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Qiagen NV (NASDAQ:QGEN)

Q2 2012 Earnings Call

July 25, 2012 9:30 AM ET

Executives

Albert Fleury – Director, IR

Peer Schatz – CEO

Roland Sackers – CFO

Analysts

Daniel Wendorff – Commerzbank

Tycho Peterson – JP Morgan

Bill Quirk – Piper Jaffray

Pete – William Blair

Romain Zana – Exane BNP Paribas

Jeff Elliott – Robert W Baird

Doug Schenkel – Cowen & Co

Vamil Divan – Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the QIAGEN Conference Call on the Q2 Results 2012. (Operator Instructions)

I would now like to turn the conference over to Albert Fleury, Director, Investor Relations and Corporate Finance NA. Please go ahead sir.

Albert Fleury

Thank you, operator. Good afternoon and welcome to the QIAGEN conference call to discuss our latest quarterly results. Joining me on the call are Peer Schatz, Chief Executive Officer; Roland Sackers, Chief Financial Officer; and John Gilardi, Vice President, Corporate Communications and Investor Relations. A copy of this announcement and the presentation for this conference call can be downloaded from the Investor Relations section of our webpage at www.qiagen.com.

Moving on to slide two, before I turn the call over to Peer, please keep in mind that the following discussions and responses to your questions reflect management’s view as of today, July 25, 2012. As we share information to help you better understand our business, we will make statements and provide responses that state our intention, beliefs, expectations, or predictions of the future. These constitute forward-looking statements for the purpose of the safe harbor provisions. They 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 a complete description of the risks and uncertainties, please refer to our filings with the U.S. Securities and Exchange Commission.

I would now like to hand the call over to Peer.

Peer Schatz

Thank you, Al. Hello. I would like to welcome you to our conference call and the opportunity to discuss our results for the second quarter and first half of 2012. As you saw in our release last night, we are achieving our goal to deliver faster growth in 2012 despite a continued challenging macro business environment. We are very pleased with our strong performance for the first half of the year. The success of our actions we are taking to drive growth and innovation at a faster pace, alongside a solid outlook for the remainder of the year, allowed us to raise our full year outlook.

In the second quarter net sales rose 14% at constant exchange rates to $307 million on growth across all customer classes and regions. Adjusted operating income grew 10% to approximately $86 million and adjusted diluted earnings per share rose to $0.25 per share from $0.23 in the second quarter of 2012.

As you can see on the slide, we achieved similar growth rates for the first half of the year as well, led by a 14% improvement in sales and adjusted earnings per share of $0.48 per share. These results were again ahead of our targets, but what were the reasons? Demand for our product among customers and pharma, applied testing and academia continues to be strong, especially in light of these challenging macro economic conditions.

We also continued to see solid gains among our growth drivers in molecular diagnostics. These include companion diagnostics for personalized healthcare and tests in our profiling portfolio, both of which are underpinned by QIAsymphony.

In Point of Need we gained about 1% of growth in the second quarter through the addition of AmniSure, a novel premature ruptured fetal membrane test for use in pregnant women. In prevention, sales of products testing for HPV were lower in the second quarter as we had been predicting and the year to date trends are in line with our expectations.

As we have been saying, we are maximizing the value of our HPV franchise and are effectively and successfully competing in this market. But the overall market is not expected to be a growth driver in 2012. In terms of the 14%, constant exchange rate growth in the second quarter of 2012, about 9 percentage points came in from Cellestis, Ipsogen and AmniSure acquisitions.

At the same time, the rest of our business delivered 5 percentage points in the second quarter and provided 6 percentage points in the first half. So, we are seeing an improving trend over 2011. A key driver has been the progress we have been making on our strategic initiatives to drive platform success, add content, broaden our geographic presence, and grow efficiently and effectively.

Among the highlights, we are on track to achieve our goal for more than 200 new placements of the QIAsymphony automation platform. This builds on the more than 550 systems in place at the end of 2011. These systems are being placed across all customer classes and geographic regions. Critical to our success has been the Rotor-Gene Q real-time PCR cycler and its recent U.S. regulatory approvals. In combination, we can offer the industry’s fastest growing, broadest and most versatile menu.

In terms of adding content, launch plans are in full implementation for the therascreen KRAS test that received FDA approval in early July. This milestone reaffirms our global leadership in companion diagnostics and is just the beginning of a significant development in the U.S. companion diagnostics market.

We also announced in June our initiative to enter select segments in the field of next-generation sequencing. Our aim here is to capitalize on many of the already existing elements that QIAGEN has in place, along with external partners to offer workflows that will expand the use of NGS into clinical research and molecular diagnostics. First products are expected to launch in 2013 and I will provide more insights later in the presentation.

We also announced last night plans to launch a $100 million share repurchase program, the first in the history of QIAGEN. This program is a signal of our conviction in the growth opportunities of QIAGEN and our belief that the current share price does not reflect the company’s potential. As we launch this program, we are maintaining our financial flexibility to take advantage of opportunities in the marketplace while increasing our return on capital and building shareholder value.

Moving to slide five, I wanted to show you how we view the various contributors to our performance in more detail. Here you see the growth rates and contributions from our four customer classes for both the second quarter and first half of 2012. Molecular diagnostics continues to overall perform very well. In prevention, our QuantiFERON TB test remains on track for more than 20% constant exchange rates pro forma sales growth in 2012. And overall, our personalized healthcare portfolio, which also includes development programs, is expanding at a rapid pace, above 20% constant exchange rate as well.

AmniSure will provide about $12 million of additional sales in 2012. Our profiling business is growing at a healthy rate as well, whereby the expansion of reagent rental contracts is creating lower instrument sales at this time, but bringing customer commitments to higher future consumable sales.

