Qiagen NV (QGEN)

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QIAGEN N.V. (QGEN) 1Q 2012 Earnings Call April 24, 2012 9:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to QIAGEN N.V. investor and analyst conference call on the Q1 results 2012. (Operator instructions) I would not like to turn the conference over to Albert Fleury, Director Investor Relations and Corporate Finance NA. Please go ahead, sir.

Albert Fleury

Thank you. Good afternoon and good morning to you in the U.S. and welcome to the QIAGEN conference call to discuss our latest quarterly results. Joining me on the call this morning are Peer Schatz, Chief Executive Officer, Roland Sackers, Chief Financial Officer, and John Gilardi, Vice President, Corporate Communications and Investor Relations. A copy of this announcement and the presentation for this conference can be downloaded from the Investor Relation’s section of our home page at www.qiagen.com.

Before I turn the call over to Peer, please keep in mind that the following discussion and responses to your questions reflect management’s view as of today, April 26, 2012. As we share information to help you better understand our business, we will make statements and provide responses 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 involve certain risks and uncertainties that could cause QIAGEN’s actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For a complete description of the risks and uncertainties, please refer to our Form 20-F filed with the U.S. Securities and Exchange Commission.

At this time I’d like to now hand the call over to Peer.

Peer Schatz

Thank you, Al. Good morning to all joining us from the United States and good afternoon to all joining from Europe. I’d like to welcome you all into our conference call and the opportunity to discuss our results for the first quarter of 2012. As you saw in our release last night, we are pleased with our start into 2012 and improving demand for our products across all customer classes and regions. And sales were $296 million representing a 13% increase at constant exchange rates.

Adjusted operating income rose 14% to approximately $80 million and adjusted diluted earnings per share rose to $0.23 per share. These results led by double-digit growth in all regions and also contributions from all customer classes were ahead of our targets. What were the reasons? Demand for our product among customers and Pharma Applied Testing and Academia improved better over the first quarter of 2011, a period that was adversely affected by the disasters in Japan as well as unrest in Northern Africa.

We also saw solid gains among our growth drivers in molecular diagnostics. These include companion diagnostics for personalized health care. These areas are contributing more than $75 million in sales across QIAGEN and growing rapidly. We’re also seeing solid growth for our disease profiling tests. Growth in this area is further underpinned by the success of QIAsymphony. HPV sales were flat in the quarter. As we have said, HPV is not expected to be a growth driver in 2012, however, remains a solid foundation for our expansion in molecular diagnostics into the growth driver areas that include personalized health care and profiling.

In terms of the 13% constant exchange sales growth, about 7% percentage points came from the Celestus and Ipsogen acquisitions completed in the third quarter of 2011. The rest of business delivered 6 percentage points, so we’re seeing signs of improvement over 2011. A key driver has been the progress we have been making on our strategic initiatives to drive platform success, to add content, to broaden our geographic presence and to grow efficiently and effectively.

Important developments in the first quarter of 2012 included the first regulatory clearance of a QIAsymphony component in the United States, the Roto-Gene Q real-time PCR cycler and in China we received approval for the second of three components, in this case, the QIAsymphony SP module.

In terms of adding content, we are preparing for the U.S. approval of the KRAS biomarket tests. FDA decisions are expected during 2012.

And we are improving our efficiency and effectiveness. The efficiency program launched in late 2011 is making good progress and we are now implementing projects that are freeing up resources to reinvest. Also in our press release we announced some organizational leadership changes. Effective July 1, we are creating two business areas; Molecular Diagnostics and Life Sciences. I will touch on this topic later.

Moving to Slide 5, I wanted to show you how we view the various contributors to our performance; Molecular Diagnostics which represented 47% of QIAGEN sales rose 21% on the constant exchange rate basis. We are to invest even more in our rapid growth drivers. These include personalized health care, profiling and QuantiFERON-TB test. These and other products together delivered 37% constant exchange rate growth and represented 29% of our sales.

As I mentioned earlier, we are seeking to maximize the value of our HPV franchise. We had flat sales in the first quarter of 2012, both in the U.S. and globally and this product now represents 18% of net sales globally. In the United States the contribution is fallen to 14% of sales in the first quarter of 2012 compared to 16% in the first quarter of 2011.

