Qiagen N.V. (QGEN) Q4 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to QIAGEN's conference call to discuss results for the full year of 2013. [Operator Instructions] Please be advised that this call is being recorded at QIAGEN's request and will be made available on their Internet site. [Operator Instructions] At this time, I would like to introduce your host, John Gilardi, Vice President of Corporate Communications at QIAGEN. Please go ahead.

Thank you. And good afternoon, and welcome to all you who have dialed in for our conference call. Our speakers today are Peer Schatz, the CEO of QIAGEN; and Roland Sackers, our CFO. A copy of this 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 will see the customary disclaimer. The discussion and responses to your questions on this call reflect management's views as of today, January 30, 2014. Today we will be making statements and providing responses to your questions that state our intentions, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the Safe Harbor provisions. They involve risks and uncertainties that could cause actual material -- actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For more information, please refer to our filings with the U.S. Securities and Exchange Commission. I would like to now hand over to Peer.

Thank you, John. Hello, and welcome to our conference call today to discuss our results for the fourth quarter of 2013 and for the full year, and also to provide you with perspectives on our goals for 2014. We are pleased with the results for 2013, having delivered our communicated targets. The achievements of 2013 show the progress we are making to accelerate innovation and growth, especially by focusing on our 5 growth drivers. With QIAsymphony, the first growth driver, we are expanding the test menu. We recently completed a 510(k) submission in the United States for the C. difficile assay, which detects bacterial infection that is a growing problem in healthcare facilities. We also have sought U.S. clearance for the QIAsymphony complete workflow, and we are working on a number of other potential submissions for 2014. This breakthrough automation platform, QIAsymphony, is setting new standards, and we have set a new goal for at least 250 new placements in 2014. In Personalized Healthcare, we have reached several new agreements for co-development projects with growing interest from pharmaceutical companies following the U.S. regulatory approval of our therascreen EGFR companion diagnostic kit in July. Uptake of our companion diagnostics is improving in the United States following progress on reimbursement issues. We are pleased with the premium pricing achieved with our evidence-based reimbursement strategy. The second of our 5 growth drivers is QuantiFERON-TB, which is the modern Gold standard for detection of latent tuberculosis. This product has a strong growth profile and is set to exceed $100 million of sales in 2014. We are expanding this franchise's global presence and are preparing for an important launch in China this year. Two of our growth drivers involve our next-generation sequencing initiative. Our ambition is to offer broad portfolio of products and services to drive the use of this breakthrough technology in clinical research and diagnostics. We have a 2-pronged approach. First, we are offering many products as universal solutions that can be used with any sequencing platform or data. An important initiative for 2014 will be to accelerate the growth of this expanding portfolio, which also includes industry-leading sample technologies. Second, we are advancing our own next-generation sequencing benchtop sequencer workflow, which will use these products as well, but integrate them into a seamless work stream, as we say, from sample to insight. On the GeneReader NGS workflow, we are moving ahead with development and our plans for commercialization in 2014. A key achievement of 2013 was becoming the industry leader in commercial bioinformatics, which is one of our 5 growth drivers, through the combination of Ingenuity and CLC bio with our own activities. We are establishing an important foundation for growth by offering gold standard solutions to transform complex data generated by any sequencer into valuable molecular insights. Bioinformatics is a market segment set for dynamic growth, and we are anticipating significant incremental sales contributions in 2014 and beyond. Turning to 2014, I would like to share some initial perspectives. As you know, we expect increasing headwinds from the HPV product portfolio in the United States, which continues to face competitor-driven pricing pressure. A topic for 2014 is the nonexclusive switch of a U.S. reference laboratory to a competitor product portfolio in addition to ours. So after 2 percentage points of sales headwind in 2013, we currently expect a sales headwind in 2014 of about 4 percentage points from the U.S. HPV portfolio. At the same time, remember that we are anticipating a solid business expansion from the rest of the portfolio of about 8% to 9% on a constant exchange rate basis and that are our top growth drivers. So this leads to our guidance, for about 5% -- 4% to 5% constant exchange rate growth in adjusted net sales for 2014. If we look into 2015, we expect the bottoming out of the U.S. HPV screening revenues. And we can see an exciting impact from our strong focus on attractive long-term growth drivers in the years to come. In summary, we are pleased with our performance in 2013, a year with challenging macroeconomic trends and key actions to transform QIAGEN and strengthen our capabilities. We look forward to accelerating the pace of innovation and growth in 2014 and delivering improved results. And on Slide 5, to provide an overview of results for our 4 customer classes. All of the customer classes delivered growth for the year led by Molecular Diagnostics and Applied Testing, while Ingenuity and CLC bio provided first-time revenues in all customer classes as well. As I mentioned earlier, we continue to place QIAsymphony systems and generate double-digit growth in consumable sales. These involve primarily products from our profiling infectious disease portfolio. Contribution from instrument sales, however, were lower in 2013, and this is due to how the revenue from instrument placements is deferred over a multiyear period in QIAsymphony reagent rental agreements. In Prevention, the QuantiFERON latent TB test continue to grow well above 20% on a constant exchange rate basis and eclipse our target with robust demand in the United States, while we have benefit from shortages [ph] of the 120-year old skin test. Personalized Healthcare is another growth driver, and here we saw mixed results. Sales of companion diagnostic kits were higher, but revenues from Pharma co-development projects were down significantly compared to 2012, and they were especially lower in the fourth quarter of 2013. We have said before that the timing of these revenues can be volatile, but are anticipating higher revenues in 2014. We're also very pleased that we signed a record number of agreements with pharma companies in 2013. In our HPV portfolio, where products are used to screen women for the human papillomavirus and the risk for cervical cancer, global sales declined 4% on a constant exchange rate basis in 2013 and provided about 16% of total sales. Here we have a differentiated picture as well with sales in the United States down at a double-digit pace in line with our expectation and creating about 2 percentage points of headwind on total QIAGEN sales. But at the same time we saw solid double-digit constant exchange rate growth in the rest of the world where we have done extremely well in winning business from screening programs. In the Life Sciences, all customer classes grew despite challenging macroeconomic trends. Applied Testing sales grows at a mid-single-digit constant exchange rate basis, returning to growth during the second half of the year and overcoming the tough comparison to the outstanding QIAsymphony instrument revenues in 2012. Pharma grew at a low single-digit constant exchange rate, and this was supported by the bioinformatics acquisitions. Trends were challenging in this area during the fourth quarter of the year as well, with the impact of Pharma industry productivity initiatives and restructuring activities weighing on growth. Academia sales were under pressure during the year, given the U.S. and European funding environment, and the bioinformatics contributions were important to delivering growth. As for 2014, we anticipate better overall funding trends, but the 2014 levels are still below those seen in previous years. I would like now to hand over to Roland.