At the same time, HPV sales declined at a single-digit pace in the first half of the year, in line with what we had been expecting as we see to maximize the value of this franchise. Let’s look at the U.S. HPV performance, and I would like to reiterate again that this is under 14% of our sales. Volumes are largely stable in the first half of the year. Market conversion efforts continue to be successful and the new U.S. guidelines are getting attention among physicians. These guidelines were highly favorable for QIAGEN, and also rather negative for at least one competitor test. It is increasingly clear, particularly based on recent publications, that no competitor has come out with a better product, and particularly not in terms of clinical data.

We are very successful in managing our market share leadership. We are not seeing any signs of major shifts in market share, nor do we anticipate this in the second half of the year. Prices however continue to be under pressure as you absorb the impact of multi-year agreements reached within our customers. But the net impact remains negative, but the business continues to be manageable and is in line with our expectations, which is a single-digit decline in revenues in this area in 2012, or in other words, under 1% of organic growth headwind.

Turning to the life sciences, here we are focusing on new opportunities. This business, which is unaffected by acquisitions, is growing at high single-digit rate, led by applied testing and also on solid results from pharma. Academia has also been a contributor, albeit growing at a slower pace. We remain cautious about funding in the second half of the year and in 2013, both in the U.S. and Europe, but we are committed to growing faster than the market and to continue to gain market share based on the superiority of our products.

On the situation in the U.S., like you have been hearing from peer companies, there is no clarity on sequestration yet, and the same goes for the NIH budget for 2013. These issues are obviously beyond our control and are not going to be resolved anytime soon, but our view is that sequestration, or an 8% budget cut, is unlikely.

As for NIH, we also anticipate a flat budget in 2013 based on the recent actions from President Obama as well as various House and Senate committees. We are preparing for various scenarios and that is what we see our customers doing as well. We will provide more insights when we announce our guidance for 2013 in January.

So, in summary, this performance in the first half of 2012 gives us confidence about accelerating growth and prompted us to raise our full-year targets.

I would like to hand over to Roland for a review of our financial performance. Roland?

Roland Sackers

Yes, thank you, Peer, and good afternoon to everyone in Europe and good morning to those joining from the U.S. As you heard from Peer, for the second quarter of 2012, we were ahead of our targets for net sales and adjusted EPS, and we made significant progress on our strategic initiatives. We are committed to, actually awaiting, full-year growth in 2012, overall results in 2011. And based on this performance in this first half of the year, we have raised guidance for both sales and adjusted EPS. Before I go into more detail on the outlook, I will briefly talk about results for the second quarter and first half year.

On slide six, you see our key results for the quarter. Net sales rose 14% using constant exchange rates to approximately $307 million. Consumable and related revenues were up 12% using constant exchange rates, while instruments rose 28% constant exchange rate-wise in this period.

Adjusted gross profit rose 7% to approximately $219 million. As a result, the adjusted cost profit margin declined slightly to 71% in the second quarter of 2012 from 73% in the same quarter of 2011. However, it was steady compared to the first quarter of this year.

As we have returned to two consecutive quarters above the 70% level, we are confident of achieving our full-year target on adjusted gross margin of about 70% to 71%. I also want to highlight that we achieved this adjusted cost – profit margin while driving rapid growth within our instrumentation business as well as with our QuantiFERON TB test, which continues to have a very strong sequential quarterly performance. Since it is manufactured by a third party, it has a cost margin well below the average consumable level for QIAGEN. We are working to bring the manufacturing in-house in the future.

Adjusted operating income rose 10% to approximately $86 million over the second quarter of 2011. And the adjusted operating margin remained steady at 28% of net sales despite the gross margin decline, so we continue to gain operating leverage.

As a percentage of net sales, higher manufacturing and sales costs were essentially offset by lower spending in R&D, marketing, and administration. In particular, the lower RD spend is reflective of our efforts to conduct ever more focused activities and derive benefit from R&D partnering programs.

Adjusted net income grew 11% to approximately $61 million at a faster pace than net sales in adjusted operating income. This was due to lower interest expenses more than offsetting the impact of a higher tax rate.

And now on slide seven. For the quarter, we delivered solid growth in all regions and we were particularly pleased with the broad business expansion in Europe and Asia Pacific regions. Two product rules, namely the QuantiFERON-TB test and the QIAsymphony automation platform, were clear growth drivers. Results in the Americas were not as strong as in the rest of the world, rising only 7% using constant exchange rates over the second quarter of 2011.

We saw solid performance across many parts of our business, particular in applied testing and pharma. But as noted by Peer, in the U.S., HPV sales were down in comparison to the same quarter last year. The Europe, Middle East and Africa region accounted for 35% of net sales and grew 18% using constant exchange rates. Spain and other areas of Southern Europe remain challenging. However, our exposure in these countries remains quite small, and other areas of Europe are compensating well for this so far.

The Asia Pacific and Japan region accounted for about 18% of net sales and grew 20% using constant exchange rates. Growth was mainly led by contributions from molecular diagnostics, particularly in personal healthcare, where we had strong growth in Japan.

Ipsogen’s blood cancer testing portfolio continues to provide dynamic growth in this region as well since the acquisition in July 2011.We also gained important contributions from pharma benefiting from the expansion of drug R&D activities in the region.

I’m now on slide eight. We are now halfway through the year, and we feel that we have good momentum and remain confident about accelerating our full year growth rates in 2012 over 2011.

Recapping the key numbers for the first half of the year, net sales rose 10% and were up 14% at constant exchange to approximately $604 million over the same period in 2011. We are improving our profitability and margins in comparison to the first half of 2011. This is reflected in the 12% growth in adjusted operating income to approximately $167 million and the adjusted operating income margin improvement to 28%.

It is also worthwhile to keep in mind that this is happening at the same time we are aggressively pushing into new geographic regions. We expect to further enhance productivity and improve the value of our business operations while reducing the costs of 14 operations.

