QIAGEN's (QGEN) CEO Peer Schatz on Q1 2016 Results - Earnings Call Transcript

| About: Qiagen N.V. (QGEN)

Qiagen N.V. (NASDAQ:QGEN)

Q1 2016 Results Earnings Conference Call

April 28, 2016, 09:30 AM ET

Executives

John Gilardi - VP, Corporate Communications and IR

Peer Schatz - CEO

Roland Sackers - CFO

Analysts

Daniel Arias - Citigroup

Bill Quirk - Piper Jaffray & Co

Tycho Peterson - JPMorgan

Isaac Ro - Goldman Sachs

Jack Meehan - Barclays

Scott Bardo - Berenberg

Steve Beuchaw - Morgan Stanley

Daniel Wendorff - Commerzbank

Doug Schenkel - Cowen and Company

Jon Groberg - UBS

Vijay Kumar - Evercore ISI

Operator

Ladies and gentlemen, thank you for standing by. I am Patrick Wright, your Chorus Call operator. Welcome and thank you for joining QIAGEN's Conference Call to discuss the results of the First Quarter 2016. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded at QIAGEN's request and will be made available on their Internet site. The presentation will be followed by a question-and-answer session. [Operator Instructions]

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

John Gilardi

Thank you, Patrick. And welcome all of you to our conference call. Our speakers today are Peer Schatz, the Chief Executive Officer of QIAGEN; and Roland Sackers, the Chief Financial Officer. Also joining us today is Dr. Sarah Fakih a member of our IR team.

On Slide 2, you see the customary Safe Harbor statement explaining that the discussion and responses to your questions on this call reflect management's views as of today, April 28, 2016. We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations or predictions of the future, and these constitute forward-looking statements for the purpose of Safe Harbor provisions.

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

With that, I would like to now hand over to Peer.

Peer Schatz

Thank you, John, and I would like to welcome all of you to this conference call.

As you saw in our press release, Qiagen is moving ahead on initiative to accelerate growth and drive further innovation in our Sample to Insight portfolio and we saw those efforts reflected in our performance for the first quarter of 2016. Let me go through the key messages.

First, we achieved our targets for the first quarter. Adjusted net sales rose 2% at constant exchange rates, but they were unchanged at about $298 million at actual rates and this was due to two percentage points of currency headwinds.

Instruments rebounded after a weaker performance in the fourth quarter of 2015 with now 6% growth at constant exchange rates for the first quarter. Sales from consumables and related revenues rose 2% on a constant exchange rate basis and provided about 88% of sales.

Adjusted diluted earnings per share were $0.19 at both actual and constant exchange rates, compared to $0.22 in the first quarter of last year and our results were in line with the target we had set for $0.19 to $0.20 per share at constant exchange rates. Adjusted operating income also declined in the first quarter and this was due to the expected investment.

Second, we're moving ahead with our transformation. This was another quarter where you see the power of our growth drivers which now represent about 35% of sales and continue to grow at a double-digit constant exchange rate pace.

Our strategy is to leverage our sample to inside portfolio and continue to build our leadership and providing a range of molecular testing solutions that enable customers to gain valuable insights. One of our advantages is the ability to leverage this portfolio across the continuum from basic research and the life sciences through to clinical care and molecular diagnostics.

At the same time, our growth has been offset to some degree in recent years by declining revenues in the U.S. for HPV test, used for cervical cancer screening. For the first quarter of 2016 and as expected, we saw headwind of about two percentage points and a similar trend is anticipated for the second quarter. However, we expect the headwinds to abate in the second half of the year and to be only about one to two points on a full year basis.

Third, we've announced plans for a forth $100 million share repurchase program. This is a signal of our commitment to disciplined capital allocation, which also includes targeted value creating acquisitions such as with Enzymatics and MO BIO and the public tender offer to declare Exiqon.

And as a final point, we're reaffirming our full year targets for 2016. As we announced in January adjusted net sales are expected to rise about 6% on a constant exchange rate basis with about one percentage points for MO BIO and about five percentage points coming from the rest of our portfolio even when absorbing the U.S. HPV headwinds. These targets do not include contributions from the pending Exiqon acquisition.

I am now on Slide 5 to review some of the achievements for the first quarter. We have a very strong position in a core area of sample technologies and the addition of MO BIO’s products fit very well and have allowed us to accelerate and broaden our Sample to Insight portfolio per microbiome and metagenomics applications.

Another area of sample technologies receiving a lot of attention is liquid biopsy where QIAGEN products have already enabled hundreds of peer reviewed journal articles. In fact, a recent journal oncology article detailed how study at the Dana-Farber Cancer Center on liquid biopsy and non-small cell lung cancer patients has prompted the hospital to begin offering a liquid biopsy based test to all non-small lung cancer patients at that institution.

In Personalized Healthcare, we saw single-digit growth in slightly higher revenues from our companion diagnostic partnership. One announced highlight was the announcement of a new master collaboration agreement with Mirati Therapeutics and their targeted therapy glesatinib as the first project.

Our companion diagnostic will guide treatment decisions based on analysis of RNA biomarkers produced by mutation of the MET gene. Placements of the QIAsymphony automation system had a solid quarter as our teams achieved more than 50 new placements.

We are on track to achieve the 2016 target for more than 1,750 cumulative placements compared to more than 1,500 at the end of 2015.

I am now Slide 6 to review the progress being made with the QuantiFERON latent TB test especially with the rollout of the fourth generation QuantiFERON TB Goal Plus version that has been launched in select markets.

Among the key developments to independent studies were recently presented that reaffirmed the clinical performance and value of the fourth generation test. One study in the European respiratory journal showed it had an even higher sensitivity than the tuberculin test as well as earlier QuantiFERON generations.

