Qiagen N.V. (QGEN) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to QIAGEN N.V. Investor Analyst Conference Call on the Q2 Results 2013. [Operator Instructions] I would now like to turn the conference over to John Gilardi, VP, Corporate Communications. Please go ahead, sir.

Good afternoon, and thank you, and welcome to our conference call today to discuss our latest results. Our speakers today are Peer Schatz, the CEO of QIAGEN; and Roland Sackers, our CFO. A copy of the announcement and the presentation for this conference call can be downloaded from the Investor Relations section of our homepage at www.qiagen.com. On Slide 2, you'll see the customary legal disclaimer and statements. The discussion and responses to your questions on this call reflect management's views as of today, July 31, 2013. Today, we will be making statements and providing response to your questions that state our intentions, beliefs, expectations or predictions for the future. These constitute forward-looking statements for the purpose of the Safe Harbor provisions. They involve certain risks and uncertainties that could cause our actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. And for more information, please refer to our filings with the SEC. I would like to now hand over to Peer.

Thank you, John. Hello, and welcome to our conference call and the opportunity to discuss our results. As you saw in the release last night, we achieved our adjusted net sales and EPS targets for the second quarter and reaffirmed our full year guidance for our adjusted net sales and earnings targets based on the performance for the first half of 2013. We had strong demand for our portfolio of Molecular Diagnostics growth drivers and delivered higher sales in this overall customer class, despite the anticipated slowdown in revenues related to HPV screening. In the Life Sciences, we saw a different picture than in the first quarter of 2013 with growth in Pharma and Academia, but weaker results in Applied Testing. All regions contributed to growth and were led by the top 7 emerging markets. We're making progress on our goals for 2013. In Personalized Healthcare, a highlight was the recent FDA approval of our EGFR companion diagnostic kit. This was granted simultaneously with the FDA approval of Gilotrif, which is the brand name for afatinib from Boehringer Ingelheim, as the new first-line treatment for non-small cell lung cancer. We also reached new confidential agreements for companion diagnostic co-development projects, both within existing partners and also with new pharma companies. We are on track to begin the launch of our sample-to-insight next-generation sequencing benchtop workflow in 2013. We have reached an important milestone with placements at early access customers. Our ambition is to drive the use of this breakthrough technology in clinical research and diagnostics by offering a fully integrated workflow from biological sample to highest-quality data interpretation and actionable results. The very positive response to our Ingenuity acquisition reaffirms our conviction that our gold standard in biological data interpretation will be a crucial differentiator for QIAGEN. It is not just about sequencing samples, but instead, about offering a complete, high-quality workflow and one that provides the most powerful insights. In terms of the QIAsymphony automation system, placements continue at a strong pace with placements up 15% in the first half of the 2013 compared to the same period in 2012, which was already a record year for QIAsymphony. We are well on track to break through 1,000 cumulative installed systems during 2013 and continue to see robust double-digit growth in consumables. And the last point to mention on this slide is of the completion of the major efficiency project that we began in late 2011. QIAGEN has been going through a transformation as we streamline the organization consolidated sites and reallocated resources to growth initiatives following a series of bolt-on acquisitions. The last set of actions involved resigning the sales and regional marketing teams in the United States and Europe. Given the changes in our markets and also the QIAGEN portfolio, we wanted to better address customer needs across the continuum from basic research to translational medicine and into clinical diagnostics. We continue to have the only U.S. clinical sales force in the Molecular Diagnostics industry and a strong share of voice in our market segments. As Roland will discuss later, the restructuring charges for these projects are going to end in 2013, and we realize that it is time for us, even in more in light of these charges, to deliver on generating tangible benefits for these actions. We are convinced that these actions have strengthened QIAGEN considerably and will play a key role in accelerating sales growth and improving profitability. Finally, you saw in the release that we announced plans for a new $100 million share repurchase program. This is a signal of our conviction in the growth opportunities of QIAGEN, especially as we complete the sufficiency program and also that we are not satisfied with the current valuation. As we launch this program, we are maintaining our flexibility to take advantage of strategic opportunities, while increasing returns to shareholders. Turning to Slide 5. I would like to review the results of our customer classes. Molecular Diagnostics led the performance and provided about half of sales. In Prevention, the QuantiFERON latent TB test continued to grow at a 20% plus constant exchange rate growth rate with the fastest growth in the United States. Our teams are driving conversion based on QuantiFERONs superior accuracy and aided by delivery problems for the tuberculin, the derivative needed for the 120-year-old competing TB skin test. In Personalized Healthcare, we saw a mixed picture. Sales of companion diagnostic kits rose at a double-digit pace but the Pharma co-development project provided lower revenues. We are seeing improved demand for Companion Diagnostics in the United States as uncertainty over reimbursement is clearing up, and we expect new growth impulses from the EGFR approval. Our Profiling business, again grew at a good pace, supported by rising sales of consumables used on QIAsymphony. As I mentioned QIAsymphony placements are growing at double-digit pace. And the related assets in Consumables sales are also growing at a high double-digit rate. The majority is in Molecular Diagnostics and the percentages placed as reagent rentals continue to rise. Although we are creating multiyear revenue streams, this weighs on current instrument sales. Staying [ph] in Molecular Diagnostics, sales of products for HPV testing fell 17% in the second quarter, which is more than the single-digit decline in the first quarter, but this is something we had anticipated and there are some year-over-year baseline reasons. It is more important to look at the year-to-date trends. For the first half of the 2013, global HPV sales are down about 10% constant exchange rate representing 15% of total sales and we continue to expect about a 10% decline in HPV sales for 2013. The challenges are in the United States where we face significant pricing pressure as new competitors search for market share gains. QIAGEN maintains a solid leadership position in the United States with our test ranking as the gold standard. We announced in June that a major U.S. reference lab had reached a new nonexclusive agreement to consolidate the purchase of women's health screening products and I want to make a few points. First, they will continue to offer our HPV test to customers. Second, the transition to the competitor HPV test is 1 of 4 products trying to be converted simultaneously and this will take time. And third, we see no signals of other laboratories wanting to consolidate suppliers. The reason is clear, labs want to have the freedom and flexibility to adapt. They also want to offer gold standard tests since this is what customers are demanding and no single supplier can do so across a broad menu. Our position as the gold standard is the key reason why labs are sticking with our HPV test. We continue to sign labs to new multiyear agreements and we'll remain the market leader. As for the impact in 2014, we expect this customer development to have an adverse impact on our results but this is to represent less than 2% of our anticipated 2014 total adjusted sales at the worst. We also continue to expect U.S. HPV product revenues to represent less than 10% of total sales in 2014. Before moving on, I would like to note that Ingenuity revenues were booked in the Pharma and Academia customer classes. As I mentioned earlier, we saw a change in trends in the Life Sciences from the first quarter of 2013. Applied Testing sales were down and faced a tough comparison to the outstanding instrument sales in 2012. However, we saw solid growth in consumables, and we expect overall positive trends here for overall 2013. Finally, a return to growth on higher sales in all regions after the significant slowdown in the first quarter. Academia sales were also slightly higher in comparison to the second quarter of 2012 as emerging markets more than offset the ongoing cautious spending in the United States and Europe. In the U.S., sales are obviously, under pressure due to sequestration. But we are not experiencing market share losses, just overall restrictions on spending. The European landscape did not change during the quarter as we continue to see cautious spending patterns. Also the anticipated government funding impulses in Japan have not yet materialized. And now on Slide 6, to review the completion of our major efficiency project. We have made transformational changes that were designed to address the fast-changing industry conditions, as well as issues specific to QIAGEN. These included the reallocation of resources to growth initiatives, in particular to nextGen sequencing. The sufficiency project had 5 areas of focus and we have streamlined organizational structures and eliminated duplication. We focused our R&D portfolio and project to offering high growth potential and improved processes to accelerate innovation. We improved capacity utilization to increase efficiencies by closing down some sites as well, such as Hamburg, Morgan and Crawley. We optimized sales and marketing channels to better identify address customer needs, we captured savings from the expansion of shared services, such as the new service center in Poland and the outsourcing of some IT activities creating functions that can be efficiently scaled as QIAGEN grows. We've taken a $76 million pretax charge in operating income in the second quarter and this was to cover the following types of initiatives. One, closing some sites and integrating their activities at our global hubs in the United States, Germany and China to gain efficiencies. Two, financing changes in our R&D portfolio to put more emphasis on faster growing areas. This included allocating more resources to the NGS initiative and deemphasizing HPV-related R&D projects. And last, changes we have made in our commercial and marketing organizations. So the question is, why were they charged much higher than we had forecast? The answer is that we decided to take the opportunity to accelerate and expand the range of efficiency projects, which we had originally planed in light of industry trends, including M&A actions. We want to get this finished and we have. Many of you know QIAGEN well and some of you are very familiar with the new structures, processes and initiatives. The company is quite transformed and we are using this strength to push for higher growth. We are convinced that the benefits of these actions will become even more evident in 2014 and beyond. This was one of the motivators behind the decision to launch a new share repurchase program. I would now like to hand over to Roland.

