Qiagen NV (QGEN) 2003 Q1 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the Qiagen Incorporated first quarter earnings conference call. At this time all participants have been placed in a listen-only mode. The floor will be open for your questions and comments following the presentation. It is now my pleasure to hand the floor over to your host, Dr. Solveigh Mahler. [Ma’am], you may begin.

Thanks a lot. Good morning and hello, everybody. Thank you very much for joining, Qiagen's First Quarter 2003 Earnings Conference Call. I'm Solveigh Mahler, Manager of Investor Relations at Qiagen. With me on the call are Dr. Metin Colpan and Peer Schatz. The conference call will cover a 15 minute presentation followed by a Q&A session. We will be using a presentation during the conference call, which can be downloaded from the investor relations section of our home page at www.qiagen.com.

We understand that many people have time restrictions, therefore, please limit yourself to only one question during the Q&A session. To meet all the concerns for many of you about the length of our call, we hope you understand that we have asked the operator to ensure that each participant is permitted to ask only one question during the Q&A session. The time of the conference call is set at one hour. If you have any additional questions or need any further information, please don't hesitate to contact us after the call. As always we will be more than happy to answer all your questions and provide you with any information you might need.

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 reports that Qiagen has filed with the US 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, Solveigh. Good morning or good afternoon, ladies and gentlemen. First quarter 2003 was a solid quarter for Qiagen.

Analyzing our product breakdown on slide five, you see consumable products for nucleic acid purification and genetic analysis represents 76% of our revenue share. These products grew slightly lower in this first quarter mainly affected by the NIH budget delay in the United States. Instruments were in line with our expectations and represent approximately 10% of our revenues. And we observe the very strong growth of our Synthetic Nucleic Acid business, which represents 13% of our revenues. Despite the NIH budget delay, our Consumables continued to grow over 16%, setting a solid base for future growth. In Late Q1 the NIH budget was approved and signed by President Mr. Bush, with an increase over 17% over prior year. Without the NIH budget delay our consumable products growth would be approximately 22%.

Research on functional genomics, expression analysis on microarrays or by real time PCR applications, create an increasing demand for Qiagen's core products for nucleic acid purification and handling. We expect that functional genomics will be an important market for Qiagen's products for the foreseeable future.

A very strong growth driver for Qiagen was our Molecular Diagnostics business. With over $2.6m in market volume, Molecular Diagnostics show a rapid growth for diagnosing infectious diseases like HIV, Hepatitis B and C, genotyping, and oncology diagnostics. As more and more tests become available, and used under routine diagnostic procedure conditions, Qiagen's products will become more and more the standard pre-analytical sample preparation solution. In these routine applications the standardization and the combination of consumables with reliable automation or a key for success. Qiagen's QIAamp product lines for diagnostic applications, in combination with the BioRobot instrumentation platform, offer this reliable and reproducible solution for complex biological specimen to be analyzed under routine diagnostic conditions.

The new coronavirus virus, causing the SARS disease in Asia or other regions, created a rush to fast and simple virus tests based on PCR. At leading virology labs in Asia, Europe and the United States have adopted the QIAamp viral RNA kit as the standard preanalytical sample preparation automatically. All published product calls so far for coronavirus tests start with the Qiagen QIAamp virus RNA isolation kit. These examples demonstrate that QIAamp products have already been accepted as the standard in molecular diagnostics, and that we are very well underway in our strategy to create Qiagen's product as the standard for preanalytical sample preparation in molecular diagnostics.

Molecular diagnostics and functional genomics are very similar in terms of methods and applications. And function genomics research has created a huge market potential for Qiagen products with very high growth rates. Our products address our customers' needs, while working with a broad range of biological samples for complex applications for whom may need highest quality sample preparation for reproducible results. Our main products for functional genomics are our total RNA and genomic DNA purification product lines, combined with our BioRobot instrumentation for reliable and standardized automated sample preparation. Our DNA oligonucleotides and array ready oligo sets for microarray application, and also our PCR and quantitative PCR products for gene amplification and analysis.