Moving down the income statement, adjusted net income rose 11% despite a higher adjustment takes place in the first half of 2012. It was 26% compared to 24% in the same period of 2011. As always, we expected the adjusted tax rate to be lower in the second half of the year as our income bases get higher, but also due to further tax planning initiatives, which are underway, will contribute to our performance.

Moving to slide nine, here is an overview of our financial position at the end of the second quarter. We continue to have a healthy balance sheet and solid financial position, one we are using to strengthen our operations. The recent acquisition of AmniSure and Intelligent Bio-Systems clearly fit in to our M&A strategy, namely to first gain access to novel technologies, second, add technology to our portfolio, and third, expand into new regions.

As of June 30, we had group liquidity of approximately $266 million, and the equity ratio was 68% compared to 65% at the same time in 2011. Our strong balance sheet and cash flow enables us to pursue growth and investment opportunities, and this will be key focus over the next few years as we are committed to expanding the size and value of our company. That said, we are also able to return a portion to shareholders through the share repurchase program we announced last night.

Cash and cash equivalent at June 30, 2012 amounted to $214 million compared to $221 million at December 31, 2011. In the second quarter net cash provided by operating activities amounted to $89 million.

As you may recall, our operating cash flow had been under pressure in the first quarter 2012 due to cash payments related to our efficiency program. We are still seeing related payments but on a much smaller scale, and were able to over-compensate this with our other improvements in working capital. Compared to the second quarter 2011, we have almost doubled our free cash flow, reaching $66 million.

I would now like to hand back to Peer.

Peer Schatz

Thank you, Roland. I’m now on slide 10 to provide an overview of the progress we have made on our strategic initiatives and what we have achieved so far in 2012. Most importantly, we are well on track to achieve our goal to add more than 200 new QIAsymphony systems worldwide by the end of 2012. This builds on a more than 550 systems in place at the end of 2011.

As for QIAensemble, we plan to provide an update in the second half of this year. We are very active here and are looking forward to sharing this progress with you. First important element of this program, the launch of the QIAensemble, The Decapper, at the end of 2011 has been very favorable.

In terms of adding content, we received U.S. regulatory approval for our therascreen KRAS test in July. And we are preparing for a number of regulatory submissions in the second half of the year, including a therascreen EGFR test in the United States as a companion diagnostic.

As we broaden our geographic presence, we are reviewing options to expand into new markets in Eastern Europe, Asia and Latin America. The top seven markets are maintaining a rapid growth pace, up 28% on a constant exchange rate basis, in the second quarter and providing 12% of total sales.

Many actions are also underway to help QIAGEN grow more efficiently and effectively. Also in the second quarter, organizational and leadership changes were announced to improve capabilities to address customer needs. These took effect on July 1, and we are getting very good responses across the organization.

We are also continuing to free up resources that can be reallocated to growth initiatives through various projects that began in November 2011. These actions will help improve our growth and adjusted operating income margin in 2013 and beyond.

I’m now in slide 11. As I mentioned earlier, we announced in June an advanced initiative to enter the field of next generation sequencing, or NGS. It is important to note that we are adding an NGS capability in a very, very targeted way. Our initiative does not target discovery applications, which are today by far the largest market segment of next generation sequencing. Instead, we want to capture rapidly emerging opportunities in selected areas, particularly by brining this technology into clinical research and molecular diagnostics.

Customers in these areas have been telling us that the current competitor offerings, which are focused on the life sciences, do not meet their needs and this is delaying the uptake. What do they want? Clearly cheaper, more efficient, and routine workflows based on proven standards. But more specifically, they want to be able to process multiple samples at the same time, which means continuous loading. They also want to process samples individually and for their own specific targets which means random access.

They also want full workflows that can become routine processes in their labs. This means offering everything from sample preparation right through to interpret of results. They want assay portfolios and a broad content portfolio. They want more clinically relevant information to be extractable from the data.

Our aim is to address all of these needs by offering complete workflow solutions based on proven QIAGEN technologies in combination with contributions from a range of partners. These partners include a collaboration with one of the world’s leading business software companies, SAP, to develop bioinformatics and also the acquisition of Intelligent Bio-Systems. We’re also open to working with other players to leverage our content strength as well.

However, in the core segment of molecular diagnostics in clinical research, we believed it was important to have our own platform option as well. So, since sometime, we’ve been funding a previously undisclosed, very significant development effort. We are not playing cheap on this. We have taken elements from many sources and assembled a novel solution. Targeted QIAGEN NGS system will aggregate components, chemistries and other elements from several sources and therefore, will boast specifications beyond what has been previously disclosed from any contributed element.

In many ways, we are repeating a strategy that has worked well for QIAGEN in the past, developing customer-friendly, automated workflows involving breakthrough technologies. We did this with real time PCR, and you see the successful impact with the QIAsymphony RGQ automation platform, same goes for our initiatives with pyrosequencing.

Some people are asking will next generation sequencing replace real time PCR. The answer is no. The technologies will be complementary, and the same holds for pyrosequencing in fact many poyrosequencers stand right next to the NGS systems. We see NGS being adopted in areas such as exploratory diagnostics, the diagnosis of complex diseases, and treatment of cancer patients. With the addition of the QIAGEN NGS portfolio, we will have a stronger competitive position to offer customers a broad range of technologies with complete proven routine workflows.

Turning to slide 12, I want to explain in more detail how QIAGEN has the elements for success in NGS. Many are already in place, since they are already commercially available products that are adaptable to NGS. Sample-to-result workflows will combine a broad range of QIAGEN products. We will exploit our leadership in sample technologies. We also have a leading capability portfolio in target enrichment.

Another important competitive advantage is our portfolio of molecular content. GeneGlobe, our web portal, already offers more than 60,000 well defined and characterized molecular assays, and we will now use these for NGS applications. These assays have generated well over $100 million of sales in last three years. In the first wave, we will offer eight preconfigured gene panels for use primarily in cancer and also enable customers to create their own customized panels.