While a study presented at ECCMID confirmed the superior performance of QuantiFERON TB Gold Plus to the tuberculin skin test and the other IGRA test in high risk dialysis patients. This is an important group that has a 10 to 25 times higher risk of contracting TB than the general population.

Another important milestone was the Draft B rating recently issued by the U.S. preventive service task force which is a panel of experts in primary care that developed guidelines. This positive rating validates the existing targeted CDC guidelines for TB and will help in the implementation of more latent TB screening in the primary care setting.

This is very positive as QuantiFERON will be recommended as an alternative to the skin test and will be preferred in patients who have received the BCG vaccine and also those who are unlikely to return for the second visit required for by the skin test and this can often involve half of all patients.

As a last point QuantiFERON was also chosen in the National TB tenders in South Korea and Taiwan and this comes after the recent public tender win in the United Kingdom. These were very visible processes due to their size and scope. So we're very pleased that the value and the performance of our solutions were recognized.

I am now on Slide 7 to give you an update on our bioinformatics and universal NGS solutions. We had some important new product launches and developments in the first quarter that have further advanced and expanded our overall offering. As a first point, QIAGEN has won a prestigious award for the second consecutive year at the recent critical assessment of Genome Interpretation or CAGI.

This conference poses a series of complex challenges to assess computational methods from predicting the effects of certain genomic variations. QIAGEN was once again recognized as having the most accurate solutions for solving clinical hereditary disease cases.

RNA-seq explorer is also an important new product launch that brings together ingenuity pathway analysis to COC biomedical genomics work bench and our liquid biopsy kits to analyze and interpret RNA sequencing data. We're very pleased with customer feedback to the launch of the recent American Association for Cancer Research Meeting.

Furthermore, we expanded our universal NGS portfolio with the launch of more than 170 new QIAseq Targeted RNA Panels for NGS based Gene expression and profiling. These are based on a novel panel design and provide a powerful solution for RNA sequencing and analysis on any NGS sequencer; thanks to the integration of our RNA sample technologies with Ingenuity bioinformatics.

Another highlight was our new collaboration with 10x Genomics that we announced at AGBT in February. We're pleased that our relationship with 10x covers both core marketing as well as product harmonization and we're seeking to ensure the optimal utility of bringing together solutions from both companies.

We see significant potential for combining 10x Genomics technologies with QIAGEN's portfolio in the field of single cell analysis and also to align these technologies for use in the GeneReader NGS system to enable customers to gain access to valuable insights.

As a last point, the acquisition of Exiqon would add a top player in the field of non-coding RNA, which is a heart researcher and a synergistic portfolio in RNA analysis in bioinformatics. We believe our offer will create value for the shareholders for both companies and look forward to completing this transaction during 2016.

I am now Slide 8 to update on the GeneReader NGS System and the progress we're making to commercializing the truly first complete sampled insight NGS workflow. Our top priority in 2016 is to develop this opportunity and secure system placements and we're targeting to gain a double-digit share of the bench-top sequencing market for targeted panels primarily in cancer clinical research.

Following the start of commercialization at the AMP Conference in November, we've seen a broad and strong response from customers to this offering and we surpassed our replacement goal for the first quarter this year.

We see that GeneReader has hit the right nerve for customers in clinical research and diagnostics, who are looking for a complete and flexible solution, which provides high utility insights at attractive cost, can scale as volumes grow and is embedded within a strong service and support network that addresses the highest standards.

The positive customer response has been driven by the utility robustness and reliability of our first gene panel test, the QIAact Actionable Insights Tumor Panel to further increase ease of use and reduce barriers to entry for customers new to the NGS technology we have now incorporated a set of oncology standards from Horizon Discovery of the United Kingdom addressing this previously only poorly met need in a way clinical customers we truly expect.

The GeneReader NGS System is now fully compatible with Horizon standard and this achievement provides critical control data to guide and monitor overall system performance.

We chose horizon cell line derived reference standards due to their clinical relevance in the widespread commercial availability. Internal quality controls are a standard component in many other technologies such as real time PCR and aligning these clinically relevant standards for the GeneReader NGS System represents an essential quality controls step and will allow to advance the use of NGS in this rapidly growing segment.

Also on this slide you'll see how we're segmenting the market. This is a complete system designed to meet and manage the needs of clinical customers wanting to use the NGS technology for Gene panel analysis and this is the future of driving NGS beyond the current focus on the life sciences.

Indeed our view is that many labs offering NGS are processing only about 10 samples on average per week for gene panels, but the anticipated growth in GeneReader is optimally designed to help them prepare and absorb the demand.

GeneReader has significant utility for even larger and higher volume labs seeking to create high flexibility yet very robust workflows that can generate insights from actionable panels.

However all of the target accounts for GeneReader NGS Systems involve labs focused on the utility of the insights. They are not willing to face the challenges of managing complex and cumbersome workflows that require a dozen or more vendors and service providers and this is especially true for those entering next generation sequencing and those who want to ensure that they can manage this technology at an acceptable cost.

The positive feedback to our offering is building momentum and this is based on the attributes that we see as been unmatched by others. We're offering a truly complete workflow from the single vendor. GeneReader provides a way to generate valuable and actionable clinical insights to guide treatment decisions and we offer high system flexibility and scalability to address variable lab process demand.

QIAGEN is the only company to offer a transparent and flexible pricing model what we call price per insight that is designed to meet the business meets of the labs. And clinical customers trust our global service network to support them and operating a complete NGS system along with other QIAGEN workflows in their labs.

Moving to Slide 9, I would like to give you a more detailed overview of the QIAGEN GeneReader NGS System development roadmap and our ambitions for the next 12 months.