Yes. Thank you, Peer. Good afternoon to everyone in Europe, and good morning to those joining from the U.S. I'm now on Slide 6, and would like to review our results for the year. Adjusted net sales were USD 1.306 billion, and we're up 5% at constant exchange rates, which was in line with our goal of 5% constant exchange rate growth. While adjusted earnings per share were USD 1.14, and up our target of USD 1.13. About half of the sales growth came from Ingenuity and CLC bio, while the other higher half comes from the rest of the portfolio. Currency movements had an adverse impact of about 1 percentage point on reported results. As you have heard from other companies, some currencies significantly devaluated during the year against U.S. dollar, especially the Japanese yen, Brazilian real and the Turkish lira, which are countries where we have important sales operations, but few operating costs. And this is weighted on our operating results. However, this was offset by the currency gains on balance sheet positions which are reported below EBIT. Adjusted operating income was largely unchanged at about USD 355 million, and the adjusted operating income margin declined to about 27% of sales in 2013, compared to 28% in 2012. Keep in mind that we had said in the investment in bioinformatics, which is a key foundation for future growth, which results in near-term dilution of about 100 basis points for 2013, and also some margin dilution in 2014 as well. We also made significant investments in reallocated resources during the year to support R&D sales and marketing initiatives, focus on all of our 5 growth drivers. As you know, we also completed a major efficiency and effectiveness project in 2013. And we are determined to reap the benefits through improving profitability and have set targets for margin expansions in 2014 and in the coming years. Adjusted net income rose 6% for the year to USD 275.1 million, and this included some revenues from technology licenses. The adjusted tax rate was 20% for the year, which was in line with our target. And now on Slide 7, to give you an overview on our regional performance in 2013 with all regions delivering growth. About half of our sales was in the Americas, where there was 5% constant exchange rates for the year. Strong demand for the QuantiFERON-TB test led to overall positive single-digit growth in the U.S., which more than compensated for the accepted drop in HPV sales and the Academia conditions. Large customer orders in Latin America for HPV screening also supported the performance. In Europe, adjusted net sales rose 2% constant exchange rate wise. Key contributors were countries in Northern and Western Europe, with Molecular Diagnostics and Applied Testing leading the regional performance. We delivered double-digit growth at the top 7 emerging markets, which together grew 24% and provided about 14% of adjusted net sales in 2013. Among the emerging market leaders are China and India, which led to the 6% constant exchange rate growth in the Asia-Pacific/Japan region. I want to note here that sales were largely unchanged in Japan at constant exchange rates for the year, and we have not seen signs of the government stimulus funding yet. I'm now on Slide 8 and will provide some comments on consumables and instruments. Consumables and other revenues were 6% constant exchange rate in 2013 and provided about 88% of sales. We are seeing an ongoing shift in the product mix towards consumables and our expectations for rapid growth in bioinformatics further supports this trend. Revenues from instruments contributed about 12% of sales, and we are down 4% constant exchange rate from 2012. After the improving trends in the first 3 quarters of the year, instrument sales unfortunately turned lower in the fourth quarter as adverse funding trends weighted on capital projects such as Academia and Applied Testing customer classes. Instrument sales in Molecular Diagnostics were also down slightly for the year and faced a tough comparison against double-digit constant exchange rate growth in 2012. At the same time, we are very pleased to achieve our targets for QIAsymphony placements and to deliver solid growth in consumables. I'm now on Slide 9 to review our results for the fourth quarter of 2013. Adjusted net sales were up 5% at constant exchange rates, which was in line with our target for around 5% to 6% growth, while adjusted EPS of $0.36 was ahead of the target for $0.35 a share. Our entry into bioinformatics has been very successful, with Ingenuity and CLC providing about 3 percentage points of growth and the rest of the business providing about 2 percentage points. We saw solid gains among our 5 growth drivers, and our global HPV franchise absorbed lower sales in the U.S. However, we also saw a sharp decline in Pharma co-development partnership revenues and weak instrument sales against a tough comparison a year ago. Adjusted operating income was largely unchanged at USD 106.3 million compared to the fourth quarter of 2012. And here again, we are making significant investments and also faced about 50 basis points of pressure in the 2013 quarter from adverse currency movements. Moving down the income statement, adjusted net income was 6% even against the higher tax rate compared to the fourth quarter of 2012. I'm now on Slide 10, with an update on our financial position. As of December 31, 2013, we had liquidity of about USD 380 million. And our net debt was at a reasonable level of USD 482 million. Leverage has moved up slightly to about 1.1x net debt to adjusted EBITDA, compared to 0.9 at the end of 2012. We see QIAGEN is continuing to have a healthy financial position, one that provides flexibility to support business expansion as well to increase returns to shareholders. Our cash flow performance has improved during the year with QIAGEN generating USD 259 million of operating cash flow in 2013, and also higher free cash flows than in 2012. This has to be seen in light of the restructuring charges taken in 2013, which had an adverse cash impact of about USD 65 million for the year. But given that we completed our restructuring project, we are targeting to significantly improve cash flows in 2014, which is in line with our ambition to double operating cash flow in the midterm. I would like to now hand it back to Peer.

