Qiagen NV (QGEN) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen, and welcome to your Qiagen Incorporated second quarter earnings conference call. At this time, all parties have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host and Manager of Investor Relations at Qiagen, Miss. Solveigh Mahler. Ma'am, the floor is yours.

Thanks very much Don. Good morning and hello, everybody. Thank you very much for joining Qiagen's Second Quarter and Half Year 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. 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 and good morning and good afternoon ladies and gentlemen. This is Metin Colpan speaking. We have had a very successful second quarter in 2003 and we are very satisfied with our financial result and our strategic position for the long-term expansion. Our net sales have increased 19% to $86.3m. The operating income increased 85% to $17.3m and the net income increased 143% to $11.1m from $4.6m in second quarter 2002. These financial results reflect Qiagen's strong position in our core markets and the robust growth in this customer base. During this call, I will give you more background information on our research market business, our integrated instrument approach, and our excitement on gene silencing and an outlook to the molecular diagnostics market.

Our consumer business showed a strong growth of 23% and we further expanded our market position and leadership. Representing 75% of our net sales, our consumer business has always been a strong business with robust growth and improving positive trends in the market. We observe a weakening competition as the product needs get more and more complex and the customers' needs are increasing. Today, we generate 45% of our revenues in the academic market with an encouraging outlook, 25% are from our pharmaceutical customers and approximately 10% from our biotech customers, both with still low spending, but signs of acceleration, and 20% are coming from molecular diagnostic customers, clinical research, and related product, which all show a rapid growth. Today, our customers in academic and industrial research are asking themselves what is the function of the genes, what role do they play in diseases, and spend their budgets mainly in areas to study the functions of RNA and proteins in culture cells, model animals, and human samples. The samples and the applications are far more complex to be addressed with low technology. Here, we are in a field where cutting edge technology and application know-how are absolutely key.

Customers are looking for reliable, reproducible solutions to address their needs and are more and more less interested in combining reagents by themselves to solve the specific application need. They look for integrated application solutions. Here, we leverage our market and technology leadership position. We plan to further expand our portfolio of nucleic acid purification products, leverage our leadership in genomic DNA and RNA purification, and combine this with specific bio-reagents for our life science customers with unparralled quality, reproducibility, and service. For the complete solution, we believe instruments will be an essential part of our future success. With the acquisition of GenoVision in 2002, we're very successfully integrated into Qiagen and it significantly contributed to the expansion of our strategic position. The magnetic bead base nucleic acid purification solutions, added through the acquisition, leveraged Qiagen's leading nucleic acid purification technologies and resulted in exciting new product offerings. The combined solutions exceeded targeted revenues and have been very well accepted in the marketplace. Today, our instrument platforms cover the low, medium, and high throughput needs with specific turnkey applications.

During the past 12 months, gene silencing becoming the fastest growing segments in life science research. This new science is going to be one of the key technologies to be used in the future. The use and demand for si-oligonucleotides have grown dramatically by academic and industrial customers and we are very excited about these markets with very high growth rates, high margins, and little competition with only four licensees worldwide.

We have the largest sales and marketing force in gene silencing and a complete portfolio with all transactional reagents, sample preparation products, quantitative PCR reagents, and pre-developed assays for validated genes, offering our customers an integrated complete solution for gene silencing. RNAi is a powerful discovery tool for biomedical research using si-oligonucleotide segments to turn off or silence a specific gene to study gene expression patterns as well the impact of specific expression profiles directly on a cell or an entire organism. Qiagen's patented siRNA synthesis, based on TOM amidite chemistry, provides highest quality and purity RNA oligonucleotides.

Our significant momentum in the gene silencing is demonstrated by our recent announcement. We and Novartis entered into a supply agreement targeting the field of gene silencing. We believe that this agreement is one of the largest such agreements to date. This agreement with Novartis demonstrates the outstanding benefits of Qiagen's gene silencing product portfolio and this agreement is a confirmation for Qiagen's state-of-the-art synthesis technology, our bioinformatics, and our capabilities in high throughput synthesis, quality, yield, time, and cost, and purity. We have also entered in a partnership with Intradigm targeting siRNA applications. Intradigm is a leader in RNA in vivo delivery technology and we will develop siRNA for drug discovery and siRNA therapeutic products. Qiagen will manufacture and provide Intradigm with siRNA agents for its ongoing research programs in several disease areas including oncology, arthritis, pulmonary treatment, and virus infections. And third with amaxa biosystems in Germany, we entered into a co-marketing agreement of amaxa's nucleofector technology together with Qiagen's TOM amidite based gene silencing products. The combined solution has significant advantages for gene silencing mediated in primary cells. The efficient non-viral transfer of small RNA oligonucleotides into cells has so far been restricted to easy to transfect cell lines. With amaxa's technology, siRNA induced gene silencing can easily be achieved in primary cells and hard to transfect cell lines. Qiagen's siRNA products combined with amaxa's transaction technology represent now a fully integrated solution in the field of suspension cells, including primary cells like human TNB cell and cell lines. This partnership puts Qiagen into the forefront of gene silencing with an unmatched portfolio of solutions.