We have a robust development plan that builds on the foundation of the QIAact Actionable Insights Tumor Panel. We're going to expand the content offering with new multi-gene panels and this involves creating new content to enable Actionable Insights into breast and lung cancer.

For example the QIAact Breast Cancer Panel will also coverage for detection of BRCA-ness tumors. These are tumors that show molecular features which BRCA mutant tumors and may respond to similar treatment approaches.

Also in development is the QIAact Multi-Gene Lung Cancer Panel, which will be launched for detection and analysis of genetic copy number variations. This panel will be complemented by a second lung cancer panel designed to detect specific gene fusions on a chromosome level.

We’re also going to expand the types of samples that can be processed on GeneReader beyond the current ability to process their 50 samples. The most important will be the addition of liquid biopsy and we will also expand the system for fresh and frozen tissue samples.

Updates on the bioinformatics interpretation capabilities are also planned to further improve the overall workflow. We will keep you updated on the progress and the next opportunity will be the upcoming ASCA Meeting in Chicago.

I am now on Slide 10 to show you how we're making progress in bringing together the various technologies in our Sample to Insight portfolio to create more valuable integrated solutions, especially those that address hot areas of life sciences research and are bound to make their way into molecular diagnostics at the same time.

Just one example are the advances being made with liquid biopsy toward becoming part of a clinical healthcare. Another hot area involves microbiome research. We’re able to drive growth in both fields based on our comprehensive sample technologies offering.

We are addressing the needs of customers for even greater sensitivity for liquid biopsy applications in clinical healthcare with new products in our QIAact portfolio and we've successfully implemented technologies from MO BIO into other QIAGEN products to upgrade our offerings for use in highly demanding sample types required for microbiome applications.

As I mentioned earlier, our strategy is to leverage this portfolio and continue to build our leadership and providing a range of molecular testing solutions that enable customers to gain valuable insights.

The efforts we're making today in these heart research areas will translate into additional commercial opportunities in the future as we leverage the portfolio beyond the current scientific focus on basically search in the life sciences and accompany the transition into clinical care.

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

Roland Sackers

Thank you, Peer. Good afternoon to everyone in Europe and good morning to those of you who joining from the U.S. I am now on Slide 11 to review our financial performance for the first quarter of 2016 as well as our outlook for the second quarter and for full year.

As Peer mentioned earlier, we achieved our target for adjusted net sales and adjusted EPS for the quarter. The adjusted net sales growth of 2% at constant exchange rate was made up of one percentage points from the late 2015 acquisition of MO BIO while the rest of the portfolio provided the second percentage points.

In line with our expectations, total constant exchange rate growth had to absorb about two percentage points of headwind from lower U.S. HPV test sales. It’s actually weighs adjusted net sales were unchanged at US$298 million based on the two points of currency headwinds.

Moving down the income statement, the year-on-year decline of 21% in adjusted operating income to $53 million reflected the impact of the slower start to the year in regard to sales growth and also the investments to enhance our mid-to-long term growth prospects. As a result, the adjusted operating income margin declined to 18% of sales from 22% for the same period in 2015.

As for specifics on margin development, the adjusted gross margin declined three percentage points to 70% of sales. Although this was below the trend for the adjusted gross margin in recent quarters, we continue to expect a full year level of at least 70% for 2016.

The result for the third quarter of 2016 was due to a mix of factors and these included a lower gross margin from revenues related to companion diagnostic partnerships, compared to the first quarter of 2015 as well as cost to centralize some manufacturing to our European production hub in Hilden, Germany.

At the same time, we saw some positive margin contributions from the growth of QuantiFERON, but we also have cost to in-source the third party manufacturing for this product to our U.S. production house in Netherlands U.S.

Another factor creating margin pressure for the first quarter was our decision to step up investments in sales and marketing and this reduced adjusted operating income margin by about two percentage points.

Key investment areas include significantly stepping up commercialization resources particular behind QuantiFERON-TB test that we have seen some results in U.S. as well as behind our portfolio for life science customers.

Other investment areas include bolstering our e-commerce channels and expanding our presence in markets such as the Middle East and Asia. On the other hand, thanks to efficiency gains and cost containment measures, general and administration costs were lower as a percentage of sales in the quarter while the investments were slightly higher as a percentage of sales as we freed up resources to redeploy the projects such as content menu on the GeneReader NGS system.

Moving further down in the income statement, adjusted earnings per share was $0.19 and this was in line with the target for $0.19 to $0.20. We had higher net interest income in the first quarter of 2016 but we also saw other income expense bringing to a positive contribution in the first quarter of 2016 due to a mix of factors.

The adjusted tax rate was about 50% for the first quarter of 2016 and this was below the target for 17%. We were able to generate some incremental tax benefits during this first quarter that enabled us to expense the full year target to a range of about 16% to 17%. The weighted average shares outstanding were $237 million, which was in line with our outlook for about 238 million shares.

Moving to Slide 12, I would like to provide you with an overview of the customer classes. As noted earlier, these include contributions from the acquisition of MO BIO in late 2015 and was spread across all customer classes.

In Molecular Diagnostics, the mixed trends from 2015 continued into 2016. On the one hand side, we saw underlying sales growth of 6% constant exchange rate, but this was overshadowed as expected by headwinds from lower U.S. HPV test sales.

As a result, total sales to this customer was 2% at constant exchange rate and provided 48% of sales. After soft sales in the fourth quarter, instrument sales rose at a double-digit constant exchange rate pace, by consumers grew at a single-digit constant exchange rate.

Another topic from the first quarter was the timing of the revenue conditions from company diagnostic co-development projects and these revenues were modestly higher than the first quarter of 2015.

