test sales were also lower in the U.S. As we have said in the past, we are taking actions to solidify our leadership and this has included closing multiyear contracts with our customers in improving automation for our gold standard testing solutions. We will discuss this point later.

Moving on to our strategic initiatives. We have been saying 2011 is a transition year as we build our portfolio of Molecular content and rollout QIAsymphony. These actions will create growth opportunities in 2012 and beyond. This progress is reflected in the milestones that our teams have achieved to drive our platform success with our automated systems, add content to our platforms, broaden our geographic presence, and grow efficiently and effectively.

We have been very active in personalized healthcare. In the United States, we completed the second of our two submissions for our KRAS biomarker test. Each submission pairs this biomarker with a medicine for treatment of patients with metastatic colorectal cancer. FTA decision times on pre-market approval submission or PMAs are usually about 12 months. So we anticipate receiving decisions by mid 2012.

These are important achievements to-date from our more than 15 co-development projects underway with major pharmaceutical companies. In fact, we also added two new projects in the third quarter with existing partners Eli Lilly and Pfizer. I will talk more about these projects later.

The acquisitions of Cellestis and Ipsogen also provided contributions for the first time. We are pleased with our performances, and the integration processes are moving ahead quickly.

In summary, we met our sales target for the third quarter, and beat our adjusted EPS target, and are reaffirming our expectations. We are clearly not growing yet at the level that we believe is satisfactory, but our strategic initiatives are on track. They will help us deliver on our targets for 2011 and grow at a faster pace in 2012.

Before we get into more depth, I would like to hand over 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 third quarter of 2011 for QIAGEN have been largely as expected, delivering on our targets for net sales, but meeting our goals for adjusted EPS.

Recapping the key numbers. Net sales in the third quarter was 5% and it was 1% at constant exchange rate to US$288.9 million over the third quarter of 2010. As Peer mentioned, instrument sales were up 8% constant exchange rates, whereas consumers and related revenues were flat.

Looking at this from a customer class perspective, we had higher contributions from Academia and Pharma, which however will offset the Molecular Diagnostics for the reasons Peer described before.

Moving below net sales, the adjusted gross profit margin remained relatively flat, despite higher instrument sales as adjusted gross profit increased 5% from approximately US$207 million.

SG&A expenses were up 50% over the third quarter. We are making investments as a whole out of QIAsymphony. This initiative is targeting customers in Molecular Diagnostics, as well in clinical research in Academia and Pharma. We are also seeing good interest from Applied Testing customer.

Adjusted operating income was down slightly to approximately US$75 million from about US$79 million in the third quarter of 2010. Key factors were sales and marketing investments to globalize the Cellestis and Ipsogen portfolio, following there recent acquisition, as well as investments in the emerging markets of India and Taiwan that QIAGEN holds direct operations in 2011. So we are still executing on our mid-term operating leverage program and have a goal of 31% or better by the end of 2013. And we will give you more insights on this topic at our upcoming investor event.

Moving further down, the income statement, financial income was higher in the third quarter of 2011, as we benefited from the changing interest rate environment. Other income was also higher and the reported results included a one-time currency gain of about US$10milloin that was recognized as part of Cellestis acquisition. But this amount was excluded from our adjusted net income and EPS figures.

This slide obviously can be volatile and it has swung between a loss of about $2 million to an income of about $3 million in 2010 and 2011, and this has mainly been driven by foreign currency movements. For modeling purposes, you should consider a slightly positive contribution of US$500,000 third quarter and a bandwidth up and down of $2 million from this figure.

Our adjusted diluted earnings per share were $0.24 per share in the third quarter compared to $0.25 in the same period of 2010. Remember that we had indicated dilution of about $0.03 per share to full year adjusted EPS due to planned sales and R&D investments in Cellestis and Ipsogen after the acquisition.

We had been anticipating about $0.02 of dilution in the third quarter and about $0.01 in the fourth quarter. Although the overall impact has not changed, this has been inverse. I mean here that we had about $0.01 in the third quarter and we now anticipate about $0.02 in the fourth quarter.

In summary, the third quarter for QIAGEN was largely as expected in terms of sales and they surpassed our adjusted EPS target.

I am now on slide 6. We were particularly pleased with the double-digit expansion in the Asia Pacific, Japan region, and also in the Europe, Middle East Africa region. The Asia Pacific and Japan region returned to its role as a strong growth contributor, recovering nicely from the disrupted events earlier this year.

Net sales was 90% in constant exchange rate and gains were seen in all customer classes. In particular China returned to a stronger growth profile, it’s contributions for Molecular Diagnostics and Life Sciences. Japan demonstrated solid gains across all customer classes as well. We saw so strong demand in particular in Forensics.

