Qiagen NV (QGEN) 2002 Q3 法說會逐字稿

Good day, all sites are now on the conference line. I will turn the program over to Solveigh Mahler the Director of Investor Relations. Please go ahead.

Thank you very much, good morning and hello, everybody. Thank you very much for joining, Qiagen's third quarter 2002 earnings conference card. I'm the Manager of Investor Relations at Qiagen. We with me on the call are Dr. Metin Colpan and Peer Schatz. We will be using a presentation during the conference call, which can be downloaded from the investor relations section of our home page under www.Qiagen.com. We understand many people have time restrictions. Therefore, we really would like to ask you to limit your questions to a maximum of two during the Q& A session. During the call, we will be making forward-looking statements. Such forward-looking statements are subject to risks and uncertainties. For the description of such risks and uncertainties, please refer to the discussions and [INAUDIBLE] that Qiagen has filed with the Securities and Exchange Commission. Now, I would like to hand over to Dr. Metin Colpan for a short product and market overview. Metin.

Thank you. Good morning, Ladies and gentlemen. Or good afternoon. This is Metin Colpan speaking. In the past quarter we have achieved our revenue and earnings targets. Qiagen's business grew 21% to $76.9 million dollars in net sales, and our net income grew 28% to $12.9 million. We have met or exceeded our targets in Q3, 2002, and have achieved the significant revenue growth. Our consumer business representing 72% of our net sales showed a strong growth of 24%. Qiagen's consumables business, have always been a strong business, with robust growth and improving positive are trends in the markets. We have achieved further market penetration by replacing traditional home-grown methods and are gaining additional market share. The competitive landscape has not changed and we remain the market and technology leader in this field. We also expect further strong growth in this segment. Other products and services represent 5% of our business and came in line with our expectations and we had very positive and pleasing results with our custom GMP, manufacturing of plasma DNA for gene therapy clinical research. We continue the strategy to establish Qiagen's technologies and products as a standard for industrial scale DNA production for gene therapy. Our synthetic DNA or [INAUDIBLE]-type business represents 13% of our net sales and met our internal target. However, with flat revenues, this business is below our growth and profitability expectations. We observed that the [INAUDIBLE]-type market is still struggling with price erosion and the decrease of [INAUDIBLE]-type need for very large customers. A very attractive business segment is just developing and completely deferred from DNA [INAUDIBLE]. The market for propriortary anion all nucelioritized for gene [INAUDIBLE]. We observe an increase in use and demand of this technology for pathway studies in pharmaceutical and biotech drug development, as well as an interest from academic scientists and we have just launched our first cancer siRNA Oligo Set and are planning to expand these Oligo Sets.

Our instrument business start to reaccelerate and and exceeded our Q3 targets and now represent 10% of our net sales. The focus on combining applications with instrumentation led to a growth rate of 10% compared to second quarter 2002. We will further drive this business by new product introductions in the running quarter and in the new year. In the past quarter, we have launched a series of new products addressing unmet needs of our customers in our core market of nucleic acid extraction, purification and handling. First, the BioRobot 8000 MDX for molecular diagnostic applications is an ultra high [INAUDIBLE] instrument for viral nucleic acid from blood, serum, plasma and provides full walk away automation for sample prep and reaction setup through [INAUDIBLE] diagnostic laboratories. Other applications for other genetic targets will follow. For this existing instrument, we have a better-than-expected demand for this brand new platform being just out on the market for a few weeks. This quarter, we have successfully launched our new BioRobot M product lines based on magnetic beads. Coming with a menu of different applications for research and clinical customers and full walkaway capability, this product will contribute significant growth in the future. With these BioRobot M products, we believe in our strategy to leverage our leadership in sample preparation and handling and our application know how into intelligent, automated solutions for life science combining Qiagen's consumables with instrumentation. Different from our competitors, other instrument manufacturers would believe in addressing specific markets with the right solution for the customer's need instead of pure capacity expansion or selling a piece of steel. Customers want to work in reliable solution, and most of our life-size customers have variable sample numbers from a range of different biological specimen and a need for a scalable instrument platform. The main need is ease of use, reproducability and standardization, and a very important being able to address variable needs from day to day. With the BioRobot M-48 or M-96 products, we address the untapped market from medium through-put, with variable sample numbers between 1-96. A perfect solution for functional genomic applications mainly to be used in commination with QPCR or micro arrays. The hot off the press, BioRobot M-6 for six samples, we addressed the large customer base in pharmaceutical research and clinical diagnostics with a low sample through-put. For example, small molecular pathology labs in larger hospitals, who need a robust, reproduceable, standardized sample preperation which is very easy to use. The M-6 will be supplied with predispensed and prepackaged consumables for genomic DNA, viral DNA, [INAUDIBE] RNA, and other DNA and other applications at a premium price. It's very easy to use and set up, extremely easy to set up, and just the right product non-experts like in medical labs. We believe that this product will be a big success and addresses the need customers were not able to address before. These are products and technologies addressing the shift in the overall molecular research and genomics market from discovery research, which was mainly DNA sequencing to functioning genomics to understand, really, the function of the genes. Until 2001, there was still sequencing, the main focus was the need for ultra high through-put plasma purification sequencing. This could be achieved with a range of low technology solutions at 30 cents of preparation as shown on this slide, which was never Qiagen's main business focus. Now, with the move of sequencing to functional genomics, studying genomic DNA, RNA, proteins, the sample in the applications are getting far more complex to be addressed with the low technology.

Here, we're in the field where cutting-edge technology and application are absolute key. We combine sample collection, stabilization for different biological specimen, especially blood, tissue and [INAUDIBLE] swabs, and the purification of a range of genetic material like genomic DNA or total DNA to be used in genetic analysis was micro arrays or quantitative PCR applications. This is the growth segment for the future. For example, [INAUDUIBLE]matrix just reported the micro array business is growing at 33%, and Applied Biosystems reported that their QPCR business is growing at 21%. Both are indicators where the strong growth in the market place is. By combining sample collection and stabilization with sample preparation and quantitative PCR reagents, Qiagen's product opportunity and the customer and revenue potential immediately increased from 30 cents at sequencing to $8 1/2 for functional genomics applications. Here, the applications are much more complex and critical and cannot be addressed with a simple solution. Biochemical and biological know how as well as engineering know how are important to develop the complex products and solutions. We believe that the research budget of our customers remains the same or even increased, but these products need -- but the products they need have changed. Overall, our customers represent or present at 50% academic research, 35% at pharmaceutical research, and approximately 15% at biotech. In the academic market, as shown on page 11, the budgets are in tact. We see functioning from genomics application, powerful for Qiagen, as explained two slides before. Customers have completely moved away from sequencing to genomics. They're interested in target, genotyping, preclinical development or are in clinical trials. Areas where we see a strong demand for our products, which are key to the functional genomics applications. We have during this quarter, have increased our market and technology leadership and customers are looking for standardization and skill support and Qiagen is one of the best established brands in the industry. Our products offered to our customers cost reduction, ease of use, ultimation and speed to drive their discovery research further or to get their results faster. The biotech market is representing 15% of our customer base, has the same dynamics as other markets. Everyone's moving into functional genomics, drop development and clinical studies. This is a very positive outlook for Qiagen, given as a great opportunity in this great changed market. We believe we are very well positioned to capture this new opportunities for a strong market position and brant equity, our propriety product portfolio and our market leadership.