Moving to the life science, the performance in Applied Testing was challenging as sales declined 5% constant exchange rate against the strong performance in the first quarter of 2015. Instrument sales were particularly weaker in the first quarter of 2016 and as we have said in the past, this customer class can be volatile on a quarterly basis.

Our outlook remains for full year sales growth at a higher single-digit constant exchange rate and for better consumable trend. The positive area for the first quarter of 2016 involves the Pharma customer class with sales up 7% constant exchange rate for the first quarter of 2016.

We see some improving demand trends with rising R&D budgets on one side, but also face adverse trends of consolidation and restructuring projects.

In Academia, total net sales rose 2% for the first quarter, although the growth rate was below that's seen in the recent quarters, we anticipate a better trend during the year, in particular a mid-science of scientists in key markets taking a more positive mid-term perceptive on funding.

I’m now on Slide 13 to review our sales on a geographic basis. We saw improving trends across all regions and a highlight was a top seven emerging markets rising 90% at constant exchange rates and providing 13% of total sales.

The Europe, Middle East, Africa region led to overall performance with sales up 7% constant exchange rate and providing about one third of sales. The core markets of the United Kingdom, France and Germany all showed good single-digit constant exchange rate growth while Italy had weaker trends.

The Molecular Diagnostics and Pharma customer classes more than overcame weaker trends in applied testing. Growth in the Americas came primarily from the United States and Mexico. In Brazil, we saw weaker growth trends in 2015 and this is something you have to ask from other companies. When you exclude U.S. HPV tests, the Americas delivered 5% constant exchange with grow for the quarter.

Into Asia Pacific, Japan region, we saw two different trends. Number one, we saw a significant double-digit constant exchange rate drop in Japan, which continues to be a challenging microenvironment.

However, the rest of this region grew about 15% CER. The leading countries remains China, where sales grew about 10% constant exchange rate. We also saw important contribution from South Korea, Australia and Singapore. As a last point, sales in the rest of the world were down about $2 million compared to the first quarter of 2015.

Moving to Slide 14, I would like to give you an update on our balance sheet and cash flows and also some views on the news about our first $100 million share repurchase program. This new program is being initiated after it's authorization for the $700 million program recently expired.

Being completed about $17 million of repurchases and debt program, we see this program as a signal of our commitment through disciplined capital deployment and we intend to continue them while also supporting the business expansion through strategically important bolt on acquisition.

In terms of liquidity and leverage, the net debt to adjusted EBITDA ratio remains stable as about 1.5 times. The new share repurchase program and the completion of Exiqon acquisition, which is expected to cost about $100 million, I’m not expected to have a material impact on leverage as we expect this outflow to be offset by cash generation.

I’m now on Slide 15 to review our adjusted net sales and adjusted EPS targets for the full year. As announced in January, our target for adjusted net sales growth was about 6% constant exchange rate. This outlook is based on about one percentage point of growth from the MO BIO acquisition that was completed in late 2015 and about five percentage points from the rest of the business.

As we mentioned earlier, this does not take into account the proposal to acquire Exiqon and we will provide an update once the transaction is completed. This target also includes about one percentage point of headwind from lower sales of U.S. HPV test.

Moving to adjusted EPS, our guidance remains for growth largely in line with sales as a constant exchange rate and this implies about $1.10 to $1.11 per share on a full year basis for 2016. This guidance also reflects our plan to continue the pace of investments into targeted growth opportunities during the second quarter.

What is interesting to note is that we're anticipating a distribution of sales between the first and second half of 2016 that is not materially different than what we had last year and that is for about 47% to 48% in the first half and about 52% to 53% in the second half.

However, the expense distribution is different, and they're more weighted to the first half of 2016 than in 2015. This was due to our decision to accelerate operating expenditures, significantly faster than sales growth in this period.

This involves plans such as stepped on commercialization -- stepped up commercialization initiatives, such as for GeneReader and QuantiFERON, as well as to expand our regional presence. You see about roughly half of this investment as being onetime costs.

So we expect the growth in operating expenditures to be significantly slower in the second half of the year and to be lower than the sales growth rate. This is why the profit acceleration in the second half is more tied to the acceleration of expenses and cost management since the sales distribution is largely in line with previous years.

Our guidance is based on constant exchange rate, but we also provide estimates of potential currency impact. Based on rates as of April 1, we expect slightly less headwinds than in January.

So, in terms of adjusted net sales, we now expect pressure of about two percentage points on the full year guidance for about 6% constant exchange rate sales growth. For adjusted EPS, we now expect currency pressure of about $0.02 per share on the full year CEI guidance of about $1.10 to $1.11 per share.

Moving to Slide 16, I would like to provide some more details and assumptions for our outlook for the second quarter of 2016 and the full year. For the second quarter, our target is for adjusted net sales growth of 4% at constant exchange rates.

This takes into account two percentage points of headwind from declining US HPV test sales, so it’s underlying sales growth target is 6% constant exchange rate. In terms of adjusted EPS, we have set a target for about $0.22 per share at constant exchange rate and this compares to $0.26 in the second quarter of 2015.

This reflects investments we discussed in our last call on which we’re making to enhanced growth and for adjust4ed earnings growth to accelerate in the second half of 2016.

This slide also contains adjustment assumptions for the second quarter and the full year. As I mentioned earlier the adjusted tax rate for the second quarter is expected to be 16% and we've set a new range for the full year of 16% to 17%.

With that I would like to hand back to Peer.

Peer Schatz

Yeah, thank you, Roland. I’m now on Slide 17 for a summary before we move into Q&A. Let me review what we have announced. First we achieved our targets for the first quarter for adjusted net sales growth at 2% constant exchange rate growth and adjusted earnings per share at $0.19 while moving ahead on initiatives to accelerate growth and drive further innovation.

