Qiagen N.V. (QGEN) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. I am Emma, your PGI Call operator. Welcome, and thank you for joining QIAGEN's Conference Call to discuss the Q4 Full Year 2018 Results. 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, and welcome to our conference call. The speakers today are Peer Schatz, the Chief Executive Officer of QIAGEN; and Roland Sackers, Chief Financial Officer. Also joining us today is Dr. Sarah Fakih from our IR team. Please note that this call is being webcast live and will be archived in the Investors section of our website at www.qiagen.com. A copy of the press release is also available in the same section. Before we begin, let me cover our Safe Harbor statement. The discussions and responses to your questions on this call reflect management's views as of today, Tuesday, February 5, 2019. 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 the U.S. Securities and Exchange Commission. We will also be referring today to certain financial measures not prepared in accordance with generally accepted accounting principles. You can find a reconciliation of these figures to GAAP in the press release and the presentations for the call. With that, I would like to now turn it over to Peer.

Well, thank you, John, and thank you to all of you for joining us for this call. 2018 was an important and good year for QIAGEN. We delivered our performance in line with our outlook for net sales growth and exceeded our target for adjusted earnings per share. But very important is that we made big steps forward and delivered outstanding progress in developing what we believe is the most dynamic and disruptive portfolio of Sample to Insight solutions for molecular testing. This portfolio opens up vast market opportunities where our core competence can make a real difference and create value. This creates a very attractive foundation for the years to come. Our growth initiatives are moving ahead well as we continue to execute on QIAGEN's strategy as a global leader in molecular testing and want to create even greater value from this unique and differentiated portfolio. I have these key messages for you today. First, we achieved our full year target for net sales growth and exceeded our upgraded target for adjusted earnings per share. Net sales were $1.5 billion, rising 6% at constant exchange rates and within the outlook we gave for 6% to 7% CER growth. Adjusted earnings per share were $1.34 on a reported basis and $1.35 at constant exchange rates, and that compared to the outlook for $1.33 to $1.34. We acknowledge that there were moving parts, in particular, on the revenue line in the fourth quarter as we shed sizable businesses over the last 12 months and made many decisions to better focus, while lifting one of the broadest portfolios of disruptive, next generation platforms into the Molecular Diagnostics market. Roland will have more details on this in his section. The improved profitability I mentioned before was also reflected in the adjusted operating income margin, which rose 1 percentage point to 27% of sales, which is one of the best margins in this industry and is a number even more impressive as it includes the investments in the development and commercialization of the newly launched QIAstat-Dx molecular syndromic testing platform. Second, we believe QIAGEN has the most dynamic and disruptive portfolio of Sample to Insight solutions for molecular testing. Among the highlights, sales of the QuantiFERON-TB test grew 21% at constant exchange rates in 2018 to $223 million, and this gives us additional confidence in achieving the 2020 target for $300 million of sales. The European launch of our strategic collaboration with DiaSorin and new automation options for customers to use the DiaSorin system for the test readout is building momentum, and we plan to launch in the United States in 2019. In next-generation sequencing, our teams exceeded the goal for $140 million from this portfolio, up from about $115 million in 2017. We have set a goal for 2019 sales of about $190 million, fueled by recognition for our differentiated universal NGS solutions, which can be used on any sequencer, as well as growth in placements in revenues for our GeneReader NGS System. We're also moving ahead with new placements of the QIAsymphony automation platform, and we're pleased to report that we well exceeded the 2018 target for 2,300 cumulative placements, with more than 120 new placements in Q4 alone. Our goal for 2019 is to reach more than 2,500 cumulative placements. As another highlight, our teams are establishing a solid European footprint for the QIAstat-Dx system, which is rapidly gaining recognition as a preferred and next-generation solution that provides accurate insights into complex disease syndromes. For 2019, we are confident in our target for about $30 million of sales and are preparing for the U.S. launch in this year. For the NeuMoDx platforms, we are seeing good uptake and first placements to Europe after the start of our distributor agreement in the region. These two, new fully integrated testing platforms are highly synergistic with our portfolio and benefit from sharing the sales channels with QIAstat-Dx and QIAsymphony. The new partnership with NeuMoDx enables us to offer novel platforms, which offer the ease of use of clinical chemistry testing automation now to molecular diagnostic laboratories. And finally, we are entering digital PCR, one of the fastest-growing segments of the life sciences market, with novel digital PCR systems; we are planning a 2020 launch of highly automated workflows with significantly quicker time to resolve, higher multiplexing, and greater throughput flexibility than currently available platforms. Third, we're announcing our outlook for full year 2019 to deliver faster sales growth, along with further improvements in adjusted EPS. We have set a target for about 7% to 8% CER total net sales growth. This includes about $30 million of sales from QIAstat-Dx, weighted into the second half of 2019 due to plans for the U.S. regulatory approval, and launch in this period. For adjusted EPS, we have set a target for $1.45 to $1.47 per share, and this includes $0.03 of dilution from other investment into digital PCR. We have a number of major product launches planned for 2019 and 2020 and anticipate a steady adjusted operating income margin as we leverage recent efficiency gains to help fund these exciting projects. So, as a quick summary, we are pleased with the progress QIAGEN made in 2018 and look forward to further important improvements in 2019. And with that, I would now like to hand over to Roland.