Let me now talk about the next exciting market of Qiagen, molecular diagnostics. We see major opportunities for Qiagen on our molecular diagnostics business segment. With today, over $2.5m market volume, we expect strong growth in the near future for molecular diagnostic in infectious diseases like HIV, Hepatitis B and C, and human papilloma virus, and more and more other infectious agents. Today, Qiagen is in a very strong position to become the standard for pre-analytical sample preparation. And as more and more tests became available for infectious diseases, oncology, genetic testing, HLA typing, and identity testing, and use under routine diagnostic procedures, there is an urgent need for stabilized pre-analytical solutions including sample collection, stabilization, purification, and handling. We offer our molecular diagnostic customers standardized and proven solutions, a strong product pipeline, an unparallel range of applications with an extensive breadth of chemistries and technologies, a strong IT position and freedom to practice, and all the related regulatory compliance activities and more than 10 years experience in molecular diagnostics.

Qiagen decided not to develop diagnostic tests by itself. We will focus ourselves on the front end to create standardized solutions for molecular diagnostics. Our leadership in diagnostic solutions is confirmed by our supply agreement with Marsh (ph) Molecular Diagnostics for automated viral nucleic acid purification for Roche Diagnostic pipelines. To build a leading position and a standard in molecular diagnostics, from doctor's office to the diagnostic laboratory to the result, Qiagen and Bikinson (ph) have formed the Pax joint venture, an open standardized platform as a pre-analytical solution for all molecular diagnostics applications and we are very confident the market for molecular diagnostics needs a standardized front end solutions to become a widely accepted enterprise. Our belief in the future is collection, stabilization, and purification of clinical samples have to be an integrated standardized solution. With this, I will hand over to Peer Schatz, who will go to the second part of our presentation.

Yeah, Thanks, Metin. Good morning, good afternoon. A few words on the financials and also on the business outlook, before we go into the Q&A session. To start out, we have the same slide we always have showed in the last few presentations, namely the growth in Qiagen's product line. This is on actual currency rate, but we still see the trends over time, consumable business being relatively solid over the last two quarters and it is now over the last two years. And interestingly, you see the instrumentation business has been moving upward over the course of the last two quarters. This is mainly due to some instrumentation products that emerged out of the acquisition of GenoVision Technologies that performed into product late in the year 2002 and in the first quarter this year. Synthetic DNA business is quite volatile, which sometimes has larger transactions in it. We had very strong growth in the first quarter. We had really cautioned that this is probably not indicative of future growth, but it's really taking market share in this market away from most other players and most importantly, we achieved the profitability of revenue in this Q2 2003 quarter. This was mainly based on the refocusing of the product lines on higher margin, higher synergistic product, synergistic Qiagen sample preparation in handling products.

Now, a few words on our acquisitions planning. I think that this is really something that it looks very important to Qiagen going forward, but important for a very different way than it is for many other companies. We do not necessarily believe in large transforming acquisitions to build growth. Qiagen's core competency, such as financial market opportunity in front of itself, sample preparation and handling is, I thought they are very substantial market and as we know, there is a substantial unconverted revenue potential in that market that we are working to convert over to using Qiagen products. In addition, the market is growing quite rapidly. So our acquisition strategy has always been to acquire very small pieces of technology that give us some very critical advantage in rapid growth areas or very important technology areas for Qiagen's core competency.

