John Gilardi - QIAGEN NV Peer M. Schatz - QIAGEN NV Roland Sackers - QIAGEN NV.

Vijay Kumar - Evercore ISI Tycho W. Peterson - JPMorgan Securities LLC Steve C. Beuchaw - Morgan Stanley & Co. LLC Jack Meehan - Barclays Capital, Inc. Daniel Arias - Citigroup Global Markets, Inc. (Broker) Daniel Wendorff - Commerzbank AG (Broker) Ryan Blicker - Cowen & Co. LLC William R. Quirk - Piper Jaffray & Co..

Ladies and gentlemen, thank you for standing by. I am Patrick Wright, your Chorus Call operator. Welcome and thank you for joining QIAGEN's conference call to discuss the results of the third quarter 2016. At this time, all participants are in a listen-only mode.

Please be advised that this call is being recorded at QIAGEN's request and will be made available on their Internet site. The presentation will be followed by a question-and-answer session. At this time, I would like to introduce your host, John Gilardi, Vice President of Corporate Communications and Investor Relations at QIAGEN. Please go ahead..

Thank you, Patrick, and welcome to all of you and we appreciate you taking the time to join us on this call tonight. Our speakers today 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.

You will see in the presentation the standard Safe Harbor statement explaining that the discussion and responses to your questions on this call reflect management's views as of today, November 2, 2016.

We will be making statements and providing responses to your questions that state our intentions, beliefs, expectations, or predictions of the future and these constitute forward-looking statements for the purpose of the Safe Harbor provisions.

These statements involve risks and uncertainties that could cause actual results to differ materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For more information, please refer to our filings with the U.S. Securities and Exchange Commission.

We will also be referring on this conference call to certain financial measures not prepared in accordance with U.S. GAAP. You can find a reconciliation of these figures in the press release and the presentation for this call. Also, two quick points before I hand over to Peer.

First, as you know, our analyst investor day will be held on Tuesday, November 15, in New York. We have changed the times and will now begin with registration at 9:30 AM, start the event at 10:30 AM, and want to end by 3 PM local time.

We made this decision after another company in the industry changed its release date and we wanted to help you avoid this conflict. Second, QIAGEN will be at The Association for Molecular Pathology Meeting next week in Charlotte.

We plan to hold customer events on Friday in the exhibition hall but will not be participating in the Corporate Day on Wednesday. We will recap our AMP activities at the Analyst Day. With that, I would like to now hand over to Peer..

Yeah, thank you, John. And I would like to welcome all of you to this conference call. Our results for the third quarter and first nine months of 2016 show QIAGEN's transformation is building momentum and the new sales growth trajectory is taking hold.

The benefits of our transformation, which we have acknowledged has taken longer than we expected, are increasingly emerging as a result of our efforts to expand our leadership in molecular testing.

We have a unique ability to serve customers along the dynamic continuum from basic research to clinical healthcare and will continue to focus on these opportunities. Let me go through our key messages. First, we delivered on our targets for the third quarter.

Net sales rose 9% at constant exchange rates against our guidance of 8% to 9% constant exchange rate growth and were up 8% at actual rates to $338.7 million due to the 1 percentage point of currency headwinds. We had another strong quarter with 10% CER sales growth, excluding the U.S. HPV headwinds.

Adjusted diluted earnings per share were at $0.29 at both actual and constant exchange rates, and this was ahead of our target for $0.28. Second, QIAGEN is building momentum in the second half of 2016 and setting a new sales growth trajectory based on our full year target for an increase of about 67% on constant exchange rate basis.

The performance for the third quarter was another important step towards achieving our full year sales growth target. All regions grew in the third quarter, backed by gains in Molecular Diagnostics and Life Sciences customer classes and in particular Molecular Diagnostics rising 12% on a CER basis when excluding the U.S. HPV test sales.

Our growth drivers are leading the transformation, maintaining a double-digit CER pace and representing about 35% of sales in the third quarter of 2016. An important topic for today is a series of initiatives we have underway to further improve how we operate as an organization after the period of significant investment.

We want to align our cost base, better allocate resources to invest for growth and develop an even stronger high performance culture.

The related actions include closing two sites, expanding the use of shared service centers, realigning marketing activities within the company and further optimizing our commercial channels, especially greater use of digital opportunities.

While planning started earlier in 2016, implementation will now occur during the fourth quarter of 2016 and into 2017. We will take a pre-tax restructuring charge of about $75 million in the fourth quarter of 2016 and also pre-tax charges of about $10 million during 2017 related to these initiatives.

In line with our policy, they will be included in adjusted results. We are convinced these actions will help us to support the expected strong sales growth momentum and result in a significant increase in operating leverage. Third, we are moving ahead on our commitment to return $300 million of capital to shareholders by the end of 2017.

The first tranche of about $250 million will be completed through the synthetic share repurchase proposal we announced in August and this is on track for completion in January 2017. This type of program which has been used by other large multinational Dutch companies combined a direct capital repayment with a reverse stock split.