These workflows will incorporate the QIAtube and QIAsymphony automation platforms and the fact that our workflow leverages is clinical, well validated sample to result solutions is a key competitive advantage in our favor. As for the sequencer module, we believe this new system will have a competitive profile against competing options.

It builds on proprietary sequencing by synthesis technologies and the benefits of QIAGEN’s chemistry, as well as unique instrument concepts by IBS. Most importantly, we will offer many novel features that are essential for clinical sequencing and again in a much more attractive workflow package. The clinical sequencing, it’s about workflows that can become routine processes. It is a different market than NGS and life sciences.

We see many competitive advantages with our system being able to process up to 20 individual samples in parallel and also for flow cells and reagents to be loaded continuously while in operation. Also up to 20 different assay types can be processed at the same time, and we will also offer new bioinformatics, including those emerging from collaboration with SAP, to better handle the processing of large amounts of data produce by next generation sequencing.

Data processing is seen as a major barrier to adoption of NGS Technologies in clinical settings. But this is why we have joint forces with SAP, and we will leverage their novel IT platforms and resources in our workflow. You’ll be hearing more from us about this initiative in 2013, as we provide specifications on the systems and prepare to launch the first products.

Turning to slide 13, I mentioned earlier that we are on track for achieving our target of more than 200 new QIAsymphony system placements in 2012. This builds on the more than 550 systems in place at the end of last year. Placements continue to be driven by the QIAsymphony status as the industry’s first automation system that can process both commercial assays and a broad array of laboratory-developed tests from sample to clinical result.

Another factor is that we have assembled what we believe is the industry’s most versatile range of tests targeting use on QIAsymphony. Many of these tests that you see on this slide are already being used on the QIAsymphony systems. The Rotor-Gene Q, PCR cycler is obviously a critical module, and for those tests not already on the system, plans are in place to migrate them.

In term of QIAsymphony placements, about 60% continue to be in molecular diagnostics, while applied testing leads in terms of placements among the other customer classes. When you look at the menu here, it is clear why there is such a strong demand in applied testing, given the new mericon range of products for food safety, the veterinary products as well, and then also the proven Investigator brand in human ID, and SERTL for quality assurance in drug manufacturing.

Turning to slide 14, we are very pleased with the U.S. Regulatory approval for the therascreen KRAS test for use in patients with metastatic colorectal cancer. This milestone is clearly extremely important for QIAGEN. The approval of this test marks the first approval of a QIAGEN therascreen companion diagnostic in the United States, and it builds on the success we have achieved in Europe, where we offer a broad range of tests. Japan as well, where we gained approvals in late 2011 for therascreen KRAS and therascreen EGFR biomarker tests.

First, therascreen approval is so important since it provides a template for the delivery of a very deep pipeline of therascreen tests coming forward in the future. It’s also a key milestone for the industry overall. We believe this approval represents the first approval of a companion molecular diagnostic developed from a partnership between a pharma and a diagnostic company.

We continue to strengthen our leadership position in personalized healthcare, which is anchored on three major revenue streams, one the sale of biomarker kits for companion diagnostics and for use in clinical trials, two, milestone payments from co development projects, and three revenues from associated products.

The largest and fastest-growing portfolio are clear the kit sales, as our regulated menu increases. Our personalized healthcare business is today by far the largest in the world in molecular diagnostics and is fast approaching $100 million of sales in 2012, continuing an overall growth pace of more than 20%. But kit sales are faster, while revenues from development services are typically providing a solid revenue base.

It is amazing to consider that we only entered this market in 2009, and there are significant growth prospects ahead of us. The U.S. launch of the therascreen KRAS biomarker test is getting well underway. Our sales and marketing teams went through final training at ASCO, and now it is time to maximize the market potential.

Our number one priority is to convert laboratory developed test labs to our tests. We are very encouraged by the response and acknowledgement by these labs about the benefits of switching to an FDA approved test.

Beyond these tests, we will be working with our pharma partners to drive therascreen KRAS testing penetration to an even higher level. Based on an estimated price of about $200 per test, therascreen KRAS and colorectal cancer will be an attractive $20 million market opportunity in this one indication alone and a new growth driver for QIAGEN.

And that is just a start. We are working to add a therascreen KRAS test for lung cancer, a new indication, and beyond therascreen KRAS the next submission will involve therascreen EGFR, also for lung cancer, in 2012. These potential markets show you why we are optimistic about maintaining a rapid growth pace, primarily also in the personalized healthcare and for the overall company in the future. There are over 15 programs running QIAGEN highlighting the depth and breadth of our pipeline which we hope to see emerges products over the next few years.

Turning to slide 15, you can see that we have updated our list of selected regulatory projects and marked the approval of the therascreen KRAS test in the United States. We still have a number of submissions planned for the second half of the year, and these are all progressing. A top priority is the U.S. submission of therascreen EGFR assay as a companion diagnostic, and we are also working to complete the submissions of two CMV, cytomegalovirus virus, tests one based on – one is a pre molecular test based on the Quantiferon technology, the other one a real time PCR test, that will strengthen our product offering for transplantation.

This chart does not include many submissions being made in other customer classes and also in other markets around the world. One of our competitive advantages is our truly global presence, and we are now moving to build up the testing menu in the U.S. and around the globe as well.

I would like to hand back to Roland now.

Roland Sackers

Thank you, Peer. I’m now on slide 16 to review some of the details about our share repurchase program. As you saw in the release last night, we announced the first share repurchase program in QIAGEN’s history. Our intention is to repurchase up to $100 million of our shares, which represents about 6.2 million shares based on the current share price. We would buy back shares in both Frankfurt and on NASDAQ, and this will be done opportunistically. We see this program as a commitment to our strategy of returning to a faster growth profile and also a signal that we continue to feel our shares are significantly undervalued.