I want to reaffirm a few statements. First, no HPV competitor has come out with a better product, neither in terms of clinical data nor in terms of automation. Most, in fact, have significantly inferior clinical profiles. Second, HPV is valuable in providing critical mass in building relations with customers. We are determined to maintain our HPV leadership and are successful in doing so, as we have a very strong, competitive offering. Third, we believe our rapid growth drivers should more than outweigh any concerns in 2012 about lower HPV sales in the United States.

Turning to the life sciences, which involves the Academia, Pharma, and Applied Testing customer classes, here we are focusing on new opportunities. You can see that Applied Testing and Pharma both delivered very robust, double digit growth in the first quarter of the year. Academia was also a contributor, amid improving trends albeit with growth at a much slower pace than in the past. We are still seeing uncertainties about funding in Academia going into the second half of the year and in 2013, both in the U.S. and Europe.

Overall this performance gives us confidence about accelerating full year growth in 2012 over 2011. As for our full year guidance, we see it as a balanced, taking into account the opportunities and risks we see. What we can say at this time is that we are increasingly confidence of achieving the guidance and we will review it accordingly as the year progresses.

I would like to hand over to Roland for a review of our financial performance. Roland?

Roland Sackers

Thank you, Peer and good afternoon to everyone in Europe. Good morning to those joining from the U.S. As you heard from Peer, we have started the year with good momentum and are committed to accelerating our full year growth in 2012, over our results in 2011.

Today I will briefly talk about our performance in the first quarter, before providing you with an update on our outlook on the rest of the year.

On slide 6, you'll see our key results for the quarter. Net sales grew rose 13% at constant exchange rates to approximately US$296 million. Consumables sales were up 14% using constant exchange rates, while Instruments rose at a slower 5% pace, using constant exchange rates, in the period.

Adjusted gross profit rose 10% to approximate US$210 million. The adjusted gross profit margin was 71% for the first quarter of the year, down slightly from 72% in the first quarter of 2011.

As you may recall, the adjusted gross profit margin in the fourth quarter of 2011, was 69%. We saw this as a normal way to slip below 70%. That census was due to specific factors in that period, namely the gross margin on companion diagnostic co-development payments that were booked as revenues. As you can see, we've returned to a level above 70%, and are on track to meet our full year target of an adjusted cost margin of between 70% and 71%.

I also want to highlight that (inaudible) adjusted gross profit margin while driving rapid of QuantiFERON-TB test. When it is manufactured by a third party it has gross margin below the (inaudible) consumable average. Adjusted operating income was 14% to approximately US$80 million from the first quarter of 2011 and the adjusted operating margin remains steady at 27% of net sales.

As a percentage of net sales, higher manufacturing and sales costs were essentially upset by lower spending on R&D, marketing and administration. Adjusted diluted earnings per share were $0.023 in the first quarter, up from $0.21 in the same period of 2011. (inaudible) despite a higher adjusted tax rate. First quarter of 2012 compared to 26% in the same period of 2011.

I also want to note there the difference between the reported tax rate, which was 14%, and the adjusted tax rate. The difference was due mainly to a much higher tax rate on the adjustments, since these were mainly in high tax jurisdictions. In summary, the third quarter for QIAGEN was a solid start to the year.

I’m now on Slide 7. For the quarter we delivered double-digit growth in all regions and we were particularly pleased with the broad business expansion in the Americas, namely the U.S., Canada and Brazil. The Americas, which account for 47% of net sales grew 15% using constant exchange rates. Placement QIAsymphony tests across all customer classes, as well as contributions from the QuantiFERON-TB test underpinned this growth. In the U.S., as noted by peer, HPV were stable in the first quarter. The Europe, Middle East and Africa region, which account for 34% of net sales, grew 12% using constant exchange rates. Spain and some other areas of southern Europe remain challenging.

However, our exposure in this region is quite small and other areas of Europe are doing better, such as Germany, France and the Nordic region and we also saw improvement this year (inaudible) in Italy. The Asia-Pacific and Japan region accounted for about 18% of net sales and grew 14% using constant exchange rates. Growth is mainly lead by contributions from Molecular Diagnostics.

