Qiagen N.V. (QGEN) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing-by. I am Patrick, your Chorus Call operator. Welcome and thank you for joining QIAGEN’s Conference Call to discuss the Results of the Third Quarter 2015. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded at QIAGEN’s request and will be made available on their Internet site. The presentation will be followed by a question-and-answer session. [Operator Instructions] At this time, I would like to introduce your host John Gilardi, Vice President of Corporate Communications and Investor Relations at QIAGEN. Please go ahead.

Thank you, Patrick. And thank you, for all of you for joining us today for our conference call. Today we’re going to review the results released last night and provide a business update before the Q&A session. Our speakers today are Peer Schatz, Chief Executive Officer of QIAGEN; and Roland Sackers, the Chief Financial Officer. On slide two, you will see the customary Safe Harbor Statement explaining that the discussion and responses to your questions on this call reflect management’s views as of today, October 29, 2015. 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. These statements involve risks and uncertainties that could cause actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For more information, please refer to our filings with U.S. Securities and Exchange Commission. Also during the call, we will be referring to certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. You can find a reconciliation of these figures to GAAP measures in the press release and the presentation for this call. I would like to now hand over to Peer.

Thanks John. And welcome to all of you. QIAGEN continues to move ahead on initiatives during this year to accelerate growth in 2015 and beyond and these are reflected in our results for the third quarter and first nine months of this year. I have these messages to summarize our performance. First, our results for the third quarter: We saw solid developments in our Academia, Pharma, Applied Testing customer classes, but at the same time more moderate growth in Molecular Diagnostics also when excluded the expected adverse impact of declining U.S. HPV sales. We also saw overall challenging conditions in Japan and China. This led to adjusted net sales rising 2% at constant exchange rates. At the same time, adjusted earnings per share were $0.29 at constant exchange rates and in line with our target. We maintained the adjusted operating income margin at 25% of sales and this was after making a decision to step up incremental investments into sales and marketing activities. We feel this will help us prepare for the faster growth phases following the approaching end of the HPV headwinds. Adjusted net sales were $315 million at actual rates which was a decline of 7% and included a stronger than expected adverse impact from foreign currency movements. We had expected about 7 to 8 percentage points but it was then actually about 9 percentage points. Adjusted earnings per share were $0.27 at actual rates which was unchanged from the third quarter of 2014. Second, we are moving ahead on transforming QIAGEN and preparing to accelerate growth into 2016 and beyond. As you know, our performance over the last few years has been marked by the sharp impact of declining revenues of HPV tests in United States used for cervical cancer screening against solid growth from the rest of the portfolio. We saw the same situation in the third quarter. Sharply lower U.S. sales of HPV tests created about 3 percentage points of headwind which was in line with our expectations against the 2% constant exchange rate overall growth; and this applies about 5% constant exchange rate growth from the rest of the portfolio. Third, we are on track to achieve our full year target for higher adjusted net sales and earnings per share at constant exchange rates. Adjusted net sales are expected to rise about 4 percentage points on constant exchange rate basis. We have tightened the full year target for adjusted earnings per share to a $1.16 at constant exchange rates which is within the range we had set in January 2015. Moving to slide five, this shows you how QIAGEN has been growing during this challenging transformation. As you know, we have been taking heavy price pressure on our U.S. HPV test franchise in United States and this was due primarily to competition induced dramatically lower prices. For the full year in 2015, we continue to expect about 3 to 4 percentage points of headwind and this is in line with the results for the first nine months of the year. We also expect these sales to only represent about 3 percentage points of our total sales for 2015, so any future change in this HPV franchise is not expected to have a major impact on overall sales. At the same time, we are growing and investing into rest of our portfolio which generated 7 percentage points constant exchange rates sales growth during the first nine months of 2015 and provided 96% of our sales. This is why we are making the incremental investments to help drive this acceleration. I’m now on slide six to discuss some highlight for the third quarter. On the QIAsymphony automation platform, we are moving ahead towards our goal for 250 new placements during the year which would bring the cumulative placements to more than 1,500 systems. Also during the quarter, we launched in Europe the first multiplex asset to run on QIAsymphony RGQ. The RespiFast RG Panel received CE-IVD marking for the detection and differentiation of 22 pathogens, 18 viruses and 4 bacteria that cause respiratory tract infections in human. Moving down to next generation sequencing, preparations are progressing as planned towards commercialization of the GeneReader benchtop next generation sequencing workflow later this year. I’m now on slide seven for a quick update on QuantiFERON, our latent TB test that is setting new standards for detection of this potentially deadly infection. As you see on the left side, sales have been ramping up and we are on track for about 20% growth this year at constant exchange rates. In the United States, I wanted to note that we had rest [ph] months in August and September. The third quarter is traditionally the strongest quarter of the year due to back to school testing. We significantly revamped and expanded our sales organization during the first half of 2015 and we are now seeing a very positive