In the EMEA region, where sales rose 50% constant exchange rates, we are seeing solid growth in Molecular Diagnostics, particularly for our QIAsymphony platform, since we have a very broad menu in this region.

So we are seeing strong demand for the automation platform and also rising consumers flow through levels, as customers become more and more accustomized to it’s benefits. The benefits are becoming increasingly apparent to customers about what our platform really can offer in terms of laboratory automation and workflow consolidation.

Academia grew at a single digit pace in Europe with expansion particularly driven by the northern region despite increasing overall pressures from the implementation of government authority measures. Finally, in Southern Europe, we continue to face a number of forces working against us, but other areas are more than offsetting this modest impact.

The temporary distortion of results for the Americas where sales were down 12% constant exchange rates overshadows the important contributions from other areas of our business.

As we mentioned earlier, this regional decline was due mainly to the timing of a national HPV tender outside the U.S. and also by weaker HPV sales in the U.S. As noted earlier, we expect better results in the Americas in Molecular Diagnostics in the fourth quarter of this year.

Pharma delivered solid growth in the U.S., while Academia sales were slightly higher but still impacted by budget concerns. This ongoing uncertainty over NIH budget in 2012 remains a key issue in the U.S.

This discretionary budget cuts in the U.S. are having an effect on grant funding rates. We believe, this will be continue to have a direct impact on some of our customers in the U.S., until we get greater clarity on budgets.

Moving on to slide 7, I would like to provide some comments on our financial position after the first nine months of 2011. As of September 30, our group liability stands at US$486 million. Our equity ratio is at 65% and our leverage is now at about one times net debt to adjusted EBIDTA.

Free cash flow for the first nine months in 2011 was approximately US$109 million compared to approximately US$108 million in the same period of 2010.

For the third quarter, free cash flow was US$42 million and this was down from US$66 million in the third quarter of 2010. Free cash flow in the third quarter was affected by higher inventories. We are now relocating some manufacturing activities to our site in Hilden, Germany, after completing construction project. Another factor that broadened our cash flow was the impact of contract to hedge a portion of our foreign currency exposure.

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

Peer Schatz

Yeah, thank you, Roland, and we are now on slide eight. I would like to provide some perspectives on the performance of our four customer classes.

Molecular Diagnostics, which represented 46% of net sales in the quarter, declined 5% on a constant exchange rate basis. As we mentioned, earlier we saw strong instrument sales particularly from the Global QIAsymphony rollout, and also growth in Profiling and Personalized Healthcare, while prevention was lower due to the reduced HPV contributions in the Americas.

Applied Testing, which provides 7% of net sales, has been facing a similar situation during 2011, double-digit growth in consumable, but weak instrument sales, which can be very volatile. This resulted in steady year-on-year sales. A key growth driver remains human identification in forensics, where we are benefiting from new European standards. We also have one national police tenders in Eastern Europe and Asia. In food safety and veterinary we are obtaining approvals for our food and veterinary assays particularly for use on QIAsymphony.

I would like review Academia and Pharma together, since we are seeing some similar trends. Compared to the first half of 2011, we saw solid growth in both customer classes with Pharma up 6% on a constant exchange rate basis, and Academia growing 7%. A key driver was our decision to step up the expansion of our direct marketing channels; I know they are trying touch points to our customers. We have also launched initiatives putting a stronger emphasis on science based selling and in particular on our range of products for cancer research from basic research to translational medicine and then drug discovery and development.

We are pleased with these results, but the overall environment remains challenging. In Academia, increasing budget pressure is affecting buying patterns among customers. And in Pharma although we are benefiting from sustained demand from Molecular technologies, you can see from recent announcements that many pharmaceutical companies are intensifying their cost containment measures. But we are going to intensify our focus on growth initiatives in these customer classes, particularly Academia given the strategic importance as an innovation driver. And we anticipate these customer classes to provide single digit constant exchange rate sales growth in the fourth quarter this year.

Moving to the next slide, we are making good progress on our strategic initiatives, all of which are supporting our objective to leverage our leadership in sample and assay technologies across our four customer classes. First and foremost we want to drive platform success underpinned by the rollout of our flagship platform QIAsymphony worldwide. Our top priority remains increased placements and improve the utility of this instrument with an expanded menu.

We are in the early stages of a platform and content story that will play out over the next five to ten years. This will lead to increasing sales growth as we expand the menu of assays available for use on a growing installed base. The full version QIAsymphony RGQ, which includes pre-modular elements for sample preparation, assay setup, and real-time PCR detection with a Rotor-Gene RGQ, was launched at the end of 2010, so about a year ago, and we are pleased with the uptake. We anticipate reaching an installed base of more than 550 installed systems worldwide by the end of 2011. We are also seeing strong growth in demand for consumables used on this system. Every placement creates an opportunity for annual consumable sales or so-called pull through of anywhere between $30,000 and $300,000.