Second, we're moving ahead on imitative to transform QIAGEN and we're demonstrating success in areas with solid growth prospects. The benefits of these efforts will become even more apparent during 2016 a year with important catalyst.

Third, we've announced our fourth $100 million share repurchase program and this is a signal of our commitment to disciplined capital allocation. We will continue to strengthen our portfolio with targeted acquisitions and look forward to completing the Exiqon transaction.

And as a last point, we have reaffirmed our full year guidance for higher adjusted net sales and earnings per share at constant exchange rates as QIAGEN prepares for an even stronger performance in '17 and the coming years.

With that, I’d like to hand back to the operator for the Q&A session. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question today comes from the line of Daniel Arias of Citigroup. Please go ahead.

Daniel Arias

Good morning. Can you guys hear me?

Peer Schatz

Yeah, good morning, Dan. How are you?

Daniel Arias

Okay, thanks, doing well. Roland on the expense structure, how confident are you in the budget that you have here at this point for your growth initiatives? Obviously between the GeneReader and QuantiFERON and liquid biopsy there is a good deal of market development to be done.

So as you push into these opportunities, I’m just curious what the error bands look like at this point in terms of the investment levels that you’ve baked in?

Roland Sackers

I think we have our hands very well around our expense structures because the reason while I think we've very excellent and explained in early January this year when we give guidance and we delivered exactly what we were planning for the first quarter.

If you look on the areas we decided where we invest in it's a very -- this is very focused activity we could expect and doing quite well. And if you look on the big aspect on the allocation to second slide and fourth quarter, just take first quarter one way and if you would use this as a basis for the fourth quarter assuming for the next three quarters, assuming still there is a certain pick up in the second quarter, you will see that with expected revenue increase we will do quite nicely our guidance. So I guess there is a lot of execution required and nevertheless we're very focused around that and definitely see that.

Operator

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

Bill Quirk

Great, thank you, good afternoon. I've one question and a quick follow-up. So first off and this is somewhat related to Dan’s question, so Roland thinking about the plan consolidation in the first quarter, presumably this should help you in future periods, if so can you just help us think about the magnitude of that and then again I have follow-up, thanks.

Roland Sackers

Yeah good question, I think but what we just spelled out here in the first quarter is that we're still trying to consolidate as many production size into our larger regional hubs here in Germany as well in Maryland and the U.S. and clearly this is quite helpful for all level at the end of the day.

And if you assume for a second that our gross margin in the first quarter was roughly 100 basis point below I would say average run rate of the three quarters, half of that was really one time impact. And therefore we feel quite confident that also over the next three quarters the gross margin as well as going about 70% and even the larger share in the third and fourth quarter.

Bill Quirk

Okay. Great. Thank you. And then just on OUS HPV it's obviously been a nice growth driver for you in the past. It looks like it slowed down here this quarter. We didn’t pick up anything in the competitive results and so I’m curious was this just a lack of tenders in the quarter or is perhaps the market slowing outside the U.S. thank you.

Peer Schatz

You’re absolutely right on that one that that business is a tender business typically ex-US and therefore it is little bit lumpier and you’ll see more volatility in that growth rate, but we remain incredibly well positioned competitively and are seeing competitive wins pretty much continually.

Operator

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

Tycho Peterson

Hey thanks, two quick ones. First on GeneReader, I am trying to understand how you’re managing the reimbursement dynamic with your customers with the $550 gene reimbursement down around $600. It seems like a lot of labs are having a hard time making the profit. So just wondering how active you are in helping with some of the reimbursement discussion?

And then separately Peer, I’m trying to get a better comfort in the guidance for the year. I mean by our math and you did do about 7% to 8% organic in the back half and you’re coming off 2% in the first quarter 4% in the second quarter. So maybe just get us comfortable with what further drive that revenue reacceleration in the back half of the year? I know you do have easier comps?

Peer Schatz

Sure. Okay so the first question obviously we are moving through and preparing also the appropriate regulatory processes to be able to position these systems adequate, but if you look at the system and also the panel as it designed today, it’s designed for very attractive economics and we're one of the few providers who can actually provide a positive value contribution to laboratories and allow laboratories to create a profit.

Once you actually take all of the components and all of the services required to do a next generation sequencing run together, this often is not one or two suppliers, but this is often more than a dozen that come together for a complete work flow.

Costs are much higher than most labs normally would think and looking at price per insight model where we actually are able to integrate everything from the primary sample through the report and create a very, very reliable price per insight for that, that is actually in a range that allows a very attractive margin even under these new reduced panel rates. That is something that is driving a lot of customers to look at this and see this as a really viable option.

Its different in different countries around the world, but the economics of is not really just economics of the sequencing reaction. That’s actually a small fraction of it. The majority of the economics of the cost of the work flow and various steps around the sequencing reaction upfront and downstream and we have created a fully integrated system that takes care of that.

In terms of the revenue distribution I'll hand over to Roland in a minute, but I guess the one statement that he made in his comments was very important that we’re pretty much comparable in terms of the revenue distribution we’re guiding for this year to what we saw last year.

The revenue distribution last year was something like 48%, 52% of full year revenue target and this year its depending on what number you use would be above 47% to 53%. So it's not really materially different and considering that we’re seeing these strong growth rates in key product areas such as QuantiFERON and others that are doing very well now moving into the second quarter we feel quite good about that revenue target.

This issue with the profits accelerating in the second half of the year is not a revenue story. It is a cost management story, because we accelerated expenses in the first half that we're confidently will show a nice benefit in the second half and therefore would allow us to slow down expense growth.

Operator

Our question comes from the line of Isaac Ro of Goldman Sachs. Please go ahead.