impact. We are also using digital media campaigns to target various groups such as parent with children going back to school. In Europe, we had a strong quarter in terms of sales growth with accelerating adoption of the fourth generation QuantiFERON-TB Gold Plus that was launched earlier this year. Moving on to China where we introduced QuantiFERON during 2014, we’re making progress on our commercialization efforts in the top tier cities. We’re building a strong national distribution network and sales so far have quadrupled and are set to exceed $2 million. While this is still a small number, it is the ramp that we are focused on and that is excellent for such a screening test that needs time to adopt. Our efforts are ramping up well as move ahead on the validation and reimbursement discussions required to bring the screening test into this large market. Beyond the top markets, we are expanding the use of QuantiFERON into other regions such as Southeast Asia. In August, Stop TB and QIAGEN organized a regional meeting in Indonesia for key opinion leaders from more than 20 countries and the World Health Organization, WHO to discuss TB prevention standards. The reason is that the WHO and others realize that the fight against latent TB infections is critical to controlling the disease overall. So, we see significant growth prospects ahead in this $1 billion market opportunity. I’m now on slide eight for a quick update on the progress in our personalized healthcare portfolio where we are expanding our position as the top partner to pharma companies for companion diagnostics. Among recent highlights was that our teams reached new master collaboration agreements with two pharma companies. This brings the number of publicly announced deals to 12, under which we have framework agreements for collaborations involving multiple biomarkers. The inflow of new projects has never been stronger and spans across all platforms and this includes QIAsymphony and ModaPlex as well as next generation sequencing and our gene panels. We recently added new projects involving key biomarkers such as EGFR and KRAS who have seen so far the most regulatory and commercial success and as well for IDH1 and 2, FGFR, PI3-Kinase, BRAF. On our last call, we mentioned the FDA approval in July of a therascreen EGFR kit as a companion diagnostic to guide the use of AstraZeneca’s targeted lung cancer therapy IRESSA. This marks the fourth U.S. regulatory approval of a QIAGEN companion diagnostics paired with the cancers therapy. Since then, we have completed the submission of the therascreen EGFR kit for use as a companion diagnostic with Clovis Oncology’s rociletinib therapy for use in a specific type of patient with lung cancer differentiated by the status of the T790M mutation in the EGFR gene. So having these multiple approvals linked to our KRAS and EGFR kits means that we’re setting new standards. A fast growing part of our offering involves liquid biopsy sample technologies which have the potential to improve outcomes of patients. On this slide, you see two recent journal articles mentioning liquid biopsy solutions. In these cases, they are using our QIAamp circulating nucleic acid kit for the isolation of free-circulating DNA from plasma. This is the kit we have also automated on the QIAsymphony; commercial demand has been extremely strong. I am now on -- in general, we have created strong standards and have a broad range of solutions for liquid biopsy sample processing, and that is the real challenge since these QIAGEN solutions are used in almost every laboratory working in this area. The first studies here involve using liquid biopsy in the 54-gene next generation sequencing panel to detect somatic mutations in patients with metastatic solid cancer tumors. This prospective blinded study done by Guardant Health showed the free-circulating DNA panel revealed a very high sensitivity specificity and accuracy compared with tissue-based reference standard analysis for the KRAS and BRAF biomarkers in colorectal cancer patients. The second study involves researches MD Anderson and the trial involving actionable mutations in patients with advanced cancers referring for experimental targeted therapies. Among the findings was that testing of cell-free DNA demonstrated acceptable concordance with standard of care mutation analysis of primary or metastatic tumor tissue obtained during clinical care. As we have said before, we see significant opportunities for liquid biopsies and we will further develop our leadership position in this area, yet it may take some time to see the technology become more standardized in clinical diagnostics and that will require more studies just like these. I’m now on slide nine for an update on the progress in bioinformatics. On this slide you see that our offerings are set to further drive clinical NGS adoption and to push barriers of data analysis. The QIAGEN Clinical Insight platform continues to build great momentum. This evidence-based clinical decision support solution is designed for clinical labs to analyze somatic and hereditary cancer panel tests. Another of the highlights was the launch of a new end-to-end hereditary disease solution for labs to accelerate their solve rates in diagnostic odyssey cases. These are cases that involve patients who have to go from doctor to doctor searching for a solution to the health issue and it often involves a rare disease. Our team showed data at the American Society for Human Genetics explaining how labs using this new hereditary disease solution can solve upto 99% of these cases. And the benchmarking study showed that this was not possible using other bioinformatics solutions. As these cases are clinically and emotionally incredibly challenging, these results are very exciting. Also Intel [ph] recently announced some data on a new collaboration with QIAGEN in whole-genome analysis. Together we have developed a reference architecture that is able to rapidly and efficiently process vast amounts of NGS data at a significantly lower cost and infrastructure requirement yet with a higher accuracy. The optimized service solution consisting of a CLC Genomics Server and the Biomedical Genomics Workbench has cut the required number of computer nodes by 50% compared to the current recommendation from the leading sequencing supplier. This minimizes the total cost of ownership for our customers significantly. With this, I’ll hand over to Roland.