Let's show this on these two examples that we did last year. The Xeragon acquisition, which closed in Q2 2002, $8m in stock, not a very large transaction. It did not really have any material sales prior to that acquisition. But as you saw from recent transactions also, these transactions that we mentioned in the first quarter press release, there is a substantial momentum in this siRNA market and most importantly, siRNA is not about selling the oligonucleotide, it is not that revenue that is critical to Qiagen, or important to Qiagen, what is important is that people that are doing siRNA are substantial revenue opportunities for sample preparation products, absolute Qiagen core competency products as well as amplification products, and transfection products that are purchased in bundle. But with this one acquisition of Xeragon, we were able to capture the momentum in this Qiagen core market opportunity and take it forward much faster than we would have by addressing this market from the flanks without that quarter, siRNA chemistry.

Second acquisition GenoVision AS which closed in Q2 2002 with $14m in stock, 50% stock 50% cash. The important thing here is they had developed a sample preparation platform that they had really not started selling it, so the revenues that they had prior to the acquisition were really immaterial. But they had developed a platform, which was very unique and through the combination with some Qiagen technologies that are Qiagen's proprietary technologies at Qiagen, we were able to, in combination, create a very exciting product line and as you saw from the instrumentation sales, that product line are so called [Inaudible] for mid and low throughput sample preparation is growing very rapidly.

In addition, we were able to combine certain technologies into Magitrack (ph) consumable lines, which is based on magnetic particles. Though these products significantly exceeded expectations and are absolutely Qiagen's core competency, but this was not purchasing of an acquisition of a revenue base that has made Qiagen margin diluted our sales force. It was an acquisition of small pieces that catalyzed current competencies that we had at Qiagen into very exciting growth product lines and [Inaudible] .

A few words on the geographic distribution of revenues. We clearly see that Europe is still growing a lot faster than the United States. Compared to Q1, North America has picked up versus Canada, limited to that growth. North America is till quite weak, Europe is growing at a very solid 18% growth and this certainly had to do with a larger pharmas portion in North America. We do believe that pharma has probably found its bottom sometime during Q2 and potentially is looking at recovering now. It's probably still too early to put into projections going forward, but we feel good about North America especially going into 2004. Geographic distribution of net sales continues to show North America under 50% of sales and Europe now over 30%, Japan 11%, and rest of the world at 8% of sales. They are pretty difficult distribution, there maybe change there except for a slight decrease on the North American line.

Going into the numbers, as you see on slide filed for Qiagen's second quarter 2003, you saw most of these numbers on the press release. I think importantly, with - in times of volatile currencies, it's very important to put more clarity behind the product lines than individual growth rate per product line. And this was clearly something that was difficult in the first quarter of 2001 and [Inaudible] numbers there, but that's because of some uncertainties in many areas. So, in the press release itself, we have an extensive table that I think should answer all of the questions on constant currencies, by product line, growth rate, etc.

"THIS PART OF THE CONFERENCE CALL AUDIO WAS POOR".

And so I hope this is helpful and the gross margin on that great amount of benefit for these [Inaudible] . Those growth rate showed that the proved growth was advancing currency was about 9%, actually we exclude some revenues from discontinued product. Again as you know, we've discontinued some services that follow us close together last year that is one services. A growth rate where is in double digit. It's just for the sake of simplicity, we are now including that sort of growth of 9%. The consumable growth rate with about 13%, reported in a 3% insurance- 6%. The oligo were- had a negative growth, but this is mainly due to a repurchasing in a more profitable product line, mainly these content products, we are rising in growth. And the other line is mainly impacted by the closure of the [Inaudible] impacted by that or as a result. The gross margin was reported at 65% at the [Inaudible] constant currency numbers 67%, all exactly what we had projected in the beginning of the year. The currencies are fluctuating, the revenues were up substantially from the estimates or mostly estimates out there. The gross margin was impacted by currencies as well is now [Inaudible] and the income from operations on a constant currency basis is 23%, it's well above [Inaudible] for this year in operating margin. And this [Inaudible] very fast growth on net income we can do with a difficult one. But the market environment is not changed substantially from the second quarter of 2002 we are clearly still in a very weak environment. So yes, we are comparing a weak 2002 with still that you have to say, but the market is still for all the time the recovery are steadily increasing. Market is still in that rather weak state and in the recovery mode. So I think the comparison is really [Inaudible] .