Thank you, Peer. Good afternoon to those of you in Europe and good morning to those of you in the U.S. I will first review the financial results for 2018 and later provide you with our outlook for 2019. For full year 2018, we achieved our net sales target of 6% to 7% CER growth with 6% CER growth, and we exceeded the outlook we raised in November for adjusted EPS of $1.33 to $1.34 coming in at $1.35 per share at constant exchange rates. In terms of currency impact, net sales also rose 6% on a reported basis. The currency tailwinds during the first half of 2018 were offset by the headwinds during the last two quarters, in particular in the fourth quarter due to the Turkish lira and the euro, which together accounted for about two-thirds of the gross impact. We saw solid growth across our portfolio during 2018. And as expected, this was enhanced by the launch of QIAstat-Dx, which provided less than 1 percentage point of incremental growth. These results helped to absorb approximately 1 percentage point of headwinds from reduced U.S. HPV sales. Organic sales growth, which excludes the business portfolio changes discussed throughout the year and acquisition contributions in both periods were 6.7% at constant exchange rates in 2018. For the fourth quarter of 2018, net sales grew 4% to 5% CER, and this was below our target for 6% to 7% CER growth. On a reported basis, net sales rose 2% to $403.2 million, which included currency headwinds of a solid 3 percentage points. Adjusted diluted earnings were $0.40 per share and $0.41 at constant exchange rates. This was ahead of our target for about $0.39 to $0.40 at constant exchange rate. Although, we exceeded our target for adjusted EPS, sales for the quarter were softer. This was mainly due to changes agreed upon during the quarter in the third-party R&D project and applied testing linked to the divestment of the veterinary testing assay portfolio and our decision to accelerate the reduction of low margin third-party instrument service contracts to ensure service capacity for several new QIAGEN instruments launches. As you know, QIAGEN has offered services to support customers this instruments from other companies. This has enabled us to achieve critical mass in our global service capacity, but these revenues at the relatively low margin. We're taking on a number of these service agreements over the last few years as we move into a period of new instrument launches. We decided to ramp down many of these agreements to ensure we have available service capacity on instruments. For the full year, net sets were 6% on a reported basis and also at 6% CER pace. The currency tailwinds during the first half of 2018 were offset by headwinds during the last two quarters, particularly in the fourth quarter due to the Turkish lira and the euro, which together accounted for about two-thirds of the adverse impact. We saw solid growth across our portfolio during 2018 and as expected this was enhanced by the launch of QIAstat-Dx. These results to absorb also one – a solid 1 percentage point of headwinds from reduced U.S. HPV sales. Organic sales growth rates exclude the business portfolio changes discussed throughout the year and acquisition contribution in both products were 6.7% at constant exchange rates in 2018. Moving down to income statement on a full year basis for 2018, adjusted gross margin remained steady at 71% of sales. Adjusted operating income rose at a faster pace than net sales and grew 9% to $403.3 million. The adjusted operating income margin also about 100 basis points at constant exchange rate and about 70 basis points on a reported basis to 26.9% of sales compared to 26.2% in the year ago period. That said, during the course of 2018 that we were able to realize efficiency gains faster than planned and also took a prudent approach for cost management. This led to lower overall levels of research and development, sales and marketing and general administration expenses as the percentage of sales in 2018 compared to 2017. For the fourth quarter of 2018 adjusted gross profit margin was 70% and declined about 80 basis points from the fourth quarter of 2017. This was mainly due to the wrap up of QIAstat-Dx system an adverse mix in the portfolio -- product portfolio. Adjusted operating income declined 2% in the fourth quarter to $119.4 million, reflecting the heavy investments in launching QIAstat-Dx in Europe and preparing for the U.S. launch in 2019. Adjusted operating income margin was 30% compared to 31% in the year ago period. Finally the adjusted tax rate for the full year was 90% of sales, while the number of shares outstanding was in line with our targets at 233.5 million I would like to now review our sales results for the product categories in our four customer classes. Among the product categories, consumables and related revenues rose 4% CER to $344 million in the fourth quarter of 2018 and represented 85% of total sales. Here we saw solid business expansion in the Molecular Diagnostics, Pharma and Academia customer classes, along with underlying mid-single-digit CER growth in Applied Testing, excluding the veterinary testing portfolio divestment in the spring of 2018. On a full year basis, consumables and related revenues experienced 6% CER growth and represented 88% of total sales. In the fourth quarter of 2018, instruments rose 5% CER to $59 million and provided 15% of total sales. Sales of instrument products advanced at a 13% CER rate, but this was partially offset by a 10% CER decline in service revenues. For the full year, instrument revenues rose 6% CER to $186 million and were 12% of total sales. Molecular Diagnostics rose 5% CER for the fourth quarter of 2018 to $194 million and provided 48% of total sales. This was led by continued double-digit CER sales gains for the QuantiFERON, latent TB test but was hampered by the drop in instrument service revenues. For the full year, Molecular Diagnostics sales rose 8% CER and represented 49% of sales. The Life Science customer classes provided 52% sales of -- for the fourth quarter of 2018 and rose 5% CER on a combined basis. On a full year basis, that grew 4% CER and represented 51% of total sales. As mentioned earlier, Applied Testing sales in 2018 were impacted by the divestment of veterinary testing assays in order due to the change in R&D projects related to this portfolio. Sales for the fourth quarter were up 1% CER to $39 million, but rose as an underlying mid-single-digit CER rate. For the full year 2018, sales were largely unchanged from 2017. Excluding the divestment, Applied Testing sales were up 4% CER in 2018. Pharma sales rose 5% CER to $74 million in the fourth quarter of 2018, slightly below our plan. Here we saw a mix of very low single-digit CER growth in consumables, combined with double-digit CER gains in instruments. For the full year 2018, Pharma had 5% CER sales growth with total sales of $291 million or 19% of total sales. The Academia customer class led the performance in the fourth quarter of 2018, with 6% CER growth and sales of $95 million, led by double-digit CER growth in instruments and support by single-digit CER growth in consumables. In the Asia Pacific, Japan had the strongest performance among the regions. For the full year, Academia rose 5% CER with $342 million and represented 23% of total sales. I would like to now review the performance among our three geographic regions. Europe, Middle East and Africa led all regions with 13% CER growth in the fourth quarter to $143 million, providing 35% of sales. We saw improving trends in France, Italy, Belgium and Turkey, but Germany showed weaker trends. On a full year basis, sales grew 6% CER to $490 million and represented 33% of total sales. The Americas regions had a disappointing performance in the fourth quarter of 2018, with sales down 4% CER to $169 million and representing 42% of sales. It was in this region that we felt the impact of the decline in instrument service revenues in the Molecular Diagnostics customer class. For the full year in 2018, the Americas grew 6% CER growth to $693 million and represented 46% of total sales. The Asia-Pacific/Japan region grew 8% CER in the fourth quarter with sales of $91 million that represented 23% of total sales. We were pleased with the double-digit CER growth trends in Japan and China, while South Korea returned to growth during the quarter as a comparative impact of the 2017 QuantiFERON latent TB tender subsided. For the full year, sales grew 5% CER to $315 million, and represented 21% of sales. I would like to now give you an update on our balance sheet and cash flow. As a first point, operating cash flow for 2018 rose 25% to $359 million, and this includes the $30 million of payment for prepaid royalties for the genetic screening partnership with Natera. At the end of 2018, our leverage ratio remains at a moderate level of 1.4 times net debt-to-EBITDA. We plan to continue our disciplined capital allocation policy, focused on targeted acquisitions to strengthen our portfolio, along with increasing returns, such through our current $200 million repurchase program. I would like to now hand back to Peer for a strategy update.

