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Edited Transcript of QGEN earnings conference call or presentation 5-Feb-20 2:00pm GMT

Q4 2019 Qiagen NV Earnings Call

Amsterdam Feb 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Qiagen NV earnings conference call or presentation Wednesday, February 5, 2020 at 2:00:00pm 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

* Roland Sackers

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

* Thierry Bernard

QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area

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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

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* 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

* Scott Bardo

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Stephen Christopher Beuchaw

Wolfe Research, LLC - Director of Equity Research

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

* William Robert Quirk

Piper Sandler & Co., Research Division - MD and Senior Research 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 Q4 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.

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

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Thank you, and welcome to our conference call today. The speakers today are Thierry Bernard, the interim CEO of QIAGEN and also Senior Vice President of our Molecular Diagnostics business; and Roland Sackers, Chief Financial Officer. Also joining us today is Phoebe Loh from the 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 available on the same section.

Before we begin, we cover our safe harbor statement. The discussion and responses to your questions on this call reflect management's view as of today, Wednesday, February 5, 2020. 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.

Additionally, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles. You can find a reconciliation of these figures to GAAP in the press release and the presentation for this call.

I will now turn over the call to Thierry.

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [3]

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Thank you, John, and let me begin by welcoming all of you to our conference call. It's really a pleasure to be able to talk to you again after our last call in October of 2019. As you have seen yesterday afternoon, our performance for 2019 showed that QIAGEN exceeded the updated outlook that we had set for the fourth quarter sales growth and delivered on full year sales growth. And at the same time, we exceeded the target set for adjusted earnings.

As we go through this period of change at QIAGEN, we delivered on our commitments to you all, and we continue to focus on attractive growth opportunities across the continuum from life science to molecular diagnostic. At the same time, as we said also in our Q3 earnings call, we are realistic about our challenges that began in mid-2019, especially in the Asian markets, particularly China, as well as the decline in revenues from companion diagnostic co-development due to the changes in our clinical NGS strategy announced in October. As for 2020, we have announced a balanced outlook that sets out realistically ambitious goals that capitalize on growth opportunities in our Sample to Insight portfolio, while also addressing the challenges that carry over from

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As the first key message for today, net sales for the fourth quarter of '19 were $413.5 million and rose 4% at constant exchange rates, CER, and this was ahead of our outlook for 3% CER growth. Adjusted earnings per share were $0.48 at constant exchange rate and also on a reported basis. This was once again above our outlook for $0.45 to $0.46 per share.

My second key message for today is that we delivered on the sales outlook for the full year 2019 and also exceeded the target we had set for adjusted EPS. Net sales '19 were $1.53 billion, raising 4% at CER against our target for growth at the same rate. The drop in companion diagnostic co-development revenues related to our strategic decision in NGS cost us about 1 percentage point of incremental growth.

Adjusted EPS was $1.43 per share and $1.46 at CER. This was better than the outlook we had set for $1.43 to $1.44 per share at constant exchange rate. The reported results included, as we disclosed last year, a pretax charge of $302 million on operating results for the measures we announced in October regarding our decision to stop internal development of NGS instrumentation in light of our new partnership with Illumina. We have also advanced other efficiency measures during the last few months, and this helped to increase the adjusted operating income margin to 27.6% of our sales.

As the next key point, we made good progress during '19 on improving our Sample to Insight portfolio. As you saw recently, in our press release from early January, we reached a new milestone with more than 2,500 cumulative placements of the QIAsymphony automation system. This has really become a steady and consistent growth engine for QIAGEN, in particular as an anchor to our leadership in sample processing, and we continue to plan for more than 200 new placements in 2020.

Although we saw a slowdown in the fourth quarter in QuantiFERON latent tuberculosis test sales, which was due mainly to adverse trends in the Asia Pacific region, the test had a full year sales growth of 10% CER in '19. A key development of the fourth quarter was the U.S. regulatory approval of this asset for the use of DiaSorin LIAISON system, which had previously received European clearance back in 2018.

Our portfolio of products for use in next-generation sequencing achieved our goal for $180 million in '19, supported once again by the third consecutive year of double-digit CER growth in our bioinformatics business, which is now known as QIAGEN Digital Insights.

And as the last key message, we provided yesterday our outlook for 2020, and this is clearly aligned with what we discussed with you all in our Q3 earnings call. Net sales are expected to grow about 3% to 4% CER for the full year. As I mentioned before, we have set targets that balance growth opportunities in our portfolio with our challenges. In particular, the ongoing weakness of our China business and expectation for a further reduction in revenues from companion diagnostic co-development due to the changes in our next-generation sequencing strategy. But at the same time, we expect the expanding menu for QIAstat diagnostic to drive further placement and the FDA approval on the DiaSorin workflow to translate into a good conversion of QuantiFERON-TB testing in the U.S.

Finally, we also believe that our universal NGS portfolio will deliver double-digit growth in '19 as we expand our offering.

Adjusted EPS is expected to be about $1.52 to $1.54 per share at CER as we continue to improve operating efficiencies and maintain our strategy for very disciplined capital allocation.

And now I would 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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Yes. Thank you, Thierry. Good afternoon to those of you in Europe, and good morning to those of you in the U.S. I would like to go over our key financials for the fourth quarter and for the full year 2019.