Isaac Ro

Good morning, guys. Thank you for taking the question. I wanted to focus on Slide 9 with your GeneReader roadmap and appreciate, there is probably a lot of detail you don’t offer today, but I was hoping to maybe comment on two items.

First was in the sample type expansion comments where you're looking at liquid biopsy does that relate specifically to liquid biopsy samples for research work or would it be actually clinical diagnostics, to liquid biopsy on GeneReader.

Peer Schatz

Sure, while so the liquid biopsy sample technology solutions we have today are very widely used. We're selling millions of these every year and we also have announced to the market that we are going to launch new versions that also will have clinical claims attached to them.

So the GeneReader NGS system is a system targeting clinical research and diagnostics and therefore the liquid biopsy solutions that we will be bringing on to the system will be solutions that will be quarter below into into clinical work flows as well.

The system as you know the frontend system, the QIAcube, is today already automating the clinical sample -- the DNA, liquid biopsy solutions that are registered with FDA and this will therefore be an integration of already of very robust and highly validated system.

Operator

And our next question comes from the line of Jack Meehan of Barclays. Please go ahead.

Jack Meehan

Thanks, good morning. I had two somewhat really questions with QuantiFERON, nice to see the sales force investment starting to pay off. I am curious, do you think this is the new norm of the way to I think about the growth rates and may be what you're seeing here in the U.S. in terms of growth?

And then just in the appendix of the deck some of the headcount numbers, do you think you feel like you're where you need to be now in terms of the sales and marketing headcount. Is this where we should think about it through the rest of the year? Thanks.

Peer Schatz

Sure, if you look at the 331 numbers, they already reflect the steep increase and in particular the QuantiFERON lab and clinical sales channel that we created. There is an overlap with the general sales channel that we have certainly in the laboratories, but we decided to create a focused approach that is now targeting particularly the QuantiFERON portfolio.

And that was increased substantially over the last 12 months not talking 20%, 30%. We are talking tripling or even quadrupling and this is already reflected in the headcount numbers in the first quarter.

So, as these people are coming on and being trained and this happened over the last six months, So partly even in March of this year, we're expecting to see the effect in particular in the second half of the year.

We've seen and tracked and monitored regions where we have implemented these additional resources and we've seen very positive effect. And so we're looking forward to also see that with the resources that have also more recently come on board.

In other words, yes. So we expect also this would further underscore what Roland had in his comments in terms of also having more accelerated investments into areas that have higher growth and we expect that to see -- we expect to see pay off in the second half of the year.

Operator

Our next question comes from the line of Scott Bardo of Berenberg. Please go ahead.

Scott Bardo

Yeah, thanks very much for taking my questions. I have two please. Firstly understand clearly that you have relatively good management on some of the operating costs SG&A and the mid R&D cost.

I think historically one that surprises has been some volatility in gross margin and so what I just wanted to bit come to back to please is your confidence in gross margin and is there any chance of any volatility in CDX contracts that you saw last year perhaps you can describe some of these dynamics as to manufacturing product consolidations some of the production when the benefit come please. So just we can get some comfort margin will be delivered.

And second question please and just relates to GeneReader. Obviously some encouraging commentary about an issue or I know you're still due to place your targets for the market.

Can you give us a flavor of how demand is tracking insofar as are you just seeing any blip for loyal historic QIAGEN customers or is the pace of interest accelerating or do you expect linear placements going forward.

Just give us some sense of dynamic for the placement power of GeneReader and also when you expect some of these new panels to come to market? Thank you.

Roland Sackers

Let me take it off with the gross margin question. I think Scott you're pointing to a very important point, the gross margin I would say in QIAGEN especially if you look at our instrumentation and also our consumer business is actually quite stable and even slightly improving.

So volatility comes all this with two factors. One is we talked about in the past is this Companion Diagnostic deals where we developed products for Pharma partners. They are first of all have a quite significant quarterly volatility and of course it comes in with quite significantly lower gross margin and that is clearly something.

But it's not helpful from time to time for the overall gross margin and that is again one part of the impact you have seen in the first quarter as well and another one is as you know we start sometime ago to adjust for certain restructuring cost and therefore we had to float it through our overall cost of sales.

Something what we actually should review that we point to that going forward probably more precise that is better thing something what you can put it in your model.

And nevertheless it's clearly -- it's important to emphasize such underline consumer trends in terms of profitability as well as everything I want to simply is actually intact and helpful and solid for QIAGEN. And therefore we come from our gross margin at 70% plus probably even again also here a certain acceleration from the second -- into the fourth quarter.

Peer Schatz

And Scott to the first question this is a system that is going into accounts Clinical Research Diagnostics that we not necessarily buy something just off the shelf even with the QIAGEN logo, which clearly goes a long way.

Most of these customers that are around the world by the way they certainly are QIAGEN customers as we said before almost every pathology lab or any clinical research lab around the world is a customer of ours and so we do have relationships and say recognition of the brand equity.

So that said the first who to came in are ones that had a very pressing need and in many cases a frustration with the complexity of the current workflows that are much more complex than typically when it's led to believe and in particular in routine testing.

And so by creating the simplicity or allowing the simplicity on the pathway to profitable economics for laboratory to be visible, this has allowed people that I wouldn't even call early adopters, but people who are just in the right phase in their decision making process to step in.

We expect this to accelerate going forward and in particular when you see more data coming out which looks very good and we have been getting great feedback in the meantime from many test accounts and many early adopters already and we're looking forward to put more data out in also more studies.

And also it’s not a blip. It is the beginning of a trajectory and one that we feel very confident about and the message is resonating and in particular QIAGEN is very welcomed into this market with the approach that we are taking.