We already have a number of customers with annual consumable levels well above $100,000 to $150,000. These types of initial results, particularly given that the full version was launched only in late 2010 in Europe, and early 2011 in the U.S., gives us confidence about the longer-term substantial growth potential.

In addition to QIAsymphony, keep in mind that we are also selling more than 600 new Rotor-Gene RGQ real-time PCR platforms every year and there are already more than 6,000 of these platforms around the world. Customers using these Rotor-Gene RGQ systems are natural targets for QIAsymphony and replacing manual steps or the use of our other platforms.

The majority of QIA symphony placements in the first wave are with customers who are adding modules. So, in other words, creating a full QIAsymphony RGQ system. But full off-the-shelf system sales have been jumping significantly as well. We are not aware of any other competitor offering such a broad range of instruments to meet diverse customer needs and then combining this with an extensive testing manual. We will provide more insights on QIAsymphony at our Investor Event on November 17, at the AMP meeting in Dallas.

I would like to now spend some time reviewing how Cellestis and Ipsogen underpin the strategic initiatives, and also provide an update on our perspectives about HPVN initiatives to strengthen our leadership in personalized healthcare.

Moving to the next slide Cellestis and Ipsogen fully support our strategic initiative to add content. We completed the full acquisition of Cellestis in late August and QuantiFERON TB Gold; a breakthrough in detecting latent tuberculosis has been delivering uninterrupted strong growth. Key drivers in the third quarter was a sales expansion in the U.S, Europe, and Japan. We are making investments to quickly address new markets and drive global expansion. We are already investing into sales and marketing initiatives and are planning new R&D projects to develop tests that would detect latent diseases and mirror some of the molecular diagnostic tests that are used in patients with active diseases.

The market potential we are now targeting is the use of QuantiFERON TB Gold as a companion diagnostic to test patients for latent TB status before being prescribed certain medicines. We are launching a new campaign targeting rheumatologists who prescribed TNF alpha blocking medicines. It is well known that the risk of latent TB reactivating significantly greater when using these types of medicines. So we are adding sales and marketing resources to target this opportunity.

Turning to Ipsogen, we now hold approximately 72% of the shares and launched a tender to fully acquire the leader in blood cancer diagnostics. In fact, the most important post-acquisition progress was the agreement with Eli Lilly to develop a companion diagnostic for the JAK2 biomarker, for which Ipsogen has worldwide exclusive license and a great assay portfolio. We anticipate reaching more co-development agreements for Ipsogen biomarker portfolio as well.

Also, of note, was the fact that this JAK2 test Ipsogen’s JAK2 test was chosen in July by the myeloproliferative disorders research consortium to assess mutation loads in two international multicenter trials supported by the National Cancer Institute and Roche Pharma. Key growth drivers are the flagship JAK2 and BCR-ABL biomarker tests. Ipsogen has been seeking to accelerate its expansion beyond Europe and the U.S., and our global operations provide an excellent infrastructure for that. We are also now working on U.S. submission strategies.

I’m now on slide 11. On HPV, we wanted to frame the discussion to explain how we are addressing market dynamics in various parts of the world. As you know, the relative contribution of HPV to total sales has declined in recent years due to strong growth in our profiling and personalized healthcare portfolio. It was about 20% of total sales in the first nine months of 2011 and this is down from about 25% for the same period in 2008.

This is also reflected in the geographic breakdown. About 15% of our total sales came from HPV in the United States in the first nine months of 2011, and this is down from about 20% for the same period in 2008. We are providing this new level of disclosure, since we believe the market is overestimating the contributions of HPV in the United States to our business.

We also see HPV as having a broader strategic role to QIAGEN. It has been key in riding the expansion of our overall molecular diagnostics initiatives. In fact, we generated about 25% of our total company sales from non-HPV areas of molecular diagnostics, so significantly more than the HPV area in the first nine months of 2011, and this is up from about 19% in 2008. So, HPV is providing great critical mass to get more phase time with our customers.

I want to make it clear that we are not talking about bundling but instead maximizing the value of customer relations built up over the years since we entered molecular diagnostics. We have been talking about HPV initiatives for some time. Driving market conversion remains paramount. The recently announced guideline changes are positive for us in many ways. They favor HPV Papco testing and they have put a clinical counterweight against some marketing driven initiatives pushing genotyping for a very small subset of patients.

