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Edited Transcript of QGEN earnings conference call or presentation 1-Aug-18 1:00pm GMT

Q2 2018 Qiagen NV Earnings Call

Amsterdam Aug 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Qiagen NV earnings conference call or presentation Wednesday, August 1, 2018 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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* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* Daniel Anthony Arias

Citigroup Inc, Research Division - VP and Senior Analyst

* Daniel Wendorff

Commerzbank AG, Research Division - Analyst

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Gunnar Romer

Deutsche Bank AG, Research Division - Research Analyst

* Patrick B. Donnelly

JP Morgan Chase & Co, Research Division - Former Analyst

* Romain Zana

Exane BNP Paribas, Research Division - Research Analyst

* 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. My name is, Emma, your Chorus Call operator. Welcome, and thanks for joining QIAGEN's conference to discuss the Q2 2018 results. (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 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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So thank you, Emma, and welcome, all of you, to our conference call today. The speakers are Peer Schatz, the Chief Executive Officer of QIAGEN; and Roland Sackers, the Chief Financial Officer. Also joining us is Dr. Sarah Fakih from our IR team.

Please note that this call is being webcast live and will be archived on the investors section of our website at www.qiagen.com. A copy of the press release is also available on the same section.

Before we begin, let me cover, as usual, our safe harbor statement. The discussions and responses to your questions on this call reflect management's views as of today, Wednesday, August 1, 2018. We will be making statements and providing responsibilities (sic) [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 visit our filings with the SEC.

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 the call.

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. We're quite pleased with our results for the second quarter of 2018. These results show a solid performance and further progression towards achieving the goals we have set for another exciting year of growth. We are on track to achieve our targets for higher sales and adjusted earnings and are building momentum as our growth opportunities across our Sample to Insight portfolio continues to create value.

I have these key messages for you today. First, QIAGEN achieved the sales targets set for the second quarter for 2018 and exceeded our goals set for profitability. Total net sales were $377.2 million, rising a solid 6% at constant exchange rates and at the high end of our guidance for 5% to 6% CER growth. As was the case in the first quarter, these results include a modestly negative impact from the disposal of several product portfolios announced in the second half of 2017. Total growth was 8% at actual rates due to 2% points of currency tailwinds. We were particularly pleased with the improved profitability as the adjusted operating income margin rose 2.2 percentage points at constant exchange rates and was 27% of sales. Adjusted EPS was $0.33 per share, and at the same time, at constant exchange rates, ahead of our guidance for $0.31 to $0.32 CER.

Second, we are advancing our Sample to Insight portfolio to address growth opportunities across the continuum from basic Life Science research to routine clinical health care. Among the highlights were the QuantiFERON-TB test maintaining a dynamic double-digit CER pace at 20%, and we are on track with our target for $300 million of annual sales in 2020. We saw very strong expansion in the United States and in Europe, as we move towards completing the transition to the fourth generation of the test. At the same time, the comparison in the Asia Pacific region reflects the significant contributions in 2017 from tenders in South Korea.

We have recently announced an important new partnership with Hamilton, which will further improve pre-analytical automation of the new single-tube blood collection option. And we are also moving ahead towards the start of our partnership with DiaSorin and embedding the readout of the QFT test on more than 7,000 LIAISON systems worldwide.

With these 2 solutions, we have a complete and powerful automation workflow for QuantiFERON-TB.

In next-generation sequencing, we are on track to achieve our goal this year of more than $140 million from this portfolio, up from about $115 million in 2017. We are seeing further placements of the GeneReader NGS System, along with ongoing solid growth of our universal solutions for use with any sequencer. The already optimal utility of the GeneReader system was further expanded for use into a range of hereditary diseases, and we saw a number of studies highlighting our liquid biopsy and tissue biopsy solutions on GeneReader at the American Society of Clinical Oncology meeting in June.

We are also moving ahead with new placements of the QIAsymphony automation platform and have full confidence that we can reach more than 2,300 cumulative placements by the end of this year. We're seeing double-digit CER growth in related consumables used on this system, which has become the most highly versatile and modular automation platform.

Third, QIAstat-Dx is off to a very successful start in Europe and rapidly gaining recognition as the next-generation platform to provide insights into complex disease syndromes. The first 2 QIAstat-Dx tests are already launched in Europe, delivering Sample to Insight processing of highly multiplex PCR panels to evaluate respiratory and gastrointestinal syndromes. Teams are also working as planned towards of the U.S. regulatory submission of the system in 2019. As a last point, we exhibited QIAstat-Dx at the ASCO conference to assess its potential for rapid interrogation of key oncology targets and we're very pleased with feedback.

Fourth, we are reaffirming our guidance for 2018. We continue to expect about 6% to 7% CER total net sales growth. This outlook includes about $7 million of first-time sales from QIAstat-Dx weighted into Q4. It now assumes about 1 percentage point of headwind from reduced U.S. HPV test sales and also absorbs the adverse impact of the recent portfolio changes. For adjusted EPS, we continue to expect about $1.31 to $1.33 per share at constant exchange rates.

So as a quick summary, we are pleased with the strong start into 2018 and are excited about the opportunities for the new year and the progress we are making towards our midterm 2020 targets.

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. I will first review the financial results for the second quarter of the year and later provide some updates on our perspectives on the guidance for 2018.

This was a strong performance for the second quarter, marked by solid sales growth of both instrument as well as consumables and further improvement in the adjusted operating income margin. And for the first half of the year, we also had a 35% increase in free cash flow to USD 123 million.