With, this I will now turn the lead to Peer who will take you further through our third quarter conference call.

Yeah, thank you, Metin. Turning to slide 15, we have about 15 or so slides there after, describing some of the financials of the third quarter of this year 2002 detailed analysis of the revenue structures, and also, we will be giving outlook on the year 2003 as well as on the fourth quarter. Again, starting on slide 15, what we show here is a slide similar to what we showed in the second quarter. What you see here is some very exciting growth, and in Europe, Asia, and other, about 35% growth. I'll go into the numbers a little more in detail later, excluding all acquisitions and all other impacts about 25% growth still very healthy. In the United States, um, we showed growth of about 11% excluding the acquisitions and other impacts compared to last year, about 8% gross. This is a significant increase, also compared to the prior quarter.

If we look at the geographic distribution of net sales on the next page, you see that the distribution changed a little bit. There were no real major changes yet. Again, the growth rate differentials are not enough to skew the distributions in a major way. On slide 16, I tried to do something, which I think requires a note of caution here. We have always been asked, well, you know, the numbers look fantastic, but, you know, last year you had a September 11th effect and that impacted your numbers in a significant way in 2001, and that's why the year-over year comparison looks quite good, and, well, this is certainly in a way true; however, 2001 was definitely a period of negative impact. 2002 is, however, as well. There are significant disruptions on certain customer groups, but still, I will try to make 2001 as if nothing had happened in the third quarter of last year, and I will take the impacted numbers for 2002 and that's what you see on this calculation. On the second yellow bar, the acquisition adjusted and also adjusted for September 11th effect, you see that last year, actually on the high-end estimate, we had an estimate of $70 million. So let's use that number. We reported 63 as you see on the first yellow bar further up. However, using now the $70 million and assuming that that would have been the revenues had no disruption on logistics and customer behavior happened in the third quarter of 2001, we then tried to adjust the various impacts and, again, there is a lot of speculation what would have been and how would it have looked had these disruptions not occurred. You see that even on this scenario which, again, I would take with a lot of caution, even there, this worst case scenario, we have a growth rate of 17% on the consumables, actually a little over 17, that we would have recorded in this third quarter, so, this is, you know, I think this really warrants a statement here, you know, this is probably one of the fastest growth consumable segments in the life signs industry, at least as far as I'm aware of. If you look at the peer, we don't have competitors. If you look at the peer groups, we have about half that growth rate, if not even less. The company is definitely in a very, very attractive area in the life signs segment, and again if you look at it just on a reported basis, it was 24% growth, so significantly faster even more.

On the instrumentation side, quite clear the third quarter was one where we now started introducing a whole sweep of now products. The M-6, the MDX, we think are very promising products for future periods they entered into the selling cycles we already sold first BioRobot MDX's, however on the quarter-to-quarter comparison and an adjusted basis, it's still negative. This is more or less still reflecting some of the general instrument trends you see in the industry; however, as maintenance said before, instruments are not equal instruments. What we're launching, as you might have noted from the descriptions Metin gave, our instrunment is targeting not just high throughput applications of which there are many, but very unique areas such as diagnostics where you have walk away fully integrated validated solutions, the second product, a low-throughput product, which we think is quite revolutionary, a tabletop DNA purification system. Whoever has been working in the labs in previous lives can certainly appreciate that is what we think is a fantastic new product line.

Synthetic DNA on a year-over-year basis looks good. Again, we had disruptions. This is an area where volumes are significantly up the revenue, even on an adjusted basis is down, and what is quite interesting is actually our other businesses, Metin said the DNA purification business and the products that we sell to large farm companies are growing quite rapidly, and we're seeing a good pipeline of revenues and also partnerships in this area, so, um, I think this is one indication that the PHARMA industry is definitely not the doom and gloom that it's being painted at the moment. There are, you know, you have the right product offering in the right spot, there are very attractive areas where the pharmaceutical companies are clearly focusing on some of these areas while this one is still small is still attractive in terms of its growth rate.

On the next slide again an estimate, we did just for the United States because that was quite significant in the last quarter, if you look at the revenue base that we had in the U.S. it grew about 11%, versus the last year numbers, if you look at the adjusted, if you look at the academic research, it grew at about 15%. That's pretty much the growth rate in prior periods. This one is a little below the last period. The summer quarters are typically slow on the academic side as well. The pharmaceutical sector was negative in the second quarter and now suddenly went to a positive growth in the biotech industry as well. This is, a little too early to start saying the sun is coming out on. We have indications there has been a turnaround in certain segments that allow us to be more hopeful on the year 2003.

On slide 20, I just put down some of the PNL and wanted to walk you through it very, very briefly and just compare it to the guidance that we gave in July on our website there was a guidance spreadsheet available, most of you have been on the call, I guess,on July 2 where we gave guidance for the rest of the year as well as 2003. We had as guidance for the third quarter, $74 to $76 million. We came in at $77 million. There was no currency impact, or no major currency impact on the top line that contributed to this. This was really just a better-than-expected performance mainly on the instrumentation side. We had quite good pickup on the instrumentation as you know, that was quite a negative, um, in the second quarter while the consumables were strong in Q2, the instrument had a high impact, especially in the U.S. That also changed the gross margin a little bit. It looks like a percent, if you calculate the numbers, you will see sometimes you have the rounding issues but the gross margin difference comes from a higher instrumentation sales. Our instrumentation products had a lower gross margin, about 50% vis-a-vis, almost 75% or more in some cases for the consumable products. On the operating expense, and I'll talk about that a little more in details, but we reached our absolute U.S. dollar number. I think there is some sigcan't measures that we put in place, I think we had successes in that area as well. The gross margin impact flows through to the ebit line slightly lower as a percentage, dollar wise pretty off line. If we look at the net income line we did about 9 1/2%, um, on the net income line, and the impact was really on the other line. We had some, instead of positive impacts on the foreign exchange we actually had exposure to one of the few currencies that had a negative move against the U.S. dollar, which was the Norwegian Krohner, and also there were some transactions on the Japanese Yen. All non-cash transactions. Mind you, it's not impacting our cash flow statement, but these are intercompany loans that were unwound after the acquisition of GenoVASION, and we took a loss on those of a few hundred dollars. I saw from a lot of the models that were out there from selling bisides, this other income line was expected to be positive, and this was the major impact on that. But, again, I think the net income line came in as we had been thinking of it. It would have been nice, obviously on the net income side to not have the impacts that would have easily brought us on to the 6 cents. For us, the important number in this third quarter was the top line, I think there has been some uncertainty, certainly many ways, spread about, that you know, the PHARMA industry is in the doom-and-gloom industry, and that revenues had no chance of growing at theses growth rates. This top line, I think, is one thing we're proud about. The fact we were able to keep the expenses flat and make our target on the EPS line as a percentage of sales, is what we met.