Thank you, Peer. Good afternoon to everyone in Europe and good morning to those joining from U.S. I am now on slide 10 to begin with overview of our financial performance for the third quarter and then review our results for the first nine months of 2015. First, adjusted net sales was 2% at constant exchange rates in the third quarter which was below the target for 3% constant exchange rates. The acquisition of Enzymatics provided about 2 percentage points but the rest of the portfolio was largely stable compared to the third quarter of 2014, but this was after absorbing 3 percentage points loss to lower U.S. HPV sales and underlying business grew about 5% constant exchange rates. In the third quarter, we saw a mix of factors that included improving performances in the life science against what we have -- what we see as a temporary weakness in molecular diagnostics in part due to volatile market conditions in China, Japan and Latin America. We had also expected faster growth instrument sales which were up only 4% constant exchange rate for the quarter after solid gain in the first two quarters of 2015. Another factor was the slowdown in China where sales in the third quarter were largely flat compared to the same period of 2014. We were also impacted by macro factors you must be hearing from other companies. Furthermore, adverse currency movements created about 9 percentage points of pressure on sales in the third quarter which was more than our expectations for about 7 to 8 percentage points and led to the 7% decline to $315 million. The devaluation in China and Brazil was among factors for this outcome. Moving down the income statement, adjusted operating income declined 8% to about $78 million and adjusted operating income margin was steady at 25% of sales compared to the third quarter of 2014. We had been planning for some operating income margin gains in the quarter, but we made a decision to reinvest some of the savings coming from our efficiency programs to increase sales and marketing investment. These involve expanding the sales force and promotional activities for the latent TB test QuantiFERON, as well as increasing the sources devoted to our portfolio targeting next generation sequencing. We have also been expanding our global presence especially in emerging markets in Asia and the EMEA region and are looking to enter new geographic markets. Another area has been to step up investment in ecommerce initiatives and digital transformation designed to increase customer engagement and accelerate sales growth. In other words, we felt these investments were a worthwhile short-term trade-off given the opportunities we see to bolster sales growth. For the full year, we are now planning for an adjusted operating income margin at about 25% of sales which is the same as a 25% underlying margin last year. Keep in mind that this target is based on actual currency rates. Coming back to the third quarter, a decline in the adjusted gross margin and some incremental investments in sales and marketing were largely offset by reduced R&D investments and efficiency gain in general and administration. So, adjusted gross margin declined about 1% percentage point which was due to a mix of factor that included the change in product mix and lower capacity utilization. R&D expenses were lower as a percentage of sales, reflecting the benefits of divesting our site in Marseille, France into a new standalone company as well as more efficient overall project spending and sizing bigger sales growth opportunities. Adjusted net income was $63 million which declined at a slower 4% rate compared to operating income against a year ago period. One factor was the lower adjusted tax rate at 16% was also below our target from 19%. This is below the usual level you see and this was due to the factors in the quarter that included leveraging financial structure and our activities in various geographic locations. We also had higher interest income and lower interest expenses compare to the same period in 2014 along with the lower amount of other expenses. The share count at $237 million was in line with our 2015 target. Adjusted EPS was $0.29 per share at constant exchange rate and this was line with our target for $0.29 to $0.30. At actual rate, adjusted EPS was $0.27 as we had anticipated with our guidance. On this slide, you also have overview of results for the first nine months of the year. Adjusted net sales grew 3% at constant exchange rate which was based on underlying growth of about 7%, absorbing about 4 percentage points of headwinds from the U.S. HPV franchise. Currency movement has been a severe this year and this lead to the swing in results showing a 5% decline to $933 million at actual rate. Adjusted operating income declined 7% to approximately $225 million U.S. in the first nine months of 2015 while the adjusted operating income margin remained at about 24% of sales. In terms of adjusted earnings per share, they were $0.81 at constant exchange rates and the result at actual rate of $0.74 shows the heavy impact of adverse currency rate so far this year. The adjusted tax rate of 18% was slightly ahead of our target at 19% while the weighted share count at 237 million was in line with our plans. Moving to slide 11, I would like to provide you with an overview of the customer classes. As noted earlier, these include contributions from Enzymatics acquisition completed in December 2014. Molecular Diagnostics sales for the third quarter were softer than seen in recent years with overall sales down 3% at constant exchange rate but they were up 3% constant exchange rate when excluding U.S. HPV sales. The latent TB test QuantiFERON continued growing at a 20% constant exchange rate pace. Personalized Healthcare sales also improved in the quarter and we did have higher revenues from Pharma company-development projects but not as high as expected. Instrument and consumable sales for the QIAsymphony automation system were also solid in the quarter but year-on-year instrument growth was much lower than rates in the first and second quarter of 2015 with the expectation of the QIAsymphony. At the same time, and this is the benefit of our ability to commercialize our portfolio to both Molecular Diagnostics and life science customers, we saw improvement in Applied Testing, Academia and Pharma customer classes. All three of this customer classes Applied Testing, Academia and Pharma delivered 6% constant exchange rate growth in the quarter with underlying expansion at mid single digit constant exchange rates supported by the first time contributions from the acquisition of Enzymatics in December 2014. As you have been hearing from other companies, we are also seeing improved customer spending patterns in the U.S. and some European markets compared to earlier in 2015 such as time remained challenging and China was weaker during the third quarter than earlier in the year. I’m now on slide 12 to review sales on a regional basis for the third quarter and the year so far in 2015. The Europe, Middle East, Africa region led the regions in the third quarter with sales up 6% constant exchange rates for both the third quarter and the first nine months. Turkey, Switzerland and the Nordic countries led the performance. Growth slowed in the Americas in Q3 mainly due to the timing of some tenders in Latin America. Excluding U.S. HPV test sales, the Americas was up 5% in the third quarter and 8% for the first nine months of 2015. Key drivers were improving life science markets as well as higher sales contributions from key areas of the molecular diagnostics portfolio. The Asia Pacific, Japan region showed a sharp slowdown for 1% constant exchange rate growth which stems in contrast to the 7% constant exchange rate sales growth for the first nine months. As mentioned earlier, we saw a challenging double-digit constant exchange rate slowdown in Japan compared to growth earlier this year and also slowdown in China; this wake on the top seven emerging markets where sales were 3% constant exchange rates in the third quarter, but were up 11% constant exchange rates for the first nine months. Moving to slide 13, here you have an update on our balance sheet and cash flow position for the first nine months of the year. Our full year target is for well above $300 million of operating cash flow compared to $288 million for the full year 2014. And this has to be seen in light of adverse currency volatility this year. So, we are seeing the improvements in our cash flow materialize that we had anticipated as a result of our efficiency efforts and this for sure in the increases for both operating cash flow and free cash flow during the first three quarters of this year. Also on this slide you see that we continue to have liquidity and a manageable net debt position which leverage at 1.5 times net debt to adjusted EBITDA. The increase in leverage which compares to 1.1 times for the same period in 2014 was mainly been due to the $250 million we spent earlier this year to repurchase some of our convertible notes in de facto share repurchase since it's moved about 10 million shares of dilution risk. I am now on slide 14, which provides you with an overview of our full year guidance for adjusted net sales and adjusted earnings per share, both at constant exchange rates given the currency volatility seeing during the year. We continue to expect full year sales growth of about 4% at constant exchange rates. This is based on about 7 to 8 percentage points of constant exchange rate growth from our core portfolio against the final year of significant headwinds from the U.S. HPV test sales, which are expected to be about 3 to 4 percentage points. In terms of adjusted EPS, based on the results for the first nine months of $0.81 per share at constant exchange rates and our goal for about $0.35 for the fourth quarter and also at constant exchange rates we have tightened our full year target to $1.16 per share. This is within the range for 2015 we had set for $1.16 to $1.18 per share in January. Moving to slide 15, here you see our outlook for the fourth quarter and the full year as well as the detailed assumptions on adjusted results. In line with our full year 2015 goals, we have set a target for about 5% total constant exchange rates sales growth in the fourth quarter. This is based on the U.S. HPV franchise creating about 2 percentage points of headwinds against approximately 7% constant exchange rate growth from the rest of the portfolio in the fourth quarter. As for currency movement, the headwinds created by the strengthening U.S. dollars began rather late in 2014, so we still anticipate an adverse impact for the fourth quarter, but this is expected to be less than the 8 to 9 percentage points seen in previous quarters. So for the first quarter and based on rates as of September 30, we expect about 5 to 6 percentage points of currency pressure on sales. Given the outlook for about 5 percentage points constant exchange rate growth, this implies that total sales will be down about 1% compared to the first quarter of 2014 at actual rates. On adjusted EPS, we expect an adverse impact of about $0.02. So, based on the target of $0.35 at constant exchange rate, this would imply about $0.33 per share at actual rates. This slide also contains adjustment assumptions for the full year and the fourth quarter. The only assumption that has been changed is adjusted tax rate on a full year basis, and this has been reduced to about 17% from the prior target at 19%. Again, this is due to our ability to leverage some financial thresholds and take advantage of the geographic distribution of our business. At the same time, we see adjusted tax rate returning to the more usual range in 2016. With that, I would like to hand back to Peer.