In terms of net sales, for the second quarter, we reached the high end of our target with 6% CER growth and net sales of USD 377.2 million compared to USD 349 million in the second quarter of 2017. Total growth was not meaningfully influenced by the launch of QIAstat-Dx automation system, as we just launched the system in this quarter.

As an additional point, organic sales growth, excluding the business portfolio changes we announced in 2017, was modestly ahead of our total sales growth. This business portfolio changes reflects the divestment of a veterinary testing portfolio as well as structural changes in China where we stopped commercialization of certain PCR-based tests and where we previously announced a transition to working with a distribution partner for HPV testing product. The currency benefits were about 2 percentage points of tailwind, resulting in 8% sales growth at actual rates. The currency contributions were at the low end of our expectations for about 2 to 3 percentage points based on rates as of April 30 due to the strengthening of the U.S. dollar against the euro during the quarter.

Moving down the income statement. The adjusted gross profit margin improved by about 90 basis points to 71.5% of net sales from 70.6% in the second quarter of 2017. This was mainly due to product mix with the solid growth in consumables, particularly Molecular Diagnostics, and also margin benefits from the strong growth in high-margin bioinformatics sales.

Adjusted operating income rose 15% to $101 million, growing at a much faster pace than net sales, thanks to the contributions of our efficiency and effectiveness programs. The adjusted operating income margin rose about 220 basis points at constant exchange rates and was up about 160 basis points at actual rates to 26.8% of sales compared to 25.2% in the year ago period.

Along with the increase is the adjusted gross margin, the efficiency programs and prudent cost actions are making an impact, and we had lower levels of research and development, sales and marketing and general administration expenses as a percentage of sales compared to the second quarter of 2017. As we have said, we expect about 100 basis points of improvement in the adjusted operating income margin for full year 2018 compared to 26.2% in 2017, which takes into our considerations that we'll reinvest a significant portion of the gain into the development and commercialization of QIAstat-Dx.

Moving down the income statement. Adjusted diluted earnings were $0.33 per share for the second quarter of 2018. The adjusted tax rate was 20% for the second quarter, which was in line with the rate for the first quarter of the year and ought to reach our target for about 20% to 21% points for the second quarter.

I would like to now review our sales results for the product categories and our 4 customer classes. Among the product categories, consumables and related revenues were 6% CER to $333 million in the second quarter and represented 88% of total sales of solid business volume expansion in the Molecular Diagnostics, Pharma and Academia customer classes. Instrument and related sales were up 7% CER for the second quarter of 2018, providing 12% of total sales and delivering a significant improvement over the 1% CER year-on-year growth rate in the first quarter.

Here we saw an impact from a shift in the instrument revenue mix, providing significantly lower contributions from third-party service contracts, but demonstrating underlying instrument sales growth of 19% CER. As mentioned earlier, we are pleased with the commercial start of the QIAstat-Dx system, but revenues in the second quarter of 2018 from this acquisition were not yet meaningful, and we expect about $7 million in sales for the full year.

Molecular Diagnostics led the performance among our customer classes, rising 10% CER to $187 million and provided 49% of total sales. This came on the combination of robust double-digit CER growth in instrument sales, along with high single-digit CER gains in consumables. Highlights include the QuantiFERON-TB test, QIAsymphony consumables and co-development revenues on companion diagnostic agreement, which were up 81% CER in the 2018 quarter compared to $40 million -- to $14 million.

The Life Science customer classes provided 51% of total sales and rose 3% CER in the second quarter of 2018.

Applied Testing sales declined 3% CER, but rose at a modest single-digit rate when excluding the divestment of our veterinary testing portfolio earlier this year. Applied Testing is also facing a tough comparison during 2018 due to the extremely strong performance in 2017 as well as some larger tenders. We expect sales in this customer class to be under pressure, as well, in the third quarter of 2018, but to show modest improvement in the fourth quarter as we put the divestment behind us.

On the other hand, the Pharma and Academia customer classes had ongoing strong growth rates. In Pharma, where sales was 4% CER, the highest growth rate was in the Americas region, and overall sales growth came in from consumables. Academia sales also rose 4% CER in the second quarter of 2018 on the back of double-digit CER growth in instrument sales and modest single-digit CER growth in consumables.

I would like to now review the performance among our 3 geographic regions. We saw similar trends as in the first quarter of this year across the regions. The Americas led the strongest year-on-year growth in the second quarter, rising 10% CER to $180 million and providing 48% of total sales. This came on the back of double-digit CER gains in the U.S., Brazil and Mexico, in -- and in particular, from sales in Molecular Diagnostics.

The Europe/Middle East/Africa region again delivered 4% CER growth in the second quarter with sales of $120 million, representing 32% of total sales. We saw improving trends in the United Kingdom, Italy, Turkey, The Netherlands and Switzerland, but encountered modestly weaker sales in France and Germany.

The Asia-Pacific/Japan region grew 1% CER in the second quarter, providing $77 million of sales and about 20% of the total. However, sales were up 5% CER for the region, excluding very tough comparison against the national QuantiFERON-TB tenders in South Korea in 2017.

In China, we saw a very positive impact of the expansion program we announced last year and yield sales for about 20% CER outside the business portfolio changes.

I would like to now give you an update on our financial position. Thanks to the strong business expansion, combined with operational discipline, net cash provided by operating activities rose 28% to USD 166.2 million in the first half of 2018 compared to $129.5 million in the year-ago period. The results for 2018 even includes a $30 million payment for prepaid royalties to Natera for the GeneReader partnership, showing the underlying strength of our business to generate cash flow.