Now few words on our balance sheet. As a company, we have been focusing on in previous conference calls, you see two numbers that I want to highlight here first of all the inventory days you see that in the second quarter of 2003, our inventory days are clearly moving down quite substantially. We are moving towards our target, that in previous conference calls, somewhere in the range of a 160 days, 150 days probably a number that we would feel comfortable again, again we keep the inventory in most location really difficult, that it moved all under that. We've been at a 130 days previously and under 140 days two years ago, but [Inaudible] . The accounts receivable days they have also been moving down, but we're really among the best in class on the receivables and all has been [Inaudible] pretty good and pretty good involved here. The first half of 2003 (Ph) numbers [Inaudible] at about the same size, we were at a little smaller actually, and it is mainly due to the closure of this [Inaudible] . And these numbers [Inaudible] that shifted around a little bit and the production [Inaudible] and we are continuing to boost R&D that is so significant [Inaudible] . As of the revenues marketing shift is over a little bit of the sales area [Inaudible] we are very happy with the position against forces that we have there on the market.

Now one slide here that I wanted to show the revenue growth comparison in life sciences. This is a slide that shows how difficult it is at over the years. I think the problem that could often would arise [Inaudible] application for that company that is really driving the industry and has a very substantial unconverted market up ible] and here are some other companies that will not be named just that initials doing. See that most of these companies buying the life science industry are substantially at the low revenue growth [Inaudible] . The growth rate that we are having in our business is as might next [Inaudible] as the average so thriving is really difficult, we are selling at different equities, we are selling in very focused products portfolio in all [Inaudible] that 350 products in very fast growth segments in life sciences. As always, we [Inaudible] summarizing our last few [Inaudible] Novaris transaction which is what we think probably is the largest that should be in its [Inaudible] again it is not important for the oligonucleotide [Inaudible] are lot of things revenue has been and things that [Inaudible] that we able to get [Inaudible] on the next slide, and the launch slide we are [Inaudible] to be the product that we've probably to announce at the launch. It is always there many more of that not an outspoken [Inaudible] clearly are now the launching about 30 products a year so it still make sense that personally there are every [Inaudible] lot of exciting things came in the market. One thing that I might be able to give additional information on that, is our newly launched website that was [Inaudible] information access to Qiagen and so the product. With this I will hand back to Solveigh. I think we will open Q&A session now. Thank you.

Yeah, thank you very much Peer. We are now looking forward to discussing your questions. Again we really would like to ask you to limit your questions to a maximum of one during the Q&A session in order to give everybody an equal chance to ask his or her question. I would like to open the Q&A session by handing over to the operator. Don?

Thank you. Ladies and gentlemen, the floor is now open for questions. If do you have a question or a comment, please press one followed by four on your touchtone phone. Again, we do ask that you only limit yourself to one question per caller in order to accommodate all the questions from the participants. Ladies and gentlemen, our first question is coming from Cheri Walker of Deutsche Bank.

Good afternoon, congratulations on the quarter.

Thanks Cheri.

Can you give us a little more color? I know you can't disclose these financials between the Novartis deal. Talk a little about how it compares with another deals in this space and could we see more deals, some more in each are coming...?

We looked it at very carefully. It's really genome life (ph) ; genome life means that there is about 30,000 genes over that out there. While you saw previous deals [Inaudible] around a few hundred siRNAs, molecules [Inaudible] segment, the rest are gene technology, genome life project that's substantially large than anything else out in the market today. The reason why I chose this because of little bit of chemistry that we have very, with a high flexibility and speed addressed the needs are double (ph) under a very short period of time. I think this is indicative of a whole wave of deals that will be coming out. Where the deal ends, chemistry clearly has substantially advantages over traditional [Inaudible] siRNA and we are very quite confident that we will do some more exhibit in this area. We began - the oligos themselves are, they are important, more important to strategic objectives that I'd asked to be in this area at all with that uses of these kinds of technologies are substantial, users of Qiagen core competency products, mainly the [Inaudible] . Anything you want to add to this?

Thank you.

Can you speak a little bit louder?

Our next question is coming from Sam Williams of Lehman Brothers.

Hi, congratulations also on a good quarter. Peer by the way, I don't know if it's just asked, but your line is appalling, we can hardly hear what you are saying, but it may be it just be of a, I don't know. I noticed that your distributors of rest of world percentage of sales as a total has gone from 1% in Q1 if I am right to 8% in Q2. Does that explain the lower gross margins that you saw or partly explain the lower gross margins we saw in Q2 and I didn't hear your explanations? But I know in conversations earlier today, we've talked about a currency impact. So how can you go into that and how much of that 8% is sales to distributors and what is your guidance going forward for the second half of this year, and for next year in terms of gross margins?