We have been successful in signing many customers to new multiyear contracts stressing the many benefits of our Hybrid Capture 2 Tests as well as the risks and costs switching. This could be accomplished with only very moderate pricing concessions and this would continue into 2012 but this was to be expected. Customers are also told us that they were very pleased with the rapid capture system the Hybrid Capture 2 Test and again still the proven gold standard but want us to improve automation. So, we are launching the Decapper unit during the second half of this year and working on automation initiatives.

Outside of the United States we also have a high market share with more than 20 competitors. We are working to convert markets to primary screening either from Pap test or even just to implement cervical cancer screening at all. In Europe, we have a leading market share and have won a number of pilots in regional tenders across the continent. These pilots and tenders are done as part of the selection process to implement national screening programs. The decisions on national programs are long-term processes and can’t be delayed and impacted by macroeconomic conditions.

During the third quarter, we for instance won an additional large tender for European country. We are well-positioned in a number of markets to move quickly if decisions are made on national implementation and we are working with authorities.

Primary screening in Mexico using our Hybrid Capture 2 Test has been a major achievement. We are addressing opportunities across Latin America as well as in the Asia Pacific region. These involves our Hybrid Capture 2 Test as well as the lower resource version so called Care HPV which we believe is a commercially viable product to complete a critical role in preventing the burden of cervical cancer.

Turning to the next slide, Slide 12, we have already discussed the new biomarker project with Eli Lilly involving JAK2. We also recently announced a new project with Pfizer that builds on our existing projects for the KRAS biomarker. We have projects on this biomarker with Bristol-Myers Squibb and Lilly for Erbitux and Amgen for Vectibix. These submissions, as you know, were completed in the third quarter for use of this biomarker paired with these medicines in patients with metastatic colorectal cancer. We are expanding the market potential for the KRAS biomarker with this new project with Pfizer since it involves patients being treated for non-small cell lung cancer.

Non-small cell lung cancer accounts for approximately 85% of all lung cancers and it is the leading cause of cancer related mortality in both men and women in the United States and throughout the world.

This is only a portion of our project we have over 15 underway but many are confidential and we cannot and would like not to disclose details we are working on many new opportunities and have more to come.

I would now like to hand back to Roland.

Roland Sackers

Yeah, thank you, Peer. I am on slide 13. We had updated our expectations for 2011 when we published half year results in July. The sectors we noted were the impact of Cellestis Exciton acquisition as well as ongoing changing market conditions, and then also due to the impact of the timing for the HPV tender. We are reaffirming the sales targets provided in July and we have expanded the adjusted EPS range for the second half of 2011 and the full year.

For the first quarter of 2011, total sales growth is expected to be approximately 40% at constant exchange rate. Molecular diagnostics is expected to be much higher than this rate including contributions from the national HPV tender and we are expecting single digit sales growth contributions from the other customer classes. For the full year, we continue to expect total sales growth of approximately 3% constant exchange rate with contributions from organic growth and acquisition. We have also updated our foreign currency exemptions for this period which we anticipate to continue to provide a positive effect on net sales.

In terms of adjusted EPS, we have expanded our previous target of approximately $0.96 to a range of about $0.96 to $0.97, and we have done the same with our target for the second half of 2011 with a range of $0.53 to $0.54. For the first quarter our target is now $0.29 and this effect is updated acquisition impact of shifting of about $0.02 for the fourth quarter, as I had mentioned earlier.

Turning to the next slide, in terms of adjustments to operating income, we expect equity based compensation of about $4 million to $5 million for the first quarter, amortization of acquired IP of approximately US $28 million and business integration acquisition and restructuring of about US$7 million. This is higher than we had forecasted on our July call but is again due to the timing of our acquisition related charges. The full year impact remains unchanged.

Our adjusted tax rate for the third quarter was 25% which was actually higher than the 22% rate for the same quarter in 2010, and for the first quarter we expect the adjusted tax rate in the range of 22 to 24%. For the full year, this would imply a range of about 23% to 25%.

The weighted average number of fully diluted shares outstanding will be around 237 million for the first quarter and 239 million for the full year 2011. Peer?

Peer Schatz

Thank you, Roland. I am now the summary slide before we move into Q&A. As I mentioned at the start, although our growth is not where we wanted to be nor how we foresee it to develop in the future, we met our targets for the third quarter of 2011 in a challenging environment and against timing trends from large transaction and prevention tenders, and from development milestones for companion diagnostic projects.

It is important to see the progress we are making on our strategic initiatives. We are creating a foundation for future growth led by the ongoing strong roll out of QIAsymphony and our initiatives to add content to our portfolio, both through internal R&D as well as through targeted acquisitions of Cellestis and Exciton. And we have reaffirmed our full year guidance supported by a stronger growth profile in the second half of the year. We are also on track to achieve our targets for the fourth quarter.

