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Edited Transcript of QGEN earnings conference call or presentation 31-Jul-19 1:00pm GMT

Q2 2019 Qiagen NV Earnings Call

Amsterdam Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Qiagen NV earnings conference call or presentation Wednesday, July 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Gilardi

QIAGEN N.V. - VP of Corporate Communications & IR

* Peer Michael Schatz

QIAGEN N.V. - CEO, MD & Member of Management Board

* Roland Sackers

QIAGEN N.V. - CFO, MD & Member of Management Board

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Conference Call Participants

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* Daniel Wendorff

Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals

* Daniel Gregory Brennan

UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences

* Doug Schenkel

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Jack Meehan

Barclays Bank PLC, Research Division - VP & Senior Research Analyst

* Luke England Sergott

Evercore ISI Institutional Equities, Research Division - Associate

* Patrick B. Donnelly

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Peter James Welford

Jefferies LLC, Research Division - Senior Equity Analyst

* Romain Zana

Exane BNP Paribas, Research Division - Research Analyst

* Stephen Christopher Beuchaw

Wolfe Research, LLC - Director of Equity Research

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I am Audrey, your PGi call operator. Welcome, and thank you for joining QIAGEN's Q2 2019 Earnings Conference Call Webcast. (Operator Instructions) Please be advised that this call is being recorded at QIAGEN's request and will be made available on their Internet site. (Operator Instructions)

At this time, I would like to introduce your host, John Gilardi, Vice President of Corporate Communications and Investor Relations at QIAGEN. Please go ahead, sir.

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John Gilardi, QIAGEN N.V. - VP of Corporate Communications & IR [2]

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Thank you, Audrey, and welcome all of you to our conference call today. The speakers for our call are Peer Schatz, the Chief Executive Officer of QIAGEN; and Roland Sackers, the Chief Financial Officer. Also joining us today is Phoebe Loh 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, Wednesday, July 31, 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 to certain financial measures not prepared in accordance with generally accepted accounting principles. You can find the reconciliation of these figures to GAAP in the press release and the presentation for this call.

As a last point, I just wanted to provide some context as to why we made the pre-announcement on July 24. This was due to the requirements of Germany securities law and the ad hoc system that we have in this country that requires companies to make a public disclosure once there's a material news development. So that material news was the change in our China partnership for our next-generation sequencing in the clinical area and the impact for the 2019 outlook. And we thought it would be helpful for analysts and investors to see this information as well together in one package with the financial outlook and the update from the second quarter.

With that, I'd like to now hand over to Peer.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [3]

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Well, thank you, John, and thank you to all of you for joining us for this call. I have the following key messages for you today. First, we achieved our outlook for net sales growth and adjusted earnings per share. Net sales were $381.6 million and rose 5% at constant exchange rates. Adjusted earnings per share were $0.34 at CER and $0.33 on a reported basis.

Second, we shared some important updates while we continue advancing our Sample to Insight portfolio. We announced on July 24 our decision to restructure the current format of our clinical sequencing joint venture in China, which has an impact on our outlook for 2019. The joint venture has been formed and announced in the middle of 2017. After a review period and discussions with our partner, we believe this decision is the best solution. A key factor with a slower-than-expected progress in bringing in vitro diagnostic clinical sequencing to customers in this country. We had been anticipating about $30 million of sales from this joint venture in 2019 and for about $20 million in the second half of this year. These involved primarily revenues for the services provided by QIAGEN to develop in vitro diagnostic assays on behalf of the joint venture as well as the sale of GeneReader NGS System in China and other consumables and products to the joint venture at transfer prices.

At the same time, it is important to note that our universal NGS portfolio in this country is not run through the joint venture but has always been commercialized directly by QIAGEN. These universal NGS products are independent from GeneReader and have been performing very well in China and also on a global basis. So we continue to believe in the promise of NGS technologies in China, and we will now consider various new options to participate in further growth opportunities there.

Moving to the QuantiFERON-TB test. Sales as expected were below the usual growth trajectory of at least 15% CER as they rose 6% CER in second quarter of 2019. This was in line with our outlook for mid-single-digit CER growth. This more moderate growth was due to the comparison against the year ago period, which marked the end of the inventory building during the conversion of customers from the third-generation to the fourth-generation QuantiFERON assay. We continue to expect full year 2019 growth above our 15% CER target.

We also had our second important FDA approval this year for a new and novel therascreen companion diagnostic assay. And this assay tests for variance of the PIK3-kinase gene to help guide the use of a new Novartis therapy for breast cancer. This announcement was in addition to our previously announced approval in April for the therascreen FGFR companion diagnostic assay to help guide the use of a new Janssen therapy for urothelial cancer.

We are in a period with multiple new product launches. These include the QIAstat-Dx system for syndromic testing that received FDA approval in May and is now available in the United States and Europe and many other countries, as well as the integrated PCR system, NeuMoDx, that we are distributing in Europe. We have 6 CE-IVD assays on NeuMoDx in Europe and have a goal to offer 11 assays by the end of 2019.

For our Life Sciences customers, we are seeing good progress on the rollout of the new QIAcube Connect sample processing instrument we introduced in January, which replaces first generation that had over 8,000 placements. The development of the new digital PCR system for 2020 launch is also progressing well.