This proposal received shareholder approval in late October. Our decision to increase returns is the result of our conviction that we are facing an attractive trend change and significant value creation at QIAGEN.

And as a final point, we are updating our guidance for 2016 and have provided you an initial indication about sales growth and adjusted earnings for 2017. For 2016, we continue to expect net sales growth of about 6% to 7% on a CER basis and this includes about one percentage point of headwinds from lower U.S. HPV sales.

For adjusted diluted EPS, our expectations for 2016 continue to be for the underlying result of about $1.10 to $1.11 per share at constant exchange rates. However, when including new restructuring charge, the full year target is now about $0.87 per share to $0.88 per share at constant exchange rates.

I would like to put our sales performance into more context. This slide provides an overview of the year-on-year trends over the last few quarters and years and the trends change are shown at constant exchange rates for the comparable prior periods.

We have seen a significant increase in growth rates during the second and third quarters of this year and are anticipating another strong year-on-year growth rate of 8% CER basis in the fourth quarter.

However, more important for us is the overall improvement on an annual basis that show the momentum of our portfolio increasing as the headwinds from U.S. HPV sales keep fading as reflected in the lines moving closer together.

So our sales growth trajectory is currently about 6% to 7% on a CER basis for this year and shows that QIAGEN is moving in the right direction and bringing the transformation period to an end. I would like to now update you on some of the portfolio developments in the third quarter.

Differentiated Technologies refers to solutions we offer that build on our strong franchise in sample preparation which involves a critical first step in any lab process. In the area of liquid biopsy, our teams launched the QIAseq cfDNA All-in-One kit at the recent American Society of Human Genetics meeting.

This is the first dedicated solution for use on any next generation sequencing platform that combines cell-free DNA extraction and library preparation for liquid biopsy analysis. It links perfectly to our QIAGEN Clinical Insight bioinformatics solution, for instance for hereditary testing.

The QuantiFERON-TB latent TB test had two very important developments recently with the first being a final Grade B recommendation from the U.S. Preventive Services Task Force for clinicians to screen adult patients and groups at high risk.

Also the World Health Organization issued its TB report in October and the fourth generation version got a great mention. The first test results indicate that the CD8 T cell response, which is an innovation for this new generation, may be able to indicate those patients at greater risk of progression to active TB.

I would like to now discuss some new product launches for our expanding portfolio in next generation sequencing and also provide an update on the GeneReader NGS System.

Since launch last November at the Association for Molecular Pathology meeting, we have seen strong overall demand based on GeneReader's status as the only true, complete Sample to Insight NGS system, and that has been despite the litigation-related challenges in the United States.

As you know from our announcement in September, we have accelerated development of selected chemistry components involved in GeneReader after U.S.

District Court in California issued a preliminary injunction as part of a patent litigation filed by a competitor that currently prevents us from marketing or selling the system to new customers in the United States. Although we deeply disagree with the court's decision, we are still planning to reach the targets we set for GeneReader in 2016.

Customers need a choice and better solutions in clinical sequencing. We are confident of our strong competitive position in this segment and continue to believe in our freedom to operate next generation sequencing in the United States, and our intention remains to return to the United States market during 2017.

Outside the U.S., commercialization is gaining momentum amid very positive customer response and we are offering important enhancements to these customers.

One of these involves the recent launch of protocols for the use of the QIAsymphony system as a high throughput, very integrated and automated option for sample processing in next generation sequencing up front to the GeneReader.

The real value of NGS, regardless of the platform, is the ability to gain actionable and reliable insights through the analysis and interpretation of the massive amounts of sequencing data being generated. Our latest innovation is an enhanced bioinformatics workflow based on QIAGEN's own solutions for hereditary and rare diseases.

This offers unique capabilities for customers for instance also using liquid biopsies in non-invasive prenatal testing and cancer biomarker discovery. We have also been significantly expanding our portfolio of universal NGS solutions.

As one example, QIAGEN has taken a strong position in the area of single-cell analysis to help researchers overcome challenges and improve our understanding of whole genomes and gene regulation. An important new product launch at ASHG is QIAscout, which is a novel instrument for isolation of variable single cells from samples.

This instrument is the size of a handheld mobile device and it will catalyze our Sample to Insight portfolio in research fields such as oncology, immunology, neurobiology and stem cell biology. The breakthrough is that QIAscout enables all scientists to accurately select single cells within minutes through visual control using a standard microscope.

The cells remain intact in their natural environment and viable for any downstream application including NGS, PCR, or stem cell/stem line research.

This compact and very affordable device integrates with our sample library preparation, panels and bioinformatics to create complete Sample to Insight workflows that help scientists achieve better insights from any sample. We will share more with you about QIAscout and other breakthroughs at our Analyst and Investor Day.

And with that, I'd like to hand over to Roland..

Thank you, Peer. Good evening to all of you. On slide eight to review our financial performance for the third quarter and first nine months of 2016 and also to update you on our outlook for the fourth quarter and the full year as well as provide some initial perspectives on sales and adjusted earnings for 2017.