In closing, we have shown with our performance in the third quarter that we are expanding QIAGEN in 2011 and ready to accelerate growth in 2012.

And with that, I would like to hand back to Mähler to open up the Q&A session. Thank you.

Solveigh Mähler

Yeah, thank you very much, Peer. We are now looking forward to discussing our question. I would like to open the Q&A session by handing over to the operator. Jason?

Question-and-Answer Session


(Operator Instructions). One moment for the first question please. The first question comes from Mr. Lai. Please state your name, company name, followed by your question.

Matt Notarianni - Robert W. Baird

Good morning. This is actually Matt in for Quinn Lai at Robert W. Baird. Starting with kind of the commentary about seeing accelerating growth in to 2012, I was wondering, Peer, if maybe you could help add some color to kind of what you are assuming by end market or maybe kind of the volume dynamics that you might be expecting, just little extra color there?

Peer Schatz

The majority of these impacts come from the year-over-year effects that we had seen in 2011 especially against the backdrop of the continuing slide in physician utilization rate in the US and also the move to reagent rental models and the roll out of the QIAsymphony systems. So, this is kind of more from the year-over-year and comparative level. We saw slower growth in automation as we had seen in the prior year also due to the reagent rentals we also had some the underlying shifts to this end in the physician utilization rates. So, those things should wash out and over the course of 2012 as they seem to be in a more stable as we have seen in the first half of this year. So, that is certainly the major effects that would give us some tailwinds into 2012.

We continue to expect the challenging markets in the academic and pharmaceutical arenas even though our more company specific related initiatives around our clinical research package and packages in pharmaceutical, molecular development supporting solutions are seeing very dynamic growth, and we've been quite successful in also linking those into diagnostic franchises that we have. So that, as you know, is our part of our core strategy.

So, those are the mix that should continue to boost the top line into 2012. We remain concerned about the general market environment but we see year-over-year effects and certain company specific effects giving us more tailwinds in 2012.

Matt Notarianni - Robert W. Baird

Great, thanks for that color. And then just wanted to kind of dive in on the academic since you really are kind of an outlier with the sort of growth that you have reported here given the uncertainty, anything special in terms of whether you're hearing from the field, customer tone, has it ebbed and flowed kind of throughout the quarter given some of the uncertainty out there? Thanks.

Peer Schatz

It definitely is a -- the market has seen quite some challenges right now. And as we know in the United States the budget situation has proven to be a little bit more favorable in 2012 than some people feared but 2013 doesn’t look too good. However, we should never forget that the US academic budgets, we are talking tens of billions of dollars, the NIH budget alone is $10 billion and now we have half a percent of that. And so, the ability to grow in this market is not a factor of the overall market growth. It is certainly influenced by that accelerated or impeded by that, but there remain a lot of growth pockets within the overall academic markets.

In Europe, it’s very similar, so we see strong funding growth in countries like Germany, and very difficult funding situations in Southern Europe and also the UK. So, I think there is no real expectation for the funding challenges to go away over the future. However, we seem to be very well-positioned because contrary to most other suppliers to the academic markets we have been focusing on the clinical application, so being very close to the patient and very close to clinical research and leveraging our ability to transition into diagnostic products. A system like QIAsymphony, for instance, is also going into some academic and pharmaceutical customer areas simply because it can transition into a more controlled and regulated environment and provide a certain degree of quality. And so that is indicative of the type of positioning we are taking in these markets. And those clinical sub-segments are seeing somewhat better growth in the overall just blue sky basis research area. And, I think the few ways of validating that is you see a lot of initiatives being published by government to think about creating clinical development activities within academic research and focusing more on partnering to get innovation actually into utility for patients.


Ladies and gentleman, please reduce your questions to one so that we can let all participants who would like to ask question take part.

The next question comes from Mr. Bonello. Please state your name, company name follow-up by your question.

Bill Bonello - RBC Capital Markets

Thank you. Bill Bonello with RBC Capital Markets. Hey, I am just wondering if you could tell us so that we can get a sense as non-HPV becomes more and more important, what is the organic growth in the quarter was on the non-HPV component of the molecular diagnostics business? And maybe along with that you could tell us what organic growth would have looked like if you hadn’t had the HPV tender issue?

Peer Schatz

Yes, that goes into quite some detail, Bill, and although I will try to answer it a few ways. First the HPV tender was majority of the difference between the growth and non-growth, and so the gap was basically this tender area. We have seen very good growth in the Profiling and PHC areas. We said before that Personalized Healthcare is now growing at 40% clip. And this is not, some people say this is a time we have got three year out business. This is actually very real. We are talking quite significant numbers near-term and we were talking about high double-digit million dollars of sales that we are already generating in this area, and this is continuing to grow quite nicely.