Thank you, Roland. I'm now on Slide 11 to provide some insights on implementing our strategy with the ambition of accelerating innovation and growth. Our strategy is anchored on expanding our leadership in Sample & Assay Technologies that address the rapidly evolving needs of customers to transform biological samples into valuable molecular insights. These 5 growth drivers address the critical needs of many customers across these classes and are driving the dissemination of molecular technologies. First we are driving global adoption of the QIAsymphony platform and expanding the menu of test content. We are also extending QIAGEN's leadership in Personalized Healthcare with innovative companion diagnostics, and we're also establishing the QuantiFERON-TB test as the modern gold standard for latent tuberculosis control. Our last 2 growth drivers are emerging very quickly. We are expanding the use of bioinformatics in molecular applications, particularly through the investments we are making after the Ingenuity and CLC bio acquisitions in 2013 and creating an industry-leading portfolio to drive use of commercial next-generation sequencing in clinical research and diagnostics, areas where there are still significant bottlenecks holding back the adoption. I'm now on Slide 12 to provide some perspectives here on the guidance we have given for 2014. Now the 5 growth drivers are driving the transformation of QIAGEN. As you see on this slide, adjusted net sales were about $1.306 billion in 2013. I mentioned earlier that we are anticipating about 4 percentage points of headwind from lower sales of HPV products in the U.S, and this is about double the headwind from 2013 of about 2 percentage points. We see 2014 as the year U.S. HPV sales fell well below of 10% of net sales. At the same time, we are anticipating about 8% to 9% constant exchange rate growth from the rest of the business, and this leads to the guidance of about 4% to 5% constant exchange rate growth. This shows the underlying strength of the overall QIAGEN business. As we have said before, this does not include any sales contributions from the planned launch of the GeneReader NGS benchtop workflow in 2014. Here are the points to consider on the growth drivers. QIAsymphony is providing about a percentage point of incremental sales growth to QIAGEN. QuantiFERON is set to break through $100 million of sales in 2014, surpassing the size of our U.S. HPV franchise. Personalized Healthcare generates more than $100 million of sales and is growing at a good double-digit constant exchange rate pace. And bioinformatics is set to be an important incremental contributor in 2014 as Ingenuity and CLC bio provide large incremental growth. As for the rest of our portfolio beyond the growth drivers, the improving environment for Life Science funding in the United States, and also partly in Europe, as well as our expanding global presence gives additional support to this guidance. However, as always, there are also risks in 2014 and this year especially in terms of the timing for incremental funding improvements in the United States, since these are more weighted towards the second half of the year. We're also closely monitoring currency trends, which are currently expected to have an adverse impact on net sales and earnings in 2014. In the next few slides, I will provide an update on our 5 growth drivers. Slide 13 shows an overview of the rapid expansion of our QIAsymphony automation platform, which broke through 1,000 cumulative placements during 2013. We have set a goal for about 250 new placements in '14, and again, in 2015, as well as to deliver double-digit consumables growth. We are pleased with the pace of placements, but the focus today is on the success to expand the menu. In December, our teams completed 2 important U.S. submissions. First, they completed a 510(k) for clearance of the artus C. difficile QIAsymphony RGQ Kit for detection of Clostridium difficile, a bacterial infection that is increasingly becoming a public health challenge in the United States and in many other countries. Second, we submitted the complete QIAsymphony RGQ MDx platform to the FDA for clearance. And here, I mean the SP, sample processing and the AS, assay setup units along with the Rotor-Gene MDx PCR platform, which already received clearance in 2012. These are important steps to increase the utility of QIAsymphony for customers and builds on the FDA approvals of our therascreen KRAS and therascreen EGFR companion diagnostic assays. We're also expanding the menu in Europe, where more than 20 assays are offered on the QIAsymphony RGQ. The RespiFinder RG panel was recently launched in Europe. This is a novel Multiplex PCR assay for the simultaneous detection and differentiation of 21 respiratory pathogens, and it is the first highly multiplex pathogen assay designed to run on Rotor-Gene Q. This is strengthening competitive profile of QIAsymphony in addressing the more urgent care testing needs of our customers. We also intend to have more test menus for you in 2014. Among submissions planned for the year are U.S. application for artus HSV 1/2; QIAsymphony RGQ Kit for diagnosis of Herpes simplex virus 1/2; and also in U.S. and European applications for healthcare associated infections from Vancomycin resistant bacteria with the artus [ph] QIAsymphony RGQ Kit; and MRSA infections with the artus MRSA QIAsymphony RGQ Kit. I'm now on Slide 14. Building up our leadership in Personalized Healthcare has many different elements, and one of these is helping our customers gain better access to biological samples to support the care of patients. We are already the leader in providing sample technologies required for pre-circulating DNA test, in particular noninvasive prenatal screening tests. And we recently made an announcement -- an important announcement in this area in expanding our partnership with Exosome Diagnostics to develop noninvasive molecular diagnostics that provide access to molecular insights contained in exosomes. These are microvesicles that can be isolated from biofluids such as blood, urine and cerebrospinal fluid, and from which high quality RNA and DNA can be extracted and purified for analysis. They're a key part of the body's complex communication system that transfers genetic instructions from cell to cell. Physicians are clearly looking for better ways to analyze and monitor disease progress, and they steer treatments that rely on tissue biopsies. Using exosomes can also provide them with insights along the entire continuum of patient care, not just when tissue samples can be accessed, for instance, in biopsies. The advancements in harvesting exosomes are moving ahead rapidly, and we see an opportunity with this collaboration to shift the paradigm in gaining access to molecular information. As part of this collaboration, which we announced last July, the first of the new sample technology kits are scheduled to be launched in 2014. These will allow researchers, drug developers and doctors to take repeated realtime genetic snapshots of disease from patients by examining exosomes without the need for tissue biopsy. The samples are designed to run on PCR, pyrosequencing and next-generation sequencing technologies. We further expanded the collaboration in January of this year to develop the first-in-class, blood-based test to detect certain mutations of an undisclosed gene associated with non-small cell lung cancer and other malignancies. The assay will have the potential to be paired with several new anticancer therapies. We have worldwide exclusive commercialization rights and intend to submit the test for regulatory approvals. Moving to Slide 15, we have been highlighting QuantiFERON-TB as one of our growth drivers. An important goal for 2014 is targeting new markets with our QuantiFERON TB test for latent tuberculosis, and we are preparing to launch in China this year. This expansion comes after having established clear market leadership in the United States and Europe for the modern egra [ph] latent TB tests. This entry into China is admittedly later than it should have been, given the opportunities here, but we are now there and are now ramping up market development activities in the top cities and targeting the main TB risk groups. As for the size of this market, some estimates are out there that more than 50 million skin tests are done each year in China. This is certainly not indicative of the market potential for modern latent TB testing, but there are substantial opportunities in the well-funded hospitals, and this could translate near term into several million dollars of sales. In addition to geographic markets, we are targeting expansion into new customer market segments as well. An increasing topic of discussion is the risk for latent TB infections developing into an active disease in people with Type 2 diabetes. As you see on the slide, a few recent examples of how TB outbreaks are affecting daily lives, in this case the collection of recent instance in the United States. This underscores the fact that TB remains a significant modern public health issue and the need for modern tests such as QuantiFERON-TB to help in the fight against the disease. Moving to Slide 16, enabling access to valuable molecular information through exosomes plays into the emerging growth drivers in bioinformatics and next-generation sequencing solutions. As I mentioned earlier, we are moving ahead on these initiatives that are anchored by our ambition to enable our customers to rapidly transform very complex data generated from any biological sample into valuable molecular insights. A key area of focus are clinical research and diagnostic workflows, where there are bottlenecks blocking the adoption of sequencing technologies particularly in Sample Technologies and bioinformatics. We are pursuing a 2-pronged commercialization strategy. First, a broad range of products and services, and this includes universal solutions that can be used with any sequencer or with any sequence data. And second, the complete sample to insight GeneReader NGS benchtop workflow that is in development. On this slide, you see the breadth and depth of the portfolio we are developing, and this will be a key part of our story at the upcoming AGBT conference at Marco Island. We will be highlighting the expansion of our universal products such as new sample technologies to improve single cell sequencing, a range of new gene panels that goes beyond just cancer, and new bioinformatics solutions designed to improve data analysis and interpretation. In terms of the new bioinformatics solutions, we see this is a key differentiator and essential to creating seamless solutions for our customers that help to create even greater value in the Life Sciences drug development and clinical diagnostics. Doing so will position QIAGEN as a unique player in this segment. No other supplier has a workflow covering this complete workflow, especially in terms of the dry lab bioinformatics. We view bioinformatics as a differentiating, value-creating product, particularly if you ask customers in clinical research and diagnostics. The quality of our products stands out well ahead of the competition, and the choice of bioinformatics has a major impact on the quality of analysis and interpretation. Even the smallest differences in the quality and accuracy of the bioinformatics can lead to significantly different outcomes. So we see our rapidly growing bioinformatics' activities is providing a sustainable competitive advantage for years. On GeneReader, our teams are moving ahead on the development working on creating the first seamless workflow from biological samples through to interpreted data analysis and interpretation of the highest quality. We'll keep you updated on our progress and plans for commercialization in 2014. With that, I would like to now hand back to Roland.