We are continuing to make solid progress on the goals we set for 2016. We are particularly pleased with the faster sales growth in the quarter, the improved adjusted EPS of $0.29 per share compared to the third quarter of 2015, and also the 15% increase in free cash flow for the first nine months of 2016.

For the third quarter, net sales was 9% at constant exchange rates and were up 8% to US$338.7 million at actual rates due to 1 point of adverse currency movement.

As expected, about 3 percentage points of total constant exchange rate sales growth came from the acquisition of MO BIO which was completed in late 2015 and the acquisition of Exiqon in June 2016. That means we had solid 6% CER organic growth from the rest of the portfolio that even included 1 percentage point of headwind from reduced U.S.

HPV test sales. These sales are expected to decline to about $30 million on a full year basis in 2016 and continue to fall further in 2017, but the headwinds are fading. After 1 percentage point of organic growth in the first quarter, we have now had two consecutive quarters at substantially higher sales growth.

This reflects the impact of our transformation and the investments we have made to step up commercialization of our growth drivers and expand into new geographic markets.

We are looking for a similar organic growth rate at constant exchange rate in the fourth quarter given the guidance for 8% constant exchange rate total growth and for our full year 2016 organic sales growth rate of about 5%. This creates a good foundation to move into 2017.

Moving down the income statement, adjusted operating income was 11% in the third quarter, reversing the trends seen in the first two quarters of the year. As we were announced in January, we planned for significant incremental investment during the first half of 2016 to enhance our mid- to long-term growth prospects.

We also said that this was expected to reduce the adjusted operating income margin for the first half, but then for expenses to return to more normalized levels in the second half and generating margin benefits. As an outcome, we expected the full year margin 2016 to be about the same as in 2015.

In line with our plans, the adjusted operating income margin was 26% of sales in the third quarter of 2016 compared to 25% for the same period in 2015, and we continue to expect a significant increase in the year-on-year margin for the fourth quarter of this year before the restructuring charge.

In terms of sequential improvement, the margin for the third quarter is 26% and that compares to 21% level in the second quarter of this year, and even 8 percentage points higher than the 18% margin level in the first quarter.

The adjusted gross margin improved by about 60 basis points while remaining at about 71% of sales and we continue to anticipate a full year margin at this level. Here we saw benefits from higher sales of consumables and also some gains from recently shifting manufacturing to our main hubs in Germany and the U.S.

from smaller sites and also incremental benefits from insourcing QuantiFERON-TB manufacturing from third parties. Reversing the trend from the first half of the year, sales and marketing expenses were lower as a percentage of sales.

We expect them to decline further in the fourth quarter of 2016 as a percentage of sales, and again, this is before the restructuring charge. R&D investments also declined as a percentage of sales, yet we will continue to invest in innovation on a more targeted basis, especially in NGS applications and other areas of our Sample to Insight portfolio.

General and administration costs were slightly higher as a percentage of sales in the quarter. This was in part due to higher cost to expand our digital capabilities.

After the period of investment, we are shifting greater attention for normalizing the cost base through the efficiency initiatives and we will continue to seek out more efficiency gains in the coming quarters while sustaining the faster sales growth. Moving further down the income statement.

Adjusted earnings per share were $0.29 and this was ahead of our target for $0.28 and coming mainly from the improvements in adjusted operating income. The adjusted tax rate was 17% for the third quarter and this was higher than our target for about 16%. I would like to now provide you with an overview of the performance among the customer classes.

As noted earlier, the acquisitions of MO BIO and Exiqon supported underlying growth in all customer classes and the majority of these sales were in Academia, Pharma and Applied Testing.

Sales of products from our portfolio to customers in Molecular Diagnostics was 9% CER and advanced at a 10% constant exchange rate when excluding the headwinds from the U.S. HPV sales. The expansion continues to come from our portfolio of growth drivers that we have built through internal developments as well as targeted M&A.

These include the QuantiFERON-TB test, maintaining the new 25% CER, full year sales growth target, double-digit constant exchange rate, growth in consumables used in QIAsymphony, and also solid demand from customers involved in infectious disease testing.

In personal healthcare, we saw higher sales of Ipsogen blood cancer tests and significantly higher revenues from co-development projects for companion diagnostics. These milestone revenues can be volatile on a quarterly basis and the year-to-date results show 18% constant exchange rate growth over the same period in 2015.

Applied Testing has overcome a weak start to the year with sales up 12% CER in the third quarter and driving 6% CER on a year-to-date basis and closer to the historical solid single-digit CER pace.

Sales to these customers rose in the quarter thanks to double-digit CER growth in both consumables and instruments and volume growth in our applications for human ID and forensics.

Against the backdrop of slower growth during 2014 and 2015, Pharma has maintained a solid pace this year with sales up 8% constant exchange rate in the third quarter and also on a year-to-date basis. Here we are getting high single-digit CER consumable growth from marketing initiatives and new product launches.

In Academia, sales rose 7% CER in the third quarter and were up 5% CER on a year-to-date basis on the back of higher consumable sales, but slightly weaker trends for instruments. We see company-specific factors supporting our trends, especially due to better marketing initiatives and new product launches and also contributions from Exiqon and MO BIO.