Thank you, Roland. And now on slide 16 for a summary before we move into the Q&A. Let me review what we have announced. First, our results for the first nine months of the year are in line with our full year targets which we have reaffirmed and are determined to achieve. The sales performance in the third quarter was marked by strong growth in the life sciences while molecular diagnostics faced some in part due to the timing of national tenders and also with weaker results in China and Japan. Second, we are moving ahead on initiatives to transform QIAGEN and are demonstrating success in areas with strong prospects. The benefits of these efforts will become even more apparent during 2016 as we put behind us the significant headwinds from the declining sales in the United States HPV test franchise. Indeed, this year is setting a good foundation for accelerating innovation and growth from our core portfolio. And as a last point, we are reaffirming our full year guidance for higher adjusted net sales and earnings per share at constant exchange rates along with ambitions to increase free cash flow and improve our margins but again for a result that actual rates to be adversely impacted by currencies. With that I'd like to hand back to the operator for the Q&A session. Thank you.

Thank you. [Operator Instructions] And our first question today comes from the line of Dan Leonard of Leerink. Please go ahead.

My first question, I was hoping you could elaborate on the weakness in China in your outlook for that region; are there specific customer classes, product lines or was the weakness more broad-based?

So, the weakness was primarily in the MDx area. We've seen better growth in the life sciences which is however is smaller piece of the business in China. We are not attributing this to a trend; we are just very encouraged at the moment with the uptake of QuantiFERON. We know this is a very substantial market opportunity for us in China. And so moving into 2016, we expect these growth rates to be very healthy as we've seen also in previous years.

And then my follow-up, Peer, could you elaborate a bit on some of the areas where you are expanding the sales force that you mentioned on a call -- you or Roland have mentioned that?

Sure. Well, the first area that we also highlighted in the call was the significant expansion in the QuantiFERON franchise. QuantiFERON is in the meantime a very important product group at TB but also other assays that we’re also taking forward into the U.S. and this is now in clinical trials and the regulatory activities are ongoing. In Europe, we have total products targeting the QuantiFERON franchise and they are marketed by a targeted sales force which we significantly increased. And this has shown some very good effect starting now in the third quarter. August and September were record months against the strong prior year period. And we see that there is a very strong outlook for this franchise for the period to come. In particular the United States and Europe we've seen a very good uptake of the 4G [ph] product due to some of these efforts. And we are also very encouraged by the uptake in China. So, that is an area where we have applied a specialized sales channel. Where we beefed up the sales channel is in the advanced genomics and informatics areas. These are areas that we are investing in heavily also in anticipation and broadening our activities in next generation sequencing, the portfolio that we will make available there. So, there are significant investments that we are making in preparation of faster growth while we are currently seeing the last phases of depressed top line or headwinds on the top line. And so this is what you currently see in some of the numbers.

