On November 6, 2017 QIAGEN N.V. (NASDAQ: QGEN; Frankfurt Prime Standard: QIA) reported results of operations for the third quarter and first nine months of 2017, delivering on goals for improvements in adjusted net sales and adjusted earnings (Press release, QIAGEN, NOV 6, 2017, View Source [SID1234521719]).
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"QIAGEN’s results for the third quarter of 2017 confirm that our Sample to Insight molecular testing solutions are delivering growth across the continuum of customer needs from basic research to clinical healthcare. All customer classes and regions supported growth trends in the third quarter, which were led by our Molecular Diagnostics and Applied Testing customer classes growing at solid rates and complemented by gains in Pharma and Academia," said Peer M. Schatz, Chief Executive Officer of QIAGEN N.V. "These results demonstrate that we are progressing well and delivering on our full-year ambitions during 2017, especially against a very strong performance in the second half of 2016, with market share gains, solid sales growth and a double-digit increase in adjusted earnings per share while strengthening our foundation for 2018 and beyond."
Third quarter 2017 results
Net sales grew 7% at actual rates to $364.0 million in the third quarter of 2017 over the year-ago period and also advanced at 7% CER. Organic expansion contributed six percentage points to total CER growth, with about one percentage point from the January 2017 acquisition of OmicSoft Corporation, a leading provider of omics data solutions. Adjusted net sales, which include all revenue contributions from OmicSoft, increased 8% at actual rates to $364.4 million in the third quarter of 2017, and rose 7% CER with one percentage point of favorable currency movements.
Consumables and related revenues (+8% CER / 88% of sales) led the performance, and supported by single-digit CER growth in instrument sales (+2% CER / 12% of sales). Among the customer classes, Molecular Diagnostics (+9% CER / 49% of sales) was led by ongoing solid growth of the QuantiFERON-TB franchise above the annual 25% CER growth target, consumables used for the QIAsymphony automation system and solid contributions from companion diagnostic pharma collaborations.
In the Life Sciences, Applied Testing delivered 14% CER (+15% CER adjusted sales) growth thanks to solid gains in the Human Identification / Forensics portfolio, and supported by single-digit CER growth in Pharma (+4% CER, +5% CER adjusted sales) and Academia (+2% CER).
Among the regions, Europe / Middle East / Africa (+15% CER) had the fastest pace due to double-digit CER growth in France, Turkey and the Netherlands, along with single-digit CER contributions from the United Kingdom and Germany. Asia-Pacific / Japan (+7% CER) benefited from dynamic growth in Korea and India, and supported by single-digit gains in China, while Japan showed a modest single-digit CER decline. The Americas (+3% CER) grew on increased sales in the U.S. and Brazil, but faced a significant expected decline in Mexico due to the expiry of a tender.
Operating income was $63.9 million in the third quarter of 2017 compared to $48.3 million in the same period of 2016. Adjusted operating income, which excludes items such as business integration, acquisition-related costs and the amortization of intangible assets acquired in business combinations, rose 9% to $96.1 million compared to $88.1 million in the year-ago period. The adjusted operating income margin was steady at 26% of sales compared to the same period of 2016. Excluding the pre-tax restructuring charge taken in the third quarter of 2017, which was $1.8 million, adjusted operating income rose 11% to $97.9 million and the adjusted operating income margin was 27% of sales.
Net income attributable to owners of QIAGEN N.V. was $48.5 million, or $0.21 per diluted share (based on 232.7 million diluted shares) compared to $34.8 million, or $0.15 per share (based on 239.3 million diluted shares) in the third quarter of 2016. Adjusted net income was $75.3 million, or $0.32 per share ($0.32 CER), up from $69.3 million, or $0.29, in the year-ago period. Excluding the restructuring charge taken in the third quarter of 2017, which was $0.2 million on adjusted net income, adjusted diluted EPS was $0.32 per share ($0.32 CER).