Property, plant and equipment expenditures were USD 42.9 million in the first half of 2018, representing less than 6% of total sales and growing at a slightly slower rate as a percentage of sales than expenditures in the same period of 2017. As a result, free cash flow rose 35% in the first half of 2017. Cash flow from the -- for the first half of 2018 included payments for the QIAstat-Dx acquisition and also approximately $21 million so far for the first tranche of our current commitment to return $200 million to shareholders. Even taking these amounts into consideration, our leverage ratio stood at 1.7x net debt to EBITDA, only slightly higher than the 1.6x level for the same period in 2017.

We continue to have a healthy balance sheet and are maintaining our disciplined capital allocation strategy, focused on value creation through targeted M&A deals and return to shareholders.

I would like to now hand back to Peer for a 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.

Our flagship QIAsymphony automation platform continues to show very robust placement rates and solid consumable pull-through. Our leadership in differentiated technologies continues to produce growth in areas like processing samples for microbiome research.

Now let me go into more detail on the other 4 areas, including QIAstat-Dx, QuantiFERON-TB, next-generation sequencing with the universal NGS solutions and the GeneReader NGS System and our Personalized Healthcare franchise.

I'm now on Slide 10 to discuss QIAstat-Dx, our next-generation platform offering syndromic insights for a broad range of applications and a flexible range of near patient settings. The syndromic testing market has been growing rapidly based on the clear clinical benefits of highly multiplex testing as a more efficient way to diagnose a complex syndrome compared to running one single test after another. As shown here, QIAstat-Dx is a highly flexible modular system, which makes it easily scalable for a broad range of clinical and laboratory settings and sample throughput needs. Each test kit is comprised of a self-contained cartridge capable of detecting up to 48 molecular biomarkers, so the lab can run one test to go home in on the specific pathogen, guiding the clinicians for a more precise and efficient treatment. The system is a true one-step, fully integrated Sample to Insight solution, delivering to customers what they had been looking for, a solution which allows them to focus on the results and not the workflow. Ease of use with less than 1 minute of hands-on time is a key advantage that resonates strong with our customers.

Following our launch in late April, along with CE-IVD-marked panels for respiratory and gastrointestinal syndromes, we have achieved strong initial placements in Europe. Our first customers are now up and running already in routine testing mode.

We envisioned a deep pipeline of applications, which will add to the value of QIAstat-Dx instruments for hospitals and labs. We expect to have meningitis, positive blood culture and pneumonia panels, and we are also already working on the implementation of a comprehensive oncology menu as well as the capability of running immunoassays.

QIAstat-Dx is a strategic addition to QIAGEN's portfolio of core molecular platforms, a third Sample to Insight system, along with QIAsymphony RGQ, the GeneReader NGS System. We look forward to reporting further progress in the coming quarters.

I'm now on Slide 11 to give you an overview of key developments for QuantiFERON-TB, the market-leading test for detecting latent tuberculosis from blood samples. The substantial $1 billion market opportunity is still only barely 20% converted from the 120-year-old skin test, which is more time-consuming for health care providers and less accurate than modern lab-based blood tests. In other words, there is a very large opportunity ahead of us.

A number of recent guideline changes by national as well as global health authorities, such as the WHO or CDC, have reinforced the mandate for blood-based diagnostics for latent TB screening, particularly around issues with migration, in many cases, such as IPPA recommending the use of QuantiFERON-TB specifically. In the second quarter, the international organization for migration, the United Nations migration agency, specifically endorsed QuantiFERON-TB Gold Plus and adopted the test as the only blood test for the screening of migrants in a tender to cover 16 countries in Africa, Asia and the Middle East. This is part of IOM's 5-year global plan to end TB from 2016 to 2020.

To further serve the growing demand from national and global latent TB screening initiatives, we recently announced a new partnership with Hamilton Robotics to further improve workflow automation and scalability for TB control programs. The collaboration adds Hamilton's Microlab's STAR automated liquid handling workstation to the QuantiFERON-TB Gold Plus workflow to fully automate pipetting steps following single-tube blood collection. These steps are upstream to the readout automation for which we provide solutions, most notably through our partnership with DiaSorin. The advanced single-tube blood draw option is a unique feature of the fourth-generation test and represents a key driver for QFT-Plus adoption in large-scale screening programs. This is especially helpful for countries also with high testing consolidation, such as the United States, China and Japan.

The additional automation, which will be available to customers in August already will: first, reduce overall hands-on time by at least 50%; and second, provide greater ease-of-use; and third, ensure consistency and standardization, also integrating seamlessly with the automated test readout currently being established on DiaSorin's LIAISON family analyzers.

I'm now on Slide 12 to review the progress on our next-generation sequencing portfolio. We are positioned to provide solutions for all segments of the NGS market with our Sample to Insight GeneReader NGS System and our platform agnostic universal NGS solutions. Over the last few years, we've created a strong NGS franchise, which is well on track to achieve the $140 million set out as a goal for 2018 based on superior digital NGS technology integrated into unique, comprehensive and highly differentiated menu, spanning Life Sciences and clinical research as well as customized panel development services, offering customers almost unlimited content.

We are building up critical mass with GeneReader and successfully began the integration of noninvasive prenatal testing solutions on the basis of the partnership with Natera, which was announced in Q1 2018. We have now announced the further expansion of the GeneReader platform into customized hereditary disease panels based on the human genome mutation database, the gold standard resource for human inherited disease mutations, which forms a part of our industry-leading Knowledge Base and which is integrated into QIAGEN Clinical Insights, or QCI.