Well, the gross margin is clearly impacted by sales to distributors, but not in a very substantial way. The sales that are done to distributors are typically done at a discount to a reference list price and the gross margin that can be achieved on this product is slightly lower than the average gross margin, but not substantially. The distributor in the rest of the world number can fluctuate quite significantly, depending on orders in certain areas and there are clearly also some corporate sales that we do into rest of the world and distributor areas that are sold at lower gross margin, but that is not really the major impact. The major impact is currency and as I showed from that one slide, the currency impact on gross margin in this second quarter was substantial. We had - the constant currency number was at 67% versus the reported number at 65%. So, at constant currencies, we were exactly in line with the gross margin estimates that we had given in the beginning of the year at the currencies also that translated even at the currencies that were used for that time period. So, going forward, I think that the 67% is a number on a constant currency basis that we can keep and again, these gross margins are impacted also by the area in which manufacturing occurs and as we are increasing our manufacturing also out of our German talent side, this number will continue to be more balanced. I think the interesting thing if you look at the natural hedge that our P&L carries, you'll see that while the revenues were substantially higher, some of the margins were a little bit lower. The earnings per share line is very well protected and there is hardly a difference on earnings per share. So, it is actually a very nice hedge that can be put through the P&L. So, as a guidance, we would probably get on a long-term rate on a constant currency basis, 67%.

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

Hi there. I just have a question about the European market, because a number of your peers in the sector have indicated that they have seen declining demand from some European customers, particularly academic and biotech companies in Germany and France in the main. Now, have you seen any evidence of this characteristic market?

Well, as you saw from our numbers, Europe is doing very nicely and with an 18% growth rate vis-a-vis the growth in the United States, there is a substantially higher growth rate that we see in Europe. Now, there will always be certain countries, there will always be certain companies that will decrease their spending or increase their spending, and we can't see those and forget about the rest, but I think it is important to look at the overall picture and in the second quarter, Europe has been doing very nicely. We see that there is not really too much of a biotech industry any more in some countries in Europe that is spending very aggressively and the academic areas in certain countries are saving and other countries are boosting. But I think the most important thing to remember is while academic spending might be growing or slowing, the overall growth is not the critical number. The critical number is what people are spending this on and I think what, in times like these, the market is getting more, what is more addressing now in the individual product offerings and core competencies and competitive advantages that individual companies have vis-a-vis just the presence in the market they are in, in other words, just being in life science supply does not mean that you grow with the market. It depends very much on what the product line is that you are offering into the market. And what we are seeing is that in the academic areas that certain focus areas are being created around and [Inaudible] this is a major effort in North America, but also in the rest of the world, oncology, CNS, and others that are very interesting opportunities for Qiagen. So, the positioning of the company and the technological advantage and the product offering, this is much more critical in a market like this vis-a-vis just the overall market growth.

Thank you. Our next question is coming from Anja Seyfried of Morgan Stanley.

Hello. Thank you. I just have a follow-up question on the margin question of Sam and that is really related to R&D costs. They came down as a percentage of sales, constant currency (ph) below 9%. Is that something to expect going forward and related to that, on EBIT margin target, I think you remember that at one point, the target was about 27%, by all high. Is that still something you are aiming for or am I just remembering that the wrong way?

Our R&D spending, the first question you had is one that we want to keep very constant and as always, it can fluctuate a little bit, and now it's as low as maybe 8.5% or 9% and go as high as maybe up to 11%. So, this fluctuation will continue and the commitment however, that we have to this is just to keep it approximately in the same percentage number going forward. I think most of the models that I have seen show it around 9.5%, maybe as low as 9%, maybe as high as 10% over the next four or five years out even and that is a projection that we would feel quite comfortable with. Now while we do have, on the operating margin side given out currency impact, again on the constant currency side, the operating margin was 23% and this is I think quite a bit above most of the estimates that we had for Q2, obviously the currency fluctuation moved in this direction. But if you look at sales and look at sales in a constant currency and also look at the margins on constant currency, at least that is the way we manage the business, and if you see that, the expenses that we have for every unit that we sell, these expenses are decreasing as a percentage of sales. A year ago, we were in the mid teens or as low as the mid teens. Now it is, on a constant currency basis, at 23. I think that the model going forward can and could be that we take 1% to 2% of operating margin a year in terms of efficiency going forward. This is what we have shown from 1996 through 2001, 2002 was obviously a difficult year and we are now back on the operating margin level in the second quarter, at least in constant currency terms, we are back at the same level we had in 2001 and so this path I guess we'll be able to continue over the next few years into that area that you just described before into the high twenties.