Net sales in the fourth quarter of 2019 were USD 413.5 million. This was a 4% increase at constant exchange rate and above our outlook for about 3% CER. Sales growth on a reported basis was 3%, and this was due to some modest adverse currency headwinds coming from a combination of currencies, including the euro, Turkish lira and South Korean won.

For the full year of 2019, net sales were USD 1.53 billion, rising 4% CER over 2018. On a reported basis, sales growth was 2%, absorbing about 2 percentage points of currency headwind.

Moving down the income statement. Adjusted gross margin rose nearly 2 percentage points to 71.6% of sales in the fourth quarter of 2019 from 69.8% in the year-ago quarter, supported by the solid performance of our higher-margin consumable business with 7% CER growth. For the year, the adjusted gross margin was 71%, compared to 70.7% in 2018, which remains at a strong level, especially as we are supporting multiple new product launches.

Adjusted operating income in the fourth quarter was 16% to USD 138.6 million, showing significant improvement over the same period in 2018, in part due to the savings generated by the change in orientation of our NGS strategy and targeted efficiency programs. This included discontinuation of our own NGS instrument development programs, which freed up about USD 30 million on a full year run rate, which is partially being reinvested.

The adjusted operating income margin was 33.5% for the fourth quarter of 2019, up from 29.6% in the prior year period. For full year 2019, adjusted operating income was 5% to USD 421.8 million from $403.3 million in 2018. This resulted in an adjusted operating income margin of 27.6% for 2019, compared to 26.9% in 2018.

Adjusted earnings per share in the fourth quarter of 2019 were $0.48 at constant exchange rates and they were also $0.48 on an actual basis. This was well above our outlook for $0.45 to $0.46 at CER. For the full year, adjusted earnings per share were $1.46 at CER, and the adverse currency headwinds reduced this by $0.03 to $1.43 on an actual basis.

As we mentioned earlier, we announced an approval that restructuring charges would be taken primarily in the third and fourth quarter of 2019. The vast majority of these charges were an outcome of our new partnership with Illumina and our decision to discontinue development of future NGS-based instruments. Other charges were taken as part of a decision to shift our production organization into a regional structure and also to expand activities at our QIAGEN business service centers in Poland and the Philippines.

As a result of these initiatives, we took a pretax restructuring charge of $24.9 million on operating income for the fourth quarter of 2019. This means we took a total charge of USD 302 million on operating income in results for 2019. The majority of this charge were about 68%, involve noncash charges, primarily due to the decision to discontinue NGS instrument development. In terms of cash flow, operating cash flow declined for 2019 to $330.8 million, compared to USD 359.5 million in 2018. Among the key factors were cash payments for the restructuring initiatives and higher tax payments in part to sales tax audit for prior years that were accrued for in the past.

Excluding the cash restructuring payments for the measurements announced in October 2019, operating cash flow was USD 368 million. Investments in property, plant and equipment were also higher in 2019, rising to USD 117.9 million from USD 109.8 million in 2018. This was mainly due to investments to build up manufacturing capacity to support new product launches. As a result, free cash flow declined to USD 212.9 million in 2019 from $249.7 million in 2018.

Moving to the balance sheet. At the end of 2019, our leverage ratio stood at 1.6x net debt-to-EBITDA. This was slightly higher than the level of 1.4x at the end of 2018. We continue to see QIAGEN is having a very healthy balance sheet, which can absorb more leverage to support business expansions initiatives as well as share repurchase programs aimed at increasing returns.

I would like to now review sales results based on our 2 product categories, our customers in the Life Science and Molecular Diagnostics and our geographic regions.

In terms of product categories, sales of consumables and related revenues rose a strong 7% CER to $364 million in the fourth quarter and represented 88% of sales. This was largely in line with the trend for the full year 2019 with sales up 6% CER to USD 1.35 billion and representing 89% of sales.

Instrument sales, on the other hand, were down 16% CER to USD 49 million in the fourth quarter of 2019 and represented 12% of total sales. For the full year, instruments were down 5% CER in 2019 to USD 172 million and represented 11% of total sales. The sales decline was expected and was due to our decision to strategically change the orientation of our GeneReader NGS system and also due to the reduced revenues from third-party instrument service contracts. At the same time, we are seeing good trends in reagent rental agreement, which instruments are placed with consumable contracts instead of capital equipment purchase. This should translate into solid gains in consumable sales in the future.

In the molecular diagnostics customer class, sales for the fourth quarter of 2019 was 3% CER to USD 198 million and represented 48% of total sales. Here, we saw mid-single-digit CER gains in consumables and related revenues, but also a double-digit CER decline in instrument sales. As we mentioned earlier, a key negative factor was a 2019 decline in revenues from companion diagnostic co-development project for pharma companies. This revenue fell 54% CER to $9 million in the fourth quarter of 2019. Excluding these specific revenues, molecular diagnostic sales were up about 10% CER in the fourth quarter.

For the full year 2019, molecular diagnostics sales were up 4% CER and also represented 48% of total sales. The growth was weighted down by a 27% CER decline in companion diagnostic co-development revenues to USD 42 million. Excluding these specific revenues, molecular diagnostics sales were up about 7% CER for 2019.

The Life Science customer classes saw ongoing solid trends in the fourth quarter with sales rising 4% CER to $216 million and representing 52% of total sales. For the year, Life Science sales were up 5% in 2019 to USD 789 million and also represented 52% of total sales.