Third, as you saw in the press release, on July 24, we have updated our full year 2019 outlook. We now expect net sales growth of about 5% to 6% CER for the year and for adjusted EPS of about $1.42 to $1.44 per share, also at CER. We are committed to maximizing the opportunities for our exciting new product launches and are allocating resources to the best opportunities.

So as a quick summary, we achieved our outlook for the second quarter of 2019 and have made an important decision on how to address NGS growth opportunities in China. QIAGEN is positioned for an improving growth profile in the coming years as we strengthen our portfolio and set our sights on the new midterm targets we announced in June for an 8% to 9% CER sales compound annual growth rate from 2019 to 2023 and for at least a 10% CER CAGR for adjusted earnings during the same period.

Now with this, I would now like to hand over to Roland.

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [4]

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Thank you, Peer. Good afternoon to those of you in Europe, and good morning to those of you in the U.S. Let us first review the financial result for the second quarter and later provide an update on the outlook.

Net sales in the second quarter of 2019 were USD 381.6 million and rose 5% at constant exchange rates and in line with our outlook for 5% CER growth. Sales growth on a reported basis was 1%, and this was due to the significant adverse currency headwinds that were in line with our outlook for the period. The acquisition of N-of-One, which was completed in January 2019, contributed very modest sales for the period.

For the first 6 months of 2019, net sales were USD 730.3 million and also rose 5 percentage points CER and were up 1 percentage point on a reported basis due to 4 percentage points of headwinds. About 1 percentage point of sales growth came from the launch of QIAstat-Dx, which was acquired in April 2018, while the rest of the portfolio provided a solid 4 percentage points of growth. These results also absorbed a combined 1 percentage point of headwinds from the ongoing decline in revenues from third-party instrument service contracts and the divestment of the veterinary assay portfolio that we did in 2018.

Moving down the income statement. The adjusted gross margin was 70.8% of sales in the second quarter of 2019 compared to 71.5% in the year ago quarter. For the first half of 2019, the adjusted gross margin also declined slightly to 70.3% of sales from 70.8% in the same period of 2018.

Adjusted operating income declined 2% to USD 99.1 million from USD 101.1 million in the second quarter of 2018, absorbing the investments for the development, production ramp-up and commercialization of new instruments. The adjusted operating income margin was 26% compared to 26.8% in the prior year period. These trends remained relatively consistent from the first quarter of the year, with adjusted operating income down 1% to $177 million compared to USD 178 million in the first half of 2018. As a result, the adjusted operating income margin was 24.2% compared to 24.7% in the first half of 2018.

In terms of adjusted earnings per share, we were at the high end of our outlook for $0.34 CER. Given the currency headwinds, adjusted EPS on a reported basis was $0.33. The adjusted tax rate was 20% for the second quarter, which was in line with our outlook for the quarter. For the first half of 2019, adjusted EPS was $0.62 CER, and the adjusted tax rate was also 20%.

I would like to now review our sales results based on the product categories and to our customers in the Life Sciences and Molecular Diagnostics. Among the product categories, consumables and related revenues rose 4% CER to USD 335 million in the second quarter of 2019 and represented 88% of total sales. For the first half of 2019, consumables and related revenues rose at the same 5% CER pace, reaching $648 million and represented 89% of sales.

Instrument sales rose at a much faster rate in the second quarter of 2019, growing 9% CER to USD 47 million and representing 12% of total sales. Key drivers was the rollout of the new QIAcube Connect instrument for sample processing to Life Sciences customers as well as sales contributions from QIAstat-Dx and other instruments in Molecular Diagnostics. As mentioned before, we have reduced our third-party instrument service contracts, which has created a sales headwind in the recent quarters. Excluding service revenues, instrument sales were up 15% in the second quarter.

For the first 6 months of 2019, instrument sales rose 5% CER to USD 83 million and represented 11% of total sales. And underlying sales were up 15% CER, excluding third-party service revenues.

In the Molecular Diagnostics customer class, sales were up 5% CER to USD 188 million in the second quarter of 2019 and represented 49% of total sales. This came from a combination of solid double-digit CER sales growth for instruments even while absorbing the decline in instrument service revenues and mid-single-digit CER growth in consumables and related revenues.

Sales of the QuantiFERON-TB test grew 6% CER, while companion diagnostics co-development revenues were under pressure and reduced growth in this customer class by 2 percentage points with a 21% CER decline to USD 11 million.

We had ongoing solid placements of the QIAsymphony system and double-digit CER growth in the related consumables and also contributions from the launch of QIAstat-Dx in the U.S. along with sales in Europe. For the first half of 2019, Molecular Diagnostics sales rose 7% CER and drove 49% of total sales.

In the Life Science customer class, sales were also up 5% CER and reached USD 194 million in the second quarter of 2019 that represented 51% of total sales. We experienced single-digit CER growth in both instrument sales as well as consumables and related revenues compared to the second quarter of 2018. For the first half of 2019, Life Science sales grew 4% CER and represented 51% of total sales.

Within the Life Sciences, sales to Pharma customers rose 4% CER with growth contributions from both consumables and instruments during the second quarter. Sales in the Academia/Applied Testing customer class rose 5% CER with continued double-digit CER growth in instrument sales in particular due to the launch of QIAcube Connect earlier this year and mid-single-digit CER growth in consumables.