Thank you. Our next question is coming from Meirav Shobav of UBS.

Hi, it's both Nirav and Derik on the line. We have a - what in the other - what was included in the other and I apologize if that question has been answered in your presentation, because we could not hear at all, your presentation.

Okay. The other line included, may or includes mainly revenues that are services, these are gene therapy services that we provide. These are also consumables that are used by customers for large scale manufacturing of DNA for gene therapy. And additionally, other line last year included also sales that we had through our rapid gene unit and services that were genotyping services and related services. So that is why that other line decreased. The other line today is now mainly the gene therapy product offering.

Thank you. Our next question is coming from Brian White of Deutsche Bank.

Yes. Thank you. Good afternoon. I apologize if this came up in the presentation but again I had difficulties in making out what was being said. But as you - if you want you give us an indication of the 15% underlying consumables growth, if you have an idea of what proportion of that is coming from molecular diagnostics?

The molecular diagnostics and related business is somewhere in the range of about 20%, this includes also - this includes basically revenues from product or human samples are being used, of which the large part is the diagnostic applications and some related areas in this. This business, the diagnostics business is growing very rapidly at the moment and it is clearly, if you would have growth rates that are may be four or five times as fast as the overall company, this can give you a few percentage points of growth on the overall company, but it clearly is as you see, is an important strategic area for Qiagen going forward, especially based on the level of activities that you see in the marketplace in molecular diagnostic.

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

Yes. Hello. You mentioned that there are four licensees so far to the siRNA. And I wondered whether there is any sort of restrictions on this or whether we might see eight licensees next year and 12 years after.

There has been restrictions placed on the number of licensees out there, but I think there - one has to look at what these licenses are good for an application and the benefit that Xeragon has is one that it has exclusive access to namely to TOM-amidite chemistry that gives the substantial manufacturing benefit, by simply having advantages in the way that the RNA is manufactured in creating cost benefits and also speed advantages. So the - while the number of licensees restricts the number of companies that can sell products into this area, the efficiency, the cost efficiency and the quality benefits are quite substantial based on technology that Qiagen has exclusive to itself. The number of licenses that, for instance, the MIT granted in these areas, this is restricted to a certain number and this is four.

Thank you. Our next question is coming from Karen Ros Bremner of Shaker Investments.

Yeah. Schatz, if you'd talk a little bit more about - you may as mention this, again, I had troubling hearing as well, about North American growth rate was slow this quarter, and how you expect to see that going forward on the revenue side?

The growth in North America increased versus Q1 and the growth in North America was in a major way impacted by the pharmaceutical industry that was mainly located in the United States. If you look at a lot of European pharmaceutical companies, their molecular biology or genomics or pre-clinical research is mostly located in the United States, and this contributed to, as they sort difficulties in expanding R&D activities, this contributed to a much slower growth rate in North America vis-à-vis Europe that is - which is a higher academic. So going forward, we see that the pharmaceutical industry of which some companies have now come out with very-- very strong growth rates on their budgets in terms of R&D and this is - a very substantial part of it is actually pre-clinical spending, that if you take the numbers from Novartis recently, I thought that was a great example of a company that has now started aggressively again to spend on the research side, you see that they - these numbers are now starting to expand at certain companies and a lot of that activity is actually conducted in the United States. So going forward, we think that United States will go more into the long term typical growth rate and this would certainly be substantially higher than what we see here now in this time of weakness still in the pharmaceutical sectors.

Thank you, our next question is coming from Clinton Rye (ph) of Robert W. Baird.

Good afternoon. Well, I had a question on the instrument sales. Where was the strength, is it in academics or molecular diagnostics? And on the systems that have been placed as of Q1, any returns on recurring revenue streams generated by these instruments?