Yes, and thank you, Roland. I'm now on slide nine to give you an overview of key developments in our Sample to Insight portfolio and would like to now review the following areas: QuantiFERON-TB; QIAstat-Dx, our fully integrated syndromic testing platform; NeuMoDx, our newest automation solution for fully integrated PCR-based clinical testing; next-generation sequencing with our GeneReader NGS System and our Universal NGS solutions; Precision Medicine, formally what we used to refer to as Personalized Healthcare; and our plans to enter the fast-growing market for digital PCR in the launch of QIAcube Connect. First, I'd like to provide you with an update on key developments for QuantiFERON-TB, QIAGEN's industry leading molecular tests for the detection of latent tuberculosis directly from blood samples. We achieved our full-year 2018 goal with 21% CER sales growth based on strong conversions from the 120-year-old tuberculin skin test to our modern blood-based tests. We continue to expect over $300 million of QuantiFERON sales in 2020. The clear highlight in 2018 was the launch of the new automation options for QuantiFERON-TB Plus to run on DiaSorin's LIAISON platforms in Europe late in the year, and we continue to expect availability in the U.S. in 2019 and in China in 2020. DiaSorin has more than 7,000 LIAISON instruments worldwide, so this positions our latent TB test very well in a deep and differentiated content menu on a very established platform. We recently announced plans for QuantiFERON-TB Access, which is a new solution tailor-made for latent TB testing and low resource, high burden regions. Now low resource regions lacked the clinical app infrastructure often required for molecular diagnostic tests, and although, these regions in terms of dollar sales represent only about 20% of the global latent TB market. Providing a solution dedicated to these regions is particularly important since this is the location for the vast majority of active TB cases, and many regions and countries have a blend of low resource and high resource settings, therefore, comprehensive coverage requires both solutions. First, discussions with Global Health and other institutions have confirmed a very positive reception for this noble platform. QuantiFERON-TB Access applies the market-leading QuantiFERON-TB technology in a robust single-use reaction cartridge that can be readout within 24 hours on a simple battery-powered digital format. This enables the test to be processed even in very constrained settings. We are in the final stages of development for QuantiFERON-TB Access, and are planning to conduct clinical trials in 2019 in anticipation of the launch in 2020. We believe QuantiFERON-TB Access is highly synergistic and enables us to create the most comprehensive offering available for latent TB detection. I'd like to now update you on QIAstat-Dx, our fully integrated, real-time PCR-based platform for syndromic testing applications that we launched in Europe in April 2018. We see an $800 million market opportunity in syndromic testing that is growing rapidly on the basis of new applications and the ability to address unmet needs for rapid, accurate diagnosis of complex syndromes. QIAstat-Dx enables our customers to experience a significantly improve workflow for syndromic testing based on a number of key differentiators, including exceptional ease-of-use, real-time PCR quantification and highest cost efficiency. We were particularly pleased with more than 300 placements in 2018, which shows the demand for this type of testing platform, and it is notable that within only a few months of ramp up, we are already placing instruments at a comparable rate to the previous generation technology incumbent leader. The consumables ramp up in Europe was however behind schedule, in part, due to the late 2018 launch of a new gastrointestinal panel and the late start to the European influenza season. At the same time, we feel comfortable about our target for $30 million of sales in 2019, and we are preparing for entry into the U.S. market. We submitted QIAstat-Dx to FDA in December 2018 with the respiratory panel, which is the first of many assays we are planning for this market. We expect to launch this system in the U.S. during 2019 once we receive regulatory clearance with the respiratory panel and then adding the gastrointestinal panel shortly afterwards. I would now like to update you on our strategic partnership and distribution agreement with NeuMoDx, which we announced in the fall of 2018. The two new and fully integrated PCR-based NeuMoDx automating systems complement our existing modular QIAsymphony platform. NeuMoDx uses a disruptive the microfluidic technology that enables integrated PCR testing. The system avoids using standard liquid handling technologies, and instead, fits all of the processes required for real-time PCR applications into a miniaturized micro fluidic format, making the system faster and more cost efficient than current systems on the market. The first NeuMoDx systems have been placed in Europe, and we have received very positive feedback. The positive factors include offering a new dimension of utility, significantly simplified workflows and rapid turnaround times. For example, our NeuMoDx platforms can process assays, such as chlamydia or hepatitis in about 40 minutes, compared to 3.5 hours for current systems. Speed is a very high priority for customers in this space. As with QIAstat, we have an exciting pipeline of new assays in development for launch during 2019 and 2020, and we were, in fact, today notified that we received CE approval for hepatitis B and C. In addition, we also received approval for our claim extension to use swabs for the CT/NG test that is already been launched. Moving to slide 13. In next-generation sequencing, QIAGEN exceeded the 2018 target for NGS sales of $140 million and set a 2019 goal for about $190 million. Our GeneReader NGS System is successfully created a position and following in the market for bench top oncology sequencing as evidenced by new placements in growing consumable sales in 2018. Customers appreciate the fully integrated workload, the integrated bioinformatics, the salability, the price per insight and continuous loading features. To further expand the application range of the instrument in 2018, we launched new panels for breast cancer, a range of common solid tumors, myeloid malignancies and custom NGS panels. We are building a very differentiated menu of cancer gene panels. We plan to add panels for immuno-oncology and lung cancer monitoring, and then to expand into noninvasive prenatal testing through our collaboration with Natera. All panels are combined with powerful and comprehensive bioinformatics for the analysis and interpretation of the variance detected. In addition to the GeneReader NGS System, QIAGEN offers a full portfolio of universal NGS solutions that is delivering robust double-digit CER growth. One of the 2018 highlights in our universal NGS portfolio was the launch of the QIAseq FastSelect kit, a real breakthrough for improving RNA sequencing workflows that is targeting a market opportunity of several hundred million dollars of annual sales. I'm now on slide 14. Assay development and menu expansion is now a key priority for us, and we already significantly expanded our assay development capacities and capabilities in 2018. The majority of the assay development resources are based in Manchester in the United Kingdom, where we significantly scaled our infrastructure with currently about 400 employees and plans to add access to many more resources to our recently announced joint venture with the Manchester Health System and the local government. In short, we have built a very sizable and very powerful assay development engine at our center of excellence in Manchester that is now scaling up to deliver this ambitious pipeline. Here you see a detailed overview of key assay development plans from 2018 to 2021 across our unique clinical automation offering, including QIAstat-Dx, NeuMoDx, QuantiFERON and the GeneReader NGS System. Moving to the next topic. We had a very successful year in precision medicine, where we continue to be the clear leader in companion diagnostic collaboration agreements with more than 25 master collaboration agreements in place with Pharma companies. In December 2018, we announced the collaboration with Novartis to commercialize a companion diagnostic for PIK3 mutated breast cancers. The assay uses genetic markers designed to guide for the use of Novartis compound, which is currently in late stage development. We also began building a unique network in 2018 to make QIAGEN's companion diagnostics available to patients on day one of the drug approval in the U.S. and other regulatory agencies. We have also expanded our growing footprint in one of the most exciting areas in cancer treatment in immuno-oncology with the launch of our open platform NGS panel for tumor mutation burden. We, yesterday, also announced a very exciting news that the NHS in genomics England the selected QIAGEN's HDM the most comprehensive genomic knowledge base on inherited diseases and part of our gold standard QIAGEN clinical insights, our QCI platform, to support the U.K. program to sequence and analyze and interpret 5 million genomes over the next years. Bioinformatics are an essential tool in precision medicine to analyze and interpret the vast data generated by next-generation sequencing. Being chosen for this large NHS project reinforces the value of QCI and our industry-leading bioinformatics solutions for precision medicine. Our QCI offering was further strengthened in January when we announced the acquisition of the U.S. company N-of-One, which is a widely recognized pioneer and service provider in molecular oncology services in knowledge basis. The N-of-One solutions are highly complementary to our current solutions. The addition significantly increases our value proposition and competitive advantage in oncology decision support by adding real-world evidence insights to our literature-based databases and interpretation solutions. Now this is a significant expansion of our capabilities since we are not able to offer access to more than 125,000 anonymized patient records and the service layer as well on top of our QCI Knowledge Base offerings. That we have not featured up to now. We will also expand the N-of-One services to other customers sectors, including providers, Pharma and payer segments. As a last point, I would like to discuss two highlights in our Life Sciences area, the launch of QIAcube Connect as a new generation of the QIAcube instrument for automated sample processing, and the acquisition of the digital PCR technology portfolio, Formulatrix, and our plans to enter the digital PCR market in 2020. This is one of the most attractive growth areas in Life Sciences. We are currently rolling out QIAcube Connect as a next-generation automation system that processes samples for molecular testing. The first generation QIAcube is probably one of the most successful molecular sample processing platforms ever, with, eight panels in placements. QIAcube Connect automates QIAGEN's gold standard spin column sample technologies for DNA, RNA and protein with over 3,000 protocols. In January, we announced the acquisition of Formulatrix Technology portfolio, which brings us into digital PCR. With our footprint in real-time PCR and our large assay portfolio, we see increasing opportunities to translate our real-time PCR portfolio into digital PCR applications. And the technology we acquired incorporates a novel approach to digital PCR using a microtiter plate format that dramatically improves the speed of detection with higher multiplexing and greater throughput flexibility in currently available platforms. The technology also allows much better integration into Sample to Insight workflows of the type that QIAGEN has demonstrated already in other areas. It's a highly strategic acquisition for us that protects our current strong real-time PCR base, but also creates new growth opportunities. A series of new and fully integrated instruments are in late stage development by QIAGEN and are targeting commercialization in 2020. And with this, I'd like to hand back to Roland.