I would like to now review the performance among our 3 geographic regions. The Asia-Pacific/Japan region led the performance with 12% CER growth in the second quarter of 2019 to USD 83 million, providing 22% of total sales. We were pleased with double-digit CER growth in China, which follows on from growth rates above 20% for the last 2 quarters. This is due to the increased demand in the Life Sciences and solid transfer of our QuantiFERON-TB test and other Molecular Diagnostic products, while sales in Japan were largely unchanged from the second quarter of 2018. For the first half of 2019, the Asia-Pacific/Japan region grew 10% CER to USD 151 million and represented 21% of sales.

The Europe, Middle East and Africa regions grew 5% CER to USD 118 million in the second quarter and represented 31% of total sales. We saw soft trends in the core Western European countries, in particular France, Italy and the United Kingdom, but saw improving trends in Turkey, Middle East and Africa. For the first half of 2019, sales grew 4% CER to $227 million and represented 31% of total sales.

The Americas region grew only 1% CER to USD 181 million in the second quarter and represented 47% of sales, with the U.S. growing at the same rate as the region due mainly to the slower growth rates for QuantiFERON-TB. At the same time, we had improving trends in Brazil and Mexico at higher single-digit CER rates. For the first 6 months of 2019, the Americas grew 4% CER to about $350 million and represented 48% of total sales.

In terms of the top 7 emerging markets, these countries collectively grew 20% CER in the second quarter of 2019 and represented 18% of sales. The top performers were Turkey and China, while Korea was the only one to show a year-on-year decline against growth in India, Mexico, Brazil and Russia.

I would like to now give you an update on our balance sheet and cash flow. At the end of the first half of 2019, our leverage ratio stood at 1.7x net debt to EBITDA and remains unchanged from the end of the first half of 2018. We saw a decline in group liquidity to $786 million from $900 million in the prior year period. At the same time, net debt increased to $978 million from $863 million in the same period of 2018. This reflects primarily the influx of cash flows from the business as well as proceeds from the issuance of $500 million of new cash settled convertible notes against the outflow of about $430 million for repayment of the 2019 cash settled convertible notes in the first quarter of this year as well as investments in the business and about USD 74 million for the share repurchase program.

In terms of cash flow, we saw a decline in operating cash flow to USD 127.2 million in the first 6 months of 2019 compared to $166.2 million for the same period in 2018. Among the key factors were cash payments for derivatives transactions and higher tax payments in part to settle tax audits for prior years, which were accrued in the past.

Investments in property, plant and equipment were also higher the first 6 months of 2019 at USD 54.4 million compared to $42.9 million in the same period of 2018. This was mainly due to investments in building up our manufacturing capacity to support new product launches, in particular QIAstat-Dx. As a result, free cash flow was $72.9 million for the first half of 2019 compared to $123.4 million in the same period of 2018.

I would like to now hand back to Peer for our strategy update.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [5]

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Yes. Thank you, Roland. I'm now on Slide 9 to give you an overview of key developments in our Sample to Insight portfolio. I'd like to point out 2 highlights here before going into greater detail on some areas of this portfolio. First, our flagship QIAsymphony platform continues to show strong placement rates and good growth in related consumables. And we are on track to reach our target for more than 2,500 cumulative placements at the end of 2019. Additionally, we reached an important milestone in surpassing 1 million patient tests analyzed with QIAGEN Clinical Insight. This is a significant number. This proprietary informatics solution pulls information from over 40 clinical and scientific knowledge bases, including many proprietary ones such as the vast and continually updating QIAGEN Knowledge Base, and this is playing a key role for our customers in enabling and advancing the practice of precision medicine.

On Slide 10, I would like to provide more details on our portfolio for next-generation sequencing. As mentioned earlier, we have decided to restructure our clinical sequencing joint venture in China. Sales from this joint venture were planned to be approximately $30 million in CER for the full year 2019 and weighted to the second half of this year. These involved primarily revenues for the services provided by QIAGEN to develop in vitro diagnostic assays on behalf of the joint venture as well as the sale of GeneReader NGS Systems and other consumables and products to the joint venture at transfer prices.

I want to note that sales of the larger NGS revenue component, the so-called universal NGS solutions, in China are handled directly by QIAGEN in this country, and QIAGEN is experiencing strong growth in this portfolio. We intend to review various options on how to further add from the growth opportunities for NGS technologies in China and how GeneReader can be expanded from its current base in China into a new structure.

We expect overall NGS-related sales of about $180 million at constant exchange rates in 2019 compared to the prior target of over $190 million. And this now reflects the changes in China and compares to over $140 million in 2018 and represents a growth rate of around 30%.

Just as a reminder, there are 3 main components to the calculation of NGS-related sales: NGS consumables, including gene panels, instruments and consumables for the GeneReader system; and the last, the third, involves revenues from NGS-related bioinformatics solutions. Additionally, we expect a decline of about $20 million to reflect in companion diagnostic and other assay co-development revenues. All of the adverse sales impacts due to the change in China are recorded in the Molecular Diagnostics customer class.

As I mentioned earlier, our portfolio of universal NGS solutions continues to see strong uptake in all regions. Most recently, we launched the QIAseq Expanded Carrier Screening Panel that provides identification of targets, genes and other regions of interest responsible for more than 200 disease indications. This new product leverages QIAseq's Single Primer Extension technology and is integrated with our bioinformatics solutions. This new panel further expands our existing universal NGS portfolio of more than 30 off-the-shelf pre-configured gene panels in addition to an unlimited number of panels available through our customization services.