Thank you, Peer. I'm now on Slide 17 to review our guidance for 2014 and also for the first quarter of the year. As you know, a new adjustment policy takes effect with the reporting of results for the first quarter of 2014. First, share-based compensation will be included as a cost in adjusted results. Second, cost for restructuring will only be adjusted for results related to business integration and acquisition-related activities. This comparable figures for 2013, that include share-based compensation expenses, are provided in the appendix of this presentation. In terms of guidance for the full year, as mentioned earlier, we are expecting total sales growth of about 4% to 5% constant exchange rate-wise. This is based on expectations for declining U.S. HPV product sales to create a headwind of about 4 percentage points in 2014, but for the rest of the business to grow about 8% to 9% constant exchange rate-wise. Adjusted operating income is expected to grow at a faster pace than adjusted net sales. And our goal is for at least 100 basis points of margin improvement to a level of about 26 percentage points. This is from a level about 24% for 2013 under the new adjusted -- adjustment policy. Adjusted diluted earnings per share are expected to rise to approximately $1.07 to $1.09 for full year 2014, compared to $1.02 per share in 2013. And again, this includes share-based compensation for both years. This target for adjusted EPS is given at constant exchange rates since we see the risk based on current exchange rate trends for an adverse currency impact on our earnings in 2014 due to the volatility in currencies where we have sales, but very low cost basis [ph]. As mentioned earlier, these are partly [ph] in Japan and Turkey, but also Brazil and Australia. For the first quarter of 2014, adjusted net sales are expected to rise about 4% to 5% constant exchange rate-wise and for $0.21 to $0.22 per share of adjusted EPS, also at constant exchange rates. The expectations do not take into account any acquisitions that could be completed in 2014. This slide also contains assumptions for adjustment to results for the first quarter of 2014 and also for the full year. For the full year of 2014, we expect the following: about USD 120 million for amortization of acquired intellectual property; about USD 10 million to USD 15 million for business integration acquisition items, and this is part of the new adjustment policy; and an adjusted tax rate of about 19% to 21%, which compares to about 19% in 2013 under the new adjustment policy. 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. We are pleased with our performance in 2013. We achieved our targets for improved sales and adjusted earnings growth in all customer classes and regions and made significant progress on strategic initiatives to accelerate innovation and growth. This commitment to improving sales growth is accompanied by a focus in improving earnings and cash flow as well, and also improving returns as we move forward, for instance, with the completion of our second $100 million share repurchase program. Let me review what we have announced. We achieved our communicated targets for the fourth quarter and full year in terms of sales and adjusted earnings growth. Our 5 growth drivers are gaining momentum. We have made significant progress on building the test menu and securing placements of the QIAsymphony automation platform, signing new co-development agreements in Personalized Healthcare, and developing new technologies to gain access to valuable molecular insights, driving the ongoing strong expansion of the QuantiFERON latent TB test and delivering rapid growth as we develop our capabilities in bioinformatics and next-generation sequencing technologies. In closing, we are well positioned to achieve our goals for 2014, and we'll fulfill our mission of making improvements in life possible. And with that, I'd like to hand back to the operator to open up for the Q&A session. Thank you.