Within the life sciences, sales to pharma customers rose 5% CER in the fourth quarter on mid-single-digit CER growth contributions from consumables and related revenues and, in particular, benefited from the expansion of our universal NGS portfolio. Sales in Academia/Applied Testing customer class were up 3% CER.

I would like to now review the results in our 3 geographic regions. The Americas region led the performance in the fourth quarter of 2019, rising 7% CER to USD 180 million and representing 44% of sales. [U. S.] delivered growth in line with this region, supported by double-digit CER gains in Mexico. For the year, the Americas grew 5% CER, reaching USD 722 million and providing 47% of total sales.

The Europe, Middle East and Africa region was 5% CER to USD 146 million in the fourth quarter and represented 35% of total sales. We saw improving trends in a number of Western European countries, in particular, France, United Kingdom and Germany and also solid trends in Turkey. However, we saw double-digit CER declines in Italy and Switzerland. The drop in Italy was related to the change of the TB distribution strategy in Italy in the fourth quarter of 2018 to DiaSorin. For the full year, sales in the region were up 5% CER to USD 487 million, and drove 32% of total sales.

The ongoing decline in China as well as a significant slowdown in Japan in molecular diagnostics were the key reasons for the Asia Pacific, Japan region showing a 4% CER decline in sales to $87 million, $87 million for the fourth quarter of 2019. As you may recall, aside from the discontinuation of our China GeneReader joint venture, we also had issues when some of our distributors saw a slowdown in payments coming in from their own customers and hospital and laboratories. During the fourth quarter of 2019, we put monitoring plans in place to address this issue. For the year, growth in the Asia Pacific/Japan region slowed to 2% CER, reaching USD 314 million and representing 21% of sales.

I would like to now hand back to Thierry.

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [5]

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Thank you, Roland. Thanks a lot. And I would now like to give you an overview on the portfolio updates for the fourth quarter.

So building on our collaboration with DiaSorin, as we said before, we received FDA approval in November 2019 for the automated workflow of the QuantiFERON-TB Gold Plus test on the DiaSorin LIAISON system in the U.S. This workflow offers streamlined laboratory automation for latent TB screening and supports further conversion from tuberculin test to our modern blood-based QuantiFERON technology. We see this as the best large-scale solution available for latent TB testing.

Our companion diagnostic co-development business with pharma is going through a transition period due to the change in our NGS strategy. But I would like to insist that we continue to attract a lot of business based on our track record in creating PCR-based test and an industry-leading platform with QIAsymphony and RGQ. As a recent win, we entered a strategic agreement with Amgen to develop tissue-based companion diagnostic for their investigational cancer treatment to identify patients with cancers that have the KRAS G12C mutation. This agreement focuses initially on companion diagnostic for non-small cell lung cancer, but we allow for further development of tests for Amgen's other clinical development programs.

In another partnership, we have expanded our collaboration with LabCorp regarding their use of QIAGEN Digital Insights solution. The agreement now includes an extension of their current QIAGEN clinical insight license with our human gene mutation database in order to improve identification and interpretation of genetic variants within inherited diseases. This expansion builds on the existing 7-year relationship between the 2 companies to develop, introduce and support new diagnostic test.

In the area of portfolio expansion, still, we have launched the new QIAseq multimodal panels to complement our existing universal NGS solution, which can be used with any sequencing platform in the world. This is currently the only solution that can be used to extract and reach and sequence DNA variants and RNA fusions as well as to assess gene expression in a single workflow from a single sample.

In support of both NGS and PCR application, we have launched an upgraded version of the GeneGlobe design and Analysis hub. This combines curated knowledge with content-based assays and analysis. It also provides a tool to life science researchers for the complete cycle of biomarker target exploration, custom panel configuration and ordering as well as data analysis and planning of follow-up experiments.

In bioinformatics, the integration of N-of-One is now completed, and QIAGEN Digital Insight has expanded this selection of services to Europe. QCI Precision Insights now includes EMSO guidelines and EMEA-approved oncology drugs and is available in Europe for molecular pathologists, oncologists and medical geneticists.

Next, QIAstat Diagnostic has made good progress as a platform offering fast, cost-effective and flexible syndromic testing. Just over a year after launch in the European market and just over half a year in the U.S., we are already about to reach 1,000 total cumulative placement. That represents an average of 200 placements per quarter.

Also showing solid placement raise is the Qiacube Connect platform, providing automated sample preparation to serve the lower throughput needs of laboratories. Qiacube is very ideally complement to QIAsymphony, and Qiacube Connect was launched in early 2019 and has already reached over 660 placements. This platform is the next-generation of QIAGEN's widely used Qiacube instrument, which has over 8,000 placements worldwide. Indeed, the consistent growth of QIAsymphony and Qiacube Connect underscore the strength of our sample prep technology portfolio.

Moving into 2020, we have some key new products that we expect to complement existing portfolios and contribute to our top line this and for the coming years. A notable opportunity is obviously our entry into the digital PCR world. We are on track for a mid-2020 launch of our mobile instrument which will be branded as QIAcuity.

During prelaunch previews, we have received positive feedback from customers and have even taken first orders. This fully integrated digital PCR workflows will be supported by hundreds of QIAGEN assays and are designed to deliver key advantages for 1 of the fastest-growing areas in the life sciences industry.