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

Peer, I'm wondering if you could just elaborate a little bit more on the Molecular softness. You mentioned some of that was Pharama co-development. Maybe just talk to some of the underlying issues there. Obviously some of it was geographic in China as you just mentioned but what gives you conviction that this is a transitory issue?

So I might have misspoken but the Pharma co-development franchise is actually one which is going to see a record year in 2016 and we’re seeing record income of new partnerships and co-development activities never been stronger results, add more these massive collaboration agreements that are these umbrellas under which have individual projects. We have 12 publicly announced such deals. So, this is really moving ahead very aggressively. Our MDx franchise, to you answer your question directly, is global and results are often based on a number of factors. One of them is the timing of tenders. And this involves different types of products within the business portfolio and also regions. What we saw in 2014 that there were number of infectious disease tenders that were related to outbreaks. And I think you will be able to see which ones they were that gave us a significant uptake. And at the same time in the third quarter and fourth quarter we had a significant delay on tenders that are probably pushed now into 2016. And hence we are seeing a softness in Q3 and Q4 that we’re partly able to compensate but are not necessarily in any way related to underline long term trends or anything beyond more temporal volatility. So the nine months 2015 trends even with these impacts excluding HPV were 8% and this underscores the overall confidence. So, our team is working hard to push up that growth rate even higher in 2016 and beyond. And this is reflects also the level of excitement we have with the portfolio that we are building and how we’re putting it together. The most important thing here is that QIAGEN has multiple different growth drivers across the portfolio and while there always will be these lumpiness, especially if you’re in national tenders, we were able to nicely mitigate that with very strong quarter in the life sciences which by the way is also seeing a very good trajectory here at the moment and we’re quite excited about some of the opportunities that we have in this area going forward.

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

First one is actually on HPV, so nice to see that continuing to track toward expectations for this year. Can you give us a sense for how we're thinking about the trends from here, sequential trends in HPV, particularly in the U.S. into 2016? Should we think about that as roughly flat or is there a small moderation embedded? And then maybe a broader question on HPV, I mean how did you see HPV internationally track in the quarter and how you are thinking about that going forward?

Well HPV is a very valuable franchise for us and one that takes us into many important discussions with customers and also governments. We unfortunately, as you all know, we discussed this many times, we’re seeing pricing pressures in the U.S. against however the ability that we have to actually maintain the market leading position, significant market leading position in United States. And the pricing impact has been brutal, frankly. It's been far, far in excess of what anyone would have expected. Our market-share on the other side is far higher than I think anybody would have expected a few years ago. So, this is a different picture but a similar outcome. But the situation in U.S. will -- continues to be one which is going to see a slight negative impact on the overall numbers next year but not one that we would want to call out and make a big deal about. And hence we think this is now the last year in which this will be an impact, might be a few million dollars next year, but against the size of the overall company, this would start getting non-material. So, non-U.S. HPV was up actually double-digit in the first-half of the year. There was some lumpiness also due to some of the timings of national tenders and this was primarily now also in Latin America that we saw some weakness in the third quarter. But we expect the HPV franchise actually to be a growth contributor in 2015 even with some of the continued weakness in United States. So from that perspective - and interesting phenomenon for our discussions moving into 2016, but obviously on a very, very small revenue base now in the meantime 3, 4 percentage points including 3 percentage points U.S. on an annualize basis for this year. And it will clearly go down as a percentage of sales for the U.S. in 2015, but non-U.S. will move up and we’re seeing a lot of encouraging trends for the use of this portfolio.

Doug Schenkel, please go ahead, sir.

So, I guess the first question is really just on operating -- the change in operating margin guidance. I think originally you guys had guided to 50 basis points of operating margin expansion, this year you’ve changed that to I believe about flat. Could you just walk through kind of the latter or the waterfall that kind of gets us there; essentially where are you investing more on and how does this change so much just late in the year?

I guess I tried to say on call is what we are seeing quite early actually in the quarter is that we could keep our EPS expectation for the third quarter especially because we had very good one the non-operational side, on the interest side, as well as on the tax side. And what we discussed then on the management level is that we should use these additional proceeds and invest them into especially we said also in certain marketing activity because we see here nice opportunities to even drive growth going forward. And so, at the same time, there was an active decision more or less short-term trade-off against long-term growth and that is a nice opportunity continue to drive the growth in QuantiFERON with more sales growth, more geographic expansion, same time also investing in NGS. And for example with our kind of sequence universal solution, also he bioinformatics side. And again that is all something what we believe for us good investment strategy by the same time being able to keep our guidance as it is.

Okay. And Roland then I guess really Peer as well, if you look back over the last few years, EPS growth was I think 6% in 2014. And it looks like EPS growth this year is going to be well under 10%. And if we adjust for the charge you set in Q4 of last year which made the basic comparison more favorable, EPS growth this year is again going to be pretty nominal. As you just described, you are making a decision I think to increase investment from recent levels pursuant to your growth opportunities which do appear to be promising. Is this the right way to be thinking about our models heading into 2016 that we are in a prolonged period of investment? That's really the first question. And then I guess the second part would be recognizing growth this year excluding U.S. HPV, FX, M&A seem to be tracking to just over 5%. Given the investments you've made and the enhanced level of investment you're describing here, shouldn't that start to translate into some accelerations from those levels at some point soon, meaning next year?