We continue to see good funding sentiment in the U.S. and expect this to continue in the fourth quarter and 2017. However, we are seeing softer trends in Europe, which is what we have heard from other companies and we continue to take a more conservative view.

On a geographic basis, all regions contributed to growth for the third quarter and also on a year-to-date basis. The Americas delivered 11% CER growth with the U.S. growing at the same rate while also absorbing the U.S. HPV headwinds. When excluding this impact, sales in the region rose 14% CER.

Key factors were the expansion of the Molecular Diagnostics portfolio, in particular sales, of the QuantiFERON latent TB test and better year-over-year demand from Academia and Applied Testing customers. Brazil also improved to a double-digit CER growth pace after weaker trends in the first half of the year.

The Europe / Middle East / Africa region faced a slowdown with sales rising 1% CER in the third quarter but still up 7% CER on a year-to-date basis.

As I mentioned earlier, we have seen softer trends among Life Science customers in some countries such as Germany, but at the same time we saw ongoing growth in France and the United Kingdom even with the Brexit situation.

We also saw good demand in other areas of the region, in particular with increasing contributions from the Middle East as part of our recent expansion efforts. In the Asia-Pacific / Japan region, we saw a reversal of the trends in the first half of the year as Japan delivered double-digit CER growth in the third quarter.

We are seeing better execution from our commercial teams after some management changes at the end of 2015. We also maintained a double-digit CER growth rate in China. Good performance also came from South Korea, Australia and India. As a last point, the top seven emerging markets delivered 20% CER growth in the third quarter and provided 15% of sales.

The countries of Brazil, Russia, India, China, South Korea, and Mexico all delivered double-digit CER gains, while Turkey contributed at a higher single-digit CER rate. I would like to now give you an update on our balance sheet and cash flows and also on the plans to return $300 million of capital to shareholders by the end of 2017.

As I mentioned earlier, we are particularly pleased with the cash flow generation to-date this year, which is up 15% to $187 million. Thanks to the strong cash flow and also our healthy balance sheet and the net debt to adjusted EBITDA ratio of 1.5 times, we are able to increase returns to shareholders.

As part of our new commitment, we announced in August a proposal to return $250 million through a synthetic share repurchase plan that combines a direct capital repayment with a reverse stock split.

Shareholders have approved the synthetic share repurchase proposal and we intend to complete it in January 2017 after the expiry of a two-month creditor objection period required by Dutch law. Further details about the conversion ratio and the record payment debt will be announced in January.

We intend to return the balance of the $300 million commitment through traditional open market purchases during next year. Even with the new capital return plans which we intend to fund from existing cash reserves, we see the leverage remaining below three times net debt to adjusted EBITDA.

I would like to now review our guidance for the full year and that remains for net sales growth of about 6% to 7% at constant exchange rates. This includes about $10 million of first time sales from the Exiqon acquisition in the second half of the year to our prior year full year guidance of about 6% constant exchange rate sales growth.

Moving to adjusted EPS, our underlying guidance remains for about $1.10 to $1.11 per share at constant exchange rates on a full year basis for 2016. However, the restructuring charge will be included in adjusted results when we have updated the official guidance to about $0.87 to $0.88 at constant exchange rates.

I would like to also provide some estimates about potential currency impacts. Based on the rates as of October 1, we now expect pressure of about 1 percentage point to 2 percentage points of the full year constant exchange rate sales target and about $0.01 per share to $0.02 per share on the full year adjusted EPS guidance at constant exchange rates.

We are giving you more details on the assumptions on our outlook for the fourth quarter of 2016 and the full year. In terms of net sales, for the fourth quarter we have set a target for about 8% sales growth at constant exchange rates.

This is based on solid growth from the current portfolio, which includes about 1 percentage points from the MO BIO acquisition and about 1 percentage point of headwind from the U.S. HPV sales and about $5 million of first-time sales from the Exiqon acquisition.

This is in line with our expectation on a full year basis and also takes into account about 1 percentage point of headwinds from declining U.S. HPV test sales. For adjusted EPS, we have set an underlying target for about $0.38 at constant exchange rates for the fourth quarter and this compares to $0.31 in the fourth quarter of 2015.

But the guidance has been set at about $0.15 to $0.16 per share due to the restructuring charges. In terms of the adjusted operating income margin, we continue to anticipate a level about the same as in 2015 on an underlying basis before the restructuring charge and about 18% to 19% including the charge.

We believe these initiatives are important to strengthen our foundation for more sustainable growth in 2017 and the coming years, while delivering more operating leverage. Our presentation contains further detailed information on our assumptions for the fourth quarter and the full year.

As you saw in the press release, we wanted to provide some initial guidance on sales and adjusted diluted EPS for 2017 and that is for about 6% to 7% constant exchange rate sales growth and for about $1.25 to $1.27 per share. In terms of sales growth, we are anticipating a faster organic growth rate than in 2016.

For adjusted EPS, this target represents a significant increase from the underlying guidance for 2016. The outlook for 2017 adjusted EPS includes a benefit from the planned $300 million share buyback during the year and initial contributions from the efficiency gains.