Well, the sales of instrumentation were really across the board and as you saw some of the growth drivers that we introduced in late 2002, they included lower and medium throughput product lines that have a target market in the pharmaceutical research environment, but also in the diagnostics sectors and also even in academic sectors. We saw probably the fastest growth in sectors that are in the clinical research area that are in various - in some cases, even the pharmaceutical industry, but most importantly the diagnostics sector. The small and low throughput instrumentation lines have been very aggressively being purchased by areas in which the expertise of the use is not necessarily heavily molecular biology painted and this includes areas such as pathology or other diagnostic areas that are close to diagnostics, HLA and others. So there are certain focus areas that are really across the board, and we didn't see any FimA (ph) with the exception of diagnostics really sitting down above it (ph) . Now, the recurring revenue is very different for instrument. If we take the overall instrumentation base of around 1,000 instruments or more than that, you see that the consumable stream that is running through instrumentation; if you take let's say $625,000 per instrument, which is probably at the high end including, now that there are lot of lower throughput instruments moving into the market, you see that the percentage of consumable sales that comes from instrumentation is really not that big. But once you have an instrument in there that is an extremely loyal and reliable consumable stream, going forward and typically on very high degree of customer satisfaction because one of the most important aspects of a product's performance, namely the reproducibility increases dramatically, if you have an instrumentation product. So that is - maybe just trying to explain what the recurring revenue streams we are getting through this instruments and how important they are. But it is not that when you place an instrument, you suddenly see a huge jump in recurring revenue streams, they start validating the instrument, and then they start moving into it probably over the course of six months. So, going forward while there will be an important increase in recurring revenue stream, it will not be such that we suddenly see substantial impact on the top line going forward. But instrumentation as a product and an enabling technology is very critical and important to Qiagen.

Thanks, your next question is coming from Kim Wang of Thomas Weisell Partners (ph) .

Hi, good afternoon. Thank you for taking that call. I have a few questions, follow-on questions for the - siRNA question. I couldn't identify the other three licensees to this technology and also could you break out your oligo sets into the siRNA sales and genome, side genome (ph) , and oligo set sales, and not the oligo sales, and discuss the growth rate of each segment? Thank you.

The first question is easy to answer, that is Proligo/Genset is one licensee, the second one is Ambion, and the third is Dormicon (ph) , and the fourth is Qiagen. So as you see, we clearly with the sales and marketing force of 600 people, we're substantially larger than most other entities in this area and are putting a high commitment behind this product line again for this substantial opportunity in flanking revenues into this application segment. The second question is more difficult to answer, because this gets very confidential; this is the number we would like to keep very confidential. The DNA oligonucleotide business is - well, I can say, when we publicly stated, we said that the RNA sales, sales of siRNA products and this is siRNA only and not other RNA revenues, we are really close to zero when we acquired Xeragon and we have projected at the time of the acquisition that this would be $4m in sales in 2003 and we have stated before that our number would be substantially above this. The sales of oligo sets and content products started out and a slide we showed sometime ago is being somewhere in the range of 20% of our sales and is increasing quite substantially. So, in the mean time, it has already become a much larger slice of the sales. So you see that there clearly has been a refocusing in these two product areas. So, please understand if I keep this a little bit vague, this is still an area where competitive information is very important and we are very happy to break out the overall oligonucleotide sales, but going into further detail would give away some critical information.

Thank you. Our next question is coming from Ed Godbeer of Lehman Brothers.

Hi. I just want to ask in terms of the longer-term growth, if you were going to concentrate on the RNA business in the molecular diagnostic business as a means to getting high double-digit growth and how long will it be before that represents significant share of your revenues compared to your DNA star business and can you achieve that with the existing technologies or are you going to have make further acquisitions?

I'll add some pieces into that and may be we can add some on the siRNA business. First of all, the diagnostic business is one that we've been active in now for about 10 years and we clearly had the vision way back even in the very early 90s that molecular diagnostics will be a very substantial revenue opportunity for Qiagen. And this has now clearly become a fact. If you look at our revenues and you look at the dynamics in the market and for those of you who were at recent diagnostic conferences, maybe even you see that molecular diagnostics is really changing the industry very-- very substantially at the moment, as assays are being built at the moment and momentum is being built going forward. For Qiagen, we are already today one of the most substantial players in this market serving this industry. With the sales numbers that we described before, there clearly is a substantial revenue base and a very large product offering that we have in this area. Clearly, the strategic commitment that we have requires things like regulatory efforts that are underway and aggressively being spent on and related areas. But going forward, we don't think that there is a substantial piece of technology that is missing for us to be able to address the molecular diagnostics needs even five years out from today. For siRNA, Metin, you want to add some comment?