Yes, thank you, Peer, and good afternoon to everyone in Europe, and good morning to those who are following from the U.S. I'm now on Slide 7 to provide some perspective on our performance in the second quarter of 2013. Adjusted net sales were USD 316.4 million, representing 3% growth at constant exchange rates or the same period a year ago. This was ahead of our target for our 1% to 2% constant exchange rate wise. About 2 percentage points of the growth came from AmniSure, which was treated as acquisition until May 2013 and also from the recent acquisition of Ingenuity while the rest of the portfolio provided about 1 percentage point. Currency movements had no meaningful impact on our reported results. The adjusted gross margin was steady at about 71% compared to a period a year ago. Similar to what we saw in the third quarter of this year, there was a benefit from the mix towards more consumables and also from efficiency programs. Adjusted operating income declined 3% to $83.4 million and the adjusted operating income margin declined to about 26% of net sales compared to 28% in the year-ago period. R&D investment returned to a more normalized rate of about 10% to 11% of sales in the second quarter of 2013, in part as a ramp up assay development program and clinical trial to expand our menu on QIAsymphony and drive our NGS program. Sales and marketing expenses were also higher given the investments being made into the NGS initiative, including Ingenuity, as well as to expand QIAGEN's commercial presence in key markets. Adjusted pretax income, which you do not see on this chart, however, it was about 3% to USD 82.9 million. This was due in part to nonoperating income generated in the second quarter of 2013 from providing access to QIAGEN's technologies. We provide access to other partners and on our team basis as part of our commercial utilization strategy and proceeds are treated as other income when it relates to noncore technologies to avoid distorting operational performance. Adjusted net income was up 6% and adjusted EPS was $0.27 per share, which was ahead of the target for $0.25. I'm now on Slide 8, which provides an overview of all regions delivering growth at single-digit constant exchange rates. The top 7 emerging markets led to performance with 12% constant exchange rate growth and provided 13% of total adjusted net sales. In the Asia Pacific and Japan region, sales were also about 8% constant exchange rate wise. China and India delivered double-digit gains while sales declined in South Korea. Our women's health initiative in China has been gaining momentum due to government-initiated HPV screening programs. And we saw more positive trends in the Pharma and Academia customer classes compared to the first quarter. In Europe, where net sales was 2% constant exchange rate wise, important contributions came from the United Kingdom, Turkey and the Nordic region. The Life Science funding trends remain an issue in this region given the austerity measures, while Molecular Diagnostic sales were supported by QuantiFERON-TB and the ongoing rollout of the QIAsymphony platform. The Americas region grew 2% constant exchange rate wise and contributed 48% of net sales. Solid quarter in Brazil and Mexico led the performance among the countries. While sales in the U.S. were largely unchanged as the expansion of our molecular diagnostic growth drivers offset lower HPV sales and ongoing soft market conditions in Pharma and Academia. I'm now on Slide 9 and will provide a few comments on the sales of consumables and Instruments. Consumables and other revenues provided about 87% of total sales and were up 5% constant exchange rate in the second quarter on a mix of contributions from AmniSure, Ingenuity, as well as the rest of the portfolio. Revenues from instrumentation contributed about 13% of total adjusted net sales, declining 8% constant exchange rates over the second quarter of 2012. Even though sales were down, we had a strong double-digit growth in QIAsymphony placements. Capital spending trends also weighted on instrument sales among customers in Academia and Pharma, while Applied Testing sales were down against the very strong sales in the second quarter of 2012. I'm now on Slide 10. We are now halfway through the year building momentum and focus on our sales goals for 2013. As you see, adjusted net sales [indiscernible] 3% at constant exchange rates to $620 million, again on a mix of contribution from the AmniSure and Ingenuity acquisitions, as well as growth in the rest of the portfolio. Adjusted operating income was down 3% to about USD 162 million as we continued making important investments. At the same time, we expect profitability to improve during the second half of the year, in line with expectations for faster sales growth. Our goal remains an adjusted operating margin of about 28% for the full year in 2013 and as we have said, this takes into account about 100 basis points of dilutions from the Ingenuity acquisition and the related investments. Moving down the income statement, adjusted net income was 3% and adjusted EPS rose to $0.49 per share. On Slide 11, you see a snapshot of our healthy financial position, which takes into account the Ingenuity acquisition in April. As of June 30, 2013, we had a good level of liquidity at USD 373 million, which compares to $266 million at the same date in 2012. Also as of June 30, 2013, net debt amounted to USD 491 million compared to USD 416 million at the same date in 2012. After the Ingenuity acquisitions, our level still remains at about 1 turn [ph] of net debt to adjusted EBITDA so we continue to have flexibility to support business expansion, as well as to increase returns, such as through the new USD 100 million share repurchase program that we just announced Our cash flow performance is obviously, affected by the restructuring change taken to complete the efficiency project. The current estimate is for the restructuring charges being taken for the efficiency project to have an impact of about USD 60 million in free cash flow for the full year 2013. But given our expectations for no material restructuring charges in 2014, we see opportunities for significant improvement next year. I would now like to hand back to Peer.