Operator

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

Steve Beuchaw

Hi good morning and good afternoon.

Peer Schatz

Good morning, Steve.

Steve Beuchaw

Two questions for me, one is I wonder if we could just get a little bit more comfort around the Applied Line, are there any trends you could point to with regard to orders of the backlog that give you what is clearly very high levels of confidence in the growth profile in the Applied Line over the balance of the year?

And then second for me relates actually to the repurchase announcement, the 100 is similar to what you've done in prior years, why is 100 the right number given that the stock is offered recent highs and we have confidence in acceleration over the back half of the year, why not think about a more aggressive deployment of capital or return of capital to shareholders, thanks?

Peer Schatz

Sure I’ll take the first question. The second for Roland, the Applied Testing portfolio let's say, it's a smaller part of our revenue basis and sometimes it's a little bit more volatile.

There are also tenders in there that in particular ex-US that can impact volatility. That said, the first quarter was primarily impacted by a lower instrument purchase trend that we -- our team expects to here see accelerate over the course of the year and we believe that the applied testing revenue will meet it's targets that we set for this year.

The business is growing actually very well. On the consumables side, we had some very high profile wins also in the U.S. following the entry into that market with assays. As you know we've been in the market for 25 years now with the sample technologies and have an extremely strong position in that area, but entered last year with the assays very attractive also nine digit market size.

And we're seeing our first highly competitive wins against incumbents with what we think is a very attractive alternative and that is still early, but is on a long term trajectory this is typically a very conservative market, Roland?

Roland Sackers

Yeah on the shallow what we want to do is a very balanced approach and it is clearly something also what we want to see mid and long term and if you see situations where we want to actually weigh it, there might be even different tools to do so.

Just would like to remind you what we did for example early last year where we bought an outstanding convertible bond at that time which was another $250 million. So for us share buybacks was something what we see as a general part of our capital allocation policies -- policy and that includes such share buybacks, but it also clearly includes also bolt-on acquisitions.

Operator

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

Daniel Wendorff

Yeah, thanks for taking my questions one main question and then a follow-up please and main question taking into account what you've said on tracking of costs during the year of 2016 and also if we think of the EBIT margin and just going forward into Q2 and then also in the second half, is it that Q2 is like similar to what we observed in the first quarter and then the jump in the second half. So any more color there would be helpful.

And second question is also relating to your NGS portfolio now with the GeneReader on the market, can you potentially comment on the number of early adopters you're currently working with and the eventual number of like targeted adopters of the target clinical laboratories, any comment there would also be helpful. Thank you.

Roland Sackers

Yeah, Daniel let me take the first part. Yeah I think as we try to lay out in the call is that we do expect exploration here and important not only in terms of revenue growth, but especially also in terms of profitability over the course of the year and that probably goes from let’s say a 120 percentage adjusted EBIT margin in the second quarter into an area which is probably a 30% plus in the fourth quarter and somewhere in the middle of the third quarter.

So, I think you clearly can expect a similar pattern we’ve seen in the past. I know this is just again if you look at the absolute dollar numbers that some of this expense is into the first and second quarter for targeting investments.

As we said I want launch activities on QuantiFERON sales specialist and regional expansion and how this cost fading away. So the profitability should shine through again there is also good margin improvement in the third and fourth quarter.

Peer Schatz

The first question Daniel was on the GeneReader, well we said we would give further color on the success in the progress in this area later in the year. We said that the uptake is much broader and much faster than what we initially had anticipated and put in our plan.

We expect that trend to continue. The size of the market is very much a function of the content. That was a good question in the call today also on that and the QIAact Actionable Tumor Panel, that actually addresses one of the largest applications, but it’s in most of these laboratories.

But we're going to expand from there with additional features, modalities and also different indications as well. So if you take the narrow definition, we’re not talking of a market size of dozens of systems. This is hundreds of systems a year and we said also in our commentary we're targeting a double-digit market share in the first year, which I think is quite remarkable for a solution like this and one that is the beginning of a more long term trajectory.

Operator

Our next question comes from the line of Doug Schenkel of Cowen and Company. Please go ahead.

Doug Schenkel

Hi, thank you for taking the questions. First topic is I guess really a quick one just a guidance clarification, excluding FX you reiterated EPS guidance for the year, you also reiterated gross margin guidance, you lowered tax rate for the year.

I just want to make sure that logically we are appropriate in concluding that the offset here is all increased operating spend, which would be based on other commentary. You would expect to be heavily weighted towards Q2.

And then the second topic is again GeneReader, there has been lots of qualitative commentary on placements exceeding expectations and demand exceeding expectations and how well you're doing here. You've spent considerable time on this again today. You clearly have a lot of excitement about this initiative.

That said in the absence of really anything qualitative, I’m sorry quantitative, it’s really hard for us to know how meaningful this initiative is. I believe you have nothing in guidance for GeneReader of revenue contributions for this year. I guess it would be helpful if you could provide anything quantifiable. You mentioned Peer that you expect to have double-digit market share in the first year of the launch.

There are several thousand next-gen sequencing instruments out there, is that how you’re defining the market and in terms of in Q1 exceeding expectations, you said you expect to have hundreds out there not dozens. Do you have more than a dozen instruments out there and are they in production? Thank you.

Peer Schatz

Let me start specifically with the question on tax, I think the adjustments we made here to the tax guidance is really to cover the performance for the first quarter where we came in at '15, I don’t expect any change on the overall mix for the second, third and fourth quarter therefore only a slight improvement from '17 to '16 to '17 for the year.

Roland Sackers

Doug, there were many questions in that, so I try to address that. So we shared a lot and we shared our positioning, our positioning is definitely not addressing the thousands of sequencers that are out there. We were very clear and this is what we also put into this presentation of the slide.