Understand there was some confusion in the market regarding consensuses. The multiex consensus was at 5 cents and from that side, we feel that that was a very positive performance for us. Obviously we're in a period of recovery after the revenues were readjusted and our operating expense base was seen as too high, our choice is to grow the revenues as the markets are so attractive, use these resources to amplify our benefits out there in the marketplace, and have the revenues grow to match the resource and the infrastructure. If you look at slides 22, what you see here from Q3, 2001 to this year, we grew about 11%. I think the more interesting number is actually the comparison now from the employee number as of June 30, 2002 to September 30, 2002. There was a full one person that came on to the company, which was already committed higher, so you see that we're clearly focusing on keeping our head count flat, growing the revenues into the size that we can use this infrastructure for a most optimal way to get the best possible operating margins.

The operating margins is something we really want to focus on. I think just to comparison, there are companies we listed, companies -- I won't really comment on those. There's one number I just wanted to point out is the last line, operating costs as percent of revenues, now these companies have different business models, different product lines in some cases but sell to very similar product group, at least to a certain percentage of their revenue base. If you look at this, you see that there is an average of 36% of sales being spent on operating expenses. Qiagen is currently a 49. Now, we're certainly a premium company. We invest more in research and development. We invest more in a premium service to our customers in a very focused approach. However, we always said there is significant room for improvement there, and I think this is a great benchmark of where we think we can go over time, and certainly we should be able to move into these types of numbers that you see here. Obviously it's a function of size as well, and that should allow you also to make some references on future targets.

On the near term targets, we have statements, slide 24, what we basically are doing and want to do is just simply take the operating expense base that we have and hold it flat. That is the area that you see here and what we want, this is fixed-cost area, we're holding that flat, and what we want to do is increase these revenues based on our projections and slowly move back up the operating margin. Now, this is not so unusual for us to do in the next slide is actually slide 25, it's actually a slide that the lower the bars go, the more positive, so, this is a different interpretation than most bar slides. The lower the bar, the more positive. You see that our goal is simply to reduce the operating costs as a percentage of sales and move the operating margins back to levels we have seen previously in the fourth quarter of last year. We had 24% operating margin. We're now down at 17. We have a clear mission out there that our -- just to make sure that these operating margins come back, and it's just a matter of keeping the infrastructure and the resources flat, that's something we can manage and take up the revenues and, again, our core product areas are showing a fantastic growth in our markets. It's one of the fastest growth rates in the life signs supply industry. From that side I think we have a mission that is definitely pleasurable. However, we are expecting a lot of growth, not only over a short period of time, but many years, and we're preparing for that very well.

We just finalized a very expensive capital expenditure program in which we invested $150 million in infrastructure and manufacturing sites in Maryland you saw pictures of that site, and on slide 26, shows some pictures of our side, a state-of-the-art manufacturing, the German site, and the office building that is the core of our site here in Germany, and we just moved into that a few weeks ago. On Slide 27, I just wanted to address some of the issues that we hear quite often, regarding the [INAUDIBLE] nucleotide business. What one can be upset about its current performance. One can say the contribution to Qiagen has been negative in this year 2002. However, we are very convinced that synthetic nucleic acids in what form ever are extremely attractive and strategically very, very important and attractive products going forward for a host of different applications. Many of them including areas such as the gene expression, or functional genomics areas that we were just talking about. These areas are definitely going to rely heavily on the availability of synthetic nucleic acids and having them is certainly a very significant acid. However, we're certainly very sensitive to also near-term and short-term interests from our shareholders and, therefore, we are definitely going through various scenarios to understand what would be the best for Qiagen and its customers and its shareholders, therefore in, a long-term option number one would be simply to sell this business, we're number one worldwide. If anyone can make it profitable, it should be us. However, it's one of the options we can look at. The second would be to partner it and to create some kind of a structure that would allow us to have the product; however, in the less committed version, and the third is to keep or make it profitable and there are definitely scenarios that we are working through that show this business can be turned around and made profitable in a very short period of time based on technological advances and also the capabilities that we have in the forms of infrastructure. All three of them are being looked at in a very objective way, and I think that it's too early at the moment to be able to tell you what our preference is, but it's definitely something that we will be able to comment on in the near future.

I would like to leave that area now and go to something totally different. We have been getting a lot of questions regarding our trading in Frankfurt, as you know Qiagen has a very liquid stock. We actually trade more than many large Dax companies here in Germany, about a million shares a day in Germany traded and, we're the largest component of the iMac 50 index, the [NOIA MARK]is being desolved. I would say that the standards that are being used by the [NOIA MARK] all segments and a new segment is emerging called Prime, in which all companies are being traded that are willing to take higher reporting standards. Be it a [BAYER], a BSF or a Qiagen. This is a development that we not only followed, it's development that we actively helped also developed and also contributed significant input from Qiagen to, so we're extremely happy about it. It allows us to trade now alongside companies that have a commitment to high quality reporting and also reputable companies and it allows us to have one of the most efficient and probably one of the most regulated trading platforms in the world. It's actually been very, very positive what we saw coming out of the Frankfurt exchange over the last two years. We intend to be among or if not even the first company to apply for trading on the prime station. It will take a few months and all major companies will be moving over to the prime segment and that some should be finalized by the end of next year. However, we will see probably Qiagen trading on that exchange much earlier than, that maybe as early as the beginning of next year, beginning of 2003.

Just to summarize, the highlights of the third quarter 2002. We moved into a new production and office site in Hillden, Germany. We have been building on it for two years, a major event, we didn't throw a significant party but made a contribution to the victims of the flood in eastern Germany. And we had a major supply agreement that we announced with Glaxo Smithkline. We have more of those actually going, we're not announcing all of them going forward. We expanded our supply agreement with [INAUDIBLE] Metrics, right along the line of a gene expression wave that we're seeing happening now, right along the line that was talked about forever, functional genomics. We launched the MDX products, the BiRobot M product line, sensor chip, liquid chip, and also launched our first product from Xeragon in an Oligo Set format. With this, I would like to hand back to Solveigh to open up for questions. Thank you.

Thank you very much, Peer, we're looking forward to discussing your questions. I would like to open the Q&A segment by handing over to the operator.

At this time time to register, please press the one on the touch-tone phone to. Yaw the question, press the pound sign. To register for a question, press the one on the touch-tone phone. We will take the first question from Maykin Ho at Goldman Sachs. Go ahead, please.

Hi, I think you mentioned the sales were high because of high instrument sales. As you know the sales of instrument tend to come in lumpy fashion, can you tell us what -- if this is sustainable, number one, number two, what is the backlog now versus a few quarters ago.

Uh-huh, yeah, the numbers we said were better-than expected on the instrumentation side, however, that is a small percentage of our overall sales base, so we're talking only a few hundred-thousand dollars, just south of a million dollars higher-than expected revenues on biorobotics product. This is not so major that it could really be considered lumpow an overall company side, and normally, the fourth quarter is the strong one for instrumentation. The backlogs pretty much the sale that we normally have, I would have to go back into the numbers, but I guess this is something in the range of $2 million or so that we have on backlog, so we're currently installing within three weeks or so, so that one about the backlog that we have. Maybe one note on the fourth quarter, a good question in terms of guidance. Now, it could be that the instrumentation numbers, if they're significant in the fourth quarter, that the revenue, as a percentage of sales, right now the guidance we gave was around 67%, you know, again this year, half a percent up or down can fluctuate the gross margin and, therefore, the operating margin number. That is nothing really to be concerned about. It's just a short-term sales mix so that would be maybe one statement that we make on the Q4 numbers that that might be a readjustment possibility.