Doug, I'll take the second question first and then hand over to Roland. It's interesting because I think that the summary of a lot of the things we've been saying here over the course of the last two calls, at least, is that we are clearly seeing an inflection point coming in a way that the headwinds from the HPV franchise are dissipating. And we are seeing a significant improvement coming forward towards us which is going to be the underlying growth rate that we have seen now for the past 10 quarters, which is all between 5% and 7%. So, there is a quarter with 5%; there is with times where we are at 9%; on average it was I think between around 6% to 7% -- around 6%. And this is kind of like a baseline that we are seeing. And on top of that we clearly did a lot of work to create new franchises that could have further impact on the top line. In particular the growth areas that now represent a third of our sales growing at high double digits that are increasingly impacting our overall profile of the company. So yes, our key focus is now to transition into an acceleration phase into 2016. And what you are currently seeing right now is a company that is investing to actually accelerate but still absorbing the hit on the top line, the headwind on the top line from the HPV franchise. I think what few people appreciate is that we were able to absorb that hit on the top line while reinvesting in growth engines that are now about to shine through and we are not talking now in quarters and years for this to happen but now we've made a very clear that we think 2016 is going to be substantially better simply based on the math of the headwind dissipating. So from that perspective, we are kind of in a very tight spot right now because we are investing already for a company targeting higher growth but at the same time we are still seeing like a very significant headwind which we expect to dissipate later in this year. The third quarter was clearly one where we saw some volatility on some of these national tenders. I don’t attribute anything in terms of long-term nature to this. This is just normal course of business doing business with countries. And this kind of hit us a little bit on the margin side, making the annual margin more difficult but these investments that we’re doing now, they will definitely also allow and inflection on the -- or improvement on the operating margin level to come in 2016.

And back to your question Doug, also just I think we have to see things in perspective. And if we adjusted for last year EPS was $1 and meeting $0.08 restructuring change, so there is 1.08 guidance for this year to know it's 1.16 on constant exchange rate side. So, what you are seeing here is there again with company overall growth rate including a significant headwind on HPV, let's say 4% for the year at the same time EPS growth rate somewhere 7% to 8%. So I think that is still something what we should do better, I could agree. But I think it’s still also something what is not bad. And assuming now what Peer was referring to that HPV headwind is moving away, growth rate going up, I think the likelihood on being also here seeing some margin improvement and that's why EPS improvements in about that level in 2016 is something what we are working hard on.

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

I wanted to ask one more on the personalized healthcare portfolio and just in the release talking about some of the slower growth trends for the companion diagnostic assays. I was wondering if you could just provide a little bit more color on that and whether just the level of conviction in the 4Q and beyond for that business?

So, personalized healthcare is a very long-term trend for us. And it is very real as you know it's a $100 million franchise for us. So, it is definitely important. I often see statements this is the potential future business for us. This is actually here today and generating profitability. It is exposed to some volatility, in particular due to anxieties around reimbursements and restructurings that are related to accommodate for that. We’ve seen continued anxiety in the United States in particular in reimbursement. And that has started to improve a little bit but it has still been more challenging than we would have thought. Certain parts of the portfolio are in good double-digit growth rates. I’d like to point out in particular the leukemia franchise where we have a market leading position and in the solid tumor area it has been a little bit more lumpy due to in particular large customers moving in various stages on that portfolio. But it is not something where I would say that there is a trend that would deviate in any way from what we see as a long-term trend in personalized healthcare and it is also a broad portfolio. So, we’re selling target sequencing panels, we’re selling next gen panels, we’re selling real-time PCR assays. And one of the impacts that we saw in the third quarter was actually softness in the prior sequencing portfolio, in the third quarter, which is one of the products that is used widely for instance also in Asia. So, there is some trends there that move in one direction and then in the next quarter the other. I wouldn’t attribute too much to that on the near-term as a franchise.

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

Just two quick clarifications on my questions. So one, Peer, can you just remind us as a part of your revenues, how much is the total HPV franchise, so U.S., both international as we end Q3 or what you think is going to be as we end 2015? And then just wanted to clarify in China, is the flat -- is that a local currency number or is that including currency? And then my question is, on the next GeneReader, you said you're still set for a fourth quarter -- on the GeneReader still set for the fourth quarter release. We are here in the fourth quarter, so what can we expect around announcements for that?

So, I’ll leave the China question to Roland. In terms of the GeneReader launch, we said it would be started here now in the fourth quarter of this year and we are -- we further confirmed that date now as we three times in the last three calls. And yes, we are nearing the end of the year. And yes, we’re still -- we’re confident that we will be launching this year. And the one thing I can promise, you’ll be the first to know. This is something that we’re clearly preparing and we want to do this right and make sure that you have all information available to also see the power of what we can bring forward. Roland, would you want to actually answer the China question?

Yes, China is clearly something where again we also have seen on the local basis because that is -- especially on the molecular business, especially on the instrumentation side. So I guess it is something overall what we probably see should be different in 2016. If you're just following all the discussions in China, I would say there is no mid or long-term change in direction, you will see it as something what’s I would probably call as a temporary volatility. So currency is not part of that.

Our next question comes from the line of Brian Weinstein of William Blair. Please go ahead.