As for our financial flexibility, we still have significant capabilities without relying on the equity and benefit from our strong free cash flow. Moreover, we intend to continue pursuing accretive M&A opportunities.

Also in the release, we announced that we are reviewing our current debt structure and may take advantage of the currently low mid- to long-term interest rates. If we take any action, this could result in higher interest expenses. We see this as a worthwhile short-term trade off given the current attractive credit markets and with – for higher interest rates.

I would now like to turn to slide 17, to review our increased full year outlook. Based on the strong performance in the first half year of 2012, as well as the acquisition of AmniSure in May, and the next generation sequencing initiative, we are raising our outlook for net sales and adjusted earnings growth in 2012.

For the full year, total net sales are now expected to rise approximately 8% to 9% using constant exchange rates, up from the prior range of 6% to 8%, with approximately a 3% to 4% contribution from the acquisitions of Cellestis, Ipsogen and AmniSure. This means that roughly 5% is coming from the rest of the business.

Adjusted diluted earnings per share are now expected to rise to approximately $1.04 to $1.06 for full year 2012, up from the prior range of $1.03 to $1.05. This takes into account about $0.02 of EPS benefit from the strong performance in the first half of the year, but also the $0.01 of dilution expected from investment in the next generation sequencing initiative, which includes the acquisition of intelligent biosystems.

Based on average foreign currency rates so far in 2012, our reported full year results will however continue to show some pressure from currency movements. We currently expect a currency head spend of about 3 percentage points. So actually reported results would then be lower than total constant exchange rate growth rates.

And now on slide 18, for the third quarter, net sales growth of about 9% to 10% using constant exchange rate is expected and adjusted diluted EPS of approximately $0.25. We also expect foreign currency headwinds of about 5 percentage points on reported sales in the third quarter. But this should have no or minimal impact on adjusted net income due to our natural hedge. We also have here on this slide the assumption for adjustment to operating income for the third quarter of 2012 and the full year.

For the full year, we now expect equity-based compensation of $24 million to $26 million, about $132 million for the amortization of acquired intellectual property, about $30 million for business integration acquisition and restructuring. The adjusted tax rate is still expected to be about 21% to 23%, which compares to 23% in 2011. Importantly to note for Q3 and the full year outlook is that the adjusted EPS guidance does not include any actions on the share buyback, nor any debt transaction.

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

Peer Schatz

Thank you, Roland. I’m now on slide 19 for the summary before we move into Q&A. We are performing well in a challenging macroeconomic environment in 2012, achieving our goals for faster growth. Let me review again what we have announced. We exceeded our targets for sales and adjusted earnings per share growth in the first half of the year, a mix of growth from recent acquisitions and the rest from organic business.

This has enabled us to raise our full year targets. We have also launched the first share repurchase program in QIAGEN’s history, and plans to buy back up to $100 million of stock. This is a signal of our conviction in our future prospects and views on evaluation. In closing, we are on track to delivering a stronger performance in 2012, and have begun the second half of the year with confidence.

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

Albert Fleury

Thank you, Peer. We now look forward to taking your questions. To ensure we can accommodate as many people as possible, please limit yourself to only one question and if necessary one follow-up. We are implementing a new policy to mute your line after you ask one question and one follow-up. But you are welcome to rejoin the queue to ask another question if time permits. Operator?

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will begin the question-and-answer session (Operator Instructions) The first question comes from Daniel Wendorff from Commerzbank. Please go ahead, sir.

Daniel Wendorff – Commerzbank

Good afternoon and gentlemen, thanks for taking my questions and congrats on the very good quarter.

Albert Fleury

Thanks, Dan.

Daniel Wendorff – Commerzbank

And I have a question relating to guidance. Your adjusted EPS guidance for the full year, what margin expansion opportunities do you see in terms of adjusted EBIT margin in the second half, and where would they come from? And related to that, what positive placement effects of the FDA approval of the Rotor-Gene Q do you see coming in the second half of the year? Thank you.

Roland Sackers

I’ll take the second part first and, Roland, if you could address in the first part of the question. We see a great opportunity now to roll out into pathology labs with our approved package of the Rotor-Gene Q system and also the related approved KRAS test.

The important thing is that therascreen KRAS addresses a very, very substantial market in personalized healthcare, so this is really the first test that can allow pathologists to afford the up-front investment for an instrument platform, because of the large volume they’ll be able to amortize that and to actually make a interesting business off that test alone. So we’re seeing a significant opportunity here to increase the placements in the pathology labs. But many of them actually only have a few cyclers or a few real-time PCR instrumentation options available, and we’re giving them a novel one and also a very important commercial test for them. Roland?

Roland Sackers

Yeah, hi Daniel. I think first and foremost, right now we feel very well on track to reach our 2013 goal in terms of EBIT margin and adjusted EBIT margin, as announced previously. And of course, it also goes hand-in-hand with that we’re expecting better margin profiles in the second part of the year. Specifically, on the third quarter I guess it will be comparable to the third quarter of last year. Where in the fourth quarter, we do expect a better margin than the fourth quarter 2011, so well on track I would say to our goals in 2013.

Daniel Wendorff – Commerzbank

And maybe as an add-on to that, does it come from, then, the better product mix or?

Roland Sackers

I think it’s a couple of things. First of all, we did very good with the product mix, as I said before. We clearly see very good momentum in terms of growth rate and at the same time we’re still executing on all the efficiency programs we started late last year and they are now, really over the second part of the year, come into effective.

So, you have seen that in the first quarter. And then also to a certain extent in the second quarter, we were able to conclude on a significant number of them and now we really get the benefit out of it. So, I think it’s a combination of both in terms of revenue growth, but also being more effective and efficiently and also to believe that over the course of 2013 that a more possibilities for us to grow essentially are started also, a couple of new initiatives more on the outside. Again logistics is an important driver for us right now, so there are a couple of things where I do to believe we are able to get significant impact.

Daniel Wendorff – Commerzbank

Okay, thank you very much.