And on the top line, was any foreign currency impact, I may have missed it because I came in late.

No, compared to our guidance, there was none. No.

Okay.

The next question is from Daniel Mahoney at Morgan Stanley. Go ahead please.

Hi, I've got a couple of questions. Could you talk a little about the inventory levels, it seems quite high. Could you just give us a breakdown of what were finished products and what were the process. Second question, you talk about Oligo business having net margins, net profit is below what you would like it to be, could you give us an idea what have the margins, the three major segment negligence the business are -- consumables, instruments and Oligo's are as of Q3.

Um, okay, first question was, um, on the balance sheet on the inventories, um, yes, you're correct. The inventories did increase, went from $46 million to 49.9 million dollars, and the split that we have there is, actually finished goods have been flat at 21 1/2 million, a work in process, also been flat about $10.7 million, and, um, raw materials have been flat at about $14 million as well. Um, the only difference that we had was instrumentation product. We had various purchases that we made under purchasing agreements and preparation for the fourth quarter of instrumentation product. Namely we launched the luminex sensor chip, and also the MDX systems and, um, also some of the design Mark platforms included in some of the new packages that we have, and they contributed to a $3 million buildup of inventor in our automation, our instrumentation unit in Switzerland. That was the major difference. Um, the second question was regarding the profitability of all three of the segments, um, the consumable segment is significantly more profitable on the ebit side than the overall accompany. We currently see that the Oligo nucleotide business is not profitable, it's contributing a loss. Totally unacceptible as a business target. It's depressing our ebit margin significantly, and we are probably seeing a net loss contribution of 10% of sales. Again, it's difficult to measure because one of the major impacts, the way we measure the businesses, we allocate a sales force allocation, so of a very extensive sales and marketing for us, we're allocating a certain percentage also to the Oligo nucleotide business. People are also selling the products and, therefore this can go into a loss. This is obviously an estimate, and the instrumentation unit is currently around that level again also approaching the black and, again, this is a more lumpy business as we were describing before, more and more we don't see the instruments as a stand-alone product, but you have to factor in the reagent stream. And the consumables that we sell in these products, that are often sold as a combination and we do not really issue on a stand-alone basis for a strategic valuation of the business, the instrument that, the stand-alone product, but also for revenue streams from consumables.

And just, I might have a follow-up related to some of your thoughts about the Oligo business. Is there a way of stripping out kind of low-end commodityized business, and stripping things like the RANI business, which are quite profitable. Is that easy to do?

That's one of the point -- a good point. One of the options we were looking at, that's what I was describing before with partners there could be certain areas where we can keep certain of the high-end products and then also just dispose of some of the more plain MANILA areas. Again, all the Oligo nucleotides, half of the business is highly attractive, quaptitative PCR products and also the RNA areas. From that side, we're looking at it from a strategic sales marketing prospective if it makes sense to unbundle them or if it can be unbundled.

A good point.

That's one of the options.

thanks a lot.

We we will take the next question from Aaron from Robert W. Baird & Company.

Good morning, everyone. You can remind us what kind of impact the delay of instruments had on the fourth quarter of 2001? If I remember correctly, some were pushed into the fourth quarter.

Yes, we did have a delay in that area. If you look at the slide. Again, these are very much senates, some of the orders were canceled or just insulation dates were postponed, so going back it's difficult to say what the impact was. If you see on the instrumentation numbers on slide 17, the difference between the reported numbers in Q3 of last year, and the as-if numbers was about $2 million, a little under that, around 2 million. So, you see the difference from $8 million on the top spreadsheet half, and $10 million on the bottom spreadsheet half.

So, would you say that difference, or delta moved into the fourth quarter of last year?

It was, again, we did have some delays and purchasing cancellations and not all of that discrepancy was due to backlogs, so, you know, effectively a purchase order not being placed in the shipment also not being done in the third quarter of last year, could have happened we probably say about half of that was real carryover. Again, last year we said the number was not too significant, you know, we're talking 1 or 2% of sales here, um, it's, um, it's not really very much measurable for us, what exactly, um, was not canceled at the end or, you know, you steams have cancellations on the products if there are significant delays or changes in the environment. But, at the best guess i would have would be in the range of 1 to $1 1/2 million carryover.

Um, on the revenue growth breakdown slide that you provoided, which was very helpful, um, I wanted to know if that breakdown included, and you adjusted it based on acquisitions, is that based on reported numbers or adjusted numbers for September 11th?

That's for the September period. Well, um, the first column, where somehow it seems that the description 2002 was dropped, but the column where you see the highlighted number 75, the difference between the 75 and the 77 that we reported is genoivation. That, obviously we didn't have last year, so we didn't have the difference between the 70 line, and the number 70 that you see on the yellow bar and the number 70 you see above the yellow bar.

I was actually referring to the pie chart on page 15 where you have geographic distribution --

Oh, okay. Easier to answer question, yes, the large numbers are the reported numbers and the small numbers are the acquisition adjusted numbers.

Neither of which include September 11th impact?

That is right. Yes.

Okay, last sort of question, you can speak sort of about the current environment and the academic market and PHARMA biotech market as we move into the fourth quarter?

Yeah, I think there are a number of different seens that we see, and, again, I might note that we will not change guidance, I guess that was dropped at the end of our presentation but the guidance for the fourth quarter that we published in the July presentation and also for the year 2003 remains our guidance for the moment. The visibility in the third quarter was definitely low. I think ultimately everything turned out very nicely. We're seeing, however, new searches coming out of the PHARMA and biotech sectors. Number one, a major issue, which is the switch over to the functional area. It's genomics is definitely an area that has not always been the best word it a G word, but if the analysis of nucleic acids is going into the next step for the moment, a massive step-off for Qiagen, and this is what we're seeing all over the place. We just launched in the third quarter, and you can see that on our websites, massive, programs, marketing programs to address exactly this area. You see that from other companies, revenue basis in this area, very significant growth of these types of product, and this is exactly what we're looking for for 2003. Um, so even if the overall budget, um, are increasing for us, the major issue is that this shift is happening. Over the past few years, for instance, the public-funding areas were mainly in the area sequencing was not a very attractive business for us as we have discussed very many times -- times in the past conference calls. Now, suddenly on these budgets, you see a much more significant portion of expression [INAUDIBLE] area, not only in terms of growth and opportunity for us, but in terms of the generatable value as significant step-up. So the academic markets in terms of the money flow, are quite tangible for 2003, for -- there are some, again, there is always this one issue, when exactly when will the fundings be approved, still a bit out there, but, you know, there have only been few instances where this has been very, very late, and um, we did have some discussions also with DNA on this issue in the PHARMA area, we're seeing good signs, what I think in many ways is difficult to understand, how that industry was painted with so much doom and glom. At the research and development areas of the PHARMA companies, are not standing still, they have to turn on new products, and we are seeing indications are for them to have exactly the same growth as they had in 2001. Um, so, we are seeing some indication that what we have projected, that this would be a short-term lowering of R&D expenses, that is this is proving to be right. We talked to the top 5 PHARMA companies and had direct discussions with senior management and also, researchers in in the meantime. In biotech, I heard a statement that funding for small funding for bioteches is an issue. This is not really for us, a major market opportunity. The small biotechs are 3 to 4 or 5% of the sale. The major portion comes from the large 10 biotech companies, so they put in this one chart that 49% of, the biotech market is actually the top biotechs. They're giving us similar indications as the big PHARMA companies as to their spending next year. So even on this increased spending for us, probably more important is the increasing shift into Gene expression products and thereby, generating a very significant step-up in terms of realizeable dollar revenues for Qiagen.