[Operator Instructions] And our first question today comes from the line of Tycho Peterson from JPMorgan. Tycho W. Peterson - JP Morgan Chase & Co, Research Division: I'm going to ask a couple quickly here. Just first, on the decline in instrument placements, both within applied and pharma, I'm wondering if you can elaborate on that? We see pretty strong results from a couple of your peers. Second on QuantiFERON, any color on just the assumptions for Japan and China for this year? And then the timing of a fourth [ph] skin test? And then lastly, GeneReader, you talked a lot about it, we've seen some interesting innovation in the market, obviously it's a big market opportunity. When can we actually start to see some data on the GeneReader?

Sure. I'll take the latter 2 questions. And Roland, if you could follow-up then with the first on the automation. So in terms of QuantiFERON Japan, we had a challenging year 2013, as we had said before, it was quite volatile in terms of our ability to further convert the market, but we have been able to create now the foundation from which we expect strong growth in 2014 to continue. The growth in -- so we expect a much better year in QuantiFERON in Japan, which is by the way, the second largest market in the world for this, for latent TB testing. In China, we expect a very good uptake. We've done numerous studies already validating our technology and the key decision-makers there clearly have been highlighting our technology as the one of choice to move forward on. And this is evidenced by strong support that we've been receiving also in advance now of the formal approval, which we expect any day now. So that definitely is a substantial market opportunity. At the same time, we see no slowing down across the other regions in the uptake and are addressing one segment after the other and adding new opportunities constantly. So we expect QuantiFERON to do very well in 2014. And as you pointed out before, there are a number of new products around the TB franchise, but also additional targets for the QuantiFERON technology that we will be talking about, for instance, the CMV test that is already launched in Europe is doing very well and addressing a very interesting niche and very synergistic with other products. The second -- the last question you had was the GeneReader portfolio. So in the course -- during the course of 2013, we had the product out there with select customers in early testing. We're now working on integrating all of these components that we have into a complete sample to insight workflow. And this is what we really want to demonstrate to the market, is not the performance of the individual components but the complete workflow. And this is something that we will -- we expect to be able to launch over the course of 2014. We are not being more specific on timing at this point.

Yes, answer to your first question on implementation and growth rates here. First of all, we -- just to remind you, we clearly had a very strong fourth quarter 2012, the instrument sales are actually up 7%, and that was clearly very focused on QIAsymphony. And if you recall, what we said also over the course of the year, we clearly have seen a shift in terms of customer QIAsymphony placements in terms of how customers are going to buy these instruments. We see more and more customers going for, what we call, reagent [ph] models, meaning, they don't pay the instrument upfront but rather pay it -- we are a long-term commitment in consumables and an increased consumable price. It's still a trend which continues and that clearly had an impact on the academic, especially on the Applied Testing market. So we see this is as a main driver for that tough comps on the one-hand side. More and more reagent [ph] vendors on the other-hand side. QIAsymphony is still -- is a very successful very good placement numbers also in the fourth quarter, also the reason why we set another ambition goal for 2014, just 250-plus placements. And I think it is something that we feel quite comfortable with as well.

Our next question comes from the line of Amit Bhalla of Citigroup.

Roland, I guess, can you just elaborate on the '14 guidance and more specifically on where the operating margin expansion is going to come from, particularly gross margin, R&D, SG&A? And then for Peer, Japan, you said no impact from stimulus, it's a little contrary to what we've heard from others. Do you have any confidence in terms of market share in Japan? Can you make any comments there, a potential loss if that's happening at all?

Let me start off with the question. On the gross margin side, I do believe the gross margin on a normalized basis around 71, 71.5, I think, is a kind of an area where we feel quite comfortable. Given the overall changes we talked about in this call so far on HPV and the other growth drivers. So I think that is a fair assumption that gross margins stays in that kind of an area. We do expect, on the other hand, significant leverage coming out of SG&A, clearly the area where we did a lot of changes over the last 12 to 18 months. Just recall what we did on setting up shared-service center, closing down smaller-sized clearly also will fluctuate our different sales channels. I would say that it's an area where we do expect leverage to come from R&D. It's an area where we believe spending somewhere between 11% and 12% of revenue is the right level of investment into our innovation, an area we feel quite comfortable with on the one-hand side, fueling very nicely our innovation pipeline, on the other hand giving us a very nice output on the same time. So all in, that clearly means that our EBIT margin for 2014 has to go at least 100 basis points. And so we feel also given our midterm goal of around 250 basis points that we see already here quite a significant part of that in the -- over the course of 2014.

