Qiagen NV (QGEN) 2003 Q3 法說會逐字稿

Good morning and welcome to your QIAGEN Inc. sponsored Q3 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. At this time I'll turn the floor over to your host for today's conference, Metin Colpan. Sir, you may begin.

Thank you very much Karen. Good morning and hello everybody. Thank you very much for joining QIAGEN's Q3 2003 Earnings Conference Call. I'm Dr. Dr. Solveigh Mahler, Manager of Investor Relations at QIAGEN. With me on the call are Dr. Metin Colpan and Peer Schatz.

The conference will cover 15 minutes 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 homepage, at www.QIAGEN.com.

We understand that many people have time restrictions. Therefore, please limit yourselves to only two questions during the Q&A session. The time of the conference call is set for 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. Metin.

Yes, thank you Solveigh, and good morning - or good afternoon ladies and gentlemen, this is Metin Colpan speaking.

We had a great third quarter in 2003, and are very pleased with our financial results. Our net sales have increased 18% to $90.4m. The operating income increased 49% to $19.3m, and net income increased 61% to $11.8m, from $7.3m in Q3 2002.

Our Consumable business showed a strong growth of 17%, and we further expanded our market position and leadership in nucleic acid purification and biological reagent. This is pure organic growth by internal creativity in R&D, and execution of sales & marketing. It is by no means achieved by acquisitions or other transactions. It's a proof of QIAGEN's strong market presence and our healthy market.

Representing 72% of our net sales, our Consumable business has always been a strong business with robust growth and improving positive trends in the market. We are seeing positive momentum in many market segments, with an ongoing shift in focus of academic and industrial R&D to functional genomics, and clinical research and molecular diagnostics. With the emergence of new and more complex applications, QIAGEN's core competencies in sample collection, stabilization, purification and selected downstream applications like Q-PCR and gene silencing are increasingly demanded.

Our instruments business, with 14% growth, is showing promising signals from the market; especially our Magnetic Bead-based instruments are showing a strong market interest. Customers are very attracted by our low and medium-throughput instrument line, based on Magnetic Bead application.

The synthetic nucleic acids are slow on the DNA Oligonucleotide side but they are the Oligonucleotide for gene silencing, are in a very hot business area, and with a strong growth and very attractive margin.

Our focus on our core competencies fuels our strength in addressing customer needs with state-of-the-art and proprietary enabling solutions. In addition, the recently observed increases in pharmaceutical and biotech research spending allow us to look optimistically into 2004.

With this, I will hand over to Peer Schatz, who will describe to you the dynamics of our market, and will walk you through our financials.

Thank you Metin. Yes, we have a slide here that shows the various business segments and revenue segments both at reported currencies and at constant currencies, as well as also the prior year sales.

If you look at this chart you'll see that the Consumable business had a reported revenue growth of 17%, and an actual or constant currency growth of 12%.

Now, what is so interesting here, this is again as Metin said, we'd really like to emphasis this. This is organic growth. Our R&D has continually been very, very creative and active in creating new solutions for our core competencies and has brought them very successfully to the market, and our sales force has been very successful in bringing these products to our customers.

In the instrumentation area, especially the GenoVision products that we now call the QIAGEN BioRobot M-series, have been hitting a sweet spot in the market. This acquisition with hindsight was very successful. We talked about this in the last quarter's conference call. As you see from the growth in instrumentation, it is clearly picking up. This is mostly due to these low and medium-throughput instrumentation products that are basically addressing a very wide-open market that is very eager to have solutions like these available.

In the Oligonucleotide area the growth was approximately flat at constant currencies. This is obviously not a very high growth rate but is - considering the market growth - actually quite good. We are gaining market share at this growth rate and margins are continuing to move in the right direction.

The Other share, that swings quite a bit and in this quarter, was higher than normal. It should normally come down in future quarters and continue to swing a little bit. These are mostly services, mostly large DNA purification deals where QIAGEN provides services where large amounts of DNA are purified under GMP qualities, for mostly pharmaceutical customers that are engaged in clinical trials of gene therapy products.