Our synthetic nucleic acid business showed and exciting growth over 24%, with a very high growth rate for siRNA as well as for DNA oligonucleotides. In the first quarter the DNA oligonucleotides grew by approximately 16%. This is a result of our excellent sales team and product service and quality product. We benefit also from our production and technology improvements, and also cost reduction program in synthetic DNA oligonucleotides. In addition, we observe an ongoing consolidation in the synthetic nucleic acid industry.

In summary, Qiagen has improved its market position in Q1 2003, and market penetration, focusing on its core competencies of sample collection, of nucleic acid purification and genetic analysis. We address customer needs with high quality products and excellent service, and we are very well positioned and have already achieved, in certain segments of the market, to being the pre-analytical standard. Customers see the benefits to come to reliable results in a few steps, starting with a variety of biological samples, by using Qiagen consumables and instrumentation.

With this I will now hand over to Peer Schatz, who will take you further through the presentation of our Q1 results.

Thanks Metin, and hello to everybody and thanks for joining this call. I thought we would start out this second section with a short slide on why Qiagen is different. I think this is very important in times like these, as the market is certainly changing, that the various company's roles are identified and also interpreted correctly.

Qiagen is not a general distributor of products. We have a strong sales force, but that is not our core competency. Our competency is a focus on what we think is an absolutely critical product area. And in this product area we have an enormous market share. It's almost unparalleled compared to any other tool in the molecular biology industry - the reputation, the brand equity and also the market penetration. Very different to other tools, however, it is not a tool that might go in and out of vogue. We basically stand between raw biology as it has developed over ms of years. The cells have created their structures and learned to protect genetic information, and we allow out customers to take these raw samples and extract a very fundamental molecule, if not the most fundamental molecule in life, and these are nucleic acids.

In addition, our market is not -- or our product opportunity is not growing with the market growth, but we have a very substantial market share still out there using home brew methods. It's actually by far the majority of the market, using traditional methods such as [fenal]. I know a lot of these statements are pretty well known, I think however it is sometimes important just to re-emphasize this.

In addition, Qiagen is not only supplying the research markets, as we saw before - and I think this was also evident from our release regarding SARS - this was just a very small tip of the iceberg but there is a very substantial development happening in diagnostics. And diagnostics is clearly - if you look at the recent press releases over the last few quarters - has been very much the focus of the company's business development efforts and strategic direction.

Now a few words on our growth rates. Next slide. The growth rates that you saw here over the last few quarters, and we did the same slide we had in the last conference call. You see Consumables pretty stable growth. Also again in this first quarter, obviously there was an impact from the NIH spending which we quantified about $3.0m growth. It would have been substantially higher than that on the Consumable side had the NIH performed as normal. So we saw about 16% growth on the consumables year-over-year. This could have been 22% if we adjust for the NIH. If we adjust for all currency we would be in the mid teens again.

What is very nice to see here, the Synthetic Nucleic Acid business moved back up into very strong growth rates. Again it's a combination of product mix, strategic focus, and also marketing efforts that allowed that to happen. Instrumentation has stabilized, but at a very low level. We clearly see that this is a very promising business area, and capital spending in pharmaceutical, biotech but also in academic areas are expected to come back.

If we look at the geographic distribution you see that clearly the United States is still much softer. This has to do with certainly in the first quarter now with the NIH shortfall, but also the larger presence of pharmaceuticals and biotech, that in this first quarter grew slower than the academic customers. Europe, Asia and the rest of the world showed very strong growth. We see some very exciting developments in certain European countries as well as in Asia.

If we look at the distribution of the sales, for first time actually in a very long time the United States now represents a little bit less than half of our sales. This has to do certainly also with the relative growth rates and you see Europe approaching 40% of our revenue base.