I would like to now provide an update on QuantiFERON-TB on Slide 11 and our plans to expand the franchise of assays developed with this proprietary technology. As an update on our collaboration with DiaSorin, we now have more than 120 DiaSorin LIAISON customers in Europe that have embedded the QuantiFERON-TB Gold Plus TB assay onto their systems. This is a great number so soon after the launch and promising considering the large installed base still in front of us.

In terms of the U.S., we are waiting for FDA approval during the second half of this year. Our #1 priority is further driving the conversion from the old skin test to the modern gold standard with QuantiFERON. More than 70 million skin tests are done annually. We see current global penetration at only about 20%, with ample room for growth. An urgent and important driver is the recent announcement by the U.S. Centers for Disease Control, or CDC, that they are expecting a 3- to 10-month nationwide shortage of tuberculin antigens, which are required for performing the skin test. We are seeing shortages in other countries as well, including Germany.

Building on the DiaSorin collaboration and our intention to offer a series of QuantiFERON-based assays on the LIAISON system from DiaSorin, we have entered into a new agreement with DiaSorin to co-develop a QuantiFERON-based test for earlier detection of Lyme disease on the LIAISON platforms. The QuantiFERON Lyme test will allow a new testing framework by linking QuantiFERON technology with the DiaSorin serology assays, where DiaSorin has a leading position. And this with the aim to offer a new dimension of clinical value through much earlier detection to allow much earlier treatment, this is addressing a significant unmet medical need.

The QuantiFERON Lyme test is planned to be used in conjunction with the Borrelia IgG and IgM assays by DiaSorin, creating a highly synergistic portfolio on LIAISON for customers. The CE-IVD launch for this QuantiFERON assay, which is planned for a market estimated at $400 million to $600 million of annual testing, is planned for 2021 and later in the United States.

In the area of precision medicine, where companion diagnostic assays are used to guide treatment decisions and primarily for cancer patients, we had a successful quarter with the FDA approval and launch of 2 new companion diagnostics. After the approval in April 2019 of our first FGFR assay for use with the new therapy from Janssen called BALVERSA, which was approved for use in treating patients with urothelial cancer, we received approval in June for the therascreen PIK3-kinase RGQ PCR kit, which is also the first approval of this biomarker. It was approved by the FDA for use in identifying breast cancer patients suitable for treatment with the newly approved Novartis therapy, PIQRAY, and was given approval for use with both liquid biopsy and tissue samples. In fact, this is the first companion diagnostic approved by the FDA for use in guiding treatment decisions in breast cancer using tissue or liquid biopsy specimens. This assay is expected to be used widely since it detects 11 PIK3-kinase-related mutations that are estimated to be present in approximately 40% of hormone receptor-positive advanced or metastatic breast cancer patients.

Both assays, FGFR and PIK3-kinase, were offered in the United States through our Day-One Lab Readiness program, which enables LabCorp, NeoGenomics and Quest and others to almost immediately start offering these assays to physicians and patients following the approval of new targeted therapies.

In addition, we recently announced a new partnership with Inovio Pharmaceuticals to co-develop a companion diagnostic to guide the use of Inovio's DNA-based immunotherapy in late-stage development for the treatment of cervical dysplasia caused by human papillomavirus or HPV. Inovio's VGX-3100 has the potential to become the first FDA-approved treatment for HPV infection of the cervix and the first nonsurgical treatment for pre-cancer cervical lesions associated with this virus.

I would now like to update you on our newest automation systems, QIAstat-Dx and NeuMoDx. QIAstat-Dx is our fully integrated real-time PCR platform for next-generation syndromic testing applications, and it was first launched in Europe in April 2018 with the respiratory and gastrointestinal panels. In May, we received FDA clearance of the system along with the respiratory panel and quickly began commercialization to gain as many placements ahead as possible ahead of the upcoming cold and flu season.

As part of the U.S. commercialization, we announced ahead of our recent Investor and Analyst Day in June that we have partnered with McKesson, one of the largest U.S. health care distribution companies, for them to serve as the exclusive distributor of QIAstat-Dx in the acute market segment of U.S. hospitals with 200 beds or less, an area where QIAGEN is less present with its commercial activities. McKesson also can become a nonexclusive distributor in the future for planned expansion of QIAstat-Dx into the non-acute retail clinics that are increasingly being found in U.S. retail pharmacies.

And for NeuMoDx, we are expanding the early installed base aggressively with placements in Europe and other markets outside of the U.S. for the 96 and 288 versions of this fully integrated next-generation molecular testing system.

We are now able to offer a menu with 6 CE-IVD cleared assays and are on track to offer 11 assays by the end of the year. And this in addition to the ability to allow customers to run LDTs, laboratory developed tests, in full random access. The 2 most recent CE-marked NeuMoDx assays in Europe involve detection of the cytomegalovirus and the Epstein-Barr virus.

Future menu expansion plans include blood-borne viruses, women's health and transplantation assays. Rapid menu expansion is a key focus in our plans to capture growth opportunities in this large market opportunity estimated at around $3 billion for low-plex testing and high volume in hospital and reference lab networks.

And with this, I'd like to hand back to Roland.

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [6]

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Thank you, Peer. I would like to now review our outlook for 2019. As noted earlier, we have updated our outlook for total net sales growth of approximately 5% to 6% CER growth, reflecting the lower sales growth due to the restructuring of the clinical sequencing NGS joint venture in China. We have updated our outlook for adjusted diluted EPS to $1.42 to $1.44 per share also at CER.