All right. Let me see, the question on Japan, we -- obviously we know about the stimulus funding being implemented now. We also see how it is moving through to the bureaucracy. It depends on what segment you look at, how quickly the available funding does move through the bureaucracy of the actual spending organization, and academia is certainly quite a bit slower. And there's also -- there you also have to see how the healthcare system is designed in Japan. This is -- either it is private or it is also these rather large organizations. We're still waiting for the trickle-down to actually hit the purchasing organizations. And this is pretty much consensus across the direct peers in these various customer classes and product groups that we are active in. So we're benchmarking clearly against our peer group over the past few years, and we have always been in the top category in terms of growth. We expect this also for 2013, even though that was a difficult year in Japan for the complete community. We actually -- as per the intelligence we have -- we actually did quite well in comparison. And so in the classes that we have, we believe we held or actually gained market share in key areas.

And our next question comes from the line of Daniel Wendorff of Commerzbank.

One on financials and one on next-generation sequencing, if I may. And starting off with the financial question on the operating cash flow, how should we see the intended doubling of the operating cash flows? It's a linear process of the next 3 years and particularly referring to 2014. And I would assume that the basis of 2013 plus the USD 65 million in negative -- a negative impact from restructurings, all under this -- this would come on top at least for 2014. And also maybe how should we expect CapEx going forward here? And on next-generation sequencing, I would like to refer to Slide 16 of your presentation. And then I have a question on the sample preparation kits that you're about to launch. How should we see the adoption of them? Is it that customers will likely wait potentially for the GeneReader to come? And do you expect them to sell quite well separately already, and who would use them right now? Any more color there would certainly help me.

Yes, Daniel, in terms of cash flow, as you said on the one-hand side, we do have a midterm goal of doubling our operating cash flow and on the other hand, we clearly have seen here a larger impact in 2013 as well. We still have a smaller number of payouts in 2014. So it's a quote [ph] in our P&L in 2013, but they're still around, I guess, $10 million, $15 million, which we have to pay out this year so affecting cash flow, but is a small amount in general terms. I do believe that we will see similar to what you see on EBIT margin improvement. We see that impact also in cash flow improvements so that this year should be more than a linear approach. We are able to reap off in terms of benefits. And that is a good starting point for going behind. So we did a lot of things in terms of working capital improvement. As you recall, we changed our logistic setup. We're working now with a global provider, very helpful also in inventory turnover. At the same time, we believe that we had quite a significant changes in SG&A, also the way we address our customers, which are more efficient and therefore should give us also cash benefits. So I would say, as I said, better than linear.

Second question, Daniel, was regarding what we call the universal solutions. We actually have an interesting position in next-generation sequencing is that we are already present in basically every single laboratory that is doing next-generation sequencing around the world, through the fact that we solved the upfront sample preparation part. Now if you look at next-gen sequencing, people often talk about sample preparation, but they are using the term for a different step in the process. We typically call sample preparation what you see here also on the list is transforming a raw biological sample into an analyzable nucleic acid. This is the purification and also the whole genome amplification, or whole exomes amplification or transcriptome amplification solutions that we have. This is -- here for instance, the whole transcriptome single cell kit, would follow the purification of the nucleic acid. And that's a step that we typically call sample preparation. What other people call sample preparation is typically then the target enrichment, the library preparation steps and basically the whole process following purified amplified DNA into the sequencer. The -- those -- what we call sample preparation steps are ones that we obviously have an extremely strong position in and in particular in the clinical arena, where degraded samples are used, and it is very challenging to go from a clinical sample into an analyzable nucleic acid. So from that perspective, we are simply adding to that portfolio the target enrichment of the library preparation steps. Target enrichment are basically the assays that we're talking about. We have a very broad offering and also have a new generation of these panels coming out this year, with a number of improved specifications and building on the diagnostic assay development capabilities that we have here at the company. The same is also true with the bioinformatics. So there's no need to wait for the complete workflow. We have a workflow that will be adoptable in the segment of the market, but have an extremely strong offering for the whole market.

And our next question comes from the line of Derik De Bruin of Bank of America Merrill Lynch.

So on the C. difficile assay that you submitted, I guess, a couple of questions. First of all, how many QIAsymphonys are in position in the hospital laboratories to basically use the test? I'm just trying to get a view here -- 1,000 installed base of QIAsymphony, how many of them are positioned to benefit from your molecular [ph] diagnostics menu?

I'll have to check the exact number, but we have about 2/3 of the systems in Molecular Diagnostic laboratories, of which at least 1/2, if not more, would be target opportunities for the C. diff assay.

And as you go for FDA approval of the whole QIAsymphony platform, do those customers need to do anything different to sort of get their QIAsymphony able to run the assay?

No, this is something that can be upgraded simply through the software that -- the software upgrades that we provided for the approved platform.

Great. And just a couple of housekeeping questions, Roland, if I missed I apologize. Share count guidance for '14 and net interest expense guidance?

Net interest expense more or less unchanged compared to what we had so far. Of course, adjusted for the interest rate on incoming cash flows, but unfortunately there's a rather big amount as we all know, and the share count is around 244 for the first quarter and 243 for the full year, given the actual share price on -- or based on the $24 basis.

And our next question comes from the line of Vijay Kumar of ISI Group.

I guess, Peer, as you likely mentioned sort of given this year, the transition year for the [indiscernible] and HPV declines and as you reposition now the company for growth in the outskirts, you've got new products that's going to be key component of that strategy and as you look at the things you had sort of in the portfolio, I think one of your key competitor had a number of new product announcements earlier this year now, does it change anything at all from the way you're looking at that from your perspective and for [indiscernible] clinical NGS marketing. And I'll follow up on the HAI question earlier, again, while that's a strong double-digit growth market, it's also getting a little crowded. How do you think of the go-to-market strategy and pricing?