Our unique nanoplate technology has been created to offer a cost-effective way for labs to have faster and easier access to this technology. We are seeing, as I said before, a very positive initial market response. Interest in early access is running very high, and the first order is already in place from a major U.S. pharma company. The features of our QIAcuity solution will meet the needs of current digital PCR users and enable us to accelerate conversion from the merged larger quantitative PCR market.

In Molecular Diagnostics, QIAstat Diagnostic is really having a growing impact in the syndrome testing market. We will continue to drive growth in the installed base with the release of 2 new panels of -- in 2020. The GI panel, gastrointestinal, already marketed in Europe, has been submitted to the FDA in December and, therefore, is expected to launch in the U.S. this first half of the year. In Europe, the meningitis finally is on track for commercial launch in the first half of 2020 as well. Each menu addition, obviously, adds value for more customers by delivering capabilities for additional indications.

In the QuantiFERON-TB franchise, we are ready to support expansion of modern TB testing into low-resource, high-burden areas with the release of our QuantiFERON-TB access solution. This new system is designed to advance tuberculosis control in areas with limited infrastructure using a device that avoids the need for cold chain, a computer or a continuous power supply. QuantiFERON Access is expected to launch in the last part of 2020 as CE-IVD solution, adding to QuantiFERON-TB's momentum.

And now I would like to hand it over 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, Thierry. I would like to now review our outlook for 2020 and for the first quarter of the year. As noted earlier, our outlook for 2020 calls for net sales growth of approximately 3% to 4% CER growth. The sales outlook takes into consideration overall growth in QIAGEN Sample to Insight portfolio, partially offset by significant headwinds from our anticipated double-digit CER decline in companion diagnostic co-development revenues due to the new orientation for our NGS strategy. The outlook also takes into consideration expectations for lower sales in China in the first half of 2020, mainly due to the slowdown in orders from distributors that began in mid-2019 and the end of the China-NGS joint venture announced in 2019.

While we are seeing an increase in global demand for solutions that can be used for the coronavirus testing, we have not included it in our outlook for 2020 given the uncertainties and disruption at this time to overall business trends in China. Furthermore, this outlook does not take into consideration any future acquisitions, including the potential acquisition of the remaining stake in NeuMoDx for approximately USD 234 million through the option that expires in mid-2020. Our outlook for adjusted diluted EPS is $1.52 to $1.54 CER per share, which grew over 2019 at a significantly faster pace than sales growth. We intend to invest some of the savings from stopping the NGS instrument development programs into the business, but also led some drop through to improve operating profitability.

As for currencies, based on rates as of January 31, 2020, in terms of net sales, we expect a currency headwind of about 1 percentage point on results at actual rates. For adjusted EPS for the full year, we also expect a currency headwind of about $0.01 per share. For the first quarter, our outlook is for total net sales growth of about 2% to 3% CER. This is driven by expectations for solid growth in the Life Sciences, along with underlying improvements in Molecular Diagnostics that are already overshadowed by the adverse trends expected in China and from the companion diagnostic co-development revenues.

Adjusted diluted EPS is expected to be about $0.28 to $0.29 per share at constant exchange rates. In terms of currency impact for the first quarter, based on rates as of January 31, 2020, we expect headwinds of about 1 to 2 percentage points on net sales growth and up to about $0.01 on adjusted EPS.

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

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [7]

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Thank you, Roland, and thank you all for your attention. Before we move into the Q&A session, I'd like to summarize quickly the content of our call.

First of all, and it was really of crucial importance not only for Roland and myself, but the rest of the Executive Committee and the entire company, we delivered on the sales outlook for the fourth quarter and full year 2019, and we delivered on what we committed to in our last call together. Good underlying growth across the portfolio was hindered by business trends in China, as we disclosed in Q3 last year that began in mid-2019 and the reduction in revenues from NGS-based companion diagnostic co-development project. But this is part clearly of our strategy for NGS as we disclosed this in '19 and our partnership with Illumina.

We also exceeded our target for adjusted earnings, supported by savings generated through our change in NGS strategy and other efficiency measures. And I insist that this is also something which is crucial for Roland and myself. Whatever our top line results, we always commit, obviously, to deliver on our improvement of profitability.

Additionally, we continue to have a clear focus on value creation, anchored by our commitment to disciplined capital deployment. And as a last point, we are looking for more growth in sales and adjusted earnings in 2020, taking into account what I call a realistically ambitious approach to setting targets and especially delivering quarter after quarter on our commitments.

With this, I'd like to hand back to John and the operator for the Q&A session. Thanks a lot for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll go to our first question from Bill Quirk at Piper Sandler.

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William Robert Quirk, Piper Sandler & Co., Research Division - MD and Senior Research Analyst [2]

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So first off, 2020 revenue guidance, Roland. Can you talk about some of the major assumptions that are dialed into this? For example, how much of a drag does the previously announced China and NGS changes have to the underlying or how does that affect relative to the underlying growth of the go-forward business? And then separately, we appreciate that you're not including any impact from coronavirus because it's still early. But if we think about this outbreak potentially expanding consistent with some of the leaked data that just came out, any framework for how we could think about the scenarios here?

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [3]

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I suggest that -- thanks, Bill, for the question. I suggest that Roland answers your first question on the assumption, and then I will take the coronavirus question. Roland?