Thank you, Peer. I would like now review our outlook for 2019. We have set an outlook for total net sales growth of approximately 7% to 8% CER growth for the full year 2019. This is based on the further expansion of our current business, along with about $13 million of contributions from QIAstat-Dx, which will become organic growth at the end of the first quarter of the year. We do not expect meaningful contributions from the acquisition of N-of-One. For full year 2019, we expect adjusted diluted EPS of about $1.45 to $1.47 at constant exchange rates based on the improvements in operating and financial leverage in our plan. This estimate also includes the significant investments we are making in our portfolio to support midterm growth, in particular, $0.03 of dilution for the development of our digital PCR platform that are planned for launch in 2020. As for currencies, based on rates as of January 31, 2019, in terms of net sales, we expect currency headwind of about 1 percentage points on result at reported rates. For adjusted EPS for the full year, we expect currency headwind of about $0.01. For the first quarter, our outlook is for total net sales growth of about 5% to 6% CER. Adjusted EPS at constant exchange rates is expected to be about $0.26 to $0.27 per share, also at constant exchange rates. In terms of currency impact for the first quarter, based on rates as of January 31, 2019, we expect headwinds of about 4 percentage points on the CER net sales outlook and about $0.01 on the adjusted EPS outlook at CER rates. With that, I would like to hand back to Peer.