First nine months 2017 results
Net sales grew 5% to $1.021 billion in the first nine months of 2017 over the same period in 2016, and were up 6% CER with one percentage point of adverse currency movements. Adjusted net sales also rose 5% to $1.022 billion in the first nine months of 2017, and were up 6% CER. Organic expansion contributed four percentage points to total CER growth, while two percentage points came from the acquisitions of Exiqon A/S in June 2016 and OmicSoft in January 2017. The expected decline in U.S. HPV test sales created about one percentage point of headwind, with adjusted net sales rising about 7% CER over the same period in 2016 when excluding these specific product sales.
Higher sales of consumables and related revenues (+7% CER, +8% CER adjusted sales / 88% of sales) more than offset a decline in instruments (-2% CER / 12% of sales). Molecular Diagnostics (+6% CER / 48% of sales) advanced +7% CER when excluding U.S. HPV test sales. In the Life Sciences, Applied Testing delivered double-digit CER gains (+15% CER, +16% CER adjusted sales), supported by single-digit CER growth in Pharma (+6% CER, +7% CER adjusted sales) and Academia (+3% CER). Among the regions, Europe / Middle East / Africa (+10% CER) led the performance, and supported by Asia-Pacific / Japan (+9% CER) and the Americas (+3% CER).
Operating income was $110.0 million in the first nine months of 2017 compared to $94.6 million in the same period of 2016. Adjusted operating income, which excludes items such as business integration, acquisition-related costs and the amortization of intangible assets acquired in business combinations, rose 9% to $230.5 million compared to $212.1 million in the 2016 period. The adjusted operating income margin rose to 23% of sales from 22% in the same period of 2016. Excluding the pre-tax restructuring charge in the first nine months of 2017, which was $19.2 million, adjusted operating income rose 18% to $249.7 million and the adjusted operating income margin was 24% of sales.
Net income attributable to owners of QIAGEN N.V. was $80.1 million, or $0.34 per diluted share (based on 233.4 million diluted shares) compared to $71.8 million, or $0.30 per share (based on 238.8 million diluted shares) in the first nine months of 2016. Adjusted net income was $180.8 million, or $0.77 per share ($0.78 CER), up from $171.3 million, or $0.72, in the year-ago period. Excluding the restructuring charge taken in the first nine months of 2017, which was $14.2 million on adjusted net income, adjusted diluted EPS was $0.84 per share ($0.84 CER).
Balance sheet and cash flows
At September 30, 2017, cash and cash equivalents increased to $671.8 million from $439.2 million at December 31, 2016. Net cash provided by operating activities was $210.7 million in the first nine months of 2017, down from $241.6 million in the year-ago period. Free cash flow for the first nine months of 2017 was $146.1 million, down from $186.7 million in the prior-year period, due mainly to the approximately $41 million impact of cash payments related to the restructuring activities launched in late 2016. Purchases of Property, Plant and Equipment rose to $64.6 million in the first nine months of 2017 from $54.8 million in 2016. Net cash used in investing activities was $371.9 million in the first nine months of 2017, which included payments for the OmicSoft acquisition, compared to $163.3 million in the first nine months of 2016. Net cash provided by financing activities was $386.0 million, which included net proceeds of $726.3 million from debt issuances during 2017 partially offset by $304.9 million of payments in connection with the share repurchase commitment, compared to cash used in financing activities of $15.8 million in the first nine months of 2016.
During the third quarter of 2017, QIAGEN completed the issuance of $400 million of new senior unsecured cash-settled convertible notes outside the U.S. at a 0.5% annual interest rate, and with an effective conversion price of $50.97 due to the entry into derivative transactions.