As for currencies, based on rates as of July 29, in terms of net sales, we expect a currency headwind of about 3 percentage points on results at actual rates. For adjusted EPS for the full year, we expect a currency headwind of about $0.03 to $0.04 per share.

For the third quarter, our outlook is for total net sales growth of about 4% to 5% CER. And this includes adverse impact of the changes in China but also for QuantiFERON-TB to grow above our full year target for at least 50% CER growth. Adjusted diluted EPS is expected to be about $0.35 to $0.36 per share and at constant exchange rates.

In terms of currency impact for the third quarter, based on rates as of July 29, 2019, we expect headwinds of about 2 percentage points on net sales growth and about $0.01 on adjusted EPS.

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

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [7]

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Thank you, Roland. So here's a quick summary before we move into Q&A. Let me review what we have announced.

First, we achieved our outlook for net sales growth and adjusted EPS in the second quarter of 2019.

Second, we are focused on advancing our Sample to Insight portfolio and have had some important developments. We announced a change in our clinical sequencing strategy for China and the intent to review ways to capture growth opportunities in this important market. In other areas of the portfolio, we are moving ahead, especially with the QuantiFERON latent TB test, our expanding portfolio of automation systems and renewed focus on growth in the life sciences. We are in a heavy-lift phase with new product launches that are set to help accelerate our performance in the coming years and are very proactively reallocating resources to support the most attractive opportunities.

Third, we have updated our full year 2019 outlook after the decision on the China joint venture.

And fourth, we are determined to execute on our strategy to maximize the value of our portfolio with a disciplined focus on capital allocation involving acquisitions to support our portfolios as well as increasing returns to shareholders through buybacks. These actions are aligned with our strategy to strengthen our position for more growth in 2020 and the coming years, in line with our new midterm targets out to 2023.

And with that, I'd like to hand back to John and the operator for the Q&A session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Tycho Peterson at JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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So on the China NGS decision, curious if you could provide a little bit more color on what caused the partnership failure. Was any of this as a result of competitive pressures given the BGI/ MGI launch? And then when was the decision made? Obviously, you reiterated the guidance at the June 20 Analyst Day. So I'm curious when you made this decision to break up the partnership. And then as we think about guidance, you talked about a $20 million contribution in the back half of the year, which is about 1.3% growth. You're taking down guidance by 2%. So is there something else to the guidance reduction?

And then lastly, looking ahead, what would you look for in a new partnership on the NGS front in China? And has your long-term outlook on GeneReader in China changed at all?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [3]

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Great. Thanks for asking these questions. So first, the -- China is definitely a market which is quite complex. And we're kind of -- we're offering something different to most other companies in this space in the sense that the joint venture was focused on an integrated solution, Sample to Insight, including everything, pre-configured approved assays, bioinformatics, the whole workflow. And turned out that it became very difficult to align a lot of these components into this integrated workflow and bring them through their respective processes to become available in China. This is a market that is still in a very dynamic mode and with somewhat changing goalposts. And we're just about to enter into a ramp-up phase in the second half of the year for the assay development as indicated also before. And we just didn't feel comfortable with the risk/reward profile on this.

The market for NGS in China is more an open market. You see definitely a lot of research being done. There are clinical activities being done but in a slightly more -- less integrated and more open formats. And this is also reflected by the very strong growth that we're seeing in the UNGS portfolio in China as being used across the board there and as we said previously, growing at very high growth rates.

So this was an important decision for us to make, in particular in light of the second half of the year, and also had to be done together with our partner obviously to align both of us. And for the guidance question, I'll defer to Roland.

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [4]

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Yes, Tycho. Yes, I know -- I think it's very straightforward that of course, we have to look on the full year if we talk about the full year guidance. And there clearly is also a certain impact. It's quite obvious that we also had a certain impact in the second quarter. Nevertheless, I think we were able to make our guidance here as well. But as I said before, I think at the end of the day, the $30 million on a full year basis is the right number to look at, and it's quite obvious that the rest is just in a certain range.

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Operator [5]

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We'll move next to Jack Meehan at Barclays.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [6]

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Was hoping you could give a little bit more color on the QIAstat launch to start the year. I think it added 1 point, I saw in the release, to first half growth. Just what's your level of visibility into the $30 million target for this year? What are some of the initiatives you have in place to drive placements? And finally, is there any timing update you can give on the GI approval in the U.S.?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [7]

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Thanks. Yes, good questions. The QIAstat approval came in a little bit earlier now in the second quarter, which was good. And you saw that we immediately started the launch initiatives in the United States, which, as you know, is by far the majority of the market. 80% of the global market is -- for syndromic testing is currently in the United States. So this was obviously an important event.

And we were also actively looking at ensuring that we get broader coverage than we can have with our teams that are very well positioned in molecular testing laboratories. But there's also a big syndromic market outside of those molecular testing laboratories. And that's why we signed up McKesson as the [first] partner for the smaller hospital area.

So we have quite a few people on the ground in the base. We've seen a lot of interest around the QIAstat platform. And right now, the focus, you've also seen the numbers on the instrument placements in the second quarter start moving up. And so this is important because we want to have as many placements out there as possible for -- in preparation of the fourth quarter. So depending on when the flu season starts or the respiratory season starts, we want to make sure that people have instruments available and can start ordering the consumables to be able to address their testing needs in the respiratory season.