Thank you very much, Peer.

Thanks.

The next question will come from Cherie Walker from Deutsche Banc.

Good afternoon. Can I court fet the issues from what the operating and Cap Ex numbers were?

Yeah, we will be publishing the Ca Ex with the full cash flow. In a guess two days, so we did have the final investments going through in this third quarter for our buildings but going forward, I think we will see a significant reduction in the Cap Ex rate going forward to 6 to 7%.

Okay, and then can you give me a little more flavor on the minority investment line and what we should expect there going forward.

What we have been doing, one portion is in pre-analytics, another portion is the investment in a joint venture that Jennow vision had with a Norwegian research snout, this is the number that will probably remain at a comparable rate at the preLinux numbers going into the black pretty soon. We see also that some of these products we're now developing and we're selling individually, and some of them we're selling through the JV, more complicated to track, but this is probably a number that you will see moving more down to 0 and staying that way. And, if you move it over the course of 2003 to 0, that would most likely be the number to use.

Great, and then finally, when you look at Xeragon revenue, can you give us an idea what have the growth rate was like in the quarter?

Growth rates for the Xeragon products were enormous because the company didn't exist last year. So, we had infinite growth rates on those products and we had, as a guidance to do something in the range of $1 million in sales this year, and I think we're well ahead of that number already. So, we're quite confident this will be a possibility for us to preside additional revenue opportunity to our projections for the year 2003, possibly. Once a little more visible, we are just rolling in larger customers, and it seems like we have acquired a very interesting piece of real estate in this area, but first for the third quarter, let's put it this way: We're almost already at our guidance for the year, so it's a very attractive acquisition for us.

Okay, thanks.

Uh-huh.

The next question will come from Nick Turner at Jefferies. Go ahead, please

Hello, can you hear me?

yeah, hi, Nick

Hello there. I would like to get a better grip on the old growth in the business particularly in consumables, playing with [INAUDIBLE]. Which I guess I disagree a little with yours, but looking at -- if one makes an assumption as per your guidance in quarter 3, 2001, that sales in that quarter were between [INAUDIBLE] and $19 million, another $6 million in consumables, that kind of naive calculation puts consumable revenues in the third quarter 2001 around $54 million, which based on simple calculations for this quarter would put growth down, summer around the 10% level. I mean am I right in that, I think that you have 17% yourself, which is still a significant slowdown from the growth that we have seen in other quarters. And so, I wonder could you enlighten us as to whether or not these slowdown in sales of instruments is talking through to consumables and is thecore, the underlying growth rate in the lower teen levels. If one then looks at sales in the United States for example, you did indicate growth excluding acquisitions of 8%. That would suggest if one makes the adjustments for the 8 million or so dollars you were shy last year in the quarter, that, in fact, growth, logistic growth year on year is pretty much flat in the United States. And I wonder if you could clarify that a little.

I think just very important to comment immediately on this. This is important to note that we're definitely not seeing the, anyone can make this assumption of everything being like a virus and contaminating the whole business. This is not what we're seeing. If you look at, and again I used the $7 million adjustment, you're now using ate. If we assume that a certain portion is ttributable to consumables to a certain portion of instruments, that's how you get the comparisons. It's all hypothetical again. There is no way we can go back and say these products were impacted and these products weren't. Again, also if we look at 2002, we're comparing then in this case in the bottom half of this spreadsheet, a healthy 2001 on the adjusted version to a, definitely in many ways a difficult time period in 2002. So these growth rates are certainly in many ways it's very difficult then to clean up one period and not clean up the other and take a comparison of the growth rate. But I did try to do that, and you can trace the numbers, I'll be happy to give you the spreadsheets, that are behind us, and you will see that I calculated it and this 17, if you look at the United States, that we saw in the earlier period, the earlier chart, the growth rate is significantly higher than it was in the second quarter. The second quarter, the growth rate had been almost half what have we saw here in the third quarter in the United States, not adjusted for September 11th. If you would take into the September 11th effect into these numbers then definitely it would have been pretty much comparable to what we saw in Q3. Again, these are all very -- and Q2. These are all hypothetical analyses. What, um, what would have been if and then and there are so many impacts on it. That's why I try to make it here simple and give our interpretation of it straight out.

to clarify, the numbers that you have given us on page 17 or slide 17, they're not actual revenue numbers, they're your own work --

yes, absolutely. That's why a made a lengthy cautionary state on them.

You placed quarter 2, 5% growth in the U.S.

yeah. 8% growth excluding acquisitions in the third quarter.

However, with if we make the adjustment for, and let's say, around $5 million lost revenues in quarter 3, I mean really what I'm getting at in many respects is all the adjustments we made for quarter 3 last year on the basis of the September 11th effect, in fact, a forerunner of the general slowdown in the business and, really, that is in some respects, registered, distort the growth going forward and overestimate the growth going forward based on the fact we made the adjustments for one on September 11th rather than a change in the dynamic of the market.

Well, the only thing I can say is that you know, these numbers give you a scenario, and they clearly show otherwise, and it's certainly not our indication that we're, in terms of the money flows, also in terms of the application areas, destined to so a slowdown in these areas and from that perspective, um, I don't know how to answer your question. I would be happy to discuss that with you maybe in detail, you know, what your spreadsheets are but, um, I think this would expand beyond this format, but I definitely, um, well, just tried to address this up front, this one issue that one could have with all of these adjustments that one could do with the last period and, also the United States and then, um, throw these numbers back in. These are global trends. You can't have a slowdown in one area and not one in the other. The science market is the global market. You might see short-term differences in different areas as we saw in previous periods and also in this third quarter Europe and the rest of the world growing much faster than the United States, but that's pretty much indicative of, um, what we have projected also in July that we saw in the United States in the PHARMA sectors, and it's very much also evidenced by the lower instrumentation numbers again, you know, this is a minus 17% on instrumentation numbers, which are, in a major portion, purchasing in the United States. So, again, this I think goes to great lengths to address your question. Also, the synthetic nucelic acids town a year ago had only in the United States, it was just acquired in the second quarter of 2001. So these are just a reference to that. The low growth rate in the United States in a major way comes from instrumentation and synthetic nucleic acids. These businesses are quite significant over there.

Great, I wonder if you could ask two quick questions to follow up on that. Um, you have attributed the fallen gross margin to increased --

[ Overlapping Speakers ]

of instrument sales in the quarter, higher than you were expecting. As a percentage of total sales, instruments are at 10% compared to the 12 or 13% in previous quarters, I wondered whether aside from the Oligo business now, whether we have sewn pricing pressure on consumables and whether the margin and consumables dropped to any degree. Finally, growing inventories at the expense of the rather than scaling back production. How much longer do you think we will continue to see an increase in inventories as you presumably manufacturing at the rate one would have done for somewhat higher growth, scale back in any degree.