The Profiling area is one where we are seeing also very strong double-digit growth rates in the assay sales. However because a lot of these placements are now under reagent rental people are bundling the modules that they buy to synthesize there QIAsymphony RGQ or combine the complete RGQ under reagent rental contracts, and thereby we are not getting the instruments sales, which we partly got in 2010 from other instruments for instance.

So the growth in the reagents continue to be a very high double-digit numbers. I wouldn’t want to go into more specifics on this at this point in time and maybe something that we could split out on an annual basis.

Bill Bonello - RBC Capital Markets

That’s very helpful. But in general even with your comment on the instrument comparison, which is a bit of a just, as you go forward that growth will look different. I mean in general it sounds like we should think of the non-HPV component of Molecular Diagnostics, as even if it’s growing, at least in the high single-digits or certainly growing at least?

Peer Schatz

Absolutely, absolutely and this was also visible as over the last few years as HPV was actually not a big growth driver, not a growth driver at all. We were using this as a critical mass space to develop our overall Molecular Diagnostics franchise, and have been able to diversify the portfolio quite successfully, which is today, actually quite a broad portfolio across many different disease areas and types of testing. And this has really been our vision over the future. And so the HPV component went from 20% of our sales base down to 15% and is probably over the future even as we continue efforts to covert markets and drive growth in this area, is probably going to be a lower growth area than PHC and our Personalized Healthcare and Profiling.


The next question comes from Mr. Leonard. Please state your name, company name followed by your question.

Dan Leonard - Leerink Swann

Thank you, Dan Leonard here from Leerink Swann. My one question of your parent role and obviously you are looking to drive margin leverage in the business through 2013 and appreciating will get more information at the Analyst Day conceptually how much of this leverage assumption is dependent on assumptions for rapid expansion of sales growth versus how much can you actually achieve if sales growth is more moderate, say in maybe a mid single-digit type of range and what will be the drivers?

Peer Schatz

Thanks Dan, great question. Roland, do you want to take that one?

Roland Sackers

Yeah, sure. Hi, Dan. If you look at our P&L and just looking at our operational expense number, I think you clearly see that we have a significant possibility to leverage operational expenses here at QIAGEN. Also looking backwards we clearly did so and the one thing you have to have in mind, we just closed on two large acquisitions. This clearly also had a short-term impact on our ability to leverage, nevertheless I would believe already in the fourth quarter and for sure in 2012 we will make significant steps forward from the Q3 guidance, which I would call very untypical. And I believe especially around SG&A we have significant leverage opportunities and the -- our comfort zone is somewhere between around 11% of total revenues, investments.

So I feel quite comfortable with achieving our target in that given time period. We will give on the Analyst Day more time, actually more insight in the different initiatives we started and give also benchmark to you. As you know we started certain initiatives around logistics, around certain outsourcing activities, and this is clearly helping us going forward into a very significant way.

In addition to that, also in general, we still had in a majority of all business over the last couple of years I don’t think that there is difference going forward. Also around pricing we were able to achieve the significant pricing opportunities that is going to continue and last but not least in terms of utilization wise, in terms of production, we still are wanting right now another typical leverage utilization rate of 65%, we just spent more volume going forward, we should be able to leverage on that as well. And clearly also makes more molecular less last time transient growth rate, it’s also going to help us proceeding our margin sales and growth here over the next three years.


The next question comes from Mr. Peterson. Please state your name, company name followed by your question.

Tycho Peterson - JPMorgan

It’s Tycho Peterson, JPMorgan. Maybe starting out with QIAsymphony here in the U.S., I’m just wondering if you can give a little bit more color on some of the uptake patterns, I think, in the past you’ve talked about may be half of the reagent rental, half CapEx sales and obviously it’s split between Molecular Diagnostics and Academia. So, any color you can provide on some of the dynamics there, and to what degree you’re getting competitive swap outs as well?

Peer Schatz

Sure. By far the majority of the placements are in clinical areas and followed by applied testing, which has also seen some success with. We will have new packages on the QIAsymphony call coming forward for forensic applications next year. And so, that will probably see stronger growth, also in instrumentation sales it was little weaker this year in some cases in anticipation of that. By far the majority of the placements are in the clinical area. And the placements in Europe where we have enough assays to be able to generate the reagent pull through are all most all in reagent rentals, which is actually great news out of the box. As I said in the recent call, that people put their faith in the system and are willing to commit to multiyear reagent rental contracts. Primarily, in the area of HIV and Hepatitis, but also in the area of Esoteric testing, and even in some cases Homebrew Reagents. So, in the United States it’s there is some packaging around ASRs that people are using and also Homebrew Reagents, and clearly as some of the assays are moving to the clinic and toward submission, and in anticipation of that, we expect a much stronger reagent rental opportunity. But, so it’s almost all of them in Europe and less than the majority in the States.