You saw the numbers that we published yesterday. Just here is a short overview on this slide. 13% top line growth. The EBIT margin came in at 22%. We had always said that the profitability on the operating margin side had a substantial upside, and as you see here we're clearly working on this. And we gave as a forecast in our last quarterly conference call on February 19, that we would be over 20% operating margin for the year. We're clearly already well ahead of that going forward. This is not based on cost cutting, by the way, this is just certainly also based on us coming out from a very low operating margin level last year, and revenues just pulling us back up again into operating margin levels that we saw in 2001, for instance.

The tax rate was slightly lower that it normally is. It was slightly under 30%. This had to do with a smaller tax benefit due to restructuring, but also a tax strategy that we were able to implement to capture that benefit. And this gave us an additional half a cent approximately on the bottom side. So the earning per share were actually higher than anticipated and what we guided for.

One word maybe on consolidation on currency. The P&L is typically, or is translated at an average for a period - that's how we do it - and the balance sheet items are translated at the end of the year and at the period number. So if you look at things like, for instance, inventories or accounts receivable, these are translated at year-end or quarter-end exchange rates in this case, and therefore look higher. The real DSOs or the real inventory days moved down in this first quarter. And as we discussed in February 19 conference call, is clearly also what we're out to do in 2003.

In terms of employees, not really much has changed there. There was about the same number of employees that we had about a year ago, so we're getting more efficiencies on that.

There were a lot of highlights in this first quarter. We tried to summarize them on this slide here, and I won't read them down for you. I'd be happy to address them in the Q&A session or in separate discussions.

We'll be quite a bit around in this second quarter as well. It's obviously a conference season, so we put down a list of the conferences that we expect to be attending over the next few weeks. We'd be happy to welcome you there, and maybe have face-to-face discussion, and go into further depth in some of the developments.

With this I will hand back to Solveigh. Solveigh?

Yes. Thank you very much, Peer. We are now looking forward to discussing your questions. Again we really would like to ask you again to limit your questions to one during the Q&A session in order to give everybody an equal chance to ask his/her question.

I would like to open the Q&A session by handing over to the operator.

Thank you. The floor is now open for questions. If you do have a question or a comment, please press one followed by four on your touch-tone telephones at this time. If at any point your question has been answered you may remove yourself from the queue by pressing the pound key. Once again, to ask your question, please press the one followed by four on your touch-tone telephones at this time. Our first question comes from Cheri Walker of Deutsche Bank.

Hey, it's actually Mike McGee for Cheri Walker at Deutsche Bank - how are you guys?

Fine, how are you?

Good. Just really quick some housekeeping issues. I guess CAPEX and cash from operations in the quarter?

Right, the CAPEX for the year -- well we're filing the 6-K in a few days, so this will be available on our website as well. The CAPEX outlook for the year continues to be in the range of the 6% to 7% of sales. We clearly finalized our CAPEX programs in Germantown in Maryland, as well as in Germany. And this is certainly going to reflect in a much lower CAPEX per sales number. I'm just pulling up the number for you here on the cash flow statement. Cash flows from investing activities were approximately $6.0m in this first quarter compared to about $20m the same period last year.

Thank you. Our next question comes from Sam Williams of Lehman Brothers.

Hi, and congratulations. Two questions here. One relating to margins. G&A and S&M. G&A came down I think $10.9m in Q4 to $9.7m in Q1. How much of that was due to the Rapigene closure, and can you sustain that sort of level of the need for $10m or thereabouts for each quarter going forward? S&M similar question, holding level at about $19m for the last four quarters. Is that sustainable going forward?

And then on Instruments, you had a little bit of a drop off. If I run my numbers right I think you went from about $10.5m in Q4 to roughly $8.0m in this quarter - correct me if I'm wrong. How much of that is due to a stocking effect in Q4, and again what do you expect so see going forward?

First question, Q4 is always a big Instrument quarter. Q1 is less so, so it's not unusual to see a stronger Q4 in Instruments than Q1. The second question is the margins going forward. I wouldn't put that on an absolute level, the deviations are not really too significant. $0.5m up or down on a $10b, for instance, Admin budget can happen very quickly with one single transaction or other effect kicking in. Even currency, for instance. And if you look at the whole thing on an actual currency base you will see actually that the decline on the Admin spending is even stronger, as there is obviously a significant Admin portion also in Europe. The same, by the way, also for R&D.