Yes, thank you, Roland. I would like to now provide some views on our strategy to leverage our leadership in Sample & Assay Technologies across all of our customer classes. On Slide 12, you see we are using the categorization to Sampling & Assay Technologies, to list the topics I will talk about. First, Quantimodal [ph] marks the beginning of a series of launches for a new generation of realtime PCR kits, PCR is still the work horse of every molecular biology lab and a key componens in Molecular Diagnostics and a number of actions being performed is increasing. QIAGEN has to date sold far more than 1 million realtime PCR kits to more than 7 thousand customers, representing hundreds of millions of dollars of sales. Building on this success and our expertise, the portfolio of Quantimodal [ph] kits are being utiliized to further expand our position in the growing realtime PCR market by enhancing the specificity and sensitivity of probe-based realtime PCR. The first product launches are planned for this year. As for the other products you see here, I will provide more insights in the next few slides. Moving to Slide 13. Last week, we announced the new collaboration with Exosome Diagnostics to create high-performance, biofluid sample preparation kits for Personalized Healthcare. The initial product launches are targeted for 2014. Our goal is to develop and market the first comprehensive line of products that enable the use of biofluids to explore and monitor disease status. This will be a breakthrough from the current reliance on tissue samples, which when highest quality results can be obtained, require biopsies in patients that can be challenging and expensive. Exosomes are one of the many different subpopulations of microvesicles that can be isolated from biofluids, such as blood, urine and cerebrospinal fluid. And you can extract and purify high-quality RNA and DNA from analysis from them. Exosomes carrying nucleic acids and proteins from their host cells, and they are more widely considered to be essential for biomarket discoveries for Personalized Healthcare diagnostics. We believe that offering standardized, easy-to-use exosome workflows will offer superior testing solutions for use in a wide range of detection platforms, particularly realtime PCR and next-gen sequencing. I'm now on Slide 14. As I mentioned earlier, we are moving ahead at a rapid pace with our next-generation sequencing initiative, targeting clinical research and diagnostics. Workflows have now been placed with customers for early testing, and we're preparing for the start of the phase rollout later this year. We've been developing this workflow with clinical research and diagnostic customers as our top priority and addressing their concerns about current systems. These include too many manual processing steps, having to rely on various vendors to get the job done and being required to batch samples to get cost efficient runs. One of the most important online needs in today's next-generation sequencing solutions is the availability of integrated data interpretation options. These newest customers cannot get a complete offering from biological sample to actionable insight. These insights are increasingly where the value will be created with next-generation sequencing data, such as providing a research with new clinical insights to advance a project or even a physician receiving ideas to consider in making treatment decisions. Based on feedback from our customers, the addition of Ingenuity to the QIAGEN ecosystem was clearly the right decision. We want to do more than just generate sequencing data. We want to generate high-quality data and provide the most valuable insights. This is what QIAGEN Ingenuity can do together and we see this as a key differentiator to drive adoption of our next-generation sequencing workflow. Ingenuity is far more than just a data interpretation solution for NGS applications. We are moving ahead to create seamless solutions for our customers to meet the world's leading resources for interpretation of biological information, altogether, into our range of platform technologies and content to drive science, drug development and clinical diagnostic use. And then in solo position, QIAGEN is a unique player with a constant interpretation-centric ecosystem to serve continuing customers' needs from basic research through to diagnostics. Ingenuity is accelerating scientific discovery and enhancing patient care by providing rich, accurate and visual insights into complex -- but complex biological systems. One of the value propositions of this acquisition is to embed Ingenuity's dry lab interpretation solutions into wet lab molecular assays. Many of you know that we have successfully built such a franchise with our GeneGlobe molecular assay content portal, which offers hundreds of panels for PCR and next-gen applications, as well as more than 60,000 fully annotated assays for the most sought-after diseases. So the opportunities with GeneGlobe and Ingenuity together in our product offering are going to be fascinating for our customers. Moving to Slide 15. I would like to share an example as to what makes Ingenuity the #1 choice. Ingenuity offers the deepest and broadest understanding of biological -- of biology compared to competitors. The superior quality of this content, which has been built up with massive investments over more than a decade, is due to the involvement of scientific experts and key opinion leaders who mainly create and ensure quality control in addition to automated calling. This is simply lacking with competitor products and it has a major impact on the quality of interpretation. [indiscernible] differences can lead to distortions and a lack of reproducibility in scientific or clinical interpretation especially if customers are [indiscernible] millions of data points. So we see Ingenuity's knowledge base and intuitive applications providing a sustainable competitive advantage for years. The gold standard solution for next-gen sequencing is Ingenuity's Variant Analysis. It answers a critical need for researchers trying to rapidly identify relevant cost in variants in these human diseases in a matter of hours. Next-generation sequencing customers are making it very clear that the issue is the months or years it can take to make sense of sequencing data. Variant Analysis alleviates this bottleneck and we want to integrate it into a complete sample-to-result sequencing solution. The power of the Variant Analysis is reflected in the recent announcement of the National Cancer Institute in the United States, which generated the largest data set of cancer-specific genetic variations to date. This new data contains 6 billion data points that connect drugs with genomic variants for the whole human genome. It is designed to provide a better understanding of these genetic variations and how they impact drug response in cancer patients. Ingenuity played a key role in supporting the creation of this data set as researchers use Variant Analysis and the value of Variant Analysis as an important way to disseminate the results has been recognized and how the NCI is now making the data available. In addition to its own database solution, the NCI has chosen to make it also available via Ingenuity. So this is another validation for Ingenuity's position as the gold standard for biological data interpretation. We are convinced that the rapid uptake of Variant Analysis already being used in more than 2,500 users of more than 1,000 leading institutions worldwide will continue at a dynamic pace, given its reputation as the gold standard for NGS data analysis. I'm now on Slide 16. A highlight of the second quarter was the FDA approval in July of our therascreen EGFR companion diagnostic that identifies EGFR in mutation-positive patients with non-small cell lung cancer eligible for treatment of Gilotrif from Boehringer Ingelheim. Our EGFR test has a highly competitive profile, covering more mutations than the other FDA-approved tests, including the most prominent resistance mutation, T790M. With this approval, we now offer regulated assays for the 2 big biomarkers, KRAS and RGQ [ph] in the 3 largest markets of the United States, Europe and Japan and many more such markets on the pipeline. Our portfolio of biomarkers goes far beyond KRAS and RGQ [ph] that is reflected in the slide. It shows the depths of the QIAGEN's biological content available for use in the Rotor-Gene Q with realtime PCR pyrosequencing, and in the future with the GeneReader benchtop NGS workflow. No one else in the industry can offer this type of breadth and depth of content and across so many different technology platforms and all with the unique system tied together with the most advanced biological data interpretation with Ingenuity. Here, we see that we have therascreen biomarkers, and these are primarily for solid tumors while the ipsogen portfolio biomarkers marks hematological disorders and a GeneRead of portfolio of genome panels for next-gen sequencing implications is set to expand into 20 from the current 9G [ph] panels. It is this portfolio biological content along with a range of technologies that give us the competitive advantage to be the leader in Personalized Healthcare, a position that we intend to expand with more biological content and new pharma collaborations. We are advancing our portfolio of more than 15 co-development projects with pharmaceutical companies, and we'll be gaining more insights into the next wave of filings as the year progresses. Now I'd like to hand back to Roland.