So the gastrointestinal panel is in development. We said it would be sometime in the -- later this year, earlier next year, that we would get the clearance. And we feel good about that timeline. We also feel good about the timeline -- and this is important, of the meningitis panel, encephalitis meningitis panel in Europe because that is an important cornerstone assay for us to have there as well.

So you got the menu road map. We've also showed it here again. And we are committed to making that one happen.

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Operator [8]

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We'll go next to Patrick Donnelly at Goldman Sachs.

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Patrick B. Donnelly, Goldman Sachs Group Inc., Research Division - Equity Analyst [9]

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Peer, maybe just one on the trends in Europe. It sounded like some softness in Western Europe for you guys. It seems to be weak across the industry with the general noise over there. Can you just give a few more details on what you're seeing there and then also just your expectations going forward in the region?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [10]

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Sure. It's a good observation. Europe is generally a little bit puzzling at the moment. We are definitely seeing, in particular in core European countries, that the large markets, we're seeing quite soft growth. And this despite the fact that there are commitments to academic funding and also long-term commitments -- we talked in the last call about the Horizon programs being approved and obviously quite aggressive funding coming in from the EU, which is an important cornerstone funder in public research over the coming years.

So the academic markets are -- and -- or life science markets more broadly, are indeed quite soft in Europe. And there is a lot of caution. And it could be political uncertainty. There have been a lot of elections going on, a lot of changes in the political landscape and a lot of noise. And that instability is certainly not good for predictability of funding, and that always -- there's a long lever typically that the life science markets have. So if there's uncertainty in the future, it will have an impact.

So this is our assumption of what is happening right now in Europe, and the fundamentals, however, are generally quite good. So we're watching it very closely.

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Operator [11]

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Next, we'll move to Ross Muken at Evercore ISI.

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Luke England Sergott, Evercore ISI Institutional Equities, Research Division - Associate [12]

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It's Ross -- I mean it's Luke on for Ross today. Just quickly, did you guys say 50% of TB in 3Q growth, if I heard that correctly, Roland? And then I guess just more on the TB and the strategy, can you give us an update on the details with the DiaSorin and the contract terms and how that will flow through and contribute to growth in the back half and even into 2020? And then lastly, it -- was the TB shortage or antigen shortage in the U.S. contemplated when you guys came up with that 15% guidance? Just trying to get a sense of upside there.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [13]

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Great. Yes, good questions. So the 15%, sorry for the pronunciation, is indeed 15% in the full year guidance. So our target for the full year 2019 is more than 15, 1-5, percent growth. And obviously, the second quarter was a little bit slower. So we'll see faster growth in the second half of the year as we now have much less of this inventory base effect that we had in the second quarter.

The DiaSorin partnership is quite simple. The distribution of the detection assay goes through DiaSorin. The distribution of the assay itself, which is contained in the collection tube, goes through QIAGEN. The 2 products are in about a 60-40 split. So if it's, let's say, $20, to take a round number, you'd see $12 going to QIAGEN channels directly. That would be down from the $20 that we had as an overall package. $8 would be distributed through the DiaSorin revenue line. But there are royalty rates and also purchases of components that -- where QIAGEN would be getting income that would, to a very significant degree, compensate for that $8 going away. So the difference is really only a few dollars. And that, however, is still a very attractive deal for us because the EBIT impact is quite positive.

So strategically and also financially, we have a big interest to migrate over to the DiaSorin platform. And this is obviously what we have been able to do quite successfully already in early phases and want to ramp further in the -- in particular, after the launch, in the United States as well.

The antigen was not -- we have had this in the past before. This is now a little bit a longer one. So we'll have to see what the impact is. It is more the adoption of new testing that would be done. We'll see what it means. I wouldn't want to call out that this is now a big impact for the year yet. We'll see what it effectively means and in particular also in other countries around the world that are starting to call out tuberculin shortages.

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Operator [14]

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We'll go next to Daniel Wendorff at Commerzbank.

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Daniel Wendorff, Commerzbank AG, Research Division - Team Head of Healthcare & Chemicals [15]

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It's Daniel Wendorff from Commerzbank. My question is more a general-tone question, I guess. And if you look back the last 3 years, you have shown constant exchange rate growth of 6% annually and with basically your growth drivers gaining traction. You did the right acquisitions over that time in my view. 2019 is now another year further out, and it looks as if you fall into the same ballpark again. So my question would be, what do you say to those who question that QIAGEN will be able to grow above this rate of 6%, which somehow has to be -- turn out to be a sort of hurdle over the last years?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [16]

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Sure. It's -- Roland, maybe you want to add something to that afterwards. I think it's a fair question. I think the important -- and first answer I would give, we've actually been sharing a lot of activities at the same time. And what you're seeing here is a company that is fully committed to ensuring that our focus and our resources is dedicated to high-growth opportunities. I think we all agree that with QIAstat, we have a very attractive platform and one of the highest growth areas of today's molecular testing. And with NeuMoDx, we have a next-generation platform that has the potential to address the $3 billion market. And we are committed to fueling that.