And we're targeting a sub-segment of the market that is targeting panel testing and clinical research and diagnostics and that immediately takes your thousands down to hundreds as I said before and if you would look at the market share is in the hundreds and then look at double-digit market share you don’t get hundreds or thousands of systems that we're targeting.

But it is a very doable number for us and yes we are in that trajectory and we feel very confident also that the pipeline and the commitments and also the indications that we're receiving will allow us to get there.

So the question is also here how that sub-segment of the market again panel testing and clinical research and diagnostics, how that will expand with further indications going forward and that's why we gave you some of the panel roadmap that would allow further indications and further utility and also a broader audience to be open to the GeneReader system.

The reason why we’re excited about this is because this has been a significant investment phase. It’s important product for us and the first feedback is very positive and I am sure you appreciate that this is for us important feedback for you that we feel very confident that this has been a good investment that we did over last few years.

Operator

Our next question comes from the line of Jon Groberg of UBS. Please go ahead.

Jon Groberg

Thanks. Just a couple of questions from me that we are getting from clients, one, Roland can you maybe just clarify why currency isn’t more favorable than what you're laying it out most of the other company has reported that the currency having improved they're laying out I would say a more favorable outlook both from a revenue and EPS standpoint, business might really changing the EPS impact.

And then second would you be willing to quantify anything around Exiqon in terms of what it could be mean for -- what you think it means for the business from an accretion to margins, EPS is expected to close?

Roland Sackers

Peer you want to start with the second one or…

Peer Schatz

Why don't you take this?

Roland Sackers

Okay. First I'll start with this second one on Exiqon again I think it's fairly straightforward and there is a pending deal would just refer to what we said in terms of our press release and again I don’t want to be a too aggressive now because it is has closed yet.

Nevertheless I would say we clearly said there is a lot of synergies clearly for us in terms of again focus and fitting into your company portfolio and profitability for contribution is also quite clear that it doesn’t contribute to profitability in '16 and '17.

On the FX question of course I can’t comment on other companies that therefore has little difficult but again I would like to refer to is we do have quite detailed breakdown in our appendix on where we have our currency movements and I think the one thing you should have in mind is of course if you're looking at our mix, the volatility for us comes especially on the profitability side comes always out of the countries where we do not have any cost base, there is not typically dollar Euro, there we do actually have a I would say good natural hedge.

It is well in countries where we don’t have any larger cost base and this is typically in larger markets where we have just the sales force typically and therefore any swings here is serving us more other companies who have a larger local presence where even production locally.

Operator

Our next question comes from the line of Vijay Kumar of Evercore ISI. Please go ahead.

Vijay Kumar

Hey, guys thanks for squeezing me in. So I had a two part question. One on the financial side and one big picture for Peer. So may be on the financial side going back to the guidance sequential ramp, 4% fee or revenue growth in that Q2.

So as you think about that back half high single, so we understand HPV goes where so that adds 100, 200 Bps and I think I heard you say guidance doesn’t break anything any contribution from leaders.

So what gives you comfort is this applied market normalizing or something happening within diagnostics or even academia that gives you the confidence and the big picture question for Peer was, what are you seeing up here from a big picture perspective on sequencing landscape, but obviously you're one of your large competitors and they have had some issues on the high end of the market and clearly you guys bring the opportunity as of the low end of the market right the big box versus the small box.

And I’m just curious if you're seeing anything just given that QIAGEN is the largest sample provider and you guys are probably more likely to see trends in that market before we see thanks.

Roland Sackers

Hi, Vijay I was likely that I’m only responsible for the fine print and not for the big picture, but having said that I think it’s a fair question, but I think as said before it’s clearly driven by the ramp up mainly in our gross status but also academic markets moving into the right direction.

So, its general both, have in mind also and I think there is something what I would like to remind you that of course the prior year dynamics are also important to factor in last year in the first and second quarter where has had high single digit ex-HPV growth where it was clearly different in the third and fourth quarter so also comps are important to include in your calculation.

So I think if you factor it all in and also again having in mind is what we said before 47, 53 allocation H1, H2 I think that should be doable.

Peer Schatz

So, Vijay what we basically see and what you also see in the market right now is that the high end markets that are little bit more volatile. That said, I would say that the competition is actually doing a great job in serving that market and the demand will continue to increase going forward.

It is a fundamental technology that will clearly have a very long term trajectory also in terms of the market development and that said we -- and that’s a very important differentiation that where QIAGEN fits in.

And also saw some of the surveys and studies we're not going to last are typically running five sequences already or more going to labs that are typically using these technologies for everyday use and to create utility in particular in clinical research and diagnostic and that’s a totally different ball game.

The value proposition to the high end labs that you will get from those labs is very different to labs who are actually using this as a tool they don’t want to couple together these workflows. They don’t want to add the newest reagent or instrument to the work flow.

They want to have something that works and works very reliably and creates utility for them and that’s something that our solutions cater to. It is a new value proposition and one that is resonating very well with the different market segment than the ones that we're traditionally very focused on in terms of seeing trends and also understanding demand profiles and sequencing.

This is a newly emerging area, one that is as partly also already been doing sequencing, but in many cases it’s frustrated. Many of the sequencers are not productive in these areas and people are looking for a way to actually be able to generate economics and value for their patients and that is a market that we think is new and emerging and one that is resonating well to our value proposition. But I think sequencing overall is a long-term trajectory and again upon many of the efforts also from competitors who drive this technology forward.

Peer Schatz

So with that, I would like to end this call and thank all of you for your participation today. If you have any questions or comments, please do not hesitate to give me a call or send me an email. Thank you very much.

Operator

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

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