Thank you, Peer. I'm now on Slide 17 to review our guidance for the third quarter and full year 2013. We have reaffirmed full year guidance for adjusted net sales growth of about 5% constant exchange rate wise. This include about 1 percentage point from AmniSure being treated as an acquisition through May 2013 and also about 1 percentage point from Ingenuity, which had sales of about USD 20 million in 2012 and is expected to provide about $15 million of revenues on a non-GAAP basis to QIAGEN in 2013. For adjusted diluted EPS, our guidance remains about $1.13 per share. Our guidance for the third quarter of 2013 is for adjusted net sales growth of about 6% constant exchange rate wise with about 2 percentage points from Ingenuity and 4 percentage points from the rest of the portfolio and for adjusted diluted EPS of approximately $0.27. As we have been saying, we are expecting higher year-on-year growth rate in the second half. Pharma, Academia and Applied Testing are expected to show improved results in part due to comparison against the second half of 2012. The Molecular Diagnostics growth drivers are set to keep expanding as well. This slide also contains assumption for adjusted -- adjustments for the third quarter and for full year, but before going through this, I would like to make reference to the changes announced in our press release last night in terms of the presentations of adjusted results in 2014. As of January 1, 2014, share-based compensation will be included as a cost in adjusted results. Information on share-based compensation will continue to be disclosed in QIAGEN's regulatory filings and annual reports. Also starting next year, in light of the completion of the efficiency project in 2014, cost restructuring activities will only be adjusted for business integration and acquisition-related M&A activities. We will continue to adjust volatization [ph] of our client intellectual property. So now for the adjustment for the third quarter, we expect share-based compensation of about USD 8 million, about USD 29 million for amortization of acquired intellectual property, about USD 20 million for business integration acquisition and restructuring items on the pretax operating income. For the third quarter, we expect approximately USD 5 million for business integration and acquisition-related costs and $15 million for restructuring. We also expect a similar split in the fourth quarter. As for adjusted tax rate, this is expected to be about 19% and this compares with a sequential tax rate of 23% in the second quarter of 2013. For the full year, we expect share-based compensation of about USD 33 million to USD 35 million, about $115 million for amortization of acquired intellectual property and then about $130 million to $135 million for business integration acquisition and restructuring as we complete the efficiency project. The adjusted tax rate is expected to be about 19% to 21%, which compares to 21% in 2012. With that, I would like to hand back to Peer.