Our universal NGS portfolio, supporting the entire installed base of third-party NGS instruments, continue to produce strong double-digit CER sales growth in the second quarter of 2018. A recent joint publication between the Mayo Clinic and QIAGEN to assess the prevalence of germline mutations among patients with pancreatic cancer is only one example of how our universal NGS portfolio enables breakthroughs in clinical research.

On Slide 13, I would like to update you on our Personalized Healthcare franchise. QIAGEN is a trusted partner to more than 25 leading pharma and biotech companies that rely on us to develop companion diagnostics for efficient patient stratification. We further expanded the number of master collaboration agreements and saw significant increases in companion diagnostic development activities across NGS and PCR technologies, now further complemented by QIAstat.

We have just entered into a new partnership with SRL, the large clinical testing laboratory in Japan, to enable simultaneous introduction of new drugs in corresponding companion diagnostics. The goal is to close the time gap between drug approvals and diagnostic testing, providing day 1 availability of personalized therapies.

At the May ASCO conference, we also announced a new partnership with Freenome to accelerate the development of companion diagnostics in immuno-oncology. Freenome is unique artificial intelligence platform, enables novel approaches to find new biological targets for precision oncology. The partnership will focus on a next-generation liquid biopsy assay to test for a patient's level of tumor mutation burden, a highly complex biomarker that critically determines drug response rate in immuno-oncology.

On a separate note, our careHPV Test, a unique assay to screen women in low resource settings for prevention of cervical cancer, has just been added to the World Health Organization's list of prequalified in vitro diagnostics. We already market careHPV in China for rural or undeveloped areas. And the WHO endorsement should open up opportunities for additional sales to governments and NGOs active in many other emerging markets.

With this, I would 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. We would like to now review our targets for the third quarter and reaffirm our outlook for 2018.

For the full year, we continue to expect total net sales growth of about 6% to 7% CER. This is based on the broad business expansion continuing into the second half of the year, along with about $7 million of first-time contributions from the launch of QIAstat-Dx that are considered as an M&A contribution. This outlook also absorbs the changes announced in the second half of 2017 to our business portfolio as well as the recent divestment of our veterinary testing portfolio and also about 1 percentage point of headwind from the reduced U.S. HPV sales.

For adjusted EPS, we continue to expect about $1.31 to about $1.33. This includes our previous forecast for dilution of about $0.05 per share from the investments and the launch of QIAstat-Dx as well as benefits from about $0.01 from the new share repurchase program.

As for currencies, we saw a significant strengthening of the dollar during the second quarter and primarily against the euro. So based on rates as of July 30, 2018, we expect a currency tailwind for the full year 2018 of to up about 1 percentage point, and this compares to our earlier estimate for about 2 to 3 percentage points of tailwind.

As for the adjusted EPS for the full year 2018, we now expect a currency headwind of up to $0.01 for the full year compared to our earlier estimate of about $0.02 of tailwind.

For the third quarter, our guidance is for total net sales growth of about 6% CER and includes around 1 percentage point of M&A contributions from QIAstat-Dx. However, the contributions from QIAstat-Dx are essentially being offset by the revenues loss from the recent divestment of our veterinary testing portfolio.

The guidance also takes into account expectations for sales of the QuantiFERON-TB test to grow at a modestly slower rate than usual due to the year-on-year comparison against the South Korea tender as well as lower contributions from companion diagnostic's co-development deals.

Adjusted EPS is expected to be about $0.33 to $0.34 per share, also at constant exchange rates.

In terms of currency impact, based on rates as of July 30, 2018, we expect currency headwinds of about 2 percentage points on net sales and up to $0.01 of headwind under official CER guidance for adjusted EPS.

In terms of adjustments for the full year, we expect charges in operating income for the amortization of purchased intangibles to be about USD 104 million in 2018 from $112 million in 2017. We also expect restructuring-related items to be considerably lower at about $9 million, as we have completed the efficiency programs started in late '16. Business integration costs are expected to be about $30 million and this includes the QIAstat-Dx acquisition. As for the adjusted tax rate, we continue to expect about 20% to 21% for 2018.

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

First, we had a second consecutive quarter of solid 6% CER growth with adjusted operating income growing at a much faster rate than sales and leading to and adjusted EPS of $0.33 per share, which was above our target.

Second, we are advancing our Sample to Insight portfolio across the continuum of basic research to routine clinical health care and delivering double-digit CER growth from our top products, like QuantiFERON-TB or QIAsymphony automation system and differentiated technologies, like liquid biopsy, microbiome and NGS solutions.

Third, customer response has been very positive on the start of commercialization for the new QIAstat-Dx platform, which marks a new generation of syndromic testing insights and is set to become an important growth driver.

Finally, we are on track to achieve the goals we have set for 2018 and are sharpening our focus on achieving the midterm targets we have set for 2020.

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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John Gilardi, QIAGEN N.V. - VP of Corporate Communications & IR [1]

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So thank you very much, Peer. (Operator Instructions) We're having a technical issue to get people into the queue, so if you'd like to ask a question, please send me an email and I'll put you on the list. But I hand over now to Emma to start the Q&A with the names we already have.

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Operator [2]

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(Operator Instructions) The first question comes from the line of Tycho Peterson with JPMorgan.

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John Gilardi, QIAGEN N.V. - VP of Corporate Communications & IR [3]

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Emma, let's move to Daniel Wendorff then. We'll come back to Tycho.

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Operator [4]

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The next question is from the line of Daniel Wendorff with Commerzbank.