I think going forward we are now 12% of sales approximately on Admin. Again I think that this continued to move down as a percentage of sales. I would rather put it this way. On the sales and marketing side I think we should be able to hold if not move down this percentage of sales as well, and keep the R&D percentage of sales approximately flat. This is not unusual again. Looking over the last few quarters we have every quarter over the past few years -- well very year we've taken down a percent or so, if not two on the operating margin from basically Admin and sales and marketing. And I expect that to be able to continue.

Thank you. Our next question comes from Mirov Chaubau(ph) of UBS Warburg.

Hi, it's Rose Meyerauv and Derik. We are somewhat confused about the growth rate.

Yes, I guess just looking at the numbers here, I mean if you're assuming looking at the breakout that you gave for the first quarter of 2002. In that press release it basically says that [indiscernible] last year, it says the consumables were 77% of sales. And if you use that now with the 76% that roughly comes into an 11% growth as apposed to the 16%. And I also realize that when you gave some quarterly breakdown numbers that you handed out after the last conference call in February, the first quarter of 2002 numbers are now 75% of the consumables. I am just wondering if you use that 75% with your 76% that's 14%. I'm a little confused on how you get to the 16% growth rate on consumables?

And a related question is, how can you ultimately quantify the NIH budget impact?

Okay, there are two questions here. The first question is pretty easy to answer, and it's obviously an important discussion, but 75% is not 75.00%. But you can easily have a fluctuation, it could be 74.6% to 75.5%, right? So there is a significant difference between these two numbers if you calculate the growth rates. And if you just play with those numbers then you easily see that you can actually get far in excess of that percentage that I just gave before. So we do not give the last -- we do not round the percentages to the last digit, on the, you know, five digits behind the comma to do this calculation, or to, I guess, be confused about it I think it would be necessary to just leave those decimals away, and then obviously you get to a different number. But this is the way we have to calculate as we have the real numbers behind it.

The second question is the NIH spending. The NIH, as we disclosed the last time is doing approximately $25m of sales with us. How do we calculate that? The NIH in Maryland does approximately $4.5m sales with Qiagen. That typically is about 20% of the NIH budgets the intramural spending. So if you do the calculation back up again you get to somewhere in the range of the $25m in sales. Now the way it continues as the resolution works is that only a certain percentage of last year's spending can be spent during the period in which the budgets have not been approved. We discussed that in the last conference call as well. So 70% of that, or if you take 30% of $25m you get $7.5m that would give you somewhere in the range of $2.5m to $3.0m - it's actually a little bit more if you run the numbers - it's a little bit over $2.5m that we assumed would be the impact for this first quarter.

So it's obviously an estimate because you can't calculate how much is intramural and extramural, and how much the impact is. So it's obviously hypothetical, but I think it's a very good estimate based on the numbers that we have available to us.

Thank you. Our next question comes from Nick Turner of Jeffries.

I hope you can hear me clearly, but I have one question and it's fairly long unfortunately. What I was wondering about is if you can give me some breakdown of local currency growth across the Consumable and Instrument sectors in North America and in the International regions? Clearly the 32% growth rate outside of the US is heavily affected by I would imagine the currency benefit of anything up to 18-odd percent year-on-year. And I wonder if you could add some clarity to the figures, local currency-wise, in Consumables and Instruments in the two areas that you break down?

And then just to finish that off really, you intimated that you're expecting Instrument sales and capital spending from Pharma to come back to you in the course of the year. Your peer group, if one can call it that - and I know it's not really a peer group - have painted a fairly bleak outlook for the coming quarters. What leads you to believe that Qiagen's Instrument business will recover - or should we say capital equipment business - will recover, whereas some of the peers think not?