"QIAGEN has fulfilled its commitment to return $300 million to shareholders ahead of the scheduled end of 2017 target. We are reaffirming our commitment to a disciplined approach to capital allocation, and will review new opportunities to create more value," said Roland Sackers, Chief Financial Officer of QIAGEN N.V. "We are also making significant progress on initiatives to support the improvements in sales and profitability. Related to these initiatives, we have launched a new project in China to increase investments in high-growth areas and streamline our portfolio. We will be putting more resources toward areas such as the QuantiFERON-TB test, the new MAQGEN joint venture with Maccura for the GeneReader NGS System and the life sciences portfolio. At the same time, we have also decided to discontinue some non-core diagnostic PCR tests, and are in the process of divesting the distribution of our China HPV franchise to a third-party aggregator / distributor to improve our competitive position through a more tailored product offering and better adapt to local market needs."
Top 7 emerging markets: Brazil, Russia, India, China, South Korea, Mexico and Turkey (Q3 2017: $61 million, +19% CER, 17% of sales; 9M 2017: $162 million, +15% CER, 16% of sales)
Q3 and 9M 2017: Rest of world represented less than 1% of net sales.
Growth rates at constant exchange rates (CER), sales and sales contributions at actual FX rates. Tables may have rounding differences.
Sustaining growth trajectory with Sample to Insight portfolio
QIAGEN continues to capture growth opportunities with differentiated Sample to Insight solutions enabling molecular testing across the continuum from basic research to clinical healthcare. Among recent developments:
QuantiFERON-TB Gold-Plus (QFT-Plus), the fourth generation of QIAGEN’s market-leading blood test for detecting latent tuberculosis (TB) infection, was launched in the United States. QFT-Plus provides significant detection and workflow benefits for screening programs that form the basis of global TB control efforts, and studies have demonstrated the valuable potential of the test to measure the risk of progression to active, contagious TB. The test’s proprietary CD4+/CD8+ design captures a broad picture of an individual’s immune status and delivers a comprehensive evaluation of immune response to TB infection with the potential for enhanced clinical insights. The U.S. launch of the fourth-generation version follows the launch and uptake in over 75 countries following the start of commercialization in 2016.
Personalized Healthcare surpassed a milestone of 25 master collaboration agreements with pharma and biotech companies to develop QIAGEN companion diagnostic tests that guide medical decision-making based on individualized genomic insights. QIAGEN has launched 15 new companion diagnostic projects so far in 2017, more than any prior year. In the third quarter of 2017, submissions were initiated for five Premarket Approval (PMA) applications and one PMA supplement, pointing to several potential product launches in 2018. QIAGEN also expanded its footprint in cancer immunotherapy (I-O), adding two new collaborations for development of molecular tests to identify patients who could benefit from I-O therapies.
Next-generation sequencing (NGS) solutions ranging from digital sequencing assays to bioinformatics software were highlighted in multiple studies presented in October 2017 at the American Society of Human Genetics (ASHG) meeting. A study by Counsyl, Inc., a leader in DNA testing and genetic counseling services, found that the QIAGEN Clinical Insight (QCI) platform reduced the time required to interpret and score genetic variants by 75%. QIAGEN and Counsyl have entered a collaboration to deploy QCI as part of Counsyl’s scale-up of their genetic screening technologies. QIAGEN also began a collaboration with CENTOGENE AG to provide more complete Sample to Insight research and clinical testing solutions in rare genetic diseases. The GeneReader NGS System is rapidly gaining acceptance worldwide with a focus on clinical benchtop oncology testing. In October, the ICMP opened its new forensics laboratory in The Hague with GeneReader workflows optimized for human identification, innovative panels designed for identification of missing persons and integrated bioinformatics, marking the first additional application of this system outside of clinical research.
QIAsymphony, the leading Sample to Insight workflow automation solution for molecular labs worldwide, continues to expand its base of global placements, which are nearing the full-year goal for more than 2,000 cumulative systems, up from more than 1,750 at the end of 2016.