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Daniel Wendorff, Commerzbank AG, Research Division - Analyst [5]

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And I have a question, potentially more of a top-down in nature. And when I look at your constant exchange rate growth rates you achieved in 2017, what you guided for 2018 and when I then have in mind what you said, at the end of this day, at the end of 2016 is 7% to 9% sales growth CAGR. How should we think of this in light of the next year and also 2020? And is the high end more likely? Is the low end more likely? So how should we think of this? And maybe a small follow-up question. In looking at your QIAstat-Dx launch and the positive customer feedback you talked about, and what are -- so who are these customers? Are these big labs, small labs? Or any more color you can give us here would be much appreciated.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [6]

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Roland, do you want to take the first? I'll take the second.

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [7]

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Sure. Long and short answer. Of course, the range is the range, Daniel. And of course, we will update you on guidance for '19 when we give our Q4 results and the full year results probably next year. Nevertheless, I think what is fair to say is we feel quite comfortable right now moving to 2018. You have seen that we were able now, 2 quarters, coming out in slightly ahead of our own expectations. At the end of the day, in terms of both -- in terms of revenues, but also in terms of profitability. Particularly on profitability, I think we have seen very nice step-ups. And now, of course, also the positive feedback from customers who are on QIAstat-Dx gives us clearly a good feeling also moving into the overall budget process to 2018. So I would say, outside any large macro events, which I would say, really not QIAGEN-specific, I think we feel very well on track to also again confirming our midterm guidance probably next year. And I think it is where we are today.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [8]

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So Daniel, the QIAstat platform has a whole range of different target customers. And they include customers that benefit from the near-patient testing, availability, i.e. hospitals. They also include laboratories that want to be able to offer the syndromic diagnostic testing as well. So the customers recruit themselves from -- everything from even smaller physician practices that have the ability to run these types of tests up to very high-volume, large commercial labs or large central teaching hospitals that are running high volumes of these syndromic tests. So the range of benefits, as we highlighted in Q1, is really very broad. And the -- therefore, the ability to flex the platform into different throughput settings, but also into different types of versatility settings or user demands is very high. The current customer base recruits from all of those segments. There is a clearly heavy weighting in terms of number of placements into hospitals versus the larger routine laboratories. They are typically looking at multiple placements. We have placements, which include most of them, obviously, 1 module. But we also have placements that are between 5 and 10 modules in an integrated fashion to create very high throughput. So it's really too early and it's more anecdotal at this stage. We'll probably have better information in a few months from today.

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Operator [9]

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The next question comes from the line of Tycho Peterson with JPMorgan.

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John Gilardi, QIAGEN N.V. - VP of Corporate Communications & IR [10]

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It's not working. Let's move to Patrick Donnelly.

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Patrick B. Donnelly, JP Morgan Chase & Co, Research Division - Former Analyst [11]

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Maybe just one on QuantiFERON, obviously continues to be a healthy growth driver. Another quarter of 20% growth. Not surprising. I know you guys have been talking about the step down the back half for a while. But is that just purely due comps? Anything else to call out there? And then can you also just talk through what you're seeing in the different geographies? Any change to the competitive landscape? And then I have a quick follow-up.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [12]

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Sure. Well, QuantiFERON is a very long-term, strong growth dynamic that we are executing on. And as we highlighted in our intro, this is further being confirmed almost on a monthly basis to be a vast market opportunity. And we are replacing the skin test as the primary competitor, as we address these, also, new areas of testing that are being supported by recommendations, guidelines or national screening programs. So yes, the Q3 and Q4 numbers, they are somewhat impacted by the significant shipments to Korea last year. If you look at the underlying growth, it is always in the mid-teens. We always said that, that would be something like a core growth, and that there would be implementations and tenders that we would add on top of those. That is a little bit more difficult to plan and, hence, the -- now more guiding towards that core growth now for the second half of the year. But as you see from the recommendations and also that -- well, the time line that we shared with you on that one slide, there is a lot happening around the world in the area of latent TB, and we're driving that with medical teams in a very significant way. And so as these opportunities open up to take some time and to prepare the screening standards and the infrastructure and just -- and that -- then over time then leads into more concrete screening programs, and that goes through a political system. So it takes some time. But I -- therefore, we point to things like the national guidelines and the support here. And if you just look at the national guidelines in last 4, 5 months, you see Australia, Tunisia, China, New Zealand, Japan, Mexico all coming out with national guidelines where now latent TB testing is integrated and often specifically mentioned in QuantiFERON-TB. So the long-term growth trajectory is fully intact, also, in Q3, Q4, where it's more difficult to plan for these tenders when they come into the numbers, and that's obviously something we'll benefit from.

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Patrick B. Donnelly, JP Morgan Chase & Co, Research Division - Former Analyst [13]

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Very helpful. And then maybe just a quick one on the Freenome announcement yesterday, maybe just a bit more color. It sounds like an interesting opportunity on TMB side, but just the trajectory of when we can see that be meaningful for you guys and just the rationale behind a partnership would be great.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [14]

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Sure. So as we all know, immuno-oncology is one of the hottest topics currently in the area of cancer testing. And you've all seen our announcements about a year ago with a massive partnership with a cornerstone partner, BMS, but also others have now joined. And we are developing a next-generation immuno-oncology portfolio of tests that are much broader than what is being done today. But for that purpose, liquid biopsy will always be a key aspect, as immuno-oncology it will probably call for recurring treatments and, therefore, also recurring testing, where liquid biopsy, obviously, has to come to play. So we have been very successful already today with our pan-cancer panels. We have a very interesting TMB product also that will come out near term. But what we're much more interested in is a more -- the more long-term play that is much more comprehensive than TMB and MSI and others. And I think this is something our pharma partners are very excited about and we're working intensely toward. Freenome allows us to apply some of their AI to some of the findings that we have from these large pools of data that we're generating to see if we can further improve the selection of the targets that we're using in the liquid biopsy assays to provide even better insights from these liquid biopsy assays.