Yes, thank you, Roland. I'm now on Slide 18 for a quick summary before we move into Q&A. Our results show the ability of QIAGEN to grow in challenging conditions. We are making progress on our initiatives to accelerate innovation and growth and have reaffirmed our plans to deliver improved sales and earnings for the year. This commitment to improving sales growth is accompanied by a focus on improving earnings and cash flow as well, and we want to see the benefits emerge from the major efficiency project that we have just completed. This conviction is shown in our decision to launch a new $100 million share repurchase program. Let me review again what we have announced. We achieved our targets for the second quarter in terms of sales and adjusted earnings growth. The FDA approval of our therascreen EGFR companion diagnostic kit compared with a breakthrough medicine for lung cancer patient is a key step in strengthening our Personalized Healthcare leadership, being backed by the deepest and broadest portfolio of content. Our next-generation sequencing initiative is moving ahead towards a phase customer launch later in 2013. Customer feedback and the acquisition of Ingenuity confirms our conviction that integrating gold standard for biological data interpretation will be a crucial differentiator in offering a complete and highest-quality NGS workflow. We are also nearing the milestone of 1,000 unit of placements of QIAsymphony. And we have also completed a major efficiency projects with a final group of initiatives, we are convinced that this project will put QIAGEN in a far better position today and we are determined to show the benefits through faster and higher value growth. In closing, we are delivering innovation and growth during 2013 even in a challenging environment and proactively addressing these market dynamics to leverage our leadership across all customer classes. With that, I'd like to hand back to the operator to open up the Q&A session. Thank you.

[Operator Instructions] .

Operator, do we have a problem with the queue?

Excuse me, Vamil Divan? Vamil Divan - Crédit Suisse AG, Research Division: My question relates to EGFR, and the percent [indiscernible] you talked about there.How should we just think about the uptake because that test now there's a [indiscernible] in U.S. as compared with your success, what seems like good success you've had with KRAS. I mean, more generally, now that you have approval of these 2 companion diagnostics, how is that impacting sort of instrument demand in the U.S.? If you could just kind of touch on that...

KRAS experience, well, that would be a very important one. First, it allowed us to create a broad availability of our platform technology in our pathology labs. And clearly, this is something that will benefit the therascreen EGFR uptake due to the fact that the instruments are available now in those labs. And the workflows are well understood in training now [ph]. So that should be a significant benefit. The KRAS experience was also an interesting one because during the KRAS adoption, we had turbulences in the reimbursement landscape. And they, to a certain degree, are still here, but they're starting to clear. So the therascreen KRAS experience will definitely serve as a good template for EGFR. With KRAS, we've been able to achieve a very significant adoption. We are -- we, very quickly, went to 50%, 60% market share and are moving higher on that. And people are now appreciating that the investments that they made in the platforms can now be amortized over not only KRAS, but now also EGFR. It is exactly the same customer who does the EGFR testing compared to the KRAS testing. So from that perspective, we expect a good uptake. We already have a good share in the research applications, and we will make sure that, that converts also now to the clinical diagnostic application for EGFR, going forward, especially due to the fact -- and this was very, very helpful -- and a big benefit for us is that we have such a wide range of mutations that were analytically or even clinically validated and part of the label as well. This is a big differentiator and a big value proposition for our pathology customers because they can call out specific mutations that are of value. Vamil Divan - Crédit Suisse AG, Research Division: Okay. If I could just squeeze in one more, just a follow-up on related. On the gross margin line, I appreciate the comments you guys made there, on the quarter, on the first half. Can you provide just a little more color on how to think about that? The gross margins for the third quarter and/or the second half, it did come in a little lower than we were expecting this quarter.

Yes, I could take that. We do believe that actually, the trend in the second quarter was quite positive also in terms of margin for QIAGEN. And of course, margins, too, can be directed by 2 factors on one side is our HPV franchise and the second factor is clearly, we are very successful in placing QIAsymphony [indiscernible]. We are trend QIAGEN programs, which clearly leads to incremental increase in depreciation. So those are the 2 biggest factors, going forward, I do believe our gross margin is an area where we are today is what we are going to expect.

The next question is from Tycho Peterson. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: First, just on TB, wondering if you can talk about maybe some of the competitive dynamics there for QuantiFERON, both with the receptive, getting a little bit more vocal with [indiscernible] TB -- at Oxford making a little bit more of a push in the U.S

Sure. Well, the QuantiFERON-TB sales are doing very well, and we expect that to continue for quite some time. The competitive dynamics in the latent TB area, which is the one that QuantiFERON addresses is -- there's one small competitor that you mentioned that is primarly selling through a lab service. The process is extremely complicated and difficult to replicate and this is why it has not achieved broad adoption and that is to do with the way the technology or the way the diagnostic is set up in terms of use of specific technologies. So from that perspective, we have a very good position and remember the IP position that we have or the value proposition of QuantiFERON is the way that it is -- the technology is configured in a very easy process. The active TB noise that has been coming up is one that I was quite surprised about. The active TB market in the United States is not really very big. It is very big outside the United States and in emerging countries and in developing countries. In the United States, we've been monitoring it. There are some pockets of testing that are quite interesting. But definitely, any noise around TB, it is a very, very important disease to manage for the public health systems. Any noise around TB as a disease is very helpful for also bringing our message across that the best protection in the United States or other developed countries is active latent TB monitoring to contain or manage the disease.

And then, just to follow up on the trending in the back half of the year, you've had a number of questions today about kind of the assumptions around the acceleration that you're talking about. How much of that is just the function of easy comps versus maybe Pharma hitting a little better or other dynamics?

We're still quite cautious and particularly, in our Academia, where the budget cycle is now starting. We obviously had a very difficult second half last year in Academia as we went into continued with resolutions and the questions on the sequestration emerged. Now the market has gotten a little bit more used to it, so we are constantly optimistic on a rather stable situation for now. In Pharma, it was -- the [indiscernible are quite choppy so there is a quarter where we see significant ups and then a quarter significant downs. So this have to do with the site closings or big purchase programs, or big clinical trials that we are participating in, so it is a little bit more difficult to predict on a quarter. In the second half of the year, we think that the trends are intact. And you're absolutely right, there are some significant year-over-year effects that are impacting the top line sales growth through the second half of the year. So I would call it maybe 50-50, base effect versus also a continuation of the trends that we are currently seeing. If you did the math this way, we now have a little bit more than 48-point-something-percent of sales for the first half of this year and this is pretty similar to what we had last year.