It takes into account an 18% adjusted tax rate and also excludes the $0.03 of charge in 2017 from the restructuring. With that, I would like to hand back to Peer..

Yeah, thank you, Roland. I'm now on slide 14 for a summary before we move into Q&A. So let me review what we just announced. First, we had another solid performance in the third quarter, achieving our targets for net sales and coming in ahead of our target for adjusted EPS while also generating a 15% increase in free cash flow on a year-to-date basis.

Second, our results show the benefits of our transformation and we are moving ahead into a new growth trajectory as reflected in our full year sales growth target of 6% to 7% on a CER basis. We are moving ahead on new initiatives to continue the sales acceleration, while also improving our profitability.

Third, as part of our increased commitment to return $300 million of capital to shareholders, we are on track to return $250 million in early 2017 through the synthetic share repurchase and the balance during the year through open market repurchases. Also, we have updated our full year 2016 guidance.

We are confirming the previous target for 6% to 7% CER sales growth as we maintain a solid higher single-digit CER pace in the fourth quarter. We also continue to expect adjusted EPS of about $1.10 to $1.11 per share before the restructuring charge.

Furthermore, we have given you an indication of what to expect in terms of sales growth and profitability for 2017 and we will provide you with much more information and details at our upcoming Analyst and Investor Day. And with that I'd like to hand back to the operator for the Q&A session. Thank you..

Thank you. And our first question today comes from the line of Vijay Kumar of Evercore ISI. Please go ahead..

Hey, guys. Congratulations on a really nice quarter here..

Hey. Thanks, Vijay..

So maybe, Peer, just thinking about the guidance, it's a little unusual for you guys to give FY 2017 color where I think the numbers, they were really encouraging, right.

But can you just talk about some of the drivers there? I guess, A) does the 2017 guidance, does it bake in any additional HPV headwinds? And I think in the tools space in general, there's been a lot of noise from Academia, maybe some noise from Pharma.

So if you could just give some color on what the guidance, the revenue guidance bakes in for 2017, I think that would be helpful..

Sure. Well, you are absolutely right, Vijay, we normally give guidance in Q1. But this year we obviously have the Analyst Day now coming up in the fourth quarter. And we thought it would be appropriate to be able to discuss 2017 outlooks with you in great detail, but you have that in preparation of that meeting.

And we'll obviously be providing a lot more detail during the Analyst Day.

In addition, there are also a lot of other things going on, including also some very significant initiatives across the company that we've preparing for quite some time and now moving into execution and that is a contributor to these charges that we are now seeing in the fourth quarter.

And we just wanted to also give guidance on what we expect the impacts of those changes to be.

In general, the company is on a very good trajectory and moving into the year as we go back into the beginning of the year, we probably would have not been expected really in this momentum, but what we actually were able to see now in the second and also in the third quarter now with the guidance of the fourth quarter continue is a very solid underlying growth trajectory in the range of 6% to 7%.

And on top of that, we are actually layering initiatives that should further unfold for the years then thereafter. So everything is pretty well lined up at the moment. The 2017 guidance is an all-in guidance where all of these impacts are now included, both headwinds and tailwinds. And obviously if things go better, things go better.

And then we'll communicate it as we go..

Our next question comes from the line of Tycho Peterson of JPMorgan. Please go ahead..

Thanks. I want to hit on a couple things. I'll do it all at once here. First on, Peer, can you help us get comfortable with the 4Q margin step-up, ex restructuring? Second, you talked about spinning off certain activities as part of the restructuring. I'm wondering if you are exiting product lines.

And then third, can you just talk about the GeneReader roadmap from here, your confidence in the workaround, whether the timelines around fusion and liquid biopsy capabilities have changed and will we get any data at AMP, in particular on the QIAsymphony front end option?.

Sure. If okay, I'll take the two latter questions and then hand over to Roland for the margin question. So, the first was regarding the activity sites that we will be closing. There are two sites.

One is a site in Valencia which is a call center and tech service center, and we'll be partly transferring these positions over to the East Coast to our Maryland sites and also are resorting to home office options for certain employees. So that's one of the actions.

The other action is, we have an engineering site in Switzerland where we are planning a management buyout by the group and we will continue as a customer for select activities there, but on a more reduced basis. Those are the two larger spin-off activities.

We are not anticipating a very material change in the top line due to product line exits or so, but clearly, we are always reviewing that if it makes sense for us to be in certain product lines or businesses. But as of today, that is not on the table. The second is on the GeneReader roadmap.

We are really moving in full speed ahead and the feedback is phenomenal ex-U.S., where we are currently actively marketing and we, as I said, we are still targeting the original plan despite the set – this shows you how positive we are actually seeing the uptake ex-U.S.

and all of the activities, be they panel or content expansions, be they additions of future editions, they are all fully on track. We might see a small delay in some of the improvement options outside the chemistry, but this is not really too material from a customer value perspective and something we'll talk about more at the Analyst Day.

We will certainly be holding a number of sessions at AMP. I don't want to steal the thunder yet.