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Operator [15]

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The next question comes from the line of Dan Arias with Citigroup.

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Daniel Anthony Arias, Citigroup Inc, Research Division - VP and Senior Analyst [16]

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Peer or Roland, the co-development payments for Pharma continued to be pretty lumpy here. So just given the healthy contribution there this quarter, can you help us with what we should think about for contributions in 3Q and 4Q? And then I've got to ask a follow-up. Peer, I'm just curious what the plan is for just increasing general penetration of the GeneReader in the U.S. market.

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

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Yes. I'll probably take the first one. As you said, it's clearly a good success for QIAGEN in 2018, and that this is driven by, I would say, the great performance well into -- in 2017 in entering new contracts on companion diagnostics. And you also have seen, today, there's new announcements coming in. So I think it also was a business, which should be quite successful for us on the midterms. Nevertheless, I think the Q2 was clearly, in terms of milestone achievement, a very good one. Our plan was, on average, for the full year. Is a growth rate around 20%. So I would say, the third quarter typically comes in a little bit lower. And it's also the reason why it will be slightly different. And the third quarter and Q4 typically, then again, it goes up a bit. So I think we have a good opportunity here to be a bit better on the full year than we expected earlier. But around 20% is probably a good selling point.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [18]

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Right. And to the second question, the uptake of GeneReader around the world is -- continues to be quite exciting. The United States, as we highlighted in previous calls, is about 6 to 9 months behind the curve due to the fact that marketing really only started in late '16, early '17. And as many of you know, we've announced a new version of the chemistry that was launched in early 2018, which many customers were waiting for. So our goal was -- and clearly, we had some hurdles that we had to overcome in the U.S. due to the unfortunate decisions around the marketing that we had to manage. But the important thing is, now, if I look at the GeneReader as it stands today, and that was the key thing for us to do is to expand its capabilities, it is a pretty lean, pretty high-throughput panel machine that is increasingly being recognized for its high versatility and throughput for these very targeted panels. We expanded the capabilities. into hereditary. We also further improved some of the workflow aspects. We added the customization panel service, providing now an unlimited menu to the GeneReader. And there's also healthy pipeline of further, more validated assays that we will be bringing to market on GeneReader. And so this is something that has been well recognized by the pathology community. We had some very interesting sessions at AMP Europe, but also at ASCO in Chicago with a very positive feedback from the user groups on the target pathology segments. And the GeneReader is, of course, very highly for listening to the needs of the pathologists and not just putting machines into laboratories, but actually comprehensive solutions that focus on the value of the information that they can provide and report to their internal or external customers. And so this is a marketing effort and one that we will continue and which is also showing some very good ramps.

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Operator [19]

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The next question comes from the line of Gunnar Romer with Deutsche Bank.

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Gunnar Romer, Deutsche Bank AG, Research Division - Research Analyst [20]

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Gunnar Romer, Deutsche Bank. The first one would be on the IOM tender for QuantiFERON. Just wondering whether you can talk to the significance and phasing of that tender a little bit. And then second question would be on your instruments business. And I think, Roland, you made a comment that the placement of hardware has been growing strongly at 19%. Can you help us understand what the split here is in terms of real hardware within the instruments franchise and related services? And also what kind of third-party contribution you have?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [21]

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Sure. Roland, do you want to take the second one first? Okay. Then I'll take the first one.

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [22]

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Yes, yes. I wanted to do so. Sorry, I was -- so as I said, it's a good question, Gunnar. Thanks for bringing it up because, overall, consumables -- so instrument revenues were up 7%, where instrument just focusing on the hardware itself was up 90%. And the difference is, as you recall, we also have quite a meaningful instrument service business, which we entered into to get also a better utilization of our own instrumentation service groups. But now with having more and more instruments from QIAGEN now, in particular, launching GeneReader, while also now preparing for the QIAstat rollout, at the end of the day, we are reducing the third-party instrument service providing to third-party customers to a certain extent. And therefore, of course, we have a slightly negative revenue numbers in instrumentation service and -- that lowers overall instrument revenues to 7%. If you just look on the sales numbers coming from straight instrument sales of QIAGEN instruments, it was this quarter around 19%. And that is, more or less, which I think we should draw your attention to is that we have seen, of course, now a nice pickup in hardware sales. It is the first time there is such a difference on a quarterly basis. Typically service and instrument sales, in general, move quite in the same direction. But now with us, probably all through the next few quarters, focusing more on ramping up sales activities around our own instrument and doing less instrument service for third-party providers, I think, is worthwhile to note that.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [23]

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To the first question, the -- this tender is indeed quite interesting, because 2 things I'd like to highlight. First of all, the screening of migrants is a topic we pointed to already a few years ago. And some of you in Europe might have seen some press around donations that we made to the first wave of fugitives coming in and providing screening. There's obviously a high prevalence of latent TB in these populations. And what was very quickly recognized is that using QuantiFERON versus the skin test, you get a much faster result, so you don't need 2 visits. IV administration is substantially easier. And the second thing is the quality of the information is significantly better, as well, because of, partly, vaccinated populations that provides, obviously, a false-positive result. So QuantiFERON has shown a very significant improvement and also efficiency and effectiveness in this population. Now the UN has recognized that and this put us -- puts us into a different dimension. And we all know that there are tens of millions of people that are fugitives or migrants and many different definitions. Now obviously, only a small fraction of that will be tested and will take some time to move this in. So I just booked this into one of the many segments that have recognized that even in the high-prevalence populations, it makes much more sense to use QuantiFERON than a latent TB skin test. And this is something that we've been working on for 2 years. And if we see a 6-digit or maybe even 7-digit numbers of test coming in at some point in time in 3, 4 or 5 years from today, that would be nice. But it's one of many of these types of initiatives that we're pursuing.