Next question is from Mr. Daniel Wendorff.

One to start with on your next-generation sequencing initiative. I appreciate that you spent that much time on explaining how Ingenuity went to your whole product offering. And what I would be interested to know again, what makes your product offering unique. And then also what could be sort of late contribution in the first year and on the other market of the major products, which I assume, are already [ph] in 2014 that, that would be my first question. And as a follow-up question, you mentioned that the QIAGENs new placement 15% in Q2 and that's consumables growing double digits in Q2. Can you potentially comment on the average current average consumable revenues per machine per year? That would be helpful.

Dan [indiscernible] take the second question [indiscernible]. So the first is, Dan, I hope you appreciate I won't give you sales speech for NGS. I'd be happy to give you one in a few months. But at this point in time, we -- clearly, this is a very emotionally charged market and one where there are significant opportunities. We feel very confident that we have a very, very competitive offering. We're targeting towards a niche, so we're not going into the overall market of next-gen sequencing. There's some very good and also successful players in this area, and they're doing a good job. Our focus in this area is to integrate into a sample-to-result workflow, meaning not sampling purified nucleic acid, but really a sample meaning a block of FSP. And then a fully automated workflow, you create a sample to interpreted results experience. And this is quite unique in the way the solution is designed. It also allows a very high throughput of samples, which is important in clinical research and diagnostics. So we have a number of benefits. We are also not leveraging a technology philosophy that's completely unknown, very well established and high-performance technology that we're using, our approach we're using is sequencing by synthesis with our own improvements. And this is something that we will get further details on in a few months, most likely around AMP. So I'll start giving you a sales pitch later this year -- at some point, would love to walking you through our customer list. Do you want to have...

Yes, absolutely. The QIAsymphony, I think there is -- just had good news around symphony. The one good news is that there are still a huge demand for symphony out of the other very good one, placing the instruments in the field and as said, even allows where we have a very strong performance. The second, of course, also in consumables portfolio is a very good double-digit growth this year. And you have to factor in one thing, which is important to realize, is it's important to understand, of course, if you have an increasing number of placements, that's clearly, actually, in the first 12 months. It's required a certain ramp-up phase in consumables and adoption of instrument. Despite that fact, we have seen now and why it's in terms of consumables and $60,000 [ph] and not as high as $80,000 [ph]. Our top customers are now very nice and north of [indiscernible] consumables per year. So I would say a very nice improvement in terms of growth and instrumentation placements, as well as consumable portfolio and of course, more opportunities are coming up with increasing our portfolio or on this year. It's we clearly one of the growth drivers of QIAGEN and it's clearly something I think we all have to realize there's not we have set on different growth drivers. It is on one side is the QIAsymphony, it is our health care franchise. It is our latent tuberculosis franchise. It is a performance in emerging markets so rather a set of different drivers for the second part of the 2013 and also for 2014, which should help us in accelerating the growth. But it's not down to 1 topic. It's pretty 5 [ph] , 6 [ph], different CapEx, which are helping us go into the right direction.

Your next question is from Mr. Vijay Kumar.

So Peer, I wanted to dig in a little bit on Ingenuity. You have really positive feedback at ASTC. It feels like for the lab directors, for those who are trying into the next-gen sequencing, the utility of Ingenuity was unmatched. [indiscernible] The data was really sort of shared by lab directors. And my question is how do you plan to monetize Ingenuity for the special customer class, I guess? Has anything changed your view on the growth rates? Or any color you can provide would be helpful.

You're absolutely right. This solution is starting to emerge as a very clear leader in the diagnostics field as well. And there are multiple placements or many placements across the industry, including some large ones, also announced with large reference labs. The value proposition, several fold -- first of all, we're happy to support any customer using any platform and certainly on the interpretation side because this is something that we can generate value for us but also for the customer. At the same time, we think there's a value proposition in having a perfect integration where the content is, the assays, for instance, are perfectly aligned in terms of their workflows and also with the subsequent interpretation, which in some cases is still a transfer or is some sort of a translation into interpretation-ready format. So having those in the push button integration basically, 1 click from a sample to interpretive results processing is very helpful. You see some of our first panels now emerge already with integrated, also vouchers and access to the interpretation using these resources for customers who don't want to just look at the standard mutations and get those reported out on, they are part of the standard package. But to actually then look and scan the databases for potential other findings that the sequence results gave on the panels themselves. So even on small things like that, we're getting very, very nice uptake and that is increasing the value proposition of our overall workflow, including the assays. As we've said in spring, for us, the integration of Ingenuity is not about the workflow. It's not about the business model that that company had in the past. It's about integrating that value proposition into our assays, into our workflows, into our instruments and into our whole ecosystem.

Great. So maybe just one quick one for Roland. Could you just remind what the stock compensation assumptions are for the year roughly, Roland?

Sure. You will actually find in an attachment of our -- in the appendix of our slides. But we took -- we have a very constant number, so what we had seen in the second quarter is also what you're expecting in the third and fourth quarter as well.

The next question is from Mr. Doug Schenkel.

I guess one -- sorry to keep harping on Ingenuity. But it's really great to hear how enthused you are about the product. And it's interesting to hear you all just talk about how important it could been in clinical applications. I guess the one thing I'd like to hear a little bit more about is in talking to Ingenuity a number of times over the years, including just before your acquisition of the company, we heard about Ingenuity having a product in the pipeline that's very similar to Variant Analysis, targeted specifically at clinical applications. However, Ingenuity and industry consultants believe that the regulatory pathway for this product would be at best a bit unclear for the foreseeable future. Most of Ingenuity sales as you've talked about the prepared remarks have been historically to biopharma and, to some degree, over recent quarters increasingly to academic researchers. How are you guys thinking about the regulatory pathway for Ingenuity in clinical applications? And given that these applications account for a small but growing percentage of Ingenuity sales today, how do you expect the overall sales mix of Ingenuity to evolve over the next year or so?