The question second quarter first, they remained flat with the exception of purchases, mainly for for products. Of all product offering of products that we launched in Q3. The second part of your question to give me reminder.

You had a 1% margin, attributed to higher-than expected sales. In fact, the number that you, quote, suggested instrument, a percentage of total sales fell from between 12 and 13% that you posted in previous quarters to 10% this quarter. [ Indiscernible ]

margins should have gone up.

I understand. Again, the 67% that we gave as guidance in July, based on an estimate what we would be doing in the instrument number that we had projected for Q3 was lower than we had actually achieved, and, therefore when we had a higher-than-expected instrument number for Q3 the number that we had guided for July of 2002 was incorrect, first of all, we had higher sales and second of all, a larger portion of the sales were instruments, vis-a-vis our guidance that we gave for three months before that. It's not compared to prior year or any previous period. It's just compared to the guidance. That's why, you know, the researchers that I gave and the note that I made next to the numbers I gave on the guidance numbers.

Okay, Thanks.

I would like to maybe just first, um, for the group also address Cherie Walker's question on the cash flows. The 6K that will be filed pretty soon, we currently have somewhere in the range of $28 million operating cash flow for the year. 9 months numbers, we invested about $50 million in the first nine months of this year again. Again, this is a number that will go down significantly, $47 million of that when were by far the most also infrastructure, and, we had a cash flow of financing of about before $12 million. So that should give you, let's say, net decrease of cash over the full year, of about $5 million.

We will take the next we from Sam Williams from Lehman Brothers. Go ahead, please.

Yeah, good afternoon. You talked about some of the growth in the instruments, um, that's about half a million dollars, if I'm right over Q2. Can you say how much of that was due to sales of the new instruments you launched in Q3, also, you have also obviously talked about U.S. recovery in terms of spending. I mean what gives you comfort that you can, you know, kind of give us comfort that you know, one of the things you talked about earlier on at quarter or so ago was the fear that the spending slowdown might spread into the PHARMA area. What other areas, geographical or industry segment. And also --

uh-huh.

No, go ahead.

No, okay, I'll just take the third question and then I'll answer all of them. Okay. You want to go ahead?

Oh, okay, yeah, I missed something. You mentioned about an adjustment on Q4, I wasn't quite clear what that was. And then, the Oligo market, again, earlier comments that you made, you felt was the pricing pressure that stabilized. You can give us a view on what you're seeing in the last couple of months.

Okay, I'll take the first three questions and maybe can then take the Oligo question. Regarding the inventories, the products were just launched some of them at the SCC and some of them as late as mid-September, so definitely there was a significant increase in inventories of new products, what we had was also from the acquisition of, of [genoivation] that it has an instrumentation business as well now launching some of the M-6 and the genoivation product, again, M6 was part of the [genoivation] product, and the M-48, the M lines. We expanded our lines with PFF, as we issued in the press release in preparation of the sales, referencing to, we took on about half of the differences related to the products. In addition, we also have BioRobot 8000 materials and as products which are probably each half of remaining difference. If there is a 3 million deference from PFF is related products from 750 from the two others in terms of the spending spread, I think it's important to note that you know, the fact that the United States is on a slower growth and PHARMA industry has nothing do do with it being the United States, you know, in being far away from other countries and it might spread again the virus theory, what we are sewing simply is that companies like Novartis and [INAUDIBLE] you know, erosion and Novartis are doing the majority of their genetic research in the United States. Even if they're pharmaceutical companies that your -- [ Indiscernible ] A significant part of their research and development base is actually in the United States. What we, therefore, saw was not being the U.S., but was being the pharmaceutical sector and genetic research. Preclinical research contracts in Q2, and this being primarily conducted in the United States, and that's why their revenues were low more that area. Also, there is a much larger biotechnology community in the United States, um, that is directly influenced by the pharmaceutical industry. This impact was heavier there. It has nothing to do with the location of the company and it's spreading overseas. That would have happened a long time ago. These companies are in a global competition. The PHARMA market acts in a very global way. There was an interesting research piece from the Lehman Brothers coming out detailing us a few weeks ago that showed how the pharmaceutical markets were reacts in concert based on the impacts we have seen and we have probably sewn the worst of it in Q3.

In terms of the adjustment of the gross margin, the one number we're still uncertain on is the gross margin number for Q4, because yesterday we have a higher percentage of sales of instrumentation products this, mean a number that will move around a little bit, but I think that is a little too early to say. And again, for us the target is in the fourth quarter. I think we had a guidance of 78 to $80 million and 6 cents a share, and this is for us a target; and um, the gross margin line was, um, at 67% and what I'm saying is depend on this product mix, this could be 66. Um.

Right.

That's still early to say.

That's one number I would be cautious about just for internal planning purposes. For Oligo question, I'll hand over to Metin Colpan.

Thanks, Peer. We will address several segments, and we don't really have a price erosion and pricing pressure on the labeled Oligo nucleotides and the longmers. But on the so-called plain MANILA, peoplers, which is unfortunately the majority of the business, we have a tremendous price pressure. The price is coming down over the last 12 months probably approximately if we take the lowest prices from 20, 24 cents to 18 cents. This is just within 12 months. Yeah, and that's definitely hurting the whole industry, and everybody being in that by some people coming in and offering prices at this low level, where nobody's really making money on it. And I think the -- whereas if we go to Oligo nucleotides, not going to academic customers, which doesn't buy at a high, purchasing level, then the base -- or the price per base around 30, 35 cents, which is definitely the more healthy level, but that is how we so it, and I do not really expect that,on the Oligo nucleotide business, the prices will come back to the old levels. The focus as Peer said discussing that business, we have to focus on the higher value of Oligo nuceliotides, or the longMERS with DNA. There are IP shoes and freedom to operate issues which we addressing right now, you know, and that is definitely the strategy to bring the Oligo business back to profitability and growth if we're going this line.

Okay, thank you very much.

We will take the next question from Erica Whittaker at Merrill Lynch. Go ahead, please.

Hi, there. I have just a couple of questions on, um, numbers. First of all, with the currency impact on the third quarter you said that it wasn't terribly material, but you gave us a breakdown of country by country your sales and I suppose looking at that, quarter-on quarter, somewhere a currency benefit of $2 and $3 million. You're saying that's not important because it's doing what the consensus would be, is that it?

no, no. I said there was no material impact on currency compared to our guidance.

Yeah.

given in July of this year. If you look at the currency impact that we had compared to last year, it was about 1 1/2 million.

Uh-huh.

So.

Okay

That was the currency impact on a year-over year basis, and again, we do also have negative currency impact, geno vision had a significant revenue base on Aynor wojian Krohner, a crazy currency the last few months and the Japanese Yen exposure that we had was quite significant. Those were two offsetting impacts, visa video the pure EURO, and dollar impact.

Okay. The other question I have, going back to the gross margin and the impact of instruments on the gross margin, and I don't know if I'm working this out incorrectly, but last quarter, I think it was 11% instrument sales. Is that correct, about $8 million. You said the sales were 10%, they have come down in terms, the actual number to about 7.7 million, but in order to move the gross margins by 1%, wouldn't you need between 1 and $2 million of instrument sales because of the 50% gross margin? I don't know. Maybe you can help me out here.