Sure, let me take the second question first. There are several players in C. diff and there are others coming in. We don't see C. diff as a differentiating feature. We think that based on the performance of our assets, we have the potential to have an industry-leading performance of the assays as well as content provision that our assay will be able to give the user, but it is really a menu play. And remember, we're going for a broad menu, this would mean that we're approaching 25 assays running on QIAsymphony RGQ in Europe, which we shouldn't forget is about 40% of the world's market and growing very, very fast for us and we see C. diff as an important addition. In the United States, fewer players are in the market than in Europe. It's a necessary menu item and one that has a high clinical need and broad utility. So there's several versions of the assays that go very near patient and others that go very high throughput, and we state [ph] a very, very interesting segment of the midrange hospital market, like Derik alluded to. Your first part of the question was the new product strategy. If you look at our company, we are not dependent on new product -- new products coming out. And I'd like to maybe just do a theoretical calculation. If you look at the guidance we're giving, it assumes that the underlying revenues of everything, with the exception of the HPV screening franchise, is growing at 8% to 9%. I don't know of too many other franchises that are doing that, and all of these growth drivers are very long term. So QIAsymphony is still at the beginning of its life cycle, its first 1/3, let's say. And QuantiFERON we just barely started, and Personalized Healthcare, same thing. They're all 100 million-plus franchises. Bioinformatics and next-generation sequencing, the same. So we're not -- we don't need any magic new product bullet to be able to show substantial growth. If we assume that we bought them out in terms of the HPV screening pricing declines in 2015, which I think is a fair assumption if you look at where the numbers are today, and you suddenly see that the 8% to 9% shine through, you can just imagine what happens to the overall growth profile of the company, and that's what we have always been working towards and what we've been preparing for long-term, long runway growth drivers that we can ultimately use to paint the overall growth profile or paint the overall profile of the company. In terms of next-generation sequencing portfolio, this is moving forward. It's an important part of our overall franchise, and we're quite excited about the opportunity to play in this area. But I'd like to stress again, we are not including any revenues from next-generation sequencing in our numbers, it is depending on the timing of the launch, it's depending on when we decide to move forward with the sample to insight offering. For now, we have excluded anything from the guidance in terms of revenues, and we clearly see an underlying strong growth engine of the 8% to 9% of the underlying business that will shine through by itself. And next-gen would be a very exciting addition to that.

And our next question comes from the line of Daniel Brennan of Morgan Stanley.

It's actually Michael Clerico on for Dan. Looking at increasing QIAsymphony placements, could you guys give us an update on the consumable pull-through, where it is currently and what the opportunity is? Also has the consumables factored into your 100-basis-point outlook for revenue contributions from QIAsymphony?

So we have 2 components in the QIAsymphony like revenue measurement, there's the core portfolio that are directly associated assays and sample technologies running in basically a samples [ph] to result mode, and then we have a large portfolio of assays that run on LDTs or using different downstream detection [Audio Gap] next-generation sequencing or so. The broader portfolio is driving a much higher growth rate than the 1%. The core portfolio is contributing 1% and growing into good double-digit pace. The outlook for or in terms of the pull-through, we're seeing increases, constant increases in pull-through, which is very different by region. The average is somewhere between 60,000 to 80,000 that we're running on the core assay portfolio. But in Europe, we're well into 6 digits with many customers running 200,000, 300,000 a year on the platform. And even at that rate, it is only -- it is not fully utilized. In the United States, with the LDT menu being the primary driver currently, we still are in the rate below the $80,000 range. And because we have very many placements in the United States, adding menu to the platform will allow us to quickly move the throughput also up there in that region.

Okay. Also in terms of doubling your operating cash flow, over what time frame do you think this could happen? How fast do you expect the initial inflection to occur given restructuring is largely behind you?

Yes, Michael, Roland. So what we believe is truly that we see already a larger impact clearly going to happen in 2014 for exactly that reason. And because -- also even -- when we invested significantly into growth drivers for the year 2014, it is clearly also something where we believe it increased returns in 2014 as well, so we'll see clearly a larger impact for the year 2014. Midterm, what we call, was 3 to 4 years, and again we will see more than linear impact over the course of 2014 going to happen.

And our next question comes from the line of Jose Haresco of JMP Securities.

With regards to next-generation sequencing, there's obviously been a lot of product announcements over the last few weeks. Where is there still white space regards to specific applications, when you think about it below the population sequencing level? Is it exomes sequencing, is it in small labs, is it in certain types of academic labs? Or is it more on a regional basis?

Sure. First of all, it's a vast market opportunity. There's some very big numbers that have been put out there. Wouldn't even go that far in terms of the sizes, you just say that it's a large market opportunity that is synergistic to what we're doing today. So where we see the market opportunities is in simplification and dissemination. Most of these workflows are still tremendously complex. There's some very good solutions out there, but they still require very skilled operators and what we're trying to put forward is something that simplifies it and allows a higher sample throughput without the complexity of having to pool samples and batch them. So from that perspective, we are targeting the clinical research and the diagnostic markets. These are really core Qiagen turf, especially because of the complexity of the sample processing, the proximity to the diagnostics franchises, the requirement for high-quality reagents where you often manufactured under design control and high quality -- or developed under design control and manufactured under very stringent quality control systems. And this is something -- these areas that we think will have very differentiating capabilities. Sample throughput, also a need, for instance, in some of the more applied markets out there, but the big ones are for us at the clinical research and routine diagnostics markets. So this would be also typically everything exome and below in terms of capacity.

And the next question comes from the line of Bill Quirk of Piper Jaffray.