There's a lot of news that we hopefully will be able to share at AMP and it will certainly include a lot of activities around next generation sequencing, informatics, but also new personalized medicine tests and other activities that we're working on that is of interest to the AMP crowd..

Yeah. On the margin side, Tycho, you probably have noticed that we were able to manage down our operation expenses as we indicated before, quite significantly down from the second to the third quarter, roughly $10 million less spending in the third quarter compared to the second quarter and modest comparable to the Q1 levels.

So if you would assume for a second that same level, even assuming that there might be a smaller increase, you will see that we should be nicely be able to draw a Q4 guidance if it comes to the expense side and therefore to the profitability.

And also in terms of overall margins, I think we have seen in years before also a margin around this 30% adjusted EBITDA. So I would say that it should give us enough comfort level here..

Our next question comes from the line of Steve Beuchaw of Morgan Stanley. Please go ahead..

Hi. Good afternoon. One question on QuantiFERON and then one follow-up on the GeneReader. The question on QuantiFERON is really just a request for a bit of a walkthrough; your visibility in the growth there.

It's become a big product and a driver of more than 200 basis points of the total company growth, so it's particularly important that, say in terms of visibility on 2017 just to make sure we know how you are thinking about visibility on tenders and the drivers of what's going on in 2017, hopefully driving another year of 20% growth.

And then I'll actually follow up on Tycho's question on GeneReader. Just to put a finer point on it, are you comfortable at this point saying that any material engineering design validation hurdles are cleared so that you can express confidence in a launch timeline on that new chemistry to get you back in the market in the U.S. in 2017? Thanks..

Yeah. Thanks, Steve. So first on QuantiFERON, you are absolutely right. It's a very important franchise for us and expanding very rapidly. We clearly have a vast untapped market opportunity out there.

As we are increasing, we are seeing new types of screening strategies emerge, and QuantiFERON is clearly leading that effort and helping in many different settings and countries to help screen for latent TB. We are very active in this space. We have significantly stepped up the commercial efforts.

What you see here in the growth rates accelerating is much better commercial execution and also timing coming with a higher awareness, more visibility of the data, and more global also, acceptance of QuantiFERON as the gold standard for latent TB testing.

And in addition, we clearly had regulatory events for instance in China a couple years ago that are now starting to show fruit in other countries. So, this is the beginning of a very long trajectory. It's a very fragmented market.

It's much less homogenous than other screening markets, meaning every market has different dynamics and different criteria that will be important. So we're very actively pushing that. On GeneReader, I'd really like to stick to the statement if I may – that I made before that we are confident we'll be back in 2017.

And we'll provide further information on this hopefully shortly..

Our next question comes from the line of Jack Meehan of Barclays. Please go ahead..

Hi. Thanks. And congrats on the nice quarter. I was hoping you could elaborate just on the new marketing team roles in optimizing the sales channels. Just what's changing there? It's nice to see the top-line begin to inflect. Just want to make sure there's no real disruption on that front.

And then one on personalized medicine; could you just comment a little bit more on the assay growth and what the expectation is for the royalty payments in the next year? Thanks..

Sure. So marketing really changed compared to where it was 10 years ago in the sense that a lot of the activities, a lot of the value chain in marketing is increasingly digitalized and also can be shared across different product and customer classes, much better than you could a few years ago.

And what we did was take marketing activities that were running the different areas – we had three business areas as you recall, one life sciences diagnostics and informatics and the foundational activities, be they the marketing analytics, the campaign management, demand generation.

And these types of things were now integrated to serve all three of these areas to create enough critical mass and to bring in very high caliber talent that we have across the company that focus them on the execution of certain activities versus having them dedicated to the smaller revenue activities and therefore, typically sub-critical mass.

So it has a lot to do with consolidation, and that is where we are taking back office activities or support activities or activities I described before and leveraging them across multiple internal customers for further use.

So we actually expect that this should further leverage our digital capabilities and also the ability to use those more effectively to get – to use the additional economy of scale to accelerate further revenue growth.

In terms of the Companion Diagnostics portfolio, you saw growth rate was quite nice in the space again, and also the asset growth rate is doing quite well. We saw particular good growth rate in the blood cancer line and that's one that's often overlooked. It's quite a sizeable line.

We have a 30%, 40% market share, in some cases more than 50% market share in certain assay, even blood cancer, actually globally. And that's a fantastic franchise that continues to be very important for us. The additional markers that are coming forth from Pharma, you will see some come forward potentially in the near term.

We are seeing two, maybe three launches in 2017 in this area. So we had one-and-a-half years now a little bit quieter in terms of approvals, and they have to do with the sequencing and the timing of these programs..

Our next question comes from the line of Dan Arias of Citigroup. Please go ahead..

Hi, guys. Roland, on the guidance for next year, what within the 6% or 7% CER are you assuming today for M&A? And would you mind talking to the end market or segment assumptions built into that outlook in terms of MDx, Pharma, Academic, Applied? I mean, if I could, on the bottom line it looks like you'd be close to flat this year on the op margin.