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

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Sure. Yes, Bill. I think, overall, as we said before, we feel reasonably comfortable for the year 2020. It's quite obvious, and that really hasn't changed since our announcement with the third quarter results, that we believe it probably takes us up to 3 quarters to work our underlying China issues, particularly on the molecular side and the life sciences side. Also, the fourth quarter was actually quite reasonable, we had more or less a flattish growth rate here. But it will probably take some time to work some of these inventory situations we see with customers here in China on the molecular side, so I think that is clearly one larger assumption and then I should go back to a more normalized growth rate in the second half of the year.

On the companion side, I think we're clearly expecting somewhere between USD 10 million and USD 15 million headwind this year compared to last year. We finished the year, as we said, with around USD 42 million in revenues, and the whole discontinuation of our GeneReader franchise probably gives us a kind of $5 million to $7 million headwind as well.

You have seen the release that we discontinued a smaller part of our business, NeXtal, which is around about a $5 million franchise, together with some other discontinuations here as well. So this is kind of a headwind factors. At the same time, of course, we have a large launch in mid of this year, (inaudible) before, with digital PCR. QIAstat is clearly something what we expect (inaudible) to double and also our other growth drivers, in particular, QuantiFERON and also owned U.S. should do quite well this year as well.

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [5]

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So, Bill, to the coronavirus, I think it's fair to say that it's a bit premature because, I mean, unlike many companies, we have kept a rather low profile in communication at the moment because, personally, I don't want to overcommunicate when we are faced with a public health challenge. But you can imagine that because of the nature of our portfolio, we are extremely active in providing different institutions in China, but outside of China, I'm talking the CDCs companies in China that are currently providing China with a testing solution with our, for example, sample prep solution, both instrumentation and also consumables.

It's fair to say also that it's our view that QIAGEN is working on different testing solution for the coronavirus on different option, either single plates which is, for us, is our QIAsymphony on NeuMoDx, or -- which is our priority at the moment, a syndromic solution combined with our respiratory panel on our QIAstat solution. And I have in hand the latest analytical performance report on that development, and I'm quite proud to say that QIAGEN would have LDT format test ready in the coming weeks inside -- in the month of February.

So there are pluses and minuses to take into account. But our view that we see an increase of deliveries to -- for some of our extraction and consumables. At the same time, as you know, the economic activity in China has slowed down considerably. It's even difficult now to find flights to deliver into China. I mean it's a real fight week-by-week to make sure that our product can get there. So, so far, a bit premature. There are 2 balanced movement, and we will obviously update as we go. But I wouldn't like to take a bet on this at the moment.

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Operator [6]

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We'll take our next question from Tycho Peterson at JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [7]

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I want to start with QuantiFERON. Obviously, notable slowdown here. Can you talk on trends, both in the U.S., where you're up just high single digits? Has there been any impact on the Quest relationship, given their deal with Oxford? And then more importantly, on the adverse trends in China and Japan? And what is baked in the guidance for QuantiFERON at this point? Should we still think about it as kind of 15% growth business? And then secondly, for Roland, just can you clarify what's embedded in guidance for China on growth? I didn't hear a number for you. And then any update on cost initiatives and how you see the cadence of margin expansion over the remainder of the year?

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [8]

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Okay, perfect. So on QuantiFERON first, I mean, growth profiles per region. So first of all, we still see a very solid growth of QuantiFERON in our North America market. We finished the year close to 17% growth in North America driven by both growth in what we call the national account, including Quest, and also the hospitals. So we have not seen any detrimental impact of the Oxford Immunotec and Quest agreement, and I think that Quest is sticking to what they said many months ago that they will want to continue to offer those 2 solutions to their North American customer.

In Europe, we have suffered from 2 base effect for Q4 2019 -- quarter 2018 to quarter 2019 base effect. Roland explained one of them. You might remember that we had a distributor in Italy, a company called Ada, and we decided to transfer that business to DiaSorin in December of 2018. First base effect.

Second base effect, we also implemented a new distribution network for the Nordic countries in Q4 of '18, and that created a second base effect compared to Q4 2019. The relation with DiaSorin is going well in Europe. It started in Europe, as we have said today. And as you know, when we presented the DiaSorin QIAGEN agreement, we always said that we would probably, in order to protect QuantiFERON and these growth drivers for QIAGEN, we would basically abandon or [divert] a part of our detection revenues to DiaSorin. This is what you have seen a bit in Europe for a limited impact and what's going to happen in the coming months is that we have agreed with DiaSorin to move Europe to a more extensive drop shipment strategy, which will prevent this to happen again in 2020 and coming years.

China is weaker, as we said, still because of that distributor ordering decline due to stocking issues, and we are working on that. I strongly believe that our inventory is too high in China at commercial partners, and we need now to put that into the market. And that's the strategy for the coming months. As Roland said, in QuantiFERON, but also for other activities, this will take probably until the end of Q2 to definitely clean that.