We also experienced important growth contributions, however, from Pharma and Academia. The key markets remain China and Japan. We continue to be pleased with some momentum of QuantiFERON-TB test in this region, as well.

Moving to Slide 8, here is an overview of our financial position at the end of the first quarter. We continue to have a healthy balance sheet and solid financial position. One that we can use to strengthen our operations. We continue to review various M&A opportunities along our three strategic areas of Novell Technologies, adding content to our portfolio and geographic expansion.

As of March 31 group liquidity was approximately US$275 million which compares to approximately US$276 million as of December 31, 2011. Our equity ratio stood at 69% compared to 68% at the end of 2011. Our leverage has decreased slightly to approximately 0.8 times net debt to EBITDA from about 0.9 at the end of 2011. As for free cash flow, we had said in the Q1 results would be grossly affected mainly due to the restructuring payments for the efficiency program launched late in the fourth quarter of 2011 and this was the case.

Although reported net income was essentially steady at US$28 million, we experienced a growth development in other non-cash components, in income and working capital which led to negative free cash flow for the first quarter. Among reasons for the change in working capital which amounted to US$45.5 million in the first quarter of 2012 compared to US$16 million in the prior year quarter where cash restructuring payments of approximately US$20 million. Also in the first quarter of 2012 we experienced an unusually low level of accounts payable compared to the first quarter in 2011 and we also made some tax payments for both 2011 and 2012 in the first quarter of this year.

Those were among the main reasons for the performance of free cash flow and, again, they expect improvement during the course of 2012. I would now like to hand it back to Peer for a strategy update.

Peer Schatz

Thank you, Roland. I am now on Slide 6 to provide you an overview of our strategic initiatives and goals set for 2012. We are well on track to achieve our number one goal which is to have more than 200 new QIAsymphony systems by the end of 2012. This builds on the more than 550 systems in place at the end of 2011. We are in the early years of a decade long product cycle, and we expect the rollout to be successful based on QIAsymphony's versatility in terms of sample processing bandwidth, as well as flexibility to prepare and process assays. In terms of adding content, we are preparing important regulatory submissions that include a Therascreen EGFR by a market test in the U.S., and decisions on our two Therascreen KRAS submissions could be expected in 2012. Discussions with the FDA remain positive.

As we broaden our geographic presence, we are reviewing options to expand in new markets in Eastern Europe, Asia, and Latin America. And in terms of growing efficiently and effectively, we have completed the streamlining of our organization that began in late 2011. We are now working to free up additional resources that can be reallocated to further initiatives through various operational projects. These actions and reinvesting the savings will help improve our growth profile in 2013 and beyond, and also provide positive impulses to our adjusted operating margin.

Turning to slide 10, I want to give you an update on the QIAsymphony automation system. We see QIAsymphony as a family of components that offers customers the industry's first fully integrated system from sample preparation to clinical results. First, we recently received U.S. regulatory clearance for the Rotor-Gene Q, and we are working on development plans to gain clearance for QIAsymphony SP and AS modules. Gaining this first clearance is critical to expanding our test menu in the United States, since future assay submissions will be based on this platform and can now leverage the work that lead to the submission of the first module. We are continuing to see strong growth in demand for consumables. Every placement creates an opportunity for annual consumable sales, or so called pull through, of anywhere between $30,000 to $300,000. And we continue to view QIAsymphony as a very valuable, very long term growth driver.

Turning to slide 11, here is an overview of the submissions for which we have recently received regulatory approvals, as well as completed in 2011 and what we have planned for 2012. We are looking forward to completing a number of important regulatory submissions to expand the menus of our system. Top priority is the U.S. submission of the Therascreen EGFR assay. The first submission for this assay is planned as a companion diagnostic for (inaudible), the lung cancer drug in development with Boehringer-Ingelheim. This will build on the 2011 submissions of KRAS and also the 2011 approvals of the KRAS and EGFR assays in Japan, one of the largest markets for companion diagnostics. With over 15 projects, we have the industry's deepest pipeline of partnered molecular, companion diagnostics that will build on these submissions.