So what kind of expansion do you think you can do in 2017, excluding restructuring? Thanks..

Yeah. Thanks for the question. And of course, I don't want to take too much thunder away from the Analyst Day but – so therefore I try to at least to give you some indication. But starting with the bottom line, you clearly could see – and if you just do the calculation that this is again a quite significant ramp up in terms of EPS performance.

I would say, it's somewhere around 15%. And so if you calculated into margin performance, it is rather close to a 200 bps improvement over 2016. And I think that is – again there might be certain impacts coming from the gross margin, but most of it – by far the largest share comes out of operational expenses, mainly out of SG&A.

and Peer just mentioned a couple of factors where we believe we get actually growth not only a more efficient organization but clearly also impact on the top-line. On the top-line, it's quite clear that the underlying organic growth rate is going to accelerate next year compared to 2016.

As the acquisition of MO BIO is annualized in that year, there's only a half year impact from the Exiqon acquisition. So you see a quite significant ramp up on the organic side and that is the main contributor within the 6% to 7%..

Our next question comes from the line of Daniel Wendorff of Commerzbank. Please go ahead..

Hi. Thanks for taking my question. And first question would be actually related to the restructuring program and maybe as a follow up to the last question. And can you quantify how the program will help you to improve the margin not only in 2017 but maybe also in 2018? And then a follow-up question on the GeneReader.

And can you potentially help me understand who is actually buying the GeneReader or why you are placing it? Is it solely a PPI model based or actually customer buying the machine? So anything more on that front? Thank you..

Yeah. Let me take the first one here and get it out of our way. On the restructuring cost side, as Peer mentioned we are clearly focusing here on programs which we started over the course of a year and just bringing them all to the finish line. So it is clearly something where we ultimately – they actually do have long-term impact.

So the savings which you will see as efficiency gains, you see for 2017 is clearly something what we also expect in 2018 and beyond and probably even to an accelerated, an increasing degree, because it would clearly take some time over the year 2017 for them to finally come into the system.

A larger part of the savings and of the refreshing costs as you have seen before is non-cash, so it's roughly $35 million out of the total amount, and the other areas are clearly mostly around MBO and the site closures which also means that you have to get leases on that and things like that out of this way.

And again, our focus here on getting a more consolidated view and want our regional hubs here in Germany, within Netherlands and also in Asia is clearly helpful, taking complexity out of the system, not only on the site basis but also in our structures and using the momentum which we gained over the last six to nine months and now we are seeing also momentum on the sales side.

And turning that out in overall profitability will allow us that probably this programs has a payback pay at some, let's see, two-and-a-half, three years and therefore being a significant profitability to our – for QIAGEN going forward..

The other question, Daniel, was the question where the GeneReaders are placed.

And we'll have further clarity at the Analyst Day also on this, but the typical customer is a molecular diagnostic lab mostly with pathology activities that has been doing some next generation sequencing very often but wants to get rid of the pain of all the moving parts and the complexity of doing that.

And to target that, we obviously started with was solid tumor testing with the actionable panels that we have, and then we moved to liquid biopsy testing after that.

And we are seeing everything from the very advanced Molecular pathology labs that just want to do high volumes of these samples in a very robust, reliable and accurate way with very simple to use reporting that the most powerful knowledge base is behind it. This has really resonated very well with such labs. We see that.

We see it down to novices who are, in terms of next generation sequencing, novices who have molecular experience and are now starting to next generation sequencing as well. And they just see the enormous simplicity and the cost effectiveness of the solution that we can provide as a one stop shop where all solutions come from us.

We also seek large national tenders that we won where there were international programs in how to do tumor sequencing where we are now routinely also being used to run the tests in large numbers and samples in such countries even. And so there is a range of different uses.

I think everybody there is very united in the front that people are really looking for a better solution for clinical sequencing. It's not a super powerful machine that they are after. It's not something glitzy and dazzly that changes every few weeks.

It's something that is high performance, very reliable, super accurate, and gives results that ultimately can benefit healthcare. And that's exactly what we created, and this resonates extremely well. And so we'll see more of these examples at the Analyst Day..

Our next question comes from the line of Doug Schenkel of Cowen & Company. Please go ahead..

Hi. This is Ryan Blicker on for Doug. Thanks for taking my questions. Two quick ones, starting with Japan, the double-digit growth in Q3 was clearly above recent trend.

Can you provide more color on growth by customer class and your thoughts on the outlook for growth moving forward? And then on the balance sheet, could you give us an update on your thoughts surrounding M&A and capital deployment subsequent to the upcoming share repurchase? Are you still capable of doing bolt-on deals in 2017 or should we expect a pause in M&A activity, or should we expect a pause in 2017 with M&A activity maybe resuming in 2018? Thank you..

So the question on Japan, good catch. So we definitely saw very strong growth in Japan after some weaker years, and it's way ahead of market growth. The Japanese market is primarily a applied testing research market. The diagnostic market, molecular diagnostics is actually a very small market in Japan.

It's $100 million maybe in size, maybe a little larger, but we have several big products in the Japanese market, but the growth really came from the academic sales, but also some companion diagnostic sales where we have a very good position in Japan as well..