Yes, and thank you, Roland. Just a quick summary before we move into Q&A. Let me review what we have announced. First, we achieved our targets for net sales growth for the full year 2018 and exceeded the target for adjusted EPS. Second, we are advancing our Sample to Insight portfolio across the continuum from basic research to routine clinical healthcare. This portfolio is shaping up to be the most dynamic and disruptive in the industry, and we look forward to geographic expansion and new product launches during 2019 and 2020, which are set to accelerate our performance. And as a last point, we have set targets for 2019 of faster sales growth and improvement in adjusted EPS. We are determined to execute on our strategy in 2019 and strengthen our position for even faster growth in 2020 and the coming years. And with that, I'd like to hand back to John and the operator for the Q&A session.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. [Operator Instructions] The first question is from Mr. Jack Meehan from Barclays. Please go ahead.

Thank you. Good morning. Good afternoon. I was hoping you could elaborate a little on the forecast for QuantiFERON for 2019. And within that, first, if you have a sense with the DiaSorin rollout, what percentage of their installed base if you have a sense for what could adopt the test as per the menu? And then are there any important tenders that we should be looking for throughout the year?

Great. Thanks Jack. Well, QuantiFERON wasn't seen very strong growth in 2018. That exceeded our expectations as in a very strong growth path also into 2019 as per the outlook that we just shared before. And it's just a vast market opportunity that is steadily converting away from the skin test over to the QuantiFERON technology. The DiaSorin automation options have indeed created a lot of excitement, in particular, in the higher throughput automation areas, and we are slowly starting to penetrate also the hospital sectors where many of these platforms actually are. So, this is a multiyear rollout where I wouldn't expect a big jump in one or the other way to happen, but it reinforces our superior automation options in addition to superior clinical profile of the test.

Great. And in terms of the instrument service revenue, some of the pressure that you saw in the fourth quarter, could you just elaborate on what the drivers of that were? And it this something that you think will persist as a headwind moving forward?

Sure. As you probably know, we operate a significant instrument service capability where we also provide instrument services to third parties, large diagnostic companies and as well as smaller ones in this industry. And this allows us to maintain a very high degree of responsiveness for our own platforms. As we are now lifting multiple of our own platforms into the market, we want to make sure that we have enough capacity available for us. And therefore, we decided to, as these opportunities arose, to phase out some of these contracts, and therefore hold capacity for our own platform expansion plans over the next years. So, this shouldn't have this -- this was a little bit more significant in Q4, but we wouldn't expect big speed bumps like that in the coming periods.

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

Thanks very much for taking my questions. So, first question, please. Obviously, there's been a lot of activities from a corporate development standpoint over the last 12 to 18 months and quite a lot of acquisitions and strategic moves from the company. Peer, I know that, I think, that you've always aspired to be a double-digit growth company. I wonder if you can comment a little bit as to -- do you now believe you have the right bag of assets and strategy to take you to that aspiration? And if so, when we are likely to see some evidence of it? So, that's the first part, please. Second one, just a quick follow-up. You're highlighting quite a material step-up in NGS revenues this year, and this delta of around $50 million. Can you break that out a little bit? Where is that coming from? Is that all organic? And perhaps a little bit more color there, please. Thanks.

Thanks. First question, Scott. Yes, indeed, we believe we have a very strong portfolio now that was great to complete the portfolio in 2018. We're moving into 2019 with a full set of platforms that we are now executing on in terms of asset development and rollouts. So this is already a big lift, and we are focusing 200% on that as we speak. And this is why we also outline the assay development plans over the next few years, and also highlighted that we have the capability and capacity to pull this off. In terms of the NGS growth, a big growth element there are – is the very significant success of our panel technologies. They’re taking a lot of share left and right and have been growing at very high double-digit growth rates, and we expect this to continue on 2019 as well. So a large piece of it is content-related. These products are often linked with software and bioinformatics. And so we can create a very unique competitive advantage, not only on chemistry, but actually on the full workflow.