On top of the growth of the QIAsymphony, the strong strategic and also the competitive position of QuantiFERON, we have some really, really important differentiating products out there. And therefore, if you look at the prior years, it's important not just to look at the headline number, but we have been actively spinning off businesses that we, this year, are now calling out as we're calling them into an overall growth number. And therefore, that is what you were observing here. Roland, do you want to add anything?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [17]

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Yes. No, I think that was about that. And I think just to add, it's clearly that we did a lot of our homework over the last couple of quarters. And we see no certain traction with product launches in Europe, no more in the U.S. We shouldn't forget that also next year, with digital PCR and other important launches coming up for QIAGEN, we see in particular that some of the instruments are gaining traction. So we talked about it today on the QIAcube side, typically something where people are not focused. Nevertheless, it is an important franchise for us, as we all know. Yes, absolutely, I think we all would love to see that it grows faster than what we see right now. And nevertheless, I think we are on the right track in the right direction.

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Operator [18]

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We'll move next to Doug Schenkel at Cowen.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [19]

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I want to start on GeneReader, the instrument itself, and your strategic vision from here. On the day you disclosed the change in your guidance outlook related to the JV, yes, I -- we caught up with Roland and John. And based on what we ran through it, it's pretty clear that GeneReader generated -- the instrument itself, generated about $10 million in 2018 sales, excluding Maccura. Recognizing the cost of the acquisition and R&D investment, it seems fair to assert that you probably spent in excess of $100 million to $200 million on this over the past 7 years going back to the IBS acquisition and subsequent development and commercialization efforts. I may not be precisely right, but I mean even if I'm in the right neighborhood with these numbers, it clearly hasn't been a great ROI, and that's going to happen from time to time.

And so with that in mind, you got a lot of other exciting opportunities, as you've discussed on this call. And at this point, is it fair to say that you're redirecting investment to the other areas of next-generation sequencing where you're competing more effectively today and also to other growth opportunities that we've talked about instead of continuing to invest in the instrument itself?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [20]

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Yes. Thanks, Doug. So I won't comment on the numbers. GeneReader is actually a solid niche product. It was developed for sequencing of smaller gene panels and primarily in oncology. As we all know, that market has changed dramatically in the last 3 to 4 years, in particular through the emergence of immuno-oncology. And assays like TMB and others, they require larger flow cells particularly because these assays cover hundreds of genes. And the GeneReader is targeting obviously very fast turnaround, multiple samples, high flexibility and as a part of that, is using multiple flow cells where each flow cell is up to 3 gigs. And this is still a very attractive market in many countries, and -- but a lot of the laboratories have been starting to use concurrently TMB and other larger panels. So either they have larger systems next to a GeneReader or they have the largest systems altogether. And while some of these larger-panel assays are not yet broadly used in other countries of the world, we're starting to see these mixed environments being used more. But it is in a stable life cycle, and we continue to play systems but primarily in Europe and Asia.

And that was important for us to do. A lot of that research that you see that we did around next-generation sequencing is really not the development of the instrument itself but creating a competency around next-generation sequencing. And I think we have to also acknowledge that approaching $200 million in sales in next-generation sequencing, this is one of the largest entities outside the 2 market leaders in this space in next-generation sequencing, and it's growing at 30%. So if you look at the overall investment we're still doing in the GeneReader system that we launched in 2016, '17, that was -- that is really more on the stable life science investment burn. And so even double-digit revenue numbers can make that a product worth carrying. Roland, do you want to add to that?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [21]

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No, I think you said it.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [22]

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Okay.

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Operator [23]

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We'll move next to Romain Zana at Exane.

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Romain Zana, Exane BNP Paribas, Research Division - Research Analyst [24]

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Two question if I may. The first one will be on the guidance. If we look at your QuantiFERON-TB growth guidance of more than 15% growth for the full year, it implies around 20% in H2. And this would already drive almost 4 percentage point of growth for the group. So while -- this is actually the group guidance for Q3, so is that fair to assume that the China JV headwind will be offsetting the growth of the rest of the portfolio?

And second question is on cash flow, maybe more for Roland. If you could just clarify to what referred the $41 million increase in accrued liabilities that hurt the free cash flow in Q2.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [25]

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Excellent. Do you want to take both, Roland?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [26]

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Yes. In terms of guidance, yes, I think it is quite obvious, as we said before, that we feel quite comfortable in expecting a QuantiFERON ramp-up in terms of revenues for the second part of the year. Again, it's not different than what we have seen for the full year last year. Is no different than what we have seen for the full -- for the first quarter this year. We should have in mind that the second quarter had a special event last year, and therefore, I think that is -- more than offsets the numbers we use for our models as well.

On the cash flow side, in general, I would say we clearly have seen a couple of investments which we had to make in terms of equipment. And for the ramp-up of the QIAstat production, I think that was a big driver of an impact for us right now on the cash flow side. Other than that, we had a couple of one-offs, as we talked about earlier, in the first quarter this year where we paid some tax audits that got accrued before. Other than that, I would say it's rather normal underlying business, as we said before.

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Operator [27]

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We'll go next to Steve Beuchaw at Wolfe Research.