Albert Fleury

Thank you, Dan.

Operator

The next question comes from Tycho Peterson from JP Morgan. Please go ahead sir.

Tycho Peterson – JP Morgan

Hi. Thanks for taking the question. Congrats on the regulatory momentum here with KRAS. Just wondering if there’s anything that you can highlight in terms of plans to further accelerate the menu. I understand kind of timelines you laid out, but as we think about further menu expansion, anything that can be done to kind of accelerate that? And then, are you able to comment at all on utilization patterns of QIAsymphony today in terms of what you’re seeing now that you’re starting to get the menu approved and how you’re thinking about that going forward?

Peer Schatz

Sure. It’s very important to differentiate between Europe and the United States. In Europe, we clearly have the full menu in virology, microbiology and genetics available on the portfolio, also personalized medicines. So you see the very broad range of tests that are already CE marked for use on the QIAsymphony RGQ. And there, we clearly have significant pull-through rates already on many of these systems.

The focus, therefore, is on addressing areas that we, even with our broad portfolio we have currently, are not addressing in Europe, adding selectively to that and also to accelerate the number of regulatory submissions and approvals that we will be taking forward. If you look at the system about a year or two years out, it will actually have one of the broadest menus in the molecular diagnostics industry.

So the majority of the competing platforms today only have a handful of tests approved on the systems, even after a decade or so in the market. And we are moving forward with a significant number in the pipeline across all indication areas, virology and microbiology, and also personalized healthcare.

So the goal for the United States is three-fold. So we have a significant emphasis on the resources that we have announced in development. We completely revamped the development processes that we had over the course of the last decade and also brought in new leadership and injected more resources into that area. So that’s number one and these – the first results are moving forward, and again, the pipeline is deeper than what we are basically showing here. There’s a lot more going on.

Number two is what we are also doing is we’re actively partnering out there with a number of parties and just working together with them to port content onto our platforms. And this is very often a win-win situation. We disclosed one such partnership with Incyte earlier this year around the em4 ALK test and this is just one template that we’re also putting into use in other areas.

So there are many CLIA labs, for instance, that would like to port their novel content or their proprietary content onto our platforms, and we’re helping them do that. And by doing that, we’re also creating kittable products for our sales ex-US and potentially even in U.S.

And the third thing we’re doing is we’re very actively reaching out and making sure that every test that is portable onto our system can move onto our system. And this is one of the most important tasks that we will be working on over the next future periods, is to accelerate on all cylinders internal and external cylinders, all content that we can port over to our system shall be – is going to ported over to our systems.

I would like to note, it’s not as easy taking a test and simply moving it over to a new platform. There are new chemistries. There are adoptions that are required, very often requiring a new regulatory process. And so, we will be doing this also very conscious that we’re strategically building a portfolio but we will be moving on full steam.

Tycho Peterson – JP Morgan

Okay. And then my follow-up is on Cellestis, are you able to breakout the contribution in the quarter and anything we should be thinking about in terms of next steps? Do you have to build out continued infrastructure for that business, and anything we can track externally?

Peer Schatz

Yeah. Roland, if you could provide the numbers, I’ll address the infrastructure question. The interesting thing is that this product has actually exceeded our internal expectations, even in terms of its pull that it’s generating in markets such as the U.S. and also Europe, so we’re seeing very, very good uptakes. We, therefore, have maintained a focused market development sales channel that builds on the Cellestis infrastructure that they brought in to our organization. So, QuantiFERON is being marketed in a market development way by a targeted, specialized sales channel clearly leveraging off our laboratory sales force that has relationships with all these laboratories and is able to bundle these products into packages for our customers.

So that is probably what we’re going to maintain, considering these very high growth rates and penetration opportunities that we see in front of us. And we think that that will remain very attractive for quite some time, several years. And so we decided to maintain this market development sales channel.

Roland Sackers

Yeah. And, Tycho, what we said on Cellestis, next thing is we also know what we see right now in terms of actual deliveries and in terms of acquisition, we said it was running on a $55 million run rate approximately and we expected it to grow around at least 20%. I would say that is actually what we see right now.

Operator

The next question comes from Bill Quirk from Piper Jaffray. Please go ahead sir.

Bill Quirk – Piper Jaffray

Yeah. Thanks and good afternoon, everybody.

Peer Schatz

Hi Bill. How are you?

Bill Quirk – Piper Jaffray

Good. So, Peer, first question is just thinking about the next generation sequencing announcement and how should we be looking at this? What type of milestones I guess should we be watching for? Automation within the spaces has clearly been a bit of a challenge for some of the other players, and so I guess I’m trying to just get a better handle on when we might get feedback, when we might get some type of indication that indeed we’re moving towards kind of your vision here for essentially kind of a turnkey solution?

Peer Schatz

Sure. I’d first like to note there are some great platforms out there and there’s been a tremendous amount of innovation and great leadership in this area by several players. And our opportunity here is to simply take this very clinically oriented profile that we have and adapt this technology to certain segments of the market. And so it’s a very, very targeted approach.

There has been a lot of noise in the rumor mills about the various specifications or what the product will have or not have or what it would look like. And I have to say I was quite surprised to see that, because we have not disclosed any information on this, and this has been an effort ongoing for some time. QIAGEN has one of the deepest enzymology portfolios in this industry. We have a very deep expertise in chemistry as well, and complete automation. So what we’re going to be taking forward is I think going to be quite unique.

The milestone that I would like to point to – and I hope you understand, we’re clearly positioning ourselves in a market also with a lot of dynamics in it – but the milestone I would point to is an early 2013 disclosure on the more detailed specifications of the instrument and the details on the launch plans. This is, I think, appropriate at that time, we’ll also be able to deliver a full information package for your that, I think, we’ll highlight this opportunity. But again I’d like to emphasis that we’re focusing on the clinical research and molecular diagnostic markets in the first run.