Our next question comes from Tycho Peterson from JPMorgan.

Hey. Peer, maybe I want to start with the quarter. Some of the headwinds you called out like U.S. HPV and the veterinary divestiture are not incremental. If I look, the biggest swing factor relative to our model was molecular, and that' was down meaningful to about 5%. I know you talked about US HPV, that is only $10 million. So can you maybe talk about some of the other factors that weighed on molecular? I know you talked about the decision to kind of reduce some of the low-margin, third-party service contracts? So was that a bigget contributor to molecular in the quarter? And then I have one follow-up.

Sure. Thanks, Tycho. So the first, the MDx customer class, our growth was about 5% on a CER basis. And when you exclude the U.S. HPV test sales, that grows to – goes to 7%. And if you then reflect the instrument service contracts that we highlighted, the discontinuation that we could have continued, and these are very low margin products, so the margin impact as we also evidenced by the fact that we beat EPS in Q4. The EPS impact is negligible at these instrument service contracts. As we discontinued that, that also took another 2 percentage points of growth. So, we're already there at 9% growth from the MDx side. Now, there will be a stronger quarter and a lighter quarter, but we're in this for the long game. And we see growth ramping also in 2019 in MDx. I wouldn't attribute too much to that number once we met everything out.

Okay. And just one follow-up on guidance, you're kind of guiding 5% to 6% for the first quarter. You're coming off of 5% quarter. If we think about the 7% to 9% CER guidance to 2020, I guess, how do we get comfortable with that step up next year?

Roland, do want to take that one?

Yeah, Peer. I think this year – hi, Tycho. The guidance for the full year is 7% to 8% CER. And I think that's clearly an indication on what we see right now underlying for QIAGEN. And I think, we clearly reconfirming our midterm guidance as a CAGR, which is about 7% to 9%. Again, if you see what we have on hand, by now, if you see the development also over the course of 2018, I think there is a nice way for us to come within that range.

Our next question comes from Daniel Wendorff from Commerzbank.

Hi. It's a Daniel Wendorff from Commerzbank. Thanks for taking my question. I hope my line is now open.

Yes.

Good. The question is actually –

Hi, Daniel.

Hi. And the question is actually on 2019 top line guidance. And again, if I had have what you want to achieve in NGS, what we can expect from QuantiFERON? And what you guided for QIAstat-Dx, that already brings you to the sort of 7% top line growth and excluding currencies? And may be you can talk a bit about your thinking behind your guidance for 2019. So what have you baked in terms of development for Academia, for Pharma, that would be helpful? And maybe as a follow-up on QIAstat-Dx the placements you have been successfully done so far. Is this energy direct sales and are you finding reagent rental contracts? Any more color there would be helpful. Thank you.

Roland?

Yes, I can start with the first one. Hi, Daniel. Yes, you said before, I think the good news for QIAGEN is clearly all our growth drivers are really doing quite well. And as Peer talked about in his remarks, QuantiFERON had a strong finish of the year, same is true for Symphony, same is true for most other growth drivers within QIAGEN. And I think the one thing clearly, which I think is also included in our guidance for 2019, is although, I would say, for the significant numbers of macro uncertainties, we are seeing right now well there's not one specific queue, I would think we should necessarily plan to, but if you just go down the list from Brexit, from things in Italy, from again Turkey to see the tariff discussion, if you see potential shutdowns in Europe. There's a lot of things, which in general, can happen, there is probably also one reasons why I would say we guided Q1 as we guided for it, which on a longer-term period, I think it's probably something what washes out over a longer time period. Nevertheless, I would say that's the reason why in Academia and Pharma we're probably guiding around kind of a mid single-digit growth rates similar to Applied Testing, whereas I said in assay before on a molecular side, with our growth drivers in Companion, in QIAstat and QuantiFERON we feel very comfortable. And clearly QIAstat-Dx comes on top of that.

And to the QIAstat question, Daniel, thanks for that. By far the majority are typical reagent rental placements or straight sales. It's in the beginning reagent rentals are smaller portion, and we've seen a lot of purchases straight out of the system as they have been in validation and are starting to ramp up as we now see further validation come out and the chatter is actually quite significant already on this platform in Europe further validation come out. We see -- would expect the reagent rentals spend to pick up significantly, which is good, because then you get these long-term commitments. Again, I'd like to point out that's actually very sizable number of placements. And that if you compare to what others are placing after many years in the market, this is within a few months, we ramped quite considerably, and I think it's a testament to the very fast acceptance of this new testing technology.

Thank you. The next question comes from Doug Schenkel from Cowen. Please go ahead.

Good morning, Doug.

Hi. Good afternoon or good day, guys. So first, a financial question, and then a digital PCR question. The last time you guys provided long-term cash flow guidance, that was a couple of years ago, but you indicated that you would get to $600 million in cash flow in 2020. You came in at $359 million in 2018. Now there were some working capital headwinds in 2018 that worked against you. So arguably the underlying performance is a little bit better than that. But then as we think about 2019, it does appear to be another investment year. So I’m just wondering if that $600 million 2020 cash flow target is still intact? And then, one other pause there and I'll ask the digital PCR question after.