This is Matt Larew in for Brian today, just wanted to ask for bioinformatics here. Peer, if you could update us on the current size of that business? And then thoughts on the business model moving forward, particularly now that you're going to be launching GeneReader here starting in fourth quarter, how that business model evolves from here?

So, the revenue is attributed to the bioinformatics franchise; it’s in the range of 4% of our sales base and growing at a healthy double-digit clip. They are primarily subscription fees licensees. And this -- for use of the interpretation and then the license fees for the analytical software package is that we have. The example for instance of the Intel relationship is a nice one where we created interesting options for users of in this case [indiscernible] environment, to dramatically reduce the cost of the analytical processing of in this case holding on sequencing data. And in addition to that we have a whole suite of reagents and consumables and wherever applicable also assays including also the sample technologies that are required. So, sample technologies, sample preparation and analytics and interpretation that we are seeing as an interesting package for these customers. So, there is a direct revenue component in addition to that is the ability to create very nice packages around certain themes. And we are applying that to third party, so platform independent packages; we are also applying it to our own Sample to Insight solutions. And clearly we think this is a powerful view to take. We believe a lot of these next generation platforms -- they should become much more software centric than what they are today. It's more plumbing and the hard work that is in the focus. We think the software, what to do with the data and how to design experiments and what backwards, and what reagents to use and how to best create a workflow. It’s a real unique expertise that we have. And this is putting us in a very good position. Also one of the reasons why we're seeing good growth in the life sciences at the moment are next generation frequenting reagents and panel franchise is also been quite long.

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

Thanks very much for taking my question….

[Operator Instructions] Your next question comes from the line of Isaac Ro of Goldman Sachs. Please go ahead.

Just another one on GeneReader, I think you guys have talked here about being on track for the instrumentation launch. And I'm curious to know a little bit more about the incremental investments that you think you might need to do tie together the equipment with the informatics. You obviously have a pretty broad informatics portfolio already on the market. So, I'm just trying to think through the investment for integration between the two platforms.

As we said some time ago, we see the integration of all of the components and the capabilities of QIAGEN is critical to be differentiating and this is something we invested in heavily over the last two years. And the ability to take every strength that QIAGEN has and to integrate it in something integrated and unique and unified is one of the value propositions that we've proven in many-many products over the history of QIAGEN. And this is -- other than it is a larger and more complex project than many, it's nothing very different. So in this case in informatics however are more important component and they have been in previous areas. And so that's why informatics is for us -- and we've always said that ever since we built this franchise which we are very proud of and which is doing very well, ever since we entered into this area, we have made it very clear that there is standalone business franchise with certain revenue base and by itself, not to justify the investment and generate a good return but in addition to that we think going forward every consumable will have instrument, everything that every service even that QIAGEN sells has its mark component around it that is benefited by having the informatics. And that’s something we hope we will also be able to show. As you’ve seen from the previous meetings, just you take the hereditary package; I went over this very quickly but every time we get feedback, we get tons of feedback from physicians or a geneticist where they say they have patients in front of them who have gone from doctor to doctor to doctor using all next-gen sequencing and all other capabilities are available to the laboratories providing services to these physicians, they have not been able to get a result. And using the informatics that we have, they not only can get cure it or diagnosis rates of 99% but they -- which is absolutely phenomenal, it sounds like a number but behind every one of these cases, there is kid, very often children, pediatric cases where you have very complex genetic diseases that previously were not solvable. And so this is just a big differentiator for us and one that we’re making available to the world but we are also making use of for our own Sample to Insight solutions.

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

So, just firstly, you mentioned a little bit of lumpiness, volatility in national tenders for molecular, just wondering if you could elaborate on that a little bit. And I understand infectious disease is quite price competitive, I wonder whether you're seeing any price pressure here or failed to get on certain tenders or whether this really is just a case of delays in anticipated tenders for which you expect to partake? I just have one follow-up after that.

Very valid question, Scott. I think if you look at the infection disease area, so very broad portfolio of tests. And there is an extraordinary focus typically on the United States, but we should never forget Europe which is a third of the world, and the there we have the broadest portfolio of any company currently in the market with the most flexible and advanced platforms. So -- and by the way in Europe many customers actually prefer a two-room strategy, hence the ability for us to have the cycle in one room and the sample preparation and assay set up in other. This is very often recommended and even required by public guidelines. So, we have a very good franchise there. And there the battle is typically on individual assays where somebody will come in with a competitive offering, let's say in transplantation biology and we fight that battle there, we have a strong franchise there, but then the blood virals are used to balance that out. And it's very difficult to see trends overall in individual areas. We’re clearly seeing trends and pricing move down overall in the molecular testing. They are by the way a fraction of what we have in United States. So prices are much more competitive in Europe than they are in United States. We have a very strong position in Europe and also a cost benefit in Europe. And so, I wouldn’t point to any specific assay other than this has been a trajectory which has been on for a very long time and every time there is a new assay, you can price it as a premium, it's just the old game. So there is nothing new and nothing really to look to. If you ask me for a question and answer to the lumpiness we had in the third quarter, we highlighted that there were a big infectious disease screening programs. We had good double-digit sales, if you remember last year in the infectious disease area, high double-digit sales, also QIAsymphony related. And we just didn’t have an outbreak this year in that region of the world and that was time last year in the third quarter. And these are millions of dollars typically of shipments and this year also we had a tender that basically evaporated due to administrative reason, as they always do. But this was the larger one in Q3 and Q4 and hence you have a baseline issue but at the same time this year’s numbers had an impact. Together I am not really attributing a lot -- I am much more focused right now on preparing what Doug Schenkel mentioned initially for 2016 for us to move in there with maximum momentum. And as you see from all of the numbers, we’re doing everything to prepare that while still trying everything to make sure that we meet the guidance that we set early in this year and we’re able to do that so far to the third quarter.