A couple of questions. First off, Roland, it looks like the acquisition contribution, I believe, is about $12 million for the quarter. So one's just a simple accounting question, can you help us break out the split between the different operating groups there? And then secondly, and maybe for Peer, considering or looking at the diagnostic pipeline, obviously a number of different hospital acquired inspection [ph] test in there, can you talk a little bit about where MRSA is, or perhaps when that might flow in this pipeline as well?

Yes, on the fourth quarter, the acquisitions are split again over all 4 different business areas and customer segments. We clearly -- we see right now a little less than 1/2 in Academia, a larger amount in Pharma and then really split down between Applied Testing and Smaller Molecular, so I would say a little less than 1/2, probably 40%, 50% growth in Academia, then Pharma, then Applied Testing.

Great. Second part of the question was the hospital acquired menu. So we hope MRSA, first half, we are -- we also hope that MRSA is not a timeframe or a 2014 submission and the -- concurrently or a little bit before that CE marks. On top of that, I'd refer to the menu roadmap that we put out, for instance, in our Analyst Day, that has some details on when we expect those 2 to come forward. These are just a few of a broader menu that we actually have in development. We're working on about over 30 different projects right now. So there's a lot of development activity to expand the menu.

Your next question comes from the line of Zarak Khurshid of Wedbush Capital.

Question on QIAsymphony, you mentioned the 250 placement goal for 2014. Just curious, how many of those are you expecting to be in the United States? And you mentioned 2/3 in molecular labs, can you break out how many of those 2/3 are in U.S.-based labs?

Sure. So we put a number -- it's about 50% to 60% are typically in the United States, of which about 2/3 in the States may be a tick higher, about 70% are in molecular labs. The -- so the presence is definitely heavily towards molecular and the U.S. has a very strong position in terms of placements. This is only on the LDTs. I think this is indicative of where we think it could go.

Great. And just as kind of a higher level follow-up question, you're mentioning the extraction part of the business earlier. I was just thinking or wondering how are you thinking about the growth of just that legacy [indiscernible] extraction business for 2014 as a piece of that 8% to 9%, or 8% or 9% growth in the core of the business?

Sure. It's actually quite differentiated. So there are -- just as an example of some of our instruments, we have about 180, 190 different protocols for different sample types and different applications. So in extremely differentiated -- it's not a very homogeneous requirement that our customers have. And that's one of our strengths, we have been able to solve all of their needs with very integrated solutions that are able to integrate a lot of protocols. We are seeing -- actually we have a targeted effort to expand our presence in the LDT market. This is a very important area for us also for the generic front and in the clinical research and diagnostics markets. In Academia, we're focusing heavily on the clinical research areas that are getting good funding. What is certainly more difficult are the secondary sample preparation markets where basically in vitro samples are further purified, but we're lucky that the majority of our franchises in the primary area, and we're seeing actually very good growth in many of these pockets, even above market growth and not taking share. So this -- despite already very high market shares that some cases are 2/3 up to 80% in certain segments, we have enough segments above 90%, we're actually even taking share in those. So this shows a standardization is kicking in, and this also allows us growth, but on top of that new applications on emerging -- new demands are emerging for, I'll just highlight here, the next-generation sequencing area where there are some very specific demands on the front end sample preparation area, as we call it, that we have some very unique and differentiated solutions for that, that will provide us some good growth opportunities. So it's not up there on the 9%, let's say the generic academic sample preparation there, but it's not in the low-single digits.

And our last question for today comes from the line of Dan Leonard of Leerink Partners.

I'll try to fit a couple of questions into one. First off, Peer, where do you expect the CLIA status of the complete RGQ workflow could be? Is this something that could be submitted as moderate complexity? And then my second question, at a high level, what do you think is the difference between your success internationally versus in the U.S. in HPV? And where has average ASP trended for your U.S. HPV test nowadays?

Very interesting question, Dan, on the CLIA status for the QIAsymphony RGQ. So we think that the system here as it is lined up today with the 2-room system, which is actually the preferred system, most customers in Europe for instance, don't want to have an integrated system. This is very different to the United States. They don't want to have an integrated system because they prefer 2-room strategy as a running different downstream detection systems in addition to just realtime PCR. So while we all agree that intellectually it's a very interesting thing to integrate everything, the preferred route is a 2-component strategy in Europe. And this is something that we also see in great parts of the United States for LDTs and the system like it is there on a 2-system is something that would still not be a moderate complexity system, but you could think of ways, and I won't go too far in this, where you could actually create further simplification of the platform. The second question on the HPV pricing, we're doing extremely well outside the U.S. and just in terms of the competitive advantages, it's just plain and simple clear that all of the studies that are coming out, also over the course of 2013, we have not really highlighted them to show that the competing product are inadequate. They're just not catching disease as they should, and they are putting women at risk. And this is slightly different in the United States because we have a co-testing environment. So x U.S., we're having a very, very strong uptake and adoption of our technology, and it remains the gold standard and continues to have the overwhelming market share in the market. In the United -- the pricing in the United States was always substantially higher than in Europe, where we already have 30 different competitors, but now has come closer together and in some cases, the U.S. is already below Europe indicating that we're seeing irrational pricing. In other words, I think today, if anybody would conduct a trial for an HPV screening assay and have to spend -- probably required anywhere between $30 million and $60 million to get an approval, it would be very difficult to get a return on investment on that. And this just shows there's an irrational behavior in the market right now. I don't want to point out the specific prices you see, but the second comparable product is Chlamydia and it's -- you're starting to see very aggressive bundles.

Okay, Peer, with that, I would like to close the conference call, and thank all of you for your participation. If you have any questions or comments, please do not hesitate to contact us. And thank you again for your participation today.

Thank you.

Ladies and gentlemen, this concludes the QIAGEN's conference call. Thank you for joining and have a pleasant day. Goodbye.