Hi, Doug. I think we will -- this is still on track to make our 2020 target, as well on operating cash flows as well. If you just think about what the, as you said, we clearly -- furthermore came in nicely now with a 25% growth rate in 2018 compared to 2017. So, I think that was clearly an important step forward. I think if you look on what we can do on working capital, if you just assume for a second that we get DSO down by somewhere around five to six days and also inventory days around five to six days, it makes already a difference and I think the other thing what most people do not see what clearly is an important factor for us, as well as it's quite obvious that the restructuring related charges are going down for us quite significantly over the time going forward, and that clearly has a cash impact as well. I think that is being helpful to us as well. Tax is clearly something what we have to see how it falls down in general. I think there is something what -- can beneficial, it can be something what might turn out tangibly on the FX for the next two years. But again, given the fact that I just said and assuming a slight improvement in working capital, plus reducement in acquisition as well as well as the construction related cost, we're coming quite close to the $600 million.

Okay. Thanks for that, Roland. And real quick on digital PCR, you're clearly excited about the market opportunity and your positioning in that market over the next few years. Accordingly, you're making the investments this year, you've guided us to the factor in $0.03 of dilution associated with investment in that product or that platform, I should say. How should we think about the contribution of the product line at 2020 and beyond? I'm really getting to kind of the return on investment expectation here. And specifically, is it fair to assume that this could add a point of growth as we look ahead to 2020?

Yes, Doug. So I think we will probably provide more detailed guidance by the year from today when we then start preparing the launch as we are still in the development. The specifications are indeed very exciting that we can bring to this market. We believe it's a more than $200 million market with every good growth rates. And we believe that there is room for several players in this market. But that we should be able to take a decent share in this market. And this also quite quickly, because we're in those labs every day, and we have a very complete offering in addition to what we think is a next-generation technology in digital PCR. So this is actually one of the deals that came up with quite good return expectation based on our internal business cases. And we're definitely not going to look for a few percentage points of market share, but definitely want to move into double-digit as quickly as possible and these -- that would be easily in the range of what you just discussed.

Our next question today comes from Bill Quirk from Piper Jaffray.

Hi, thanks. Good afternoon, everybody. I guess, first a big picture question then a product-specific one. Roland, when I think about or backyard whether the QuantiFERON contribution in 2019, the NGS step up and the QIAstat 2019 contribution, it does look like guidance for the core franchise is less than 1%, which given the NeuMoDx deals as well as some of the other variables, you've talked about on the call, it seems to be a fair amount of conservatism around the 7% to 8% CER guidance. I was hoping you could comment on that.

No, I think the one thing I see, we don't want to talk about, but definitely I'm not going too much here. But clearly HPV is one thing, which you have to factor in there as well. If you adjust for that, I think -- and take Peer's comments right now on services as well, I think the rest of the business actually is growing quite nicely as well. Of course, it's obvious that particular QuantiFERON and this other kind of growth drivers within moleculars are leading the pack, but nevertheless, have in mind that also, at least to a certain extent, HPV is a direct.

Our next question today comes from Ross Muken from Evercore ISI.

Hi, guys. It's Luke on for Ross. Just two quick two-parter on the QIAstat, so you talked about the demand coming in a little late, was that more on the instruments or the consumables? You talked a little bit about flu being weak. And then kind of just give us an idea of the cadence that you expect through the year given the U.S. launch? Will that be more on the instruments and consumables? Just trying to get an idea of like the margin contribution from that product portfolio.

Sure. Thanks for the question. So, first, I hope I didn't say something wrong before. So first of all, the instruments were actually, in terms of numbers, I think quite an impressive number. Again, if you see some of the smaller players out there that are talking about numbers in this range on an annual basis, and we basically ramped a little bit more than a quarter into these numbers of now 300 placements at the end of the year. That's why we wanted to share this. This is a I think confirmation of the very good acceptance of the platform and good ramp of the instruments. So there's no doubt that this is an impressive number. The concern that was -- voice was on the consumables as the primary assay we have on the system was really influenza. The gastrointestinal panel in the second version came later in the year, and didn't have enough runway to ramp in Q4. As we were out there with respiratory alone and the influenza season in Europe didn't start until mid-January, this was, therefore, a more muted influenza and respiratory disease season, and therefore, that was also reflected somewhat in the consumables. As we broaden the menu going forward, I think you will see less reliance on individuals syndromic panels and more just see the overall penetration of the syndromic market.

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

Hey, guys, thanks for taking the question. Just a follow-up to an earlier question on NGS, in general, can you give us some idea on the $140 million and also on the growth rate for next year? And sort of where things break out at this point on the universal solutions, the sequencer, the informatics, etcetera? And then also as a follow-up for you, Roland, on the pacing for the year, I think someone asked this before, but just want to get clarity on the guidance for Q1, 5% to 6%, but then the higher growth for the year, does that sort of incrementally step up, or is that really a bigger weight more kind of Q4, or how should we think about the ramp up there? Thanks.

Good. I'll take the first one. Roland, if you could take the second. So, as I said, the majority of the -- so, first of all, the one tit-bit that we put out as recently was that we had placed a few hundred now GeneReader systems and are turning consumables. This is a nice install base and giving us a solid revenue. The big components of the $190 million are to a majority, the reagents, the universal panels that we have, the library preparation agents and related consumables that are dedicated to next-generation sequencing. This would then qualify for the universal NGS package. And to a smaller degree, it is NGS specific informatics that we sell as standalone packages for use on any sequencer. This would be a small component to $190 million. So consider the majority, the majority being reagents, consumables that are used on any sequencer.

And to your question, in terms of quarterly allocation, I think there are three factors for you to have in mind. First one, I would say, in general to 2019 allocation into the fourth quarter is not much different for the underlying business and what you have seen in 2018. I think the two factors you have a to have in mind is, first of all, my comments were adjusted in Q1, and so overall microenvironment right now having, I would say, quite a list of potential impacts. Again, we have to see what plays out, what not. But I think that is something that you have to have in mind. And the third part is clearly related to QIAstat-Dx and the potential for the ramp up in terms of overall placements. And in particular, the U.S. launch, let say mid or second half of 2019, which clearly puts an extra allocation throughout, but also particularly in the fourth quarter. I think if you put of these three comments together, you can come to a fair allocation.