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Operator [24]

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The next question comes from the line of Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [25]

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So a couple of quick ones. Peer, on QuantiFERON, I want to understand the importance of the Hamilton launch. I think you said you're launching it now in August. Is it a global launch? How important do you think this is? And given that your competitor also launched an automated solution that they talked about yesterday, I'm just curious about how you think that you're differentiated there.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [26]

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Sure. We've been, obviously, working on automation for quite some time. And with the addition of the automation solution now announced yesterday, combining that also with the DiaSorin platform, we really have quite an amazing lineup that takes our customers from primary to -- through to detection and on the detection platform with 130 other assays that can be run, concurrently in random acts of continuous load. So -- and I'm referring now to the LIAISON downstream. So the automation is -- that was the one piece that we still wanted to add, which is primarily target to single-tube customers. As you know, there are 2 ways of processing QuantiFERON. You can use a single tube or you can use the multiple tube collection. The more concentrated testing sites, like the U.S., Japan and China, they typically do single tube. Also some of these national screening programs, they have concentrated sites, and they are very pleased with the single-tube process. That single-tube collection requires [reallocation], requires the set of the assay and that is done in a liquid handling step with a few other features attached to it. Now I'm not aware of any other automated latent TB test. I've seen some announcements on new reagents being announced that make automation a little bit easier. But this is an instrument that you actually plug in and a downstream clinical diagnostic testing platform that has been placed thousands of times that we are linking into. So this is really hard-core IVD automation. And the reductions in the hands-on time, the reductions also in cost increases in efficiency I referred to before are quite significant. So customers who have been running this have been very pleased with the performance. And we look forward to now starting to place this. And it's nice that this is also concurrent in Europe with the launch and -- over the next few weeks of the DiaSorin relationship in Q3, Q4 and now also with the ability to run a full automation with the Hamilton upfront.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [27]

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Okay. And then with QIAstat, can you talk on the -- what the selling cycle looks like in Europe? And the competitive wins, how much of these are swapping out [competitors]?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [28]

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They're all competitive and -- or highly competitive in terms -- there are obviously a few very obvious competitors and their incumbents and some smaller plays. And from that perspective, it was nice to see that the platform immediately taking share. And the -- I'd say, half of them are swap-outs of existing users and half of them are people entering into this market. So it's a very nice mix. It's actually a larger percentage of swap-outs of existing placements than we originally had projected. But again, these numbers are small and still a little bit anecdotal, so I'd like to put a little bit of caution to it. And we'll give more numbers in a few months.

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Operator [29]

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The next question comes from the line of Romain Zana with Exane BNP Paribas.

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Romain Zana, Exane BNP Paribas, Research Division - Research Analyst [30]

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I have first question on QuantiFERON. How should we think about the greater guideline dynamics? I mean, do you think that it will bring incremental growth for QuantiFERON? Or are you looking at it rather as something supporting the 20%-plus growth rate that we should extrapolate looking forward? And I have a follow-up on cash flow, if I may.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [31]

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Sure, Romain. I'd say, we've been, obviously, announcing a number of these things, and the time line summarizes a few of them. And this is only a small fraction of what we're working on. So there's a heavy team, our medical officers around the world to demonstrate the value of latent TB testing in many different settings. What we are trying to do with each of these, also, announcements is while some of them are actually financially, also, meaningful. In addition to that, we also see a great value of putting further comfort into the protections that we have. We are very excited about the long-term growth opportunity and the ranges you just described before, we reaffirmed the $300 million number. And this is -- makes us one of the biggest diagnostic products in the world. And for -- I think to further improve the support and the appreciation of this opportunity, we're demonstrating that there are dozens of guidelines, dozens of decision-making bodies that are coming out in support of this. And it's really round-the-world, many, many segment effort.

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Romain Zana, Exane BNP Paribas, Research Division - Research Analyst [32]

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And maybe a follow-up, if I may, for, maybe -- rather for Roland. The cash conversion has improved materially over the past 6 months. Can you give us just a bit more color about the underlying dynamics? I'm thinking particularly about the working cap managements and also tax payments because if I am right, it decreased over the past 6 months, despite the higher tax rates. So how is it sustainable looking forward? And how should we extrapolate the cash conversion?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [33]

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Yes. Thanks, Romain. for the question. I think -- overall, I think you know that we have a midterm goal for cash flow as well. And we did quite well on track on our way to achieve them all by 2020. Particular, this quarter help was a nice improvement in -- within working capital, in particular one, DSO. We clearly have seen a nice step-down around day sales outstanding. And that has also to do, on a one-hand side, this ramping up of our shared service center activities. You recall that we were, still to some certain extent, are in the middle of setting up shared service center activities that clearly had some, again, transition topics to address, but is seeing now where things are getting more and more in routine businesses. Also that number came out quite dramatically. I think there's a lot more way to go. And the second big driver where I think probably more into 2019, we see a larger positive impact actually around inventory days as well. So having that said, I do believe cash flow generation, particularly from working the capital improvement, will be a positive surprise for us within the next couple of quarters as well.

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Operator [34]

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Next question comes from the line of Ross Muken with Evercore.