Again the same thing. The numbers that I was giving, um, was always compared to the guidance, and the guidance that we had for the third quarter was 67% in gross margin.

Uh-huh.

And we had a certain instrumentation number in there, which came in higher, and um, about that number that you were saying, so we had easily 10% more instruments than we were original thought that we would be having, and, um, again the way the roundings worked, that was more than enough to move it down. So this is always compared to the guidance. Again, the whole infrastructure base has been growing. We have been finalizing certain infrastructure, um, namely also here in Germany, the big manufacturing facilities flowing into the cost of goods flying, this is the basis for our forecast going forward.

Okay, um, and then just on the, um, the Oligo business, again, you guys obviously won't be the only company feeling the pension in this market, and something that we've heard in the field is that there are companies who are now leaving the business because they're finding it too difficult to sustain and would it not be possible that if you hung in there for awhile it, you know, pricing may stop eroding or is the issue that pricing where it is now at about 15% or ever down, is that something that is just not sustainable to actually for you to become profitable and that pricing would have to increase again.

I think you have your,-- or exactly the right issue. This is the million-dollar question. Um, we clearly value the strategic importance of synthetic nucleic acids in different forms, whether it's DNA or RNA and the content forms. Very significantly for certain strategic times going forward. I don't mean acquisition work, just strategic product developments in our area you are right that have people are exiting and certain companies, also major ones have a commitment to the business despite being a drag on their numbers. For Qiagen, our growth rate is currently two to three times faster than most of these other companies, and, um, in many cases, we have a smaller revenue basis like the size we have, that some of the other players have this business as a much smaller percentage of their overall revenue, for us it's a 13% quite significant and impacts our numbers. It's like a sports car going at 100 miles an hour, if you go over a small pebble you will have an amazing impact, vis-a-vis going on a truck at 30 miles an hour, it's a different issue. So we have to understand what the value of this volatility is for our shareholders and, um, we have to understand if the value on the long-term for our customers is so high, and also the the competitive pressures, um, competitive dynamics also are such that we can turn it into a profitable business. We think we have a scenario where we can make it quite significantly, over let's say the next year but there have been significant improvements on the R&D sides, the cost of the manufacturing these nucleic acids has dropped dramatically based on, at least at Qiagen, based on certain developments that we have done on the manufacturing technology. We have significantly reduced the cost of the variable materials going in. We have more than quadrupled the through-put of the existing instrumentation base that we're using, which is proprietary instrumentation base that we're using to manufacture the Oligo nucleotides. It's not a total dog business, it's at the moment where I think there is a clear focus on a quarter out or two quarters out, that we understand that we have a duty to at least understand very well what the values are on the long-term. Very refreshing to see a two year out question being asked in this area, which, I think is very valid.

Okay, but you -- what you would need, I guess, is higher price or the higher margin parts of your Oligo business to grow to compensate for the price erosion that we have seen in the other areas in terms of your own, you know, fixed costs and all of that.

That's one. It's product mix mix would be one.

Yeah.

The second is reducing the infrastructure as were able to significantly increase the manufacturing capacity of our installed base. We can manufacture Oligo nucleotides probably the whole world 1 1/2 times over. Due to manufacturing advantages, our installed base of manufacturing equipment has become so efficient that we can address the needs of the market with our installed base. We're number one in the world, you know, if anybody can turn it around, it should be us, how far it's a question of short-term volatility on the earnings, turning it around, going through two or three or four quarters and making it profitable at the end of the period. I think it's a doable thing. One of our options, and we want to be here on the call once and be able to tell our shareholders exactly why we are are taking a step that we're taking; and that's currently what we're conducting.

Okay, thank you. Oh, one last thing, what is your tax rate going forward?

We gave the guidance somewhere in the range of between 37 and 38%. Again, the small numberson the net income sides this, can vary significantly based on the company flows.

Okay, that hasn't changed?

That hasn't changed.

Okay, thank you.

We will take the next question from Stephanie Phillips at HSDC. Go ahead, please.

Thank you very much. Actually most of my questions have been answered. I still have one rather basic question, which pafertsly asked by Miss Whittaker a second ago. Concerning slide number 5, a problem to understand what is the concerning instruments. We had correctly, 7.7 million sales in instrument instruments in Q3 and in Q2, we had about eight million sales and instruments. I don't understand how it says a 7% growth and reacceleration, and similar thing holds for the synthetic nucleic acids. There I calculated revenues in Q3 of 10 million and in Q2 of 8.7 million, so it looks like there is an increase between Q2 and Q3.

The numbers are not correct. There is a rounding on these percentages that is quite significant in those levels we had in the second quarter 7.4 million dollars of Oligo nucleotide sales of instruments and in the third quarter, eight million. And we had in the Oligo nucleotides, about 10 million in both quarters.

Okay.

That's where the numbers come from, and the consumables were from 52 to 55

Okay. Thank you.

It's a rounding number.

Uh-huh

They can make a difference

Okay.

We will take the next question from Chris Redhead.

Hi, guys, relate to this Oligo is business again. I mean some time ago, the whole business of the price erosion in the leerest of the business was an issue and you addressed it by saying you were already focusing on the higher, more valued end of it, is it case that, in fact, the higher more valued seeing quite significant price erosion or was, in fact, that you were more exposed to the lower end than perhaps we were thinking at the time.

Well, one statement there that is simply there was such a dramatic erosion in the prices that half of our business which was the plain MANILA business, had a significant price erosion. The -- that is sufficient to, on certainly these revenue basis and the fixed-cost basis. The larger you are, the significant it can be in many cases, to have the effect as we are now detailing it. And Qiagen always had a very large following in the area of longmers and modified synthetic nucleic acids, which are areas and are sought after. They were very much used in the high-pout year areas of the genomic research of arrays and genotyping. Um, and it was a preferred supply tore the high through-put of genomics labs, one of the reasons why we were leveraging on that. The product mix has actually changed to the benefit of the higher value added products with the edition of synthetic RNsoo, RNA. The question was very valid as before, um, I think mahoney, if oneka can flit out the low end flame manilla products from the high-end products, ultimately the run on the same machines to a certain manufacturing, and, therefore, you get some economy of sail.

Yeah, on the other hand, you're also saying that you have huge, huge capacity there, and you know, you're going to be working significantly under capacity. For the -- producing something that is a high quality. You can have it, the overkill in terms of production capacity. Is that not the case?

Well, the infrastructure is not, when I was talking about the significant expansion in the infrom structure, I was talking about the instrumentation. The instruments themselves are not the major aspect of this. It's the whole infrom structure of managing the chemical flow and the follow-on processing. The capacity that we were increasing was on the synthesis machines themselves. These HTS machines that were a core of our product. If you had followed on downstream, these are certain minimum efficient size, enfrostructures that you need. That is not where you get the big bang on the ebit margin. But, up, you're right. This is a business that, where we have it, a very big infrastructure where the prices on about half of the business, they they have gone south, this is causing a squeeze on us, on this revenue base and profit base that we have, this is a very significant number, and we have to understand that the short-term pain is so valuable for us in the long-term or not.