Bill Quirk – Piper Jaffray

Understood. And then as my follow-up, I’m just thinking about the instrument side of the business here obviously very strong performance in the quarter. I guess just a clarification question for perhaps Roland, was there any acquisition impact in this number, or should we thinking about this as perhaps the new normal with respect to the level of instrument sales? Thank you.

Roland Sackers

It’s clearly driven in the most significant part by the Symphony placement. I think that’s an important driver. And one thing of course, which is always hard for us predict is that in terms of Symphony placements, how much are direct sales and how many are placements. So this is one of the impact factors, which long-term as you know, don’t make a difference, but on a quarterly revenue condition, from time-to-time give us an additional benefit or a certain volatility. Nevertheless I would say instrumentation also for the rest of year continues a strong focus for QIAGEN, so I would expect here also good growth rates for at least the rest of the year.

Peer Schatz

I think one thing that I’d like to point to on this, Bill, is that we saw a very strong uptake also for QIAsymphony in the applied testing field, in forensics, food, pharma and veterinary, as our menu is quite substantial in that space in the meantime. And in this area, reagent rentals are rare. So as I highlighted in the diagnostics area, we actually are seeing a lot of reagent rental come through so that we’re not seeing growth on the instrument revenue number, but in exchange, we’re clearly getting the reagent rental commitments for the future and that’s what we’re very excited about. But applied testing is one of the areas that has been doing very nicely.

Roland Sackers

And just to be precise in your question, of course the acquisition didn’t deliver anything in terms of implementation.

Operator

The next question comes from Brian Weinstein from William Blair. Please go ahead, sir.

Pete – William Blair

Hi, guys, it’s actually Pete in from Brian. On the same vein, I was wondering if you can give me a bit more color on EEQ, something in the install base right now, specifically if you could break out placements between segments, or at least between – like clinical and non-clinical labs and how that would correlate with consumable pull-through?

Peer Schatz

Sure, as I mentioned, about 60% of the QIAsymphony placements are in molecular diagnostics and we see a very good balance between U.S. and Europe. The remainder 40% is predominantly applied testing, with forensics, probably followed by food and veterinary, and the remainder is pharma. So we’re seeing a lot of uptake in translational labs and in clinical research in the pharmaceutical space. But that is – it’s a 60, 30, 10. I’d have to look at the exact numbers, but that’s about the breakdown.

If you ask about the number of placements that we have, we’re half way in to the year. We said 200 replacement should be achieved this year, so this – and we said we’re well on track to achieve that target. So I would expect by the end of the year to have more than 750 systems, or in other words 200 incremental additions this year.

Pete – William Blair

And then as far as the consumable, pull-through –

Peer Schatz

I am sorry, yeah. That depends very much on the customer class and the region. So in Europe we have consumable pull-throughs which are well indeed in the six digits. If you have labs running the standard virology assays HIV, Hepatitis, and in addition to that also the Chlamydia and gonorrhea and others that are all available on these systems, then you clearly have a usually a six digit number. In the United States, because we have a mix between LDTs and now the first commercial products coming onto the system, it is a lower number, so we’re still in the five digits. And this will clearly move up higher in the United States, we expect and probably match what we’ll see in Europe.

We do have some accounts in Europe that are in the high six-digit numbers. So it’s a very nice pull-through bandwidth that the system has. In theory, I think we did this calculation on a recent call. The system as a theoretical pull-through of over $1 million without bending it too much.

Operator The next question comes from Romain Zana from Exane BNP Paribas. Please go ahead.

Romain Zana – Exane BNP Paribas

Yeah. Good afternoon. And thank you for taking my questions. So firstly, I was wondering in what extent you are impacted in the U.S. by the mentions increasing pricing pressure by some of your peers and some of them also highlighted the softer use of reagents. So I was wondering in what extent it has affected your U.S. business in the Q2 and how do you see the U.S. market evolving in H2. And this one question will be on the gross margin. I guess the main reason for the gross margin decline year-on-year is U.S. HPV, but medicine can, at some point of time, overbalance the negative pricing (audio gap) and if yes, when could we expect this kind of pick-up?

Peer Schatz

Sure, thanks. Good questions. The first is how do we see the general purchasing sentiment in the United States, I understand was the focus. Right now, it’s kind of like let’s wait and see for 2013, so you see the numbers in academia, and particularly in the U.S. are not in the very high range. So I think there’s a little bit of wait and see mentality going on right now, and that might actually amplify itself a little bit around the time of these budget submissions. But I think in general, we have guided very conservatively in this area. We are trying to factor in everything that potentially could happen.

In terms of the clinical markets, yes the market is under some pressure, but it constantly has been. So the fee schedules in the diagnostic markets have been going down almost every year, i.e., the reimbursement prices for tests have been coming down year-over-year with the exception, I think, of one year in the last decade, but other than that a significant decline. So a lot of these laboratories are managing these situations already since quite some time. We haven’t necessarily seen a deterioration of that.

I’d say over the last three four years, it has been quite pronounced across the whole laboratory industry and it continues to be something that the labs are managing over a competitive and very focused clearly also on making sure that they get a good product, but also at a very good price. So I wouldn’t expect a significant change in the second half of the year on the clinical side.

Roland Sackers

Yeah, on the second part of the question, Romain, it’s clearly also on the top of the gross margin, as TB of course has a certain impact, important one is of course also, we had a very strong implementation quarter, which clearly for us is an important part of our strategy as Peer mentioned before, more placements clearly leading to more consumable growth going forward. And also our very good growing QuantiFERON on TB business is a part of the gross margin impact. Nevertheless, we are well on what we planned and forecasted, actually slightly above also in the second quarter. So we feel quite comfortable with our 70% to 71% adjusted gross margin goal for the remaining of the year. Any significant potential impact on kit sales in personalized healthcare will clearly have a positive benefit on our cost margin as they come in with a very good gross margin in particular.