Okay, to the first question, the individual growth rates. I think we'd be going into a lot of detail if we would look at each individual product in each geographic region. But I understand it's obviously important. Now approximately half of the growth rate in Europe and Asia was related to currency. We have various currencies that go in different ways. It's a little bit less straightforward. We do have a Norwegian Kroner and Yen exposure obviously, so those move against each other.

The Instrument growth on constant currency worldwide was approximately flat, as obviously Instrumentation is still coming from a very weak number. Now if you look at the growth on the Instrumentation side you will see that it actually went into negative growth and flat growth again now. So we're not expecting a lot to happen in this area. But we're not expecting that, you know, this suddenly goes back up into 20% growth. The main drivers for our growth are basically low throughput instrumentation which is mainly addressing academic and smaller diagnostic accounts, as well as our diagnostic product lines that are a major part of our instrumentation product.

Again here the peer group comparison kicks in, you know. We don't sell mass specs or internal liquid handling instrumentation generic systems, but this is how they target it, and the diagnostic pool is a different purchasing source.

The second question was related to --?

That was the second question.

Okay, Nick, if you could maybe address that to us in an email - I think the operator cut us off here - we'd be happy to address that.

Thank you. Our next question comes from Aaron Geist of Robert W. Baird.

Good morning. Could you talk a little bit about the sustainability in the oligonucleotide business, and segment that based on growth from foreign currencies as well?

I think the oligonucleotide business has been discussed quite extensively, and I think we try to focus on what is our primary responsibility, namely turning it around. And that had two or three items to it as Metin suggested. Number one and the most important was the product mix. We focused on what the Qiagen strength is, namely selling products that can be uniquely combined with a sample preparation or else amplification products. And certainly among those are the probes and the array ready oligo sets. And these are a much larger portion of our sales, and much more the focus of our sales force than they were previously. 24% is more than we expect for the year. I think it's true to say we were very excited about it. I think on the RNA side we will definitely have a kicker in there that is a little bit of a wild card at the moment. We had guided for a lower revenue number, but this market is very attractive at the moment. I think Qiagen is probably the best positioned player in that we have a complete solution offering from the sample preparation through to the siRNA product. And this is a wild card and could potentially keep the growth rate comparable to what we have, or approaching what we have now.

Thank you. Our next question comes from Erica Whittaker of Merrill Lynch.

Hi there. I was wondering if we could go back to currencies, first of all the combined top line. If you could say what the growth was of all products in local currencies? And also for the previous questioner you mentioned the Instruments were local currency growth, but if you could break down Consumables please?

Well there are various affects here. Let's start out with the Consumables. Consumables we said 16% reported growth. To factor in the NIH impact, that would bring us to about 22% on the top line. If we factor out currency it would bring us back into the mid teens again.

So if you forget about the NIH and you've got 16% reported, what is it in local currency?

The NIH is exclusively US dollars, so there is no currency impact as we report in dollars. So you just extract that from that number and you will get a growth rate on the Consumables of about 8%.

On the Instruments the local currency number was approximately flat. It was about minus 2%. The Synthetic DNA products were in the range of 17%. What dropped obviously very significantly compared to last year was the Other segment. The Other segment is very much related towards Seattle services, and they dropped on a constant currency by 62%, but that's a smaller number, so it went basically from 5% down to 2% of sales.

Thank you. Our next question comes from Stefanie Philipp of HSBC.

Thank you. This is a question to pre-analytics. Could you give us an update on how the situation is then when we can expect breakeven?

The pre-analytics is basically today running on a breakeven level. The joint venture by itself is still reporting a loss from minority interest, because certain of the profits are captured at Qiagen, because we have to sell with a profit at Qiagen. That is why if you limp those two together it's not loss-making.

The developments there are, we have currently two flagship products which are the genomic DNA and the RNA product. And we have a whole suite of protocols for different combinations. The uptake is actually very interesting, and if you look at the diagnostic developments - and I think we're privy to a lot of information activity which is happening here in the market, that unfortunately we cannot disclose - but there are a number of products on the diagnostic side that are coming to market that will be focused around technologies. Mainly the quantitative PCR products and similar for diagnostics that require these types of product. So we're quite active in this area also now to get IVD products out into the market that will incorporate these solutions.