So that would explain the profile in '19. For the coming years, we strongly believe that the QuantiFERON franchise is still a double-digit growth franchise. But now we are closer, as we said in Q3 and also in our New York meeting, close to 10% to 12% growth per year, which mean what, first of all, that when you are on the franchise of more than 216 -- $240 million revenues, double digit, 10 to 12, is still very healthy. And second, it means also that QIAGEN growth is not just QuantiFERON. QIAGEN now has multiple engines of growth that are coming also to relay QuantiFERON. We talked about USGS. We obviously talked about QIAsymphony. We will talk more and more about QIAstat and obviously the digital PCR. Roland, for the second half of the question?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [9]

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Yes. Thank you, Thierry. So first of all, on China. And of course, just to remind you one more time, Tycho, it's -- whatever I'm going to say right now it's clearly excluding the potential upside we might have on a coronavirus, but it also excludes a commensurate downside, which might be due to the general business trends that we at least currently see right now in China because, as you said, it's a little bit too early to commit to any conclusion. But given our models, on our experience out of the certain fourth quarter, it seems the good news is, clearly, the fourth quarter, we have seen an improvement compared to the third quarter in China. As you know, in the third quarter, we had, I think, a minus 26% kind of a growth rate in China. I think in the fourth quarter, it was around minus 8% to 9% growth rate in China. So somewhat improvement. And as I said before, it's more or less all in [external] really not much around life science in terms of negative impact. And we do also expect that we should expect here an improvement more or less quarter-by-quarter going back to what we believe is a new model, which is probably kind of a 10-plus percent growth rate by end of this year. Now we have to see how that falls in now with the overall China effects we see before.

On margins, probably a little bit easier to answer right now. We also expect already that the first quarter we started quite strong in terms of margin improvement. I think we should have at least around the 200 basis margin improvement on adjusted operating margin compared to the first quarter last year. So it's probably 24, 25 percentage points for the first quarter. And also for the full year, I think we should see a nice margin improvement of at least around 75 basis points. It's clearly driven by a change in terms of R&D expenses. We talked about this change in our strategy around the next-generation sequence development. We're going to reinvest some of these savings, again, around about $30 million on a run rate, into sales and marketing activities, particularly around our launch activities. As you know, we have an important one coming out with digital PCR, where we believe we have an outstanding opportunity, and we just want to make right and clear that is supported as well.

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Operator [10]

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

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Stephen Christopher Beuchaw, Wolfe Research, LLC - Director of Equity Research [11]

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I wanted to focus on QIAstat. I wonder if you could speak to, in your modeling for this year and if you're open to it beyond this year, how you think about modeling the QIAstat throughput over time given you had this very rapid growth of the installed base, which naturally grows the denominator. And then downstream of that, how you think about evolving QIAstat to be a higher throughput instrument. What will be the impact of that and what would that mean for the model? And then just one last quick one for Roland. In your assumptions for this year, do you assume that, in the aggregate, that instrumentation revenue can grow?

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [12]

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Okay. I will take the one on QIAstat, and I hope that I understood what you really mean by throughput here. So it is obvious that we are pleased with the development of the installed base. We said close to 1,000 system. It's a good growth by quarter. It's a growth by quarter, which is comparable to the one of our main competitor, BioFire, but we do that with less menu.

As a reminder, we have 2 tests approved in Europe, and we have one test respiratory panel in North America. This, obviously, installed base give us a serious leverage as soon as we are going to launch more menu. So first test in Europe, meningitis; a second test in the U.S. with GI. With this in mind, we really believe that QIAstat should double the performance that we achieved in 2019, which was around $15 million and reach around $30 million. This is completely logical with adding those revenues and the growth of the market itself. We are already obviously thinking about higher throughput generation. We have, as a matter of fact, conducted an intense market surveys around different solution for -- in the last week. So we know exactly the design of the system we want to bring to the market. This system will not hit the market probably before I would prefer to say at the end of 2021 because it takes some time, obviously, to develop it. So for the profile of that franchise, I would refer to what we said in New York, which was, if you remember, combined revenues of around 150 million for NeuMoDx and QIAstat. And I always highlighted that on that QIAstat by 2023 should be around $100 million.

So it's coherent to what we said. I think it's potentially beatable. We will continue to bring new assays on the platform as years goes, such as pneumonia, the blood culture positive ID panel. And we are also, as I said before, working also on an oncology development as well to extend the potential beyond infectious diseases. As a last thing, I just alluded to our 2023 guidance in New York between NeuMoDx and QIAstat, I remind you all that the number that we gave today for the guidance '20 is without the NeuMoDx acquisition and it's just a distribution of NeuMoDx as it is now. Does it answer your question?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [13]

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Yes. In terms of instrumentation growth rate, I think we will see quite some change over the course of the year. And the factor for that is actually twofold. First of all, of course, right now, we have a significant portfolio of products. On the one hand side, we are -- you see a larger shift to reagent rental. And that's one thing. And the second topic, of course, is we still have to digest more or less the discontinuation of our GeneReader franchise here. But the second topic, which is probably much more important, is we also expect that the digital PCR platform is a much more straightforward capital sales. So a long answer short, we expect probably for the year an overall implementation growth rate in line with the company growth rate, but coming from a lower number in the first half of the year.

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Operator [14]

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We'll take our next question from Doug Schenkel at Cowen.

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Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [15]

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So really, just a few cleanups to make sure we're understanding some of the embedded assumptions in guidance correctly. First on QuantiFERON. And of course, this is really important given the long-term importance to your growth profile and in focus, given the performance in the fourth quarter. So I just want to confirm, I think you said this in answering Tycho's question, but I just want to confirm that you're assuming QuantiFERON growth will be nominal in the first quarter due to the tough comp and a continuation of what you saw in the fourth quarter and that for the year, you're assuming less than 10% or around 10% QuantiFERON growth? And then the second thing as it relates to QuantiFERON. The long-term target of 10% to 12% that you talked about, I just want to make sure that means the $400 million revenue target for 2023 that you outlined at your Analyst Day last summer is no longer on the table. And then on HPV, the last part, based on your commentary last night, it looks like global HPV sales were actually over $50 million for the year, which I think would actually represent growth versus 2018 for that franchise. Could you just talk about why that business is holding up better than expected and what you've embedded into 2020 expectations?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [16]

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Yes, let me take that.