Romain Zana – Exane BNP Paribas

Okay. Thank you.

Operator

The next question comes from Jeff Elliott from Robert W Baird. Please go ahead, sir.

Jeff Elliott – Robert W Baird

Yeah, thanks for taking the question. I was wondering if you can provide some color on the demand trends you’re seeing in Asia Pacific and talk about your expectations going forward for that market. Thanks.

Peer Schatz

Thanks, Jeff. Yeah, it continues to be a very dynamic market for us. And we have been expanding very well, and for the full year expect a very strong contribution from these markets and continue to do so. This is based on what we think are still stable macroeconomic conditions, especially in the healthcare markets, primarily in China. I’m now excluding Japan from Asia Pacific.

So, we’re seeing quite strong growth in these across all regions, but it’s also company specific. So, we’re seeing great growth around our TB portfolio, clearly, a very, very important product area there. And we’re also seeing actually seeing great uptake following the pharma companies into China. We’ve been very successful in translational research in China as well, with a number of mostly also publicized collaborations in this area and we look forward to doing more in that space.

Operator

And next question come from Doug Schenkel from Cowen & Co. Please go ahead sir.

Doug Schenkel – Cowen & Co

Hi, thanks for taking the questions. So, my first question is actually a follow-up to an earlier question. In the press release, but not on the call, you noted that a key driver to your instrumentation growth was I think what you referred to as initiatives to secure product placements such as QIAsymphony. Can you provide a little bit more color on exactly what that means and if there’s anything of note there? And then my second question is on gross margin.

Could you explain the gross margin performance given as you noted the decline in higher than corporate average gross margin U.S. HPV sales and a higher revenue mix of lower margin instruments and lower margin QuantiFERON TB tests? It seems like there has to be something else in play here, and I guess specifically was there a notable contribution from royalties and/or milestone type payments that helped you at the gross margin line? Thank you.

Roland Sackers

Yeah, well I’m going ahead with the second part of question, and Peer probably is going to answer the first part of the question. No, in the second quarter there was nothing which I would call as a in any way a non-recurring significant item in terms of revenues or even other kind of line functions which could impacted our profitably in any significant way. So, no royalty income, no significant milestone income, which would be as incremental in what we have seen in the second quarter 2011.

So it was purely driven by the impact actually on the positive side, on the very strong performance on our molecular diagnostics business outside HPV. I think there’s one thing, I think, we have to focus on also on this call is that our molecular business ex-HPV had a very significant double-digit growth rate and of course, the molecular business also has a very significant gross margin and not – actually a significant number of the consumables area have seen similar gross margin in our HPV franchise. And I think there is something I would like to remind you on.

Peer Schatz

First part of the question, Doug, the language sounds a little bit strange. I’d have to go check that in the press release. So our focus is simply to make sure that QIAsymphony is as widely available as possible as a platform. It has such unique feature and we have now put so much content onto these platforms, primarily in Europe now and starting also in the U.S., and the opportunities are just all over the place. And we want to make sure that we expand the footprint as quickly as possible so we can start generating and moving up the reagent pull-through. It’s simple as that. It’s one of the key goals at our company to expand the footprint of our automation portfolio.

Operator

Okay, the last question comes from Vamil Divan from Credit Suisse. Please go ahead.

Vamil Divan – Credit Suisse

Yeah, thanks for getting me in here at the end. Just a couple question I guess related to the – your KRAS approval and just more broadly on companion diagnostics. We get a lot of questions in terms of labs switching from their LDTs over, and I think KRAS is an interesting example just given that most of them have a KRAS test already. So, you talked about this a little bit already, but if you can you give us a little more detail, as labs are talking about converting over, what is it that’s really kind of driving it? Is it the quality of the test? Is it kind of regulatory stand that the FDA has given, without the sort of enforcement that the FDA could come down with down the road? I’m just curious to see what it is that’s kind of giving you a sense that people want to switch to your approved test?

Peer Schatz

Sure. I think it – there are basically three categories, as you correctly pointed out. Regulatory is one, and I won’t go into that here now, but I think we discussed that previously and there is a lot of discussion on that topic. The second is the product – it has to make economical sense for a laboratory to drop an existing product and move over to a commercial product. And the benefit of using that FDA=approved product is that the hurdle of validation is significantly lower, and you have a higher level of quality for the product that you don’t have to ensure through extensive internal quality control procedures and validation processes.

So, there – it’s important when you move into a laboratory to start out with a product that has substantial value in terms of revenue opportunity, testing volume opportunity to be able to generate that economical business case that would be required for a pathologist to purchase a system and to bring up the test on an FDA-approved format. And we believe that it is something we can offer with KRAS, and especially with the pipeline. If you look at the pipeline that we’re sharing with pathology, it is really deep. And with that, we clearly have a big differentiator and have not really seen a lot of pushback in converting LDT.

So we said two-thirds, up to 75% conversion should be possible. We already have a good chunk of the market today, so the test is – and that’s the third category – really good. It’s not a bad test. It is a very good test. And this is leading also with a lot of publications supporting that, leading a lot of laboratories to say well, now I have everything together. It makes economical sense. I can justify it here and it has an FDA approval, so I’m also clean on that side and it is also very good test. And this has been proven now many, many times and so I’m now going to take it on board.

The fourth element could be the reimbursement scenario for reimbursement of a FDA-approved product versus a non-FDA approved product, and all the questions around reimbursing an LDT comparably to a FDA-approved product. I won’t go in to that one, I just highlight those two in the middle. The economical and the quality elements make us very positive about the conversion opportunity.

Vamil Divan – Credit Suisse

Okay. That’s great. Thank you.

Peer Schatz

Thank you.

Albert Fleury

Great. I would like to close the conference call by thanking you all for participating. If you have any additional questions, please do not hesitate to contact John Gilardi and me. Thank you.

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