Thank you. Our next question comes from Peter Welford of Merrill Lynch.

Hi, just a quick question on the tax rate if I can, in your P&L. You seem to have a tax provision of around $2.0m positive if you take out the exceptional. If you could just explain that? And also are we right in saying that the top line impact of FX means that local currency growth on the top line is around about 7% to 8%?

The latter is approximately correct, yes. Again you should factor out, however, that we discontinued a product line, which is the services that we ran out of Seattle. As they went from 5% down to 2% of sales, this is obviously to be factored in when you do the year-over-year comparisons. And the second question was -- Solveigh do you remember that?

Oh, it was the tax question.

Oh the tax question, yes. Due to the closing of Qiagen Genomics in Seattle, and due to a structure that we were able to use in the United States, we were able to capture a tax benefit which we were able to offset the period's tax exposure. And this brought our average tax rate down to slightly under 30% from a little bit over the -- about 37% to 38%. So it's not a huge difference, but if you basically would calculate with 37% to 38% as normal. That difference is approximately a substantial part at least of also some other impacts, for instance, based on currency and some inter-company movements. But the majority of that difference between the 37% and 38% and slightly under 30% tax rate was due to the benefits coming from Seattle.

Thank you. Our next question comes from Marcus Weibrek(ph) of MainFirst Bank (ph.).

Yes, hello there. Thanks for taking my question. I'm sorry to bother you again on the top line growth. We still have the acquisitions of Xeragon and GenoVision last year, which have not been in Q1 last year but in this year. So maybe you could help me understand a bit what range was the impact of those two acquisitions? And if we include this one as well, and all the NIH budget and the currency effect on Group level - I don't want to go into the business segments but on the Group level - am I far wrong if I assume that then including all the assumptions that the underlying growth would have been in the low single digits in Q1?

No, the latter is incorrect. I think there was an estimate from one of your colleagues before that it was in higher single digits, 7% or 8%. Again there are so many impact in there that you have due to the closing of Seattle and also the currency and the NIH effects. So we'd be happy to walk you through that in a separate session. But it's slightly higher than you're assuming.

The second part of the question was related the acquisition related impacts. Actually I saw a statement coming from you regarding GenoVision and actually as we said in one conference call previously, the GenoVision sales are not just basically slapped onto our sales and off we go, and one plus one equals two. What we actually did is that we took the GenoVision products, which basically were basic instrumentation products and magnetic particle protocols, and we put our Consumables onto these systems. There has been a much smaller impact from GenoVision on a quarter-over-quarter basis. It's maybe in the range of 2% of sales, so it's not a huge impact on a year-to-year comparison. And in addition I think it's very synergistic with the Qiagen product and actually incorporates Qiagen technology.

Xeragon is a different situation, and when we acquired them we guided for $1.0m sales in 2002 and $4.0m in 2003. This is a very exciting and attractive area, and we have decided not to disclose sales of this as it is very strategically important information that we want to keep confidential. But it is a very attractive revenue base, and I think it's also evidenced on the growth rate of the oligonucleotides. DNA oligonucleotides are growing as well, bur RNA is obviously showing a much higher growth.

Thank you. Our next question comes from Fred Tony of Medcap Partners.

Morning, thanks for taking my question, guys. Two simple questions, and I think the first one has pretty much been answered. Could you give us the exact constant dollar year-over-year sales growth rate for the entire sales? And then the 32% you reported for Europe, what was that number specifically in constant dollars?

Let me pull out the number here. Okay, the year-over-year growth in Europe we reported at 32% on a constant currency basis. About half of that growth is due to currency. So it is in the range of 12% or 13% real growth. The overall growth -- or currency adjusted growth of the overall company-- would be about $74m in total sales versus the $79.5m that we reported. About $5.0m of currency related gains.

Thank you. Our next question comes from Martin Wales of UBS.

Good afternoon, good morning. I'm just wondering if you could remind me of your full-year '03 guidance, whether you're reiterating that today? I've read the comments on Reuters this morning.