Moving onto global regulatory affairs, we presently have over 50 ongoing R&D projects, which include regulatory submissions or registrations. As you can see, this represents a growing global portfolio of regulated products, and we are now moving to build up the testing menu in the United States to mirror what we have in other regions.

Turning to Slide 12, I wanted to address some of the questions we have been getting about the market potential for QuantiFERON-TB. We believe this product, which we acquired with Celestus in August 2011, is being underappreciated. 2011 pro forma sales were about $55 million and the growth rate continues at more than 20% constant exchange rate. We see long-term growth potential for QuantiFERON-TB in the United States worldwide. We're at a very low market penetration level, still.

As we've been saying, we see the latent TB testing market, which is a market in the developed world, as about 50 million tests and one valued at about $1 billion. Alone in the United States, our current estimate is that the market is about 15 million tests, and distributed among these segments as you can see here on the slide. Apart from the more than 100-year-old skin test, there is no other test on the market with any significant sales nor is there any in the pipeline.

Areas in blue are the primary targets at this time; however we are building up sales and marketing organizations to move much more aggressively into the other segments, especially immuno-compromised patients. So you'll be hearing a lot more about QuantiFERON-TB in the future and seeing it become a key contributor to our growth.

Turning to Slide 13, QIAGEN has established a leadership position in personalized health care, one anchored on various revenue streams. Sale of commercial biomarker kits for use as companion diagnostics, but also in clinical trials involving patients. Milestone payments from co-development projects. We have a robust portfolio of projects underway with many leading Pharma companies, and we are looking to add new projects in 2012. And we also have revenues from associated products, such as sample technologies, asset technologies, instruments, gene-globe molectro-pathway analysis tools, etc. We have created a business with sales of about $75 million in 2011, growing it more than 20% overall with contract development services as a base in strong growth, very strong growth, in Therascreen branded assays and related products.

We expect ongoing, strong growth in 2012, especially as we expand the commercial sales of our tests in Europe, as well as build up our presence in Japan after the approval of Therascreen KRAS and EGFR biomarker tests during 2011 in that region. And most important, we are preparing for the commercial launch of our Therascreen KRAS test as a companion diagnostic for Urbatox and Vectibix in the United States. We wanted to outline the U.S. market potential for KRAS and colorectal cancer only, which will be the indication for this test.

Based on the breakthrough data presented at ASCO a few years ago, we currently estimate that about 75,000 KRAS tests are being performed annually in this area, for this indication, in the United States. We currently sell about 20,000 PCR based KRAS tests in the United States while the rest of this market is estimated to involve laboratory developed tests. Our first priority is to convert laboratory developed tests to our tests. We are very encouraged by the response and acknowledgement by these labs about to benefit from switching to an FDA approved test.

Beyond these tests we will be working with our Pharma partners to drive penetration to an even higher level. Based on an estimated price of about $200 per reportable test, KRAS and colorectal cancer will be an attractive growth driver for QIAGEN. And that is just the start. We are working to add a theraScreen KRAS test for lung cancer and beyond KRAS the next submission will involve ETFR also for lung cancer already in 2012. These opportunities represent potential markets and show you why we are optimistic about maintaining a rapid growth pace in the future.

I'm now on Slide 14. As you know we announced a project in November to grow more efficiently and more effectively. We are enhancing productivity and have a goal to free up about $50 million of pre-tax resources for reallocation to strategic initiatives. In the first phase we have completed the streamlining of our organization and the workforce was reduced by approximately 10%. This is a net number since we are going to redeploy resources into areas that can provide faster top line growth. Teams are now working on initiatives across the organization. Key areas include focusing our R&D portfolio on growth areas across all customer classes. This obviously also includes personalized health care as well as QIAsymphony.

We're also going to optimize capacity utilization and are reviewing our site network. The project is moving quickly and we booked approximately $11 million of restructuring charges in the first quarter. Further charges are likely to be taken during 2012 and we had said that these could total up to about $20 million for the full year. And as we mentioned earlier, the payback on these investments will become evident in 2013.