The next question comes from Dan Arias from Citi. Please go ahead.

Hello Dan. Good morning.

Hi, this is Carolina Ibanez Ventoso on for Dan Arias. Peer, any early comments from volumes of Quest for now that the QuantiFERON business is in the fold?

Well, we can't give numbers on specific customers, but what both Quest, and we confirmed is that, Quest wants to remain a very good partner also for QuantiFERON going forward. There's very little incentive to move one test to the other. QuantiFERON has a cost-leading position, much higher automated than alternative products, and this has been a position that Quest has continued to reiterate to us that they want to make sure that they continue to heavily promote QuantiFERON also going forward. And there are many public documents that also reaffirm that.

The next question comes from Steve Beuchaw from Morgan Stanley. Please go ahead.

Well hello. And thanks for the time. Just a couple of minor points, I want to touch on within the broader Molecular Diagnostics conversation. One is in the discussion around the outlook for 2019 and some of the recent trends in MDx. There's been no mention of any concern as it relates to the PAMA or the U.S. lab operating environment. I want to make sure that, that I'm reading that correctly that as far as you can tell, and appreciate it may be hard to do that given some of the changes happening in the business. But as far as you can tell that, these are not having an impact on demand for Molecular in the U.S. as a category? That's my first question. My second question is more about the big picture longer term question as it relates to QIAsymphony. I understand that there have been changes in the mix of use cases for QIAsymphony. There's been a bit of headwind for consumables growth there. Can you talk about any initiatives to try to drive the reacceleration or a single-digits right way to model QIAsymphony consumables growth prospectively? And I'll get back in the queue. Thank you.

Yes, thanks. Good questions. I think I'll start with QIAsymphony first. You're absolutely right. We have started repositioning QIAsymphony as a front-end a generic system. Many customers still want to have the two-room strategy, so a non-integrated system, we will continue to support that going forward. But we won't go through the new IVD process with many of the assays that are currently on QIAsymphony, only ones where we see a very strong demand from customers to do so. This is an owner's process that also cost money. We are redirecting and hence the importance of actually doing the NeuMoDx transaction now we can redirect all of our regulatory initiatives in Europe to moving over to the new IVD standard directly on the new platform with new assays was a significant advantage. So, that your growth assumption is pretty right that you made. QIAsymphony also has approval in many, many countries in the world, so this should sustain this growth trajectory. Then the first question on PAMA, PAMA is a concern. To a certain degree has a direct impact on some of our product lines. HPV and others were impact that was already some time ago, that was already reflected in our expectations for 2019. But the important thing to note is that if large customers are seeing cost pressure, there's also an indirect impact where every vendor or partner is also expected to contribute to their -- easing their pain, and therefore, we've definitely seen the expectations in terms of pricing and partnership models has increased in 2018, and probably will continue to 2019 as well. If we can offer cost-saving products like QuantiFERON and others, they provide -- and especially NeuMoDx, provides significant cost saves, this is something that I think should bode well, but wee are being cautious.

The next question today comes from Alex Cogut from Kempen. Please go ahead.

Good afternoon. Thanks for taking my questions. Just a couple of QIAstat and then NeuMoDx. So, QIAstat, on given you have been specific about your sales target in Q4, could you share how much you actually achieved for QIAstat in Q4? And then, given the good start in placements, how many do you expect to be placed in 2019? Just the last one on NeuMoDx, what is expected contribution for NeuMoDx sales in topline guidance?

Sure. Okay, these are all very good questions. I think you appreciate that it's very tough for us in a very competitive environment to give too many details on a product. So, we decided to give the 300 placement number as we felt this was important also to confirm that this is an exciting trajectory that we're on. We, however, we don't want to put a number on this now for 2019. We would probably try to give a number then annually. This is something that as these growth rates are so fast, it would not be fair to the trajectory to pinpoint to a number in advance. In terms of NeuMoDx, this is a longer sales cycle product that we have a few placements already, which are giving great feedback. But I would assume this is not under a six-month cycle. And therefore, I think this is something we should probably try to give us some guidance on mid of the year when we already have a larger number of placements and feedback under our belt. But the first feedback is very promising here in Europe and we hope to share this very soon.

Our final question today comes from Derik De Bruin from Bank of America Merrill Lynch. Please go ahead.

This is Mike Ryskin on for Derik. Just a couple of housekeeping questions. With some of the moving parts in the fourth quarter, you talked about the strong instrument placements and consumables come in wider in the 1Q guide. I was wondering if you could offer any commentary on just the broader market conditions. Was there any impact from the U.S. government shutdown I know Academia in general, came in pretty strong? And then, what your expectations for 1Q there? And then also anything in terms of end of the year budget flush that was outsized or how expectations came in there?

Yes. We didn't really see a big budget flush, in particular, in Pharma. We didn't see that. And that was something Roland referred to. The government shutdown was only a partial shut down from the perspective of suppliers as we all know the NIH was actually up in running due to having secured funds already in October or in September. So there was a partial shutdown we saw, particular one like FDA and others, that are purchases of our products not being able to purchase. But this is a number that normally would not be measurable. It could be in the low single-digit millions. We don't anticipate this to be a big factor in 2019.

Okay. And with that, Peer and Roland, and the operator, I'd like to close this conference call. And thank all of you for your participation. If you have any questions or comments, please don't hesitate to contact us at QIAGEN. Thank you.

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