Tycho Peterson - JPMorgan

And then with regards to HPV, I appreciate the fact you have gone back and locked up a lot of your contracts. I mean are you hearing from yours customers interesting kind of the bundling dynamic and the idea that HPV will be done with chlamydia gonorrhea and taken other tests. How do you respond to that? Obviously, you will have those tests -- some of those tests with [indiscernible] (00:47:39) maybe not trip some many gonorrhea, but how do you deal with that in the near-term?

Peer Schatz

Yeah, the majority of the add-on tests are actually quite easy to develop and not really differentiate products. And there are several suppliers or there will be several suppliers offering these additional tests as well. So, it’s very difficult to differentiate on committee on freak in the future. I think it all has to do with the – with the solution offering that you are giving to the customer, for a lot of customers in the higher throughput area. Most of the systems are matched out anyway and the cost of switching is just quite significant especially if they are thinking about moving to a system, which has different workflows or also different analytes that are being used.

So, the switching costs are quite significant for any customer over the next few years, until alternatives systems are established. We are providing a gold standard highly validated solution that has shown clinical superiority in terms of being able to detect diseases significantly above the potential and existing competition. And so, from that prospective customers feel quite good about running this system, which is running in the high volumes and therefore utilizing the instrument basis that they have on site right now quite well. If you are very comfortable doing that also there is some foreseeable future.

Tycho Peterson - JPMorgan

Last one on capital deployment. Any comments here given where the stocks and any change in strategy, and overall what you view as kind of the optimal capital structure well for the business?

Peer Schatz

Roland, do you want to take that one?

Roland Sackers

Yes sure. Also yeah we will give a more detail update on our capital allocation policy on investor event. You probably are aware also on our recent Analyst General Meeting we asked for approval to do a share buyback. We got an approval of up to 10% and we will give more details, and certainly our thinking on our investor event.


The next question comes from Mr. Quirk. Please state your name, company name followed by your question.

Bill Quirk - Piper Jaffray

Thanks. Bill Quirk, Piper Jaffray. Question for Peer given this as the timing of the tender and ebbs and flows of academic research funding we certainly understand that the North America business had a lot of gives and takes this quarter. If we simply exclude HPV was the business positive in terms of constant exchange rates? And then secondly, give us any color thinking to what the selective business contributions going forward? Thank you.

Peer Schatz

Okay, well, first part of the question I’ll take and the second one Roland if you would take that one. The trends are as we talked a little bit in the prepared remarks have been actually quite good also in Academia based on some of our initiatives in Pharma, and we have also seen good trends in molecular diagnostics. And so, the answer is yes we are seeing growth also in the United States, and excluding these onetime effects and the year-over-year effects of the physician office visit decline. So, it’s not where we wanted to be but in certain pockets we have seen very high growth and those are some of our strategic areas, such as the profile of the QIAsymphony rollouts and personalized healthcare have been doing extremely well.

We have -- we're also are very pleased with the growth of the blood cancer profiling portfolio that Ipsogen is now soon to bring to our franchise, has been doing very well. It’s something we are very excited about. Also, as we can now put it onto our platforms, and as we know this assay is already validated for our systems. And Cellestis has shown some breakthrough standardization achievements in terms of becoming the standard assay to be used in latent TB testing in several guidelines, in major counties we heard about Germany, as I think a lot of you have heard about. Also, the new guidelines that have come up in Germany they called for use of this test. And so, we are going to do more and more of that going forward.

Roland, do you want to give the numbers of the Cellestis and Ipsogen contributions?

Roland Sackers

Yeah sure. As you know, we brought out a press release organic growth in general, but of course Ipsogen was still a small number, and Cellestis was small as it constituted for one month. And you probably have seen the latest financial statement, that has been the lone company whereas it came in roughly with a $50 million run rate on a yearly basis, and we had more than one month -- slightly more than one month in our books.


Ladies and gentleman, again, could I request that everybody restrict their questions to one question, so that we can get all the participants in today. Thank you very much for your cooperation.

The next question comes from Mr. Lima. Please say your name, company name followed by your question.

Brigitte de Lima - Bank of America-Merrill Lynch

Good afternoon. It’s Brigitte de Lima from Bank of America Merrill Lynch. And I will stick to the one question. Just wondering on a HPV as well, I am just wondering how I should think about as the coming quarters for HPV it’s a clearly in the second half, and the fourth quarter you will have this big one-time effect. So, what happens as we go into Q1 sales that will fall back to the 3Q level, or are there more tenders in the pipeline that will sort of take on from Q4 and we should see similar rates? I am just trying to understand how that work, are we going to see big hole again next year?