Moving to Slide 15, as you saw in our announcement last night we have made important changes to QIAGEN's organizational structure at the top level, as well. These changes are designed to capture new opportunities and better address customer needs. Most importantly, as of July 1, two new business areas are being created to intensify the focus on our customers. They are Molecular Diagnostics and Life Sciences, whereby Life Sciences comprises Academia, Pharma and Applied Testing.

As I mentioned earlier, Dr. Helga Lubenow is appointed Senior Vice President, Molecular Diagnostics and Dr. Dietrich Hauffe is appointed Senior Vice President, Life Sciences. Both will become members of the executive committee. Joachim Schorr, who had been Senior Vice President of Research and Development and a Managing Director, has decided to leave QIAGEN and pursue personal projects, but he has been retained as a consultant. Michael Collasius, former Senior Vice President of Automation, will take on a new role with responsibility for project management and business process excellence reporting to me. All other members of the EC remain in their previous roles.

We believe these changes will promote faster decision making, customer-centric decision making and our goal is to deliver targeted innovation at a faster pace through better connections with our customers. This is the appropriate time in the development of QIAGEN to make this transition into business areas and regions. It will help to better prioritize and align our R&D and commercial activities, all with the goal of driving innovation and growth at a faster pace. I would now like to hand back to Roland.

Roland Sackers

Thank you, Peer. Now on Slide 16. I would like to give you an outlook for the second quarter and for the year 2012 and assumptions for adjustments to operating income. As you mentioned earlier, we have reaffirmed our full year outlook for 2012. We also provided targets for the second quarter including our expectations for a net sales growth of approximately 11% to 12% at constant exchange rates.

As was the case this first quarter, we expect some headwind as reported to us due to year-on-year foreign currency movements. Adjusted EPS for the second quarter is expected to be about $0.24 per share. This reflects the usual trend of relatively higher cost at the start of the year, but then an improving margin profile as the year progresses.

For the full year, we continue to expect total sales growth of about 6% to 8% using constant exchange rates based off a mix of contributions from Celestus and Ipsogen acquisitions as well as from the result of our business. These estimates, as usual, do not take into account any acquisitions that could be done in 2012.

Based on average foreign exchange rates so far in 2012, our reported full year results will continue to show some pressure from currency movements. We currently expect currency (inaudible) of about two to three percent points. The actual reported results would then be lower than the total constant exchange rate, which adjusted earnings per share for the full year as expected to be between $1.03 and $1.05 per share. This is based on approximately 239,000,000 fully diluted shares outstanding.

We also have here on this slide the assumptions for adjustments to operating income for the second quarter of 2012 and for the full year. EBITDA, the best compensation of about US$21 million to US$22 million remains the expectation. About US$110 million is spent for the amortization of acquired intellectual property. About US$30 million is planned for business integration, acquisition and restructuring this includes about $20 million for the efficiency project, of which $11 million was taken in the first quarter. Also included here is about $8 million of acquisition-related cost for (inaudible) and their integration. The adjusted tax rate is expected to still be about 21% and 23%, which compares to 23% in 2011.

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

Peer Schatz

Yeah, thank you, Roland. I'm not on Slide 17 for the summary before we move into Q&A. We started 2012 with an intensified focus on accelerating our full-year growth rates, and we are increasingly confident of achieving our full-year targets. Critical to achieving this goal is making further progress on our strategic initiatives. We are creating a foundation for future growth, lead by the ongoing strong rollout of QIAsymphony, and we are stepping up our initiatives to add content to our portfolio, both through internal R&D, as well as targeted acquisitions and licensing. We are going to continue expanding our geographic presence in high growth markets, which are increasing their contributions to our results, and we will intensify our actions to improve efficiency and effectiveness through the project we launched in 2011.

In closing, we have shown with our results in the first quarter that QIAGEN is improving its performance and is ready to accelerate growth in 2012 compared to 2011. With that, I'd like to hand back to Al to open up the Q&A session. Thank you.

Albert Fleury

Thank you, Peer. We now look forward to taking your questions. Also please note to ensure we can accommodate as many people as possible, please limit yourselves to only one question, and if necessary, one follow up. We're implementing a new policy to mute your line after you ask one question and then the follow up. However, you are welcome to rejoin the cue to ask another question if time permits. Operator?

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