Well, I think there are 3 answers to that. First is there's -- there are many different regulatory systems and we shouldn'y only focus on the United States. So in other countries of the world, there is a wide open pathway for the use of these tools and they represent almost half of the world's market or even maybe more. So that's something that we're definitely taking global on this. The second thing is, if you don't believe in the use of these tools, you don't believe in next-gen sequencing and diagnostics. And we all know that it's because that's essentially what you're doing, so if you're -- any diagnostic sequencing result, there is not a single FDA-approved product out there. And data is being reported out that currently is still far away from being in a format that is regulated. And there's also, there are a lot of question marks in terms of the regulatory pathway of next-generation sequencing overall, at least for these broader scans. So we are actively working with regulators and the power of the technology is just so convincing that it can be followed up with regulated tests. Exploratory scans can be done in research use mode. The question is, who reports what and under what Safe Harbor regulatory process is then the confirmation done. We heavily believe that the use of regulated realtime PCR kits will continue for quite a long time because that is a very, very established regulatory pathway. But we also see that there is synergy with next-gen sequencing. And that synergy, the link between the realtime PCR and the sequencing products is in the interpretation side, interpretation of broad masses of information, into potentially actual mutations that could be tested for using an FDA-approved product. So there's a certain sequence that people are looking at. But right now, the whole industry is in search for a regulatory pathway. We are in an intensive discussions, as I said, and we want to work with the agencies around the world to bring the power of this technology to not only pathologists but to patients.

I guess a guidance question for either you or Roland. So correct me if I'm wrong, but it seems that your organic revenue guidance for both Q3 and Q4 is for about 4% to 5% growth. You talked about some academic improvement or at least stability versus easier comps. You've also talked about choppiness in Pharma. Pharma has been an area where you guys have been growing a little bit below the peer group the last few quarters. Is there some specific backlog to the Pharma end market that you expect to drive some notable growth behind the favorable comps in the second half? And if you talk about Japan's stimulus activity, I missed it, I'm just curious if you picked up some business there maybe at the end of Q2 that's going to help you in the second half. And also this LDT reimbursement issue, are you expecting that to be less of an issue in the second half?

Well, the number of things that I would point to is impacts, and Roland if you could maybe prepare the year-over-year numbers and also sequential additions. But as I said before, there are base effects, which are about half of that, that the other half is a continuation of trends similar to what we saw the third quarter. So we're not expecting manna from heaven, we're not expecting magical jumps anyway. If you look at the math, there is a pathway in front of us, which is pretty similar to what we saw last year. You're right, Pharma has been choppy. I would debate that it was below the peer group. If you remember, we were high-single digits last year in growth. I don't -- didn't see that with anybody. The first quarter was very weak. The second quarter was now a little bit better. It is, as an overall group, it's a little bit difficult to predict. We think we have some predictability now into the fourth quarter and are assuming a very modest growth rate for Pharma. But also here, the year-over-year is more difficult in Pharma, it's much easier in Academia. On the net, it's actually a favorable base comparison. Roland?

Yes, I think, for a while. The answer to your question [indiscernible]. So far something in Q2, so it clearly is a step-up. Something is going to happen in the second or fourth quarter, but I would remark on what was said before. We're actually in quite a similar pattern as last year in terms of allocation. First half to next year, so we're actually see that we are well on track also in terms of performance from Q1 to Q2. We have seen in all customer segments an improvement. And if we look into Q3, a lot of growth drivers are coming off into an impact. We talked about two-year [ph] ARPU. We talked about the QIAsymphony placements doing well. We talked about the consumers are growing quite nicely. We clearly have seen a very nice improvement also around the QuantiFERON-TB business. And the only nonorganic one for the rest of the year is Ingenuity, and we clearly laid out the number here as well. So clearly, a lot of different reasons to coming together here. So again, as always business is a challenge. But I would say it's no different than what we have seen last year so...

The next question is from Mr. Derik De Bruin.

So if you look at the margin outlook over the next couple of years, you obviously have taken a lot of the restructuring actions. You've got mixed changes. You've got acquisitions coming in. You've got pricing going all over the place. I guess how do we think about where -- what do you go from its 27%, 28% adjusted operating margin this year to -- are you in for a transition year as you sort of launch out the sequencing stuff? What -- when we sort of look at '15 and '16, what do we think about in the margin trajectory?

Roland?

Yes, sure. I would say we see similar performance in terms of margin development that we expect for this year. Please bear in mind that this year's margins, margins got the diluted by 100 basis points because of the Ingenuity acquisition as we laid out when we announced the acquisition despite the fact that we are probably able to margin already this year. We clearly did a lot around restructuring efforts, so it's clearly also something where we believe that we should expect certain acceleration out of that. So general, things are moving in the right direction. We still believe our midterm goal of 100 basis points. EBIT margin improvement is what we are looking for. Nevertheless, seeing all the initiatives also on the top line on the midterm, that this should be account of something that we should reach quite nicely.

Great. And then just one quick follow-up on that one. I guess, what are you sort of looking for x U.S. HPV screen growth? Is it something that was double-digits?

No. On x U.S., we moved a little bit to -- why I'm talking about it because a lot of this business is pent-up business, and we want to talk about is [indiscernible] business here. And as you see now, we did, for example, this quarter, on our China franchise. It's really something where we don't want to create too much expectations right now because sometimes this takes longer than you internally predict. Nevertheless, in terms of market share and winning tenders, we still have a good track record here. So a couple of tenders out in Europe, as well as in emerging markets, and we will report about it once we won them.

I think that -- just to add on to that, we're winning almost every time in this area as well. And the recent data, especially from a large population-based screening, a study in Denmark came out dismal for some of our competitors, and very strong for us. And this has clearly made the power of our technology very clear for these population-based screening tenders. So while they're happening on a regional basis kind of continuing, we're winning a lot of them. But in terms of growth, it is not a high-growth because most of the countries are still on [indiscernible] very limited post-screening regionally.