Differentiated technologies that enable scientists to gain better insights in large and fast-growing research areas are driving growth, in particular QIAGEN’s industry-leading solutions for liquid biopsies and state-of-the-art technologies in Applied Testing. As non-invasive liquid biopsies disseminate in clinical diagnostics, QIAGEN is partnering with leading providers to incorporate its differentiated solutions for liquid biopsy testing. For example, Clinical Genomics partnered with QIAGEN to use the PAXgene Blood ccfDNA Tube in sample collection with Clinical Genomics’ assay to monitor patients for recurrence of colorectal cancer. In forensics, QIAGEN has pioneered efforts for years to develop international standards of quality for human identity testing products, and a third-party agency recently certified QIAGEN for meeting the state-of-the-art requirements for forensics supply chain and manufacturing (ISO18385:2016).
Initiatives to sustain faster sales momentum while delivering margin benefits
QIAGEN announced initiatives during the fourth quarter of 2016 to sustain faster sales momentum while improving efficiency and accountability to increase margins. Significant efficiency benefits have already been delivered, and targeted actions are continuing during 2017. QIAGEN has expanded the scope of these programs, in particular aiming to capture greater benefits from shared service centers and digitization. In the third quarter of 2017, QIAGEN recorded a pre-tax restructuring charge of $1.8 million, which was less than $0.01 per share, that was included in adjusted results, bringing the nine-month 2017 pre-tax restructuring charge to $19.2 million (or about $0.06 per share on an after-tax basis). QIAGEN continues to review ways to improve efficiency and effectiveness, and continues to expect a pre-tax restructuring charge for full-year 2017 of approximately $20 million related to these initiatives, or about $0.07 per share, which will be included in adjusted results.
QIAGEN completes $300 million share repurchase commitment
QIAGEN has completed a commitment to return $300 million to shareholders by the end of 2017. The final tranche of approximately $60 million was completed on September 15, 2017, through the open-market repurchase of 1.91 million shares on the Frankfurt Stock Exchange at an average price of EUR 26.84 (or about $31.94 per share based on exchange rates at that time). This tranche came after QIAGEN completed the return of $245 million in January 2017 through a synthetic share repurchase that combined a direct capital repayment with a reverse stock split.
Changes in QIAGEN Executive Committee
After 12 years with QIAGEN, Douglas Liu is retiring from his role as Senior Vice President, Global Operations and member of the Executive Committee. During his tenure, he successfully ensured reliable supply and growth of QIAGEN’s portfolio and effective supply chains while helping to ensure the successful integration of more than 20 companies. He will continue to work closely with QIAGEN in an advisory role. QIAGEN is pleased to announce that Mark Gladwell has joined QIAGEN to assume the role of Senior Vice President, Global Operations and member of the Executive Committee. He brings to QIAGEN more than two decades of experience in manufacturing high-volume, high technology in vitro diagnostics and medical devices, and most recently served as Senior Vice President, Global Operations, at Alere Inc.
Dr. Laura Furmanski, who has served as Senior Vice President of the Bioinformatics Business Area and a member of the Executive Committee since 2014, will be resigning and return to management consulting. She was responsible for leading QIAGEN’s presence in bioinformatics, and oversaw the integration of important acquisitions to strengthen this differentiating leadership position. A search for a successor is in an advanced stage.
Outlook
For full-year 2017, QIAGEN expects adjusted net sales to grow approximately 7% CER. This excludes the 2016 and 2017 revenues related to the decision to streamline the China portfolio as part of the new growth initiative. These revenues amount to about 1-2% of total sales for both years. Further, this guidance is based on about five to six percentage points of organic sales growth from the portfolio (including about one percentage point of headwind from reduced HPV test sales in the U.S.) and approximately one to two percentage points from the acquisitions of Exiqon (June 2016) and, to a lesser extent, OmicSoft (January 2017).
QIAGEN reaffirms its full-year 2017 guidance for adjusted diluted EPS of about $1.25-1.27 CER per share based on operating and financial leverage, which includes benefits from completion of the $300 million share repurchase and efficiency actions initiated in 2016, but excludes $0.07 per share of restructuring costs expected for 2017. The portfolio changes in China are not expected to have any material impact on adjusted EPS excluding the restructuring charge. Based on exchange rates as of November 3, 2017, currency movements against the U.S. dollar are expected to have a negative impact on full-year 2017 adjusted net sales of about one percentage point, and a negative impact of about $0.01 per share on adjusted diluted EPS. These expectations do not take into account any further acquisitions that could be completed in 2017.