Yes. Well the outlook that we wanted to give for the year 2003 is going to not be different from what we said on February 19. We expect the growth rate on the top line to be comparable to what we saw last year in 2002, this would be about 12% to 13%. I think there's a consensus out there on average that it's somewhere in the high 330’s. And EPS or an operating margin that would be north of 20%. I think both is very doable now, and we gave that guidance in mid February, as well as also the guidance for the first quarter mid February, where currency rates were comparable to what they were for the average of the period. So there is clearly an upside based on currency. There are very diverging views on where the various currencies will go. That's not our business however, so I think at this point we will just assume that this will remain at the levels that we saw then, and this would obviously have some upside to it.

Thank you. Our next question comes from Emile Westergard; Peak Rock Capital.

Hi. I guess my question was really just again back on trying to understand what the contribution was from GenoVision. I think you mentioned when you made that acquisition that it was about a $10m business, including this HLA diagnostics business. So I think it's actually a little more than that. And I was wondering how these acquisitions that you've made are doing? I know it sounds like Xeragon is doing well. How are those doing? And again just what was the internal growth rate excluding the acquisitions? Thanks.

Okay, I think it's straightforward on the Xeragon side, as you mentioned. On the GenoVision side, GenoVision does have an HLA testing business, which the product that they sell is both an HLA testing solution as well as a sample preparation system. So that is the reason why we were very interested in buying them. We then basically dismantled some of their sample preparation devices and combined it with some of our consumables, and that created the solution that Qiagen now also started marketing in its markets, starting January 1, actually. Some of the products already started going into marketing late last year.

So we just started marketing them now in this first quarter, and the one product you for instance saw is this EZ1 system. The HLA business is, as we said when we acquired it, actually not a very high growth business. So when I look at the incremental impact I basically take this business that they had and subtract the sample preparation part of it, which is about 30% or 40%. I'd have to look at the exact number. And there's an instrumentation piece to that which is the majority, and the sample preparation piece which is the difference. So if anything there is a bigger impact on the Qiagen product line in terms of automation because those products then became Qiagen products for its markets. And we are now starting to build a recurring revenue stream of consumables.

So the overall impact, as I said, would probably be in the range of 2% a quarter. Again you'd have to factor out what we put in and what we took out from their side and how we change the business going forward. The HLA business by itself is extremely stable, and growing at single digits or so. But it is a very, very stable and recurring business.

Thank you. Our next question comes from Genghis Lloyd-Harris of Credit Suisse First Boston.

Hello. I was wondering if you could give us a little bit more color on what you think about demand from pharmaceutical and biotech companies during the year? I mean I hear your cautious optimism, and I'm trying to figure out whether you are more cautious than optimistic or the other way around?

Well I think at times like these, if you look at our guidance you will see that there's not a lot of optimism built into it. And any optimism that you might read into statements that we make are not reflected - and this we would like to emphasize - are not reflected in what we think is required to be able to do our estimates for the year. We do however see that especially in the pharmaceuticals and biotech -- if you just look at the pharma first quarter results call that we've given, Novartis came out with 25% R&D growth, Amgen was 33% R&D growth projections. And these are just indicative of many other companies in the industry. And the NIH growth is 17% for the year.

What you clearly see is that there is a very high boost or focus again on research and development spend. That seems to be coming out of statements from most of these calls that are given. And the issue is that in this first quarter what we saw is that while the money was available it was a little bit slower to flow through. And there are more heavier controls on efficiency, which is actually very good for us. Because being a standard solution provider in the market one doesn't question the usefulness of our product, and its contribution.

But I think this will just be something to see, and I think there seems to be vibes in the market already, and feelings that once this veil has lifted that there is clearly an ability for the market to snap back. This again - I just want to make absolutely sure that this is clear - that it's not the basis for our projections that we gave for the year. And this I think -- well before we, in a market like this, start changing our projection, I think we want to make sure that this is an absolute fact, and not just our judgment.