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Unidentified Analyst, [35]

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This is Luke on for Ross. Just to start off, I guess, on the -- so the next-generation sequence portfolio, some really good color on that. Can you just break out where you're seeing most of the growth out of the -- on that Slide 12 that you gave us? Any sizing of those individual buckets? Anything to help us look at this going forward?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [36]

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Right. So if you look at the absolute largest piece, it is clearly the panels that we are selling in the universal NGS. The test panels that can be run on any sequencer, they are getting rave reviews. And there's significant a uptake visible in the market. We -- in terms of growth, it is -- clearly, GeneReader is still a smaller percentage of sales. But we -- we're seeing, overall, I'd say, there's some softer growth in areas where we are heavily penetrated, which are the NGS-specific sample preparation. So we have some specific sample preparation products targeted for NGS that have certain artifact removal capabilities that are only applicable to NGS. So this is that franchise that we sum up there. So that is probably -- the sample preparation is a little bit slower growing. Some of the informatics products are somewhat slower growing, as we already have high penetration there as well. And GeneReader, which is still coming from a low market share and moving in is, in terms of growth, probably the highest. But the biggest dollar contributor to growth are clearly the NGS panels.

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Unidentified Analyst, [37]

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Okay. Great. That's helpful. And I guess, one for Roland on margins. Can you just help us unpack a little bit about the -- all the moving pieces that you had in the quarter and kind of what your expectations are for that 100 bps at the -- for the full year as for the remainder of the part of the year?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [38]

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Yes. Let me, a little bit of (inaudible) for a second and then put together to give you a complete picture. I think, if you -- as you recall, as we move into the year, we were guiding for roughly 100 basis points margin improvement for the full year. And then we announced the acquisition of QIAstat-Dx, which where we said it, more or less, comes with the dilution of $0.05 EPS, which translates somewhere between a 60% to 70% overall margin dilution for 2018. I think the good news is we see that we make much faster progress with our efficiency programs. That's why actually, that we do believe, right now, while we still have this dilution of 60 bps coming from the QIAstat acquisition in 2018, that growth -- efficiency program is probably delivering somewhere between 140 and 160 basis points on improvement. So net is then the impact into also -- I -- and the gross efficiency programs are doing quite well.

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Operator [39]

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The next question comes from the line of Derik De Bruin with Bank of America.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [40]

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So 2 quick ones. I guess, what was the net contribution from acquisitions and divestitures in the second quarter? And secondly, if I heard you correctly, you've reduced the HPV headwind by 50 bps. And yet, you're maintaining the constant currency growth. What's the offset in the rest of the business to this? And is this -- and then I'm just curious if this was directly tied back to the sample prep portfolio that seems to be a little softer?

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [41]

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So thanks for the questions. So the sample technologies are actually showing quite resilient growth, overall. I was comparing this -- the statement I made before is the statement out -- within the NGS portfolio where the growth is 30%. Here we have a different -- if you look at the sample technologies, overall, they are still very resilient and, actually, in many cases, gaining share even off 60%, 70% base market share. So that -- that's important to note. The overall growth that we are seeing is a little bit softer in the Life Sciences market overall, so that is a market that is showing improving trends. And we've been working hard on our go-to-market and commercialization initiatives this year in a broad-based initiative here at QIAGEN, revisiting and completely renewing our go-to-market and commercial resource allocation. And that is starting to show some very promising trends. And so this is something that, however, in the first quarter was still -- in the second quarter was still dilutive to the overall growth and is now moving into a more neutral, maybe even, at some point, on a quarterly basis and even into the accretion. So this is a big initiative we have ongoing here on the Life Sciences side. In terms of the acquisition and organic, Roland, do you want to comment on that?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [42]

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Yes, sure. As I said, for the (inaudible) we really like to point on the total growth rate, I think, and that is clearly something what is, at the end of the day, most important. Nevertheless, we clearly had also, in the second quarter, some negative impacts out of the divestitures we made, particular, announced last year. So it was actually, the overall organic growth rate was slightly better than the overall -- than the total growth rate.

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Operator [43]

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The next question comes from the line of Brian Weinstein with William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [44]

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It sounds like you guys are hitting on all cylinders, whether it's financially or operationally. But Peer, I'm wondering, is there anything that's not going as well as you would like right now? Where are you spending your time maybe to improve operation somewhere? Because it doesn't really seem, based off your comment, that there's a whole lot going wrong right now.

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Peer Michael Schatz, QIAGEN N.V. - CEO, MD & Member of Management Board [45]

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While we're quite pleased with the performance in this first half the year, we're very pleased with the strategic footprint we now have in Molecular Diagnostics. There is a very good momentum there. And as you have seen from some of the discussion, very long-term exciting growth in front of us. We're entering into market, taking share. We have new opportunities emerging. So this is a very dynamic part of our business. The focus on the Life Sciences is very much on the go-to-market execution, in addition to some adding further innovation [sizzle] to some of the portfolio. It's also picking up very nicely. It's a lot of hard work right now, Brian. And this is something we're very proud to see, obviously, when the numbers come in and we are exceeding our targets and our budgets here internally. And so this is gratification, but it's -- these are milestones on a path to -- towards our 2020 targets. And so we're really doubling down now, feeling the responsibility that things are working and seeing some very nice opportunities in front of us.

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John Gilardi, QIAGEN N.V. - VP of Corporate Communications & IR [46]

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So thank you, Peer. And with that, I'd like to thank all of you for your participation today and appreciate your patience with the Q&A issues that we had. And if you have any questions or comments, please don't hesitate to reach out to Sarah and me. Thank you very much.

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Operator [47]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.