And one the M&A side, of course we maintain our firepower here. It's again, there's all this opportunities for attractive deals, but of course they have to be financially attractive. And again, M&A as we said before, is part of our strategy. As you know in the past, we were clearly focusing on good deals around bolt-on acquisitions.

I think we did very good acquisitions, not only the two last year's but just what we know on the performance from Exiqon on mobile. You see that acquisition's also overall an important contributor to our value generation.

So we are clearly going to continue to focus again here the market going forward as well, and we do have flexibility to activate, create value for QIAGEN..

Our next question comes from the line of Bill Quirk of Piper Jaffray. Please go ahead..

Great. Thanks, and good evening. A couple of questions. I guess first is, just thinking about the adds to the QuantiFERON team you've made over the year, Peer, can you help us think about kind of how they are trending in terms of ramping up? You know, help us think maybe a little bit about their relative contribution in 2017..

Sure. So as you know, we started ramping up later in 2015 and into the second quarter of 2016. You know, the old rule that a sales rep is typically 20%, 30% productive in year one and 60% in year two and 100% in year three, it takes time to really ramp them up and for them to build the relationships.

So we feel very comfortable with the resources we have onboard in the United States. We're looking at expansion in other countries as well. And this will not be like the sudden ramp-up that we saw between mid-2015 and mid-2016. This will more be a continual increase yet whilst probably getting a lot of leverage and economies of scale as we go..

Got it. And then just a second question. Just thinking I guess about the restructuring plans that you've announced today, help us think about how much you're contemplating kind of beyond what you've mentioned in terms of the couple facilities.

Are you looking kind of across different pieces of the organization? Is there some additional leverage you can drive here over the longer term? Thanks, Peer..

Sure. So the two examples of the sites, those are important pieces to several activities that we're doing, so we are clearly working across the organization and also looking at many different things.

And the programs that we kicked off, they are forming initiatives, of which sites are one, marketing another one, and they are basically seeking leverage across the organization here. And we are doing this from a position of strength, which is maybe unusual, but it just shows our commitment to drive value going forward.

We feel very comfortable about the top-line trajectory and that being able to continue, but we completely recognize that we also had to ask for patience while we were pushing the top line.

And before we were able to enter into the phase now of focusing on the bottom line as well, we needed to accelerate that through initiatives around the portfolio, but also the commercial channels. That being behind us, we're moving into that next phase, and this is why this is the logical consequence.

All this is built in our plan and we already were planning this early in this year. And so, this for us was something that we turned to when we saw that the top-line was accelerating and was sustainable..

And our last question for today comes from the line of Scott Bardo of Berenberg. Please go ahead..

Yeah, thanks very much for taking my questions. Excuse me. So, just one question on QuantiFERON. Certainly seems that the business is performing very well, and you highlight here about some recent recommendations from the U.S. Preventive Services Task Force and obviously more and more global activity and awareness surrounding this.

So I just wondered if you could share thoughts. Is it beyond the realms of possibility that you accelerate growth further in this business given this increased global awareness and recommendation, or is that more difficult, given the relative size of the business now? If you could share thoughts there.

And also, obviously you are in litigation with Oxford surrounding this product. We've seen how you've been potentially injuncted from one product in North America, albeit, hopefully temporarily. Is this is a risk that you see for this franchise that we should be aware of? Or perhaps you could share some thoughts about what the likely scenario is here.

Thank you..

Hey, Scott, thanks. Well, clearly QuantiFERON is a very important growth driver for us. And as I said before, we see a long trajectory in front of us with the vast market opportunities they need to be converting. We are constantly adding new market opportunities.

Basically, as we speak, the ability to detect transition, or risk of transmission – transition from latent to active, these are completely new opportunities that provide us a new clinical value to the test and open up new segments in a much more meaningful way, and potentially accelerate also conversion from the skin tests even more.

So, it's just execution from here going forward. And the team is executing extremely well. We have great new innovation in this area that we launched, just the QuantiFERON-TB Gold Plus product, that was kind of quietly introduced a couple years ago and actually forcefully introduced it in the markets is phenomenal.

It's a complete game changer in terms of workflow, but also with new technological features that we think are just going to be extremely valuable and important going forward. Now, for some reason the litigation has emerged in this area, which is still – we are scratching our heads a little bit why this is being done.

And we have hundreds, even thousands of IP positions that we're working on and litigation that we are in. And QIAGEN is not typically the company that is – it's typically the company that has always found ways to settle, but this is – we just don't understand this situation and we'll absolutely defend our freedom here.

The ability to create an injunction is not in the pathway of this litigation. But I'd leave it at that. The real focus that we have is not really on that. That I think is noise by a competitor who are in the meantime now outgrowing, even though we have eight times more volume than they do and are just doing phenomenally better.

And unfortunately, we are seeing people resort to all kinds of stuff. So, this is just the way of life, unfortunately..

With that, I'd like to hand back, end this conference call and thank you for your participation. If you have any questions or comments, please don't hesitate to contact us..

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