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [17]

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So, very quickly, Roland, we can -- do you prefer to take it, Roland, or do you want me to take it?

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Roland Sackers, QIAGEN N.V. - CFO, MD & Member of Management Board [18]

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It doesn't matter. Let me start with HPV to get it off our way, and then we go from there. Yes, as we said, HPV actually was above $50 million. Yes, it was roughly a $55 million franchise for 2019. So we clearly, I would say, have seen here some impact, but I think it's also fair to say that we expect here some headwinds also in 2020. So I think our overall assumptions on HPV is still there, where we always said. But again, as you can see, it is also a business, which clearly has still quite some acceptance with customers. But as I said, strategically, I would expect here also headwind for 2020 coming up. Pass it on to you, Thierry?

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [19]

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Yes, for QuantiFERON, so the last thing on HPV, Roland, let's not forget that HC2, our technology, is still recognized as a gold standard on the market. So to your question on why sometimes we are not declining as fast is that because as Roland said, some key accounts, especially around the national accounts in the U.S. are still using the technology and our solution. But we still bet on a decline overall year after year.

For QuantiFERON, I confirm that we believe that 2020 will be around the double-digit growth, 10% in that adjustment of growth. We are in the long-term to 2023 probably just a bit short of $400 million. But I'm still optimistic that this number is achievable for 2 reasons. Because the guidance at $400 million we gave in New York did not really fully factor the potential impact of our LIMS assays that we are still developing with our friends at DiaSorin. And as you know, we want to have that solution available at least for the European market by 2021. And the second thing is that this $400 million number doesn't fully, fully take into account the potential of the QuantiFERON access for latent TB. It is very difficult to assess the exact potential in high-burden, low-resource countries. So we prefer to take a conservative stance, but this is why I believe it's still within reach, yes.

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Operator [20]

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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 [21]

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First one was on the strategic review. You announced the process following the third quarter call. So I was hoping to get some insight on the review. I know you recently discussed at a broker conference how you decided, I think, after extensive Board review to walk away from the process because discussions did not fulfill your criteria. So could you just elaborate a bit what the criteria were that didn't get met? Was it price or other factors, which you can kind of highlight from a high level? And also, what factors could potentially lead the Board to reengage with interested strategic parties? In particular, we understand there is no standstill agreement put in place post the conclusion of the discussions. And then just one follow-up on China. I know you've already addressed some issues there. But related to the distributor destocking issue, where you highlighted there were some factors with the hospitals and lab customers that led to that? It's not exactly clear what drove that. Could you just elaborate a bit was it QIAGEN-specific? Was there something industry-wide regulatory? And kind of what's the visibility for this issue to be resolved?

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [22]

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Well, the first part on the strategic discussion. So as we said many times, our Board is obviously fully aware of their fiduciary responsibility, and they will continue to exert that fiduciary responsibility. One of the key factors for the strategic discussion that we had in November and December is clearly deal visibility and deal feasibility. We always said that we didn't want to have a kind of Damocles sword on QIAGEN for many months with no visibility on the deal. And I think that the recent example of Illumina and PacBio proved that we are quite right on that.

For China, we said that, as you know, our distribution is mainly, not 100%, mainly done through distributors, what we call commercial partners at QIAGEN. And what we explained is that in the Q2 of '19, hospitals started to pay those distributors with delays. And as a consequence, as a spillover effect on QIAGEN, those distributors decreased their orders to QIAGEN. At the same time, as we said as well, we realized that we had some stock inventory issues at those distributors, and we prefer to clean that, and this is what we said it's going to take before, between probably 2 to 3 quarters to solve that. I think, as I said also in our Q3 call, the Chinese market remains largely attractive. It's a very good market, IVD only, in-vitro diagnostic, it's at least a $4 billion market now. It's still growing at double digit. The only thing is that before we were saying -- the market was saying it probably grows at 20% per year. My assumption is closer to 10% to 15% now. So it's still a market where QIAGEN will continue to invest.

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Operator [23]

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We'll go next to Scott Bardo at Berenberg.

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Scott Bardo, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [24]

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So the first question, really, a follow-up on the topic of the takeover. I think that, normally, when a Board and a company walk away from several takeover approaches in preference for standalone strategy, it's usual for the Board and a company to communicate the standalone proposition of the company to the financial markets. Now taking into consideration that the company has deviated from the last midterm plan in June, both in fiscal '19 and reflected in your guidance this year, should we now expect a communication from the company about realistic medium-term perspective to create value? That's question one, please. Second question, a specific question on NeuMoDx. There's not been much focus on NeuMoDx within the presentation today. I wonder if you can give us an update as to how that's performing in Europe, how the legal challenges with Becton Dickinson are going and what your appetite to have this asset is, please?

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [25]

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So I propose -- thank you for the question. I propose I will take NeuMoDx and Roland, if you want to step in for the first part of the question on the strategic discussion. NeuMoDx, we still see a very favorable acknowledgment, and welcome by not only European customers, by the way, but we also put the system in many Asian countries. But as we disclosed as well in Q3, we were expecting to have access to the HIV test much sooner. We were expecting that test in 2019, and it didn't come, and it's of particular relevance because especially when you answer to tenders, for example, like in Europe, you need to answer with a full, what we call blood borne viruses panel, which is HBV, HCV, HIV. We had the HBV. We have the HCV. We didn't have the HIV. We couldn't run for those tenders.