And just a quick follow-up please, just on your current pipeline, specifically GeneReader. Can you just remind us what we're likely to see at the upcoming AMP meeting and when QIAGEN will call its next Capital Market Day to set some financial targets for the company and pipeline?

Sure, I’ll refer to John for the Capital Markets Day discussion. AMP is an important meeting for us and I know we’ll be seeing a lot of you there next week as well. It is always an important meeting for us. It is always the meeting where molecular pathology is discussed and trends are being set going forward. And it’s a group of people that we have known for many, many years and been very closely associated with, because this is where molecular testing very often sees it through. And we will be there with a broad suite of products. Novel real-time PCR assays, the ModaPlex platform will be showing some also -- and developments on our GeneReader related portfolio. So, it's going to be really interesting to see the update and for 2016 as we all know lot of trend product at AMP in the States and we look forward to having those discussions.

So, Scott to your question about Capital Markets Day, we’re looking at holding an event in the spring of 2016 and we’ll be putting out more information about that either later this year or early January to give you guys time and the date where we’re going to meet and give you guys an update on the business and how we’re looking forward to 2016 and then probably also about 2020.

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

I had one clarification and a follow-up. So just on the guidance for ‘15, so the revenue at CER was reiterated but we're now coming in at the lower end on the EPS. Tax rate came in a little bit lighter, in light of our third quarter OpEx being pretty phenomenal, I'm just wondering what the moving part was. Is it just a conservatism or like you said, this is increased OpEx expenses related to your sales force build-out?

I think what we clearly see -- what we have seen in third quarter and what we have seen for -- what we expect for the fourth quarter is that we have beneficial non-operational expense situation on the interest side, on the tax side and the decision was taken by us that we invest some of this additional proceed in to sales and marketing activities to support some of the activities we referred to earlier by still maintaining the guidance.

Our next question comes from the line of Jeff Elliott of Robert W. Baird. Please go ahead.

This is Catherine Ramsey in for Jeff, one question on instruments and then a follow-up on GeneReader. Is that kind of a older legacy instruments being soft this quarter; is there something you have in mind to fix that, product refreshes or something like that to calibrate the growth there or was it just a one quarter change it reflects?

We don’t see that as a significant topic for us, it is rather what we’ve seen as a Q3 development. If you look at the pipeline development for yearend but also going forward, there is nothing we are concerned. Not only the Symphony doing quite well again and also in certain areas like Europe for example, like the U.S. implementation in general was quite strong. So, it has to do a little bit with some specific situations we have seen in Japan, China and to certain extent in Latin America, again nothing what we see as a long-term trend change.

And our next question comes from the line of Dan Arias of Citigroup. Please go ahead.

Maybe one on liquid biopsy, Peer, obviously a lot of activity in the market there. So, I guess as we talk through the idea of you guys investing in the important growth areas, how are you thinking about your liquid biopsy portfolio just with respect to sort of organic solutions versus building out through collaborations or acquisitions, just kind of curious about internal versus more of a business development strategy there?

Thanks for asking that question. It's a very confusing to understand what people are referring to when they talk about liquid biopsy. We have two ways of looking at it, number one is in terms of sample technologies meaning the collection, the stabilization, the attraction, the purification and the preparation of nucleic acids for a downstream liquid biopsy use. This is a very-very challenging step that can be done with many tools but can be done well. We think that’s an area we excel in and studies show that again and again and again. Hence our market share in this space is huge, not only in the prenatal testing area but in particular also in the cancer area where it is even more challenging sometimes. We have extremely high market share; it’s now 80% to 90% plus meaning that every time you read about these liquid biopsy applications, new labs emerging, new tests emerging, we can almost assure you that the frontend is a QIAGEN solution and that’s something were aggressively investing in and it's a top priority area for us. And we have a quite a broad portfolio in the mean time spanning cell-free DNA, spanning exosomes, spanning circulating tumor cells. The second way looking at liquid biopsy is looking at the horizontal, meaning the solution from a sample through to a report. And there in certain areas we have selectively also taken the report ourselves. We were the first to introduce the liquid biopsy companion diagnostic earlier this year that was earmarked in Europe and that is doing very well. And we are also active in many such programs, most of our pharma partners, some of them are even coming to us exactly for this capability because we have the ability to not only have the collection and extraction technique but even off the preparation and what is very important is also doing informatics, that Isaac question as well. It's very-very important to have this integral offering from Sample to Insight as we call. So this is how we look at this holistically. and some of these assays we will be taking forward ourselves as we are already doing, in particular in cancer and companion diagnostic and in many years we will partner and make our technology available to others. And this -- because of our very strong position in companion diagnostics, it is well accepted and in some cases even laboratories are giving us the ability to distribute these assays that they have developed ex-U.S. for instance which is still 50% of the world and at the same time supply them for U.S. coverage.

Thank you, Peer. And with that question I'd like to end the call here. We've gone a bit long today. I appreciate your time and interest in QIAGEN. If you have any follow-up questions, please let me know. And for those of you going to AMP in Austin next week, please also let me know if you will be there, so that we have a chance to talk and meet in person. Thank you very much.

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