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Stephen Christopher Beuchaw, Wolfe Research, LLC - Director of Equity Research [28]

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I'd love just to get some granularity on the trends in instrumentation. Maybe it's a 2-parter. First of all, you had 2 events in the quarter. So you had presumably some stocking into McKesson and then with Stat-Dx system, and of course, you had the initial launch of the cube. And as you pointed out, there are 8,000 systems out there that could be upgraded or replaced. So could you give us a sense for how much of an impact those 2 items had on revenue in the quarter? And then just following on that, what's your assumption for instrumentation growth for the second half of the year?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [29]

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Roland?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [30]

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In terms of instrumentation, of course, overall, in terms of placements, we expect a very good quarter. I think that's very straightforward, particularly driven by the QIAstat and NeuMoDx launches. I think the one question which is still a little bit early to answer for us is how much for the wage and rentals, how much for the straight sales. That is already something we are -- understand where we are, -- where we need a certain run rate, and QIAstat is still early in terms of lifetime. Nevertheless, overall, if you -- if I just would focus on what we've placed, I would say there is a significant ramp-up to be expected for the second part of the year, driven by generally these 3 important launches. QIAstat, NeuMoDx, both are much more facing the fourth quarter than in the third quarter, of course, and ongoing on QIAcube Connect. And the first part of your question, sorry, I didn't catch that. It's hard to hear.

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Operator [31]

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And he has removed himself from the queue.

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [32]

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Okay. Sorry.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [33]

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Okay. We'll catch up with him afterwards.

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [34]

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Okay. Later on, yes.

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Operator [35]

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We'll go next to Dan Brennan at UBS.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [36]

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I joined a little bit late. I had a 2-parter if you don't mind. I know NeuMoDx is really going to begin to hit next year, but just wondering, guys, just an update on kind of what you're hearing from kind of customers' confidence towards kind of achieving some of the revenue goals that you've set out, number one. And then number two, unrelated, but I know there was a question obviously that started the call off, I believe, on Europe. But just specifically, just kind of what's baked into your guidance in the back half of the year in terms of European growth?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [37]

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Thanks, Dan. Well, yes, indeed, we are getting first feedback in from the installed base, some in quite routine testing now already. And this with current -- a current menu of only 6 assays, which is obviously being broadened and more completed over the second half of the year and into 2020. The feedback we're getting from customers is indeed extremely positive. So as every new rollout, there are adjustments that we're making, improvements that we're doing, new software upgrades, rapidly delivering those. But everything is ramping actually very nicely, and we are seeing first customers providing side-by-side data, which is very impressive. We are seeing flexibility, time analysis, cost of ownership analysis. The general -- also the quality of the results comparisons come in, the flexibility in the samples. And all these things are pointing absolutely in the right direction. So we are excited.

And -- but it -- again, it is an early long cycle. It's an early indication now in a long purchasing cycle. We have first large reference labs, hospitals that are already testing systems and first placements altogether, purchases in addition to obviously evaluation sites on top of that.

So we're currently playing it conservative on the numbers. But it's -- clearly, if you look at the 2023 targets, NeuMoDx will play a role. We said and I think we got some comments that it was a conservative number, but that 2023 requires a contribution from QIAstat and NeuMoDx above $150 million for that target to work. And I think that's the number that we will continue to benchmark ourselves against in future quarters.

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Operator [38]

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And we'll go next to Peter Welford at Jefferies.

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Peter James Welford, Jefferies LLC, Research Division - Senior Equity Analyst [39]

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Two quick questions and then a follow-up, which is just with regards to the margin. I guess if we look, despite being a significant number of launches, right, a huge amount at the moment, you still have very well controlled both sales and marketing and R&D. I guess if we just think forward in future years, I guess can we just outline why shouldn't we see significant leverage coming through? Or perhaps another way, what are the things we should be thinking about as areas you're thinking to invest in, in future years that will, I guess, constrain the margin absent the opposite way of looking at it?

And then just to follow up on QuantiFERON-TB, which is that we're hearing that there might be a couple of months' delay in the U.S. to file an amendment before that can be fully launched on the LIAISON platform. Can you just comment at all on that and whether or not that impacted at all any of your objectives for this year?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [40]

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Roland, do you want to take that?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [41]

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Thank you. Let me kick it off with the margin question. I think, Peter, I think it's a good observation. I think we feel very positive about also our midterm margin potential. It's quite obvious that right now, we have some headwinds because we have to build out, on the one hand side, certain infrastructure particular for our new launches on the consumable side there, which clearly leads that certain products particular on the QIAstat consumable side, one on the underutilized production side, but with an increased volume over time that is going to turn around. And we do believe it is one of the contribution factors. So I would expect that on the one hand side, we get, over time, a certain ease on the gross margin side as in general, I would believe that the whole molecular franchise grows a little bit faster than the life science franchise which, I think, in general would help the overall gross margin as well.

On top of our operational expansion, I think we're going to continue to see more leverage out of SG&A, particularly on the sales side. The whole digitalization of our sales channel is very helpful for our margin track. The cost per transaction is coming down quite nicely, and that will help us, of course, midterm as well.

I think on the R&D side of expenses, I would expect that they stay in the framework where we are today in terms of percentage of revenues. It's an area where we believe we do have a nice balance in terms of input to output, and that should work out going forward. So yes, I would expect that we see also 2020 and the years beyond margin expansion year-over-year.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [42]

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Great. And related to the submission that we made in the United States to go with our partner DiaSorin, this is a PMA. And as usual in PMAs, there are information exchanges that happen between FDA and the company. I'm not quite sure what you're referring to, but we are on track and confirming second half of the year being our current expectation for those. So we have currently no reason to believe that there's any change to that originally committed timeline.

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John Gilardi, QIAGEN N.V. - VP of Corporate Communications & IR [43]

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Okay. Peer and Roland, with that, I would like to end the conference call and thank all of you for your participation. If you have any questions or comments, please do not hesitate to reach out to us. Thank you.

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Operator [44]

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