But again, the customers are really thinking that it's a differentiated platform and it's an added value platform. So as you know, we have an option to finalize the acquisition of the remaining 80% of shares of NeuMoDx. This is still a solution that we really promote on the market. This is still a solution that we really like. At the same time, we want to clarify the deliverable of milestone, especially in menu and also the clearing of the situation with Becton Dickinson before taking the final decision. Roland?

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

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Yes. Thanks for the, Scott, very thoughtful question, I guess. I think our communication on December 24 was very straightforward. At the same time, I think Thierry was very straightforward what he just said seconds before that our responsibility -- that our Board clearly knows about their fiduciary responsibilities. I think I would like to add on that, that clearly, our Board is also well aware about their disclosure responsibilities as well. And I think this is exactly what we're doing right now. I think we came forward with the guidance for the full year. I think that is something we've put out the plan as it is as of today, and that is something where we want to deliver on and take it from here. As you heard both of us saying today we clearly want to bring the company back to a trajectory where we're going to meet and hopefully beat our targets over time. And I think that is the main focus for us.

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Operator [27]

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We'll go next to Brian Weinstein at William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [28]

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A couple from here. Just first, can you just update us on the CEO search, timing and any thoughts there? And then second, the portfolio in general. Is there any additional pruning that you guys are considering ahead of that? And you mentioned that there was an opportunity to potentially take leverage up, so is there a willingness to do any deals right now? Or is that completely off the table for the time being?

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [29]

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So on the CEO search, I mean, as I said many times, as you know, the decision is in the hands of the Board. I reaffirm that it's a very healthy process for a company of that size and of that brand to have competition between different solution outside or inside of QIAGEN.

What is important to me at the moment is that there is a team, there is an executive team, and there is a CEO in place. And that being said, I expect that process to be over by Q2 of this year, as we always said. As regards to pruning the portfolio. We always said also that we are a mid-cap company. And as a mid-cap company, I really believe that our priorities would be to focus and focus and focus again only where we can take meaningful leadership position. We are not here on the market to mimic what the bigger companies are doing.

So in this mindset, everything which not considered as completely contributing to that objective of always taking leadership position will probably be divested at QIAGEN. You have seen recently that we announced the sale of our NeXtal activities. That's a typical example.

Now as far as deal-making for the future, I mean, any time it's going to make sense for QIAGEN, which is one, reinforcing our portfolio either in life science, molecular or what we call Digital Insights now. And whenever it's going to be accretive very quickly for QIAGEN, we are always open to talk, but it has to be completely coherent with what we have. It has to reinforce what we have, and it has to allow us to take those leadership position on the market.

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Operator [30]

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We'll go next to Daniel Arias at Stifel.

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Daniel Anthony Arias, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [31]

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Thierry, has Illumina outlined the way in which the sequencing assay collaboration will work now that they're also aligned with Roche in that area? What's the specific focus or division of labor there? And then just secondly, Roland, if you mentioned it already, apologies, but did you state the revenue expectations for digital PCR this year, if there are any?

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [32]

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Okay. Roland, can take the answer on digital PCR. It's a very simple one. Roland?

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

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Yes, sure. No, we haven't stated it. And again, it's a little bit too early, but I do believe that depending a bit on the launch date that it should be, again, high 7-digit, low double-digit or 8-digit million-dollar amount.

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Thierry Bernard, QIAGEN N.V. - Interim CEO, Senior VP & Head of Molecular Diagnostics Business Area [34]

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Yes, taking into account that the solution will be fully launched in the second half of the year. So and to your first question to Illumina. So you remember that we always said that we were bringing 2 companies, 2 expertise together. One is instrumentation, so it's Illumina, second is -- another one is sequencing chemistry. And I insist on this one, expertise in companion diagnostics and ability to bring those companion diagnostic to PMA approval or to regulatory approval. This is the essence of the deal with Illumina.

We always said as well that our priority on that deal was, first and foremost, companion diagnostic, and this is where we are currently focusing. We also disclosed that our relation with Illumina was pan application. You remember, we said first focus oncology. Inside oncology, companion diagnostics, but we had right for infectious diseases and other applications like autoimmune.

What I know from the Roche-Illumina agreement is that, that agreement is restricted to oncology, but this is my reading. So I'm not making comments here, but the reading is that it's restricted to oncology. So I see the QIAGEN-Illumina agreement as larger.

But again, first focus is companion diagnostics. This is what we said today and also in Q3. Because we believe that the right strategic decision for QIAGEN to take, because it's freeing up resources for other more meaningful investments, we have accepted to see a decrease of our NGL-based companion diagnostic revenue for probably 2 years to 2.5 years, and we will progressively feel that decrease with our companion diagnostic solution with Illumina. And we always said that we expect the first companion diagnostic with Illumina to come by the Q4 of 2020.

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John Gilardi, QIAGEN N.V. - VP of Corporate Communications & IR [35]

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Okay. With that, I'd like to end the call. We've run a little bit long, but we wanted to get to your questions. Thank you very much for your interest in QIAGEN, and please do not hesitate to contact the IR team if you have any questions or comments. Thank you.

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Operator [36]

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