I think today we have already a very very impressive portfolio of products to address in which you see on slide 12 addressing the whole gene silencing applications from the transfection reagents, the siRNAs, going into the silencing itself, the automation you need for it, then the extraction and purification, and then also quantitative RT-PCR and protein assay actually is [Inaudible] where you would need the antibodies, which is a quality control and definitely there are needs for some another in transfection reagents we just announced. The amaxa collaboration, which in this case, instead of an acquisition, we would more partner or take a license for certain technologies. But on the field of siRNA, I don't really see who would be an ideal acquisition target. I think here there is much more organic growth and development needed rather than go ahead and do an acquisition. And definitely microarrays is an area, which we have decided not to be really in. Here there are opportunities to address customer needs by partnering. And I think going forward, the question will be validated as iRNAs and pathway analysis and this is immediately leading to content and here we have raised to have content by our own, but also partner with other companies who have content to offer complete gene silencing and I would say signal transfection pathway fleet of solutions.

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

Ladies and gentlemen, our next question is coming from Stephanie Philipp of HSBC.

Thank you very much. Could you give some indication of how the pre-analytics business is developing?

Pre-analytics has become a cornerstone in our molecular diagnostics area and that is today probably the accommodation of the viral collection product and viral traction product today the most preeminent product in sample handling and the preparation molecular diagnostics all together. So, our position has been increasing almost every quarter and moving against home brew in non-standardized solutions and we are well on track to make our targets and the combination or the product areas that are using these combined product or the linked product to protocols and there are a number of estimates out there that are somewhere in the genes, or the revenues in this area, and this is something that we feel is achievable.

Thank you. Our next question is coming from Maykin Ho of Goldman Sachs.

Hi Peer. A follow-up question.

Hi Maykin.

How much of the molecular diagnostic business is actually pre-analytics and then also, would the Roche new instruments, for example, for Western Nile (ph) , how do your products play into that?

I will answer the second question first. Now, most of these collaborations that we have, of which some are known, some are not known, the Roche obviously is known. They clearly have some confidentiality attachments to them and as the product is not launched, it will be difficult for us to really - to address that. I think the best way to probably see that, is that the product that Roche are addressing to the market in the lowest throughput and in the highest throughput areas, if you look at these sample preparation components, they are either used manually or in instrumentation, they will most likely carry based on Qiagen technology, references to them. So this is a very successful and a very positive collaboration we have with Roche and we think that we are enabling each other very, very well in this early market and we, in addition to Roche, also have other relationships that are also showing that this joint efforts really speed up the product developments quite significantly. In terms of the percentage of pre-analytic sales of our molecular diagnostics piece, if you take the revenues that we showed here with the percentages, you clearly see that this high double-digit millions in sales that we do into molecular diagnostic related accounts and the pure play pre-analytics product that are [Inaudible] integration meaning everything comes in one box, it maybe 10% of that, maybe a little more and the combination, the protocol product makes them the remainder about at least the same size. So you see that the majority of the market is currently collecting and purifying [Inaudible] from these integration products and there is a lot of flanking revenues going into it, meaning that the automation and others of that revenue piece.

Thank you. Our last question at this time is coming from Christa Bahr of DZ Bank.

Hello. This is Patrick Phuc calling. I have a question regarding the Novartis deal. It is possible that we didn't get it, but assuming 35,000 teams at 200 Euros can we expect 5m to 10m of sales booked for the oligo business unit in this year?

We cannot comment on the numbers. That number is quite high and as you probably want to bundle and focus in certain areas, but the revenue clearly is a very substantial piece. It is, again, we can't comment on that, but it wouldn't be unreasonable to assume that this is quite a few million dollars yet. And - but this will not be booked over two quarters itself. This is something that will grow in over time. It can grow fast, it can grow over the next four quarters. It really depends on the customer, how they accelerate their work in this area and we are clearly prepared to do whatever speed that they want to have.

Unfortunately ladies and gentlemen, due to time constraints, we don't have any more time to take any questions. I would now like to turn the floor back to the management for any closing comments.

Well, with this, I think we closed our second quarter conference call. I hope we were able to address all of the questions that you had. We very much look forward to welcome you in the third quarter conference call, which will be held end of October and-

On the 28th of October.

28th of October. If there's anything that we can help you with in the mean time, we would be very happy to address your question or information needs and we look forward to talking to you. Thanks for your time.

Ladies and gentlemen, thank you very much for your participation. This does conclude today's Qiagen second quarter earnings conference call. You may disconnect your lines and have a wonderful day.