Ladies and gentlemen, I would like to remind you that only 10 minutes remain for questions.

Thank you. Our next question comes from Aaron Schwimmer of Goldman Sachs.

Hi, thanks for taking my question. I was just curious as to whether or not you see any difference in spending between biotech versus pharmaceutical companies given the different economic environments they face? Thanks.

I think one statement. Biotech is a very heterogeneous market. As we pointed out Amgen is not the small struggling biotech around the corner. With a $1.0b plus R&D budget it probably has more than 50 times the average biotech, maybe even 100 times more than the average biotech's R&D budget. So there is a big difference between the big biotechs and the small biotechs. Big biotechs are actually quite aggressive and also early adopters again, moving heavily into new things. So we see a strong growth there. The small ones are not really too relevant in terms of their spending.

I think the market has just got more cost aware, and more efficiency conscience and output conscience, and this is something that is making it a little bit slower in terms of its processing capability. But we think in the medium [indiscernible] is something which is very positive for Qiagen as we're not the big question mark tool out there, but something which is absolute standard.

On Pharma, we have views that - and also the facts out there - show that the budget growth is actually in many cases very strong. But that these spending increases as you saw from the first quarter numbers that were published in the meantime by big pharma has not yet flown through. So we're kind of like in an intermediary phase. And there's a third market segment, the diagnostic pharma, which as you saw from the statements coming out from them is on a roll at the moment. And especially in the molecular area, with the exception of Roche, which had a little bit of a weaker quarter in this segment. But a lot of the service providers are doing very well in this sector.

Thank you. Our final question comes from Karen Ros Bremner of Shaker Investments.

Thank you. I was wondering if you could give a little more color on the inventory levels? They seem to have gone up quite a bit, and I know you said part of that is currency, but if you could give a little more update on that. And where you expect tax rate going forward?

Tax rate going forward, about 37% to 38%. Again there can be big swings here, because we have some very low tax jurisdictions and very high tax jurisdictions. On an annual basis that will probably then level out, but within from quarter-to-quarter this can swing a little bit, but not too substantial. So here it is moving it by [indiscernible], so this is already a larger swing.

The inventories, as you pointed out, a major impact on the inventories is currency. And if you factor that out that takes about 10% of the inventory turn days out. So it moves us actually to under 200 days. Which is still too high, but coming from a higher number in the previous quarter. Most of our purchasing requirements, especially on the instrumentation side, have been completed for 2002, and for 2003 are now more reflecting the views that we have in terms of the market and product growth. So we're quite confident that this number will continue to move down over the quarter.

If you look at the consumables inventory component, that has remained more or less flat. It jumped up in Q2 because of the change on the revenue side, and stayed there or started to move down a little bit. The main increase over the last two or three quarters, the majority, probably more than half in terms of the inventory days, has been currency. And the remainder, basically instrumentation, which is typically purchased on a few quarters out basis. And therefore you have purchase commitments that we had to honor. Bu these products are moving quite well and we think that this number will continue to move down. The inventory days outstanding could move to 150 to 160 days or so possibly over the foreseeable future. Not within the next quarter, but continue to move down.

I would like to maybe just also reiterate a little bit our guidance for the year as a last section here. There has already been a question regarding this. The guidance for the year is something we feel very good about, and I think this quarter should show that we have a good reason to also feel so. On the operating margin side, we clearly showed in this first quarter that we can continue to move up on the operating margin level and the profitability can continue to increase. We have been very successful on our Synthetic Nucleic Acid business in achieving strong revenue growth. And also moving that into a more profitable business. And the outlook for the second quarter is such that we probably see that the second quarter might be in the range of about 5% above the first, plus/minus in that range, with an operating margin again maybe over 21%, so a slight increase over our previous guidance. And this in general should give a good light on Q2.

Okay, 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 on our Q2 results conference call on Tuesday August 5, 2003. If you have any additional questions, please do not hesitate to contact us. Again thank you very much and have a nice day. Bye.

Thank you, ladies and gentlemen, this does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful day.