The next question is from Mr. Bill Quirk.

Just wanted to follow up here. Your thoughts a little bit about reimbursement on couple of different occasions, plus a call for an earlier question. In 2Q, in the States, anyway, has become quite a problem for a number of companies, both small and large. And so I'd be curious -- it doesn't really affect some of your infectious disease products, but obviously, for the Personalized Healthcare. Maybe some of your practices where you have some overlap on genetic analysis. How should we be thinking about that? I guess have you thought about that in terms of the back-half guidance?

Sure, Bill, good question. No, there's definitely been a lot of turbulence in the reimbursement landscape in the first half of the year. The largest focus that we have in our own reimbursement effort, we've been, on the hill at least, 50x, 60x in last 6 months in various formats and we've been actively lobbying for there fairer reimbursement rates for both LDTs and also FDA-approved kits. Some of our labs are truly suffering, and we're doing everything we can to support that. Now when the reimbursement rates for LDTs came out in January, clearly that was little bit a shocker for everybody. At the same time, a few weeks later, we were informed that there would be a premium reimbursement rate for FDA-approved kits. And the KRAS reimbursement rate came out that $385, substantially, above where we had the average on the quote stacking. And this has been very favorable for customers who have run the math. Because the difference between the LDT and the FDA reimbursement rate is actually about the price per reportable. And so it is actually economically favorable to use the FDA-approved kit for laboratory compared to the LDT. Nevertheless, the base rate, the LDT rate, is just too low. And there's no question about it. And we're trying to raise that. So we are providing some additional value drivers for our laboratory customers and same will hopefully be true for each follower, where reimbursements rates are going to be sent in the next few weeks. But nevertheless, these differential reimbursements have not yet broadened through the United States. They started only in certain regions or certain coverage areas, and we expect them to go broader. Currently, a lot of laboratories are not getting these premium reimbursement rates, so it has been very difficult to adopt and to accelerate. But this is a something, I think, which is more a matter of time. And to make long things short, we have a very interesting value proposition for laboratories by going through these very, very expensive FDA approval processes. At the same time, laboratories are currently suffering because premium reimbursement rates for FDA-approved products are not available and a lot of them are LDTs, which are not very attractive.

Just to sum it up, would you expect reimbursements sort of the headwinds that you've seen to continue to dissipate here? And I guess the question is not just CMS but managed care as well. And then follow-up question is just on sequencing. Is it reasonable to assume that we should start to get some stats at meeting in the fall or back half of the year? Something like an [indiscernible],

Yes. You're absolutely right that we offer a value for our customers. So the reimbursement rates, we're able to secure for our assays, will give us tailwind or is giving us a tailwind to move into the laboratory because it's economically a lot more attractive to work with a therascreen KRAS kit, for instance, than it is to do an LDT. So this is giving us the benefit, and we have the only approved KRAS test and we have the best EGFR test out there. And this is something that should be a benefit to us. But again, we are feeling for our customers and are actively working with them because we also have an interest in LDTs as well. In terms of the NGS disclosure, yes, we will start providing more information later this year. We should see [ph] potentially AMP with the -- if you decide to do that and increasingly then build the information base over the next few months.

Your next question is from Mr. Matthew Shaer [ph].

If we are looking at the initial results, I was wondering actually what makes you very confident to reset the guidance and what could be your biggest fear in terms of all the issue and just as quick follow-up on the PHG [ph] franchise. We saw some lower [indiscernible] revenues in Q2. I was wondering if you could give us some comments on that for the rest of the year, and as well as the RGQ [ph] you signed this quarter?

I'll take the second one. Roland, if you could take the first one.

Sure, then I'll start. Yes, it's hard to say that earlier, we do believe that the ramp-up from Q1 to Q2 is quite promising because [indiscernible] to remain our customer segments. We clearly do believe that Academia is continuing to be a challenging environment. Nevertheless, it improved a bit compared to the first quarter and as Peer said before, we are still to see what happening now especially in the U.S. by end of the year, but I would say that it's still too early to speculate. In all other areas, our growth drivers are very well on track. We see that our latent tuberculosis franchise is on track. We see that our QuantiFERON franchise is doing very well. We see television consumer growth rate in Applied Testing. We are seeing good growth rates in the emerging markets. So there's a lot of different reasons why we believe that things are moving in the right direction. In a very difficult environment, I think we have to understand as well. Therefore, we also kept the guidance as it is, and we see so far on track by delivering that. And again, we are going to update U.S. as the year proceeds. But so far, I would say we study better than we thought we are. We were able to close our restructuring efforts in the second quarter of 2013, which is an important milestone that is probably not seen much from the outside. But certainly, of course, it gets us more focused and again, very clearly out for the next couple of years. So I would say also, the structure is well in place.

And Matthew, to the first question, the project milestones are typically related to the development milestones that we have with Pharma Partners, so we basically conduct a development, reach a certain milestone that could be a validation milestone or a regulatory milestone and we then write an invoice and recognize the revenue. And that can be lumpy, and this is not the majority of our actually for the minority of sales in this space. But is one that can go up to $1 million down to a few million. We are signing is a lot of the new partnerships, and this year has been very good. We've been filling the pipeline for the next few years very well. And however, we have decided not to announce most of the deals that we do because clearly, some of our former partners have pipeline attrition risks that they want to make sure that they manage correctly. Also in terms of the public information, so a lot of this is still confidential wherever possible, we are -- we discuss if we can or should release some information on it. We're trying to take this a lot closer now to market introduction. But the interesting thing is we are not only in cancer and we're also in other UNTS [ph] and other diseases as well, and have a broad set of a biomarkers, both QIAGEN proprietary but also partner proprietary assays that are being added to the portfolio. So the list I gave you in the presentation is really only what we have publicly available in the shelf. If you would it take the pipeline, it would be much bigger.

So with that, we'd like to close the conference call, and thank you for your participation. If you have any questions or comments, please don't hesitate to contact me and we look forward to talking to you. Thank you very much.

Ladies and gentlemen, the Q1 Results 2013 Conference Call is now included, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.