Peer Schatz

Sure, Bridget. I think the underlying target is to have a rather stable base on the HPV franchise and build on the growth elements that we have around the QIAsymphony platform and the HPV platform. There will be some positive contributions to rollout of our automation systems for the various applications that are now completing the workflow and that will be happening over the next few months. So that could provide a further benefit but in general the overall goal is for us to have -- to see the HPV franchise as stable critical mass base that we are not really expecting growth from but can leverage off new initiatives.

Brigitte de Lima - Bank of America-Merrill Lynch

I can understand that. But I guess the question is more are there any other sort of national tenders in the pipeline because otherwise the only thing that worries me for Q3, we saw a bit of a drop in HPV, Q4 is going to be a big increase. So what happens in Q1 is it going to drop back or as sort of full attendance coming through that will make up so we don’t we see a big shortfall as going to Q1?

Peer Schatz

Right. I think this one tender was simply, it was unfortunately moved into the fourth quarter from the third quarter. So this is why you see now the big growth in Q4 and the low growth in Q3. And normally we have enough of these, but this was just a very large order that moved. We are in so many different tenders and programs, there are dozens of these ongoing right now that we are very active and I would hope to have more of them and also to that downside would be that there would be some increase to this type of exposure, but there is so many that I wouldn’t expect this to have this type of volatility that we are seeing in Q3. It’s rather unusual that we highlighted a deal that would have this type of an impact and I think this is the first time.


The next question comes from Mr. Lawson. Please state your name, company name, followed by your question.

Peter Lawson - Mizuho Securities

Peter Lawson, Mizuho Securities. Roland and Peer thanks for U.S. HPV breakout. Since you have done an excellent job in European placements, can we get a breakout of the international HPV contribution at a similar period? Then how should we think about the run and the pacing for European tenders?

Peer Schatz

Sure. If you look at the overall contribution in the U.S. being 15%, and again that’s the portion that that has gone from basically a two competitor franchise to a four competitor franchise over the last 12 months, and that is 15% of our sales. So, basically 10% market share are worth 1.5% one-time organic sales at QIAGEN. The International portion is the difference between 15% and 20% that we have. So we have actually been quite successful in Europe, where we have over 25 competitors including almost all competitors, including all competitors that are in the United States and many more beyond that and also some very substantial one. So we have actually seen a better growth in this more competitive environment in Europe than we have seen in the United States.


The next question is the last question and comes from Mr. Groberg. Please state your name, company name, followed by your question.

Jon Groberg - Macquarie Capital

Hi, thanks a million for taking the question, its Jon Groberg from Macquarie Capital. Peer, you obviously talked a lot I think as you kind of rightly highlighted concerns amongst the investor base on HPV. Would you mind just driving a little bit more detail about the nature of the long-term agreements that you are able to sign, how long they are, whether or not they are completely exclusive to QIAGEN and kind of what you are giving up on price? That would be great. Thanks.

Peer Schatz

Yeah, well, traditionally in this industry contracts are anywhere between two and five years. That I would say is a standard timeframe that typically is considered one that customers that can enter into quite really, there is a -- there are several clauses that are important when it comes to contract ability to potentially switch technologies if something major mergers or call technology out clause. We have a lot of these contracts that don’t have those. So now we have a very, very committed customer base. And over the next few years, there is a very strong stability in our franchise overall.

The -- when you renegotiate these types of contracts there is always a price discussion and we have to remember that that markets have become a lot more competitive and a lot more difficult and challenging that they were 12 or 24 months ago. And despite that increase in the difference in macro environment, the impacts on pricing has been very moderate. We haven’t detailed that. But customers have been very open to long contracts with moderate price concessions, which we have seen also in 2009, 2008 and 2007 as well, every time you renegotiate agreement there is always a certain discussion around pricing as volumes go up and as the market changes or the customers have more price or cost concerns. So, I think we have been very successful in that record and we are very pleased with the performances of our sales teams and bringing over the value of proposition that we will have to customers. Yeah, that’s I think has much callers I think would be helpful now.

Solveigh Mähler

Yeah. With this I would like to close the conference call by thanking you all for participating today. We hope to come to you again for our fourth quarter and full year 2011 earnings conference call on Wednesday, February 1, 2012. If you have any additional questions, please do not hesitate to contact us. Again thank you very much and have a nice day. Bye.


Ladies and gentlemen, this concludes the Q 3 investor and analyst conference of QIAGEN N.V. thank you for participating, you may now disconnect.

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