For the fourth quarter of 2017, adjusted net sales are expected to rise approximately 5-6% CER compared to the same period in 2016. This excludes the 2016 and 2017 revenues in this quarter related to the decision to streamline the China portfolio. This guidance is based on approximately four to five percentage points of organic growth (including about two percentage points of U.S. HPV headwinds) and about one percentage point from the OmicSoft acquisition. Adjusted diluted EPS is expected to be about $0.41-0.42 CER excluding restructuring charges (~$0.01 per share). The portfolio changes in China are not expected to have any material impact on adjusted EPS. Based on exchange rates as of November 3, 2017, currency movements against the U.S. dollar are expected to have a positive impact on adjusted net sales of about two percentage points, and a neutral impact on adjusted diluted EPS.
Quarterly results presentation, conference call and webcast details
A presentation with additional information can be downloaded at View Source A conference call will be held on Tuesday, November 7, 2017, at 15:00 Central European Time (CET) / 14:00 GMT / 9:00 Eastern Standard Time (EST). A live webcast will be made available at this website, and a replay will also be made available after the event.
Use of adjusted results
QIAGEN reports adjusted results, as well as results on a constant exchange rate (CER) basis, and other non-U.S. GAAP figures (generally accepted accounting principles), to provide additional insight into its performance. These results include adjusted net sales, adjusted gross profit, adjusted operating income, adjusted net income attributable to owners of QIAGEN N.V., adjusted diluted EPS and free cash flow. Adjusted results are non-GAAP financial measures that QIAGEN believes should be considered in addition to reported results prepared in accordance with GAAP, but should not be considered as a substitute.
Free cash flow is calculated by deducting capital expenditures for Property, Plant & Equipment from cash flow from operating activities. QIAGEN believes certain items should be excluded from adjusted results when they are outside of ongoing core operations, vary significantly from period to period, or affect the comparability of results with competitors and its own prior periods. Furthermore, QIAGEN uses non-GAAP and constant currency financial measures internally in planning, forecasting and reporting, as well as to measure and compensate employees.
QIAGEN also uses adjusted results when comparing current performance to historical operating results, which have consistently been presented on an adjusted basis. For these reasons, we are also presenting adjusted results excluding the impact of the restructuring charge taken in the first nine months of 2017.
Reconciliations are included in the tables accompanying this report. QIAGEN does not reconcile forward-looking non-GAAP financial measures to the corresponding GAAP measures due to the high variability and difficulty in making accurate forecasts and projections that are impacted by future decisions and actions. Accordingly, reconciliations of these forward-looking non-GAAP measures are not available without unreasonable effort. However, the actual amounts of these excluded items will have a significant impact on QIAGEN’s GAAP results.
Change in accounting principle for equity-based compensation
In the fourth quarter of 2016, QIAGEN made a change in accounting principle for equity-based compensation to the "multiple attribution method," which now aligns QIAGEN’s U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) reporting. QIAGEN believes this change is preferable since it provides better alignment of cost recognition over vesting periods. Results for previous years have been revised without any meaningful impact. For the first nine months of 2016, diluted EPS was revised to $0.30 from $0.29 and adjusted diluted EPS was revised to $0.72 from $0.71, as a reduction of $2.1 million in after-tax equity-based compensation was offset by an increase of about 1.3 million in the weighted average number of shares. For the third quarter of 2016, diluted EPS was revised to $0.15 from $0.14, as a reduction of $1.0 million in after-tax equity-based compensation was offset by an increase of about 1.0 million in the weighted average number of shares. For more information, please see table accompanying this press release and filings with the U.S. Securities and Exchange Commission.