Guess the real issue can you spit out the two businesses. Then you look at what the growth potential in the high-end is. So if you're feeling the growth potential in the high end significant to make that sort of investment, clearly the margins are up, but is there a substantial growth opportunity in that end? Given the, you know, perhaps the level of -- [ Indiscernible ] Genomic screenings are lower, maybe the need for huge amounts of long Oligo's might be less than people had anticipated before perhaps.

Yes, not only the long, but I think certainly there are products and exchanges, but the real question is if the demand that we are seeing on a going-forward basis is sufficient to bring us up to into positive numbers, one can boil it down to that simple statement. What we want is a profit period, and what we want is a growing revenue base, and if it's not profitable and not a growing revenue base, we don't want it. It's as simple as that. So what we're touching on in a major way is what you're saying, we're evaluating the long-term outlook of this. What Erika mentioned before is right, we're seeing first exits from the market, and the competitive dynamics are in flux, and it should -- I think there is increasing visibility on this market going forward as these things fall into place, but, also becoming more clear. Again, synthetic nucleic acids are needed in a major way. What is happening now in the industry is almost like a paradigm shift. What we're seeing happening is moving over from discovery genomics, simple, plain sequencing was done. Boring in many ways, the huge factories why where they did genome, they needed Oligo is as well. The second step, we're seeing a much more detailed, more step-by-step-type analysis or differentiated time analysis that need high-end products, that often have hoy margins. That's what you were referencing to how big will that market be also for the synthetic nucleic acid area. Other companies have shown a clear commitment to it and invested in this area and you know, for us the question is: Can we afford to do that, do our shareholders want to do that, and what, if we make a decision, we have to know exactly that it's the right thing going forward

Okay, a couple of just another quick question, instrument sales, where were they? Are they pharmaceutical basically?

I don't have that right in front of me but I assume that there is an increasing amount of diagnostic sales especially the M-6 and also the MDX are going into that area, and we had a lack on the 9604 as it was discontinued more or less by preannouncement of the 8000 MDX, so diagnostic companies, which are showing a healthy pull are major in that area, and I assume even the pharmaceuticals industry.

Right, so they won't be -- there were instruments, the question, the reason why I'm asking the question is trying to get a feeling for where, you know, where the spend is on instruments. If the instruments spend for our research is coming back or what the, you know, you were looking at different marks, diagnostics. They're separate. Coming from a separate pool of money.

Yeah.

Um.

It's a significant part of the latter, and I would have to go through this plate of the products to really -- I can do that in the next conference call that we try to identify which products were exactly sold or at least have some indication of the market segments they go into, but, again, as Metin has been describing, selling metal is not selling metal. We have a solution and the solution is not available in the diagnostic market. It's plain and simple not available, we have a hunging solution now, the MDX is a break-through product, the M-6 brings it into the bench toss scale, a larger part of the market is the relevant size, not the big instruments like the MDX but small tabletop things. This is probably an indicator that shows you where we see the pockets of growth and instrumentation area. Low-through put and diagnostic applications.

Okay, the other point was the preanalystic. Was that growing slightly more slowly than perhaps you had originally thought? I know it's been very difficult to see how quickly that market will pick up. It's not an easy market to --

We have been seeing many more segments of it opening up than we previously saw. We have launched additional products in the third quarter under analytics. The way we're marketing them in many cases, we're doing comarketings, marketings the high product, the BDD product, and some case we create standard -- in the third quarter, we created a new product for the genome ecDNA applications as well, and these are this would be a preanalytics product. I think this collaboration with BD has certainly been more positive than what we were thinking initially. The handling of these samples is more complex, the technology, the chemistry, the mechanics of handling examples, which is BDs absolute expertise. I don't think anyone does that close to how BD does it. For us, say is very valuable access and especially as now we're moving into the Gene expression areas, some of the original Qiagen product, now that enteraction is becoming, um, a great source of expertise that we can use for both product areas.

it would be useful to get more transparency in just how well that business is doing and.

Okay.

It seems for me cloudy, I have to say.

Okay, well, the reason why we are keeping it cloudy is certainly also for competitive reasons. On a business in sales or store, or whatever the projections were for this year. The low teens. Those are numbers that are still at a very sensitive scale and we, that we would try to split them out. Right now, we have seen such a diversification of these product areas in the sense that a lot of the products are sold as protocols through Qiagen products and BG products and the preaccounting is difficult. There is also an issue there that we have to tack to our partner certainly on how they would allow us to disclose these revenues

Okay, so just from the server, an accounting point of view, some of the revenues that we may be have seen going through underneath ebit are now going above ebit. Is that the case?

we have some products going underneath ebit, and as always, we always had products going above ebit. We're selling these products.

Yeah.

They have always been going above ebit and some of the contribution, however, goes into the minority interest line, and others into other ebits.

Okay.

That's how it works. It's quite complex, and again it would require us to give disclosure on numbers that we don't have control over. But, you know, it's a process I would be happy to bring up.

Fine, now, just because -- in my model, that seems to be off, I think, so I need to work on that a bit.

Okay.

Okay, thanks a lot.

Thanks.

Next question comes from Patrick Cook.

Yes, as you mentioned to your switch to functional genomics, do we have numbers in hand that showing for the preanalytics, um, phase going up in that area as this product line is specialized on -- on this question?

Well, just on the numbers again, the area, the products we saw into functional genomics are more diverse.

Okay.

These are in some cases collection products, but it's also a stabilization that we saw under a Qiagen name, formats and purification products under Qiagen formats. I think the best benchmark is to use the company selling the detection systems out there. These are the big pox ease boxes with a trackable revenue growth. You can take all the revenue companies, 33% growth in Q2 and Q3, and um, ABI, um, 21% of the talk man products and, um, does not split up the numbers again but a point of view Iful player in the area. In addition to all the array companies.

And last question is concerning the BioRobot M-series, are you pricing competitive to for example, roush McNell light systems, based on a similar secondary technology, and can you give us a hint on the pricing of one?

We are definitely pricing them very attractively, and as you say that the system as you pointed out, looks similar and has the same metal. The difference is in the particles. The reason why we acquired geno vision which was quite advanced, with culmination of what some of of our products, we made that the leading product. Maybe in terms of the pricing assessification, you want to add a few things?

Yeah, I think we are at pricing at similar to the rush list pricing, but at the end, it's, I think, has to be attractive for the customer. We're approaching and offering certain applications, which you can't get from rush, which is a dedicated instrument platform mainly for the life cycler. We are addressing then the whole market with this applications and just to give you a price if you're interested in, you can buy an M-48, together with the liquid handler for $99,000 yesterday you make your decision today

Okay.

That is a special offer for the product introduction. The product has been just introduced this quarter. It's really too early to say okay, we have sold this many or whatever. What is important is the acceptance of the product and the vast majority, the number of customers interested in this medium or even low applications, which we had directly addressing was the M-48 and the M-6.

Okay, thanks.

Yeah, if there are no more questions, I would like to close this conference call by thanking you all for participating. We hope to welcome you again in our Q4 and full year 2002 results conference call on Wednesday, February 19th, 2003. If you have any additional questions, please call and we will be happy to provide you with any further information. Again, thank you very much and bye-bye.

This does conclude today's call, we thank you for your participation. You may now disconnect.