In addition, there are DNA purification services and also related services on a smaller scale. In addition there are sales of products, services, or intangibles which are not consumables, oligos or instruments. Typically this line has lower growth margins than the other revenue line items.

The gross margin on a constant currency basis was exactly as expected - 67%. We are continuing to show very strong pricing power. Our average discounts have actually improved in many sectors, especially now with the improving instrumentation sales, which carry a lower gross margin than the consumables. We have been very pleased with the development of the average discount.

In addition, the operating income - which came in, again, above our target which we gave earlier this year of north of 20% operating margin, here at 23% operating margin on a constant currency basis. As we see here, the continuing margin expansion combined with the top-line growth allows us to achieve an operating margin, or operating income growth, which is about twice the growth of the revenues on a normal basis. And here are actually considerably faster because we had a weaker third quarter 2002.

EPS grew 60% from $0.05 to $0.08. If we look at the next slide, the geographic distribution of sales - especially the growth rates - show you that the North American sales are clearly still weaker than the rest of the world. But it is improving, and what is nice to see is that the predictability of our sales in all segments has been increasing quite a bit.

We talked about this in the second quarter conference call, and the third quarter continued to show this very positive trend.

Europe and Asia are performing very nicely. I know there are companies that see great growth in Europe and Asia. Others see weaker growth in Europe and Asia. This all boils down to the fact that most suppliers are very, very different. As insiders to the industry, I think we can say that it's sometimes very difficult to judge if a trend is an industry trend or a demand trend, or simply a product lifecycle trend.

Companies are often very different in what they sell and QIAGEN obviously has a very attractive business. As we see here, it is clearly a demand issue that we have, as we see very strong growth in Europe. The US probably has a lot more potential than what the market is currently showing.

We see quite a bit of growth in Japan, and Europe is not far behind.

On the next slide you see the reported numbers, $90.4m in sales in this third quarter, very strong profit growth. On the next slide the first nine-month numbers - $256.3m in sales and a net income of $33.9m.

What was actually quite exciting to see in this third quarter was that now that we have completed a lot of our investment spending programs such as the infrastructure and the buildings, and other Capex programs the net cash flow has increased very significantly. In third quarter 2003 we had a net cash flow of $23.6m. This was mostly due to a much lower investing cash flow compared to about a year ago.

So our trend going forward, to have about 6% to 7% of sales for our future periods, I think can also be very well documented on this quarter, which is actually below that number.

On the next slide, some trends on inventories and accounts receivable. You'll see here that our inventory days have been constantly moving down from quarter to quarter.

In 2002 we obviously saw a big increase in our inventory levels, mostly of instrumentation products. As we said earlier this year, this was something that we were able to address and we are moving down the inventory levels constantly. Again, we think that there is definitely a possibility to take probably another 30 days off this in the near future.

In terms of accounts receivable we already have a very good performance of 58 days. It's one of the best turns in the industry, so quite solid.

On the next slide, our margin development. You'll see that our operating margin in 2003 has, every quarter, been about 23% on a currency-adjusted basis. This obviously has been above our guidance of 20%, which we gave earlier this year.

As you'll see on the next slide, however, there's a lot of room still to grow. QIAGEN is currently expending about 45% of sales on SG&A and R&D.

QIAGEN is a premium company. We are very innovation-driven. We are very focused on innovation and on being very close to our customers with a superbly trained sales force. This is something that we're willing to spend on. So I don't think that we will have operating expense levels compared to many other companies out there, but there's definitely a lot of room to continue to improve going forward, and we've proven that over many years, in 2003 as well.

On the next slide you'll see our employee development. We have remained quite stable on the employee number, with the exception that we closed one facility in Seattle. We were able to achieve operating performance enhancements due to the combination of two sites in the United States after we completed our factory build out in Maryland. So our employee base has been pretty stable at about 1550 employees.

On the next slide you'll see some of the developments that marked this third quarter. I think a lot of very interesting deals. A very interesting deal with Thermo. A very interesting deal also with Novartis. There were a lot of highlights.

I would, however, like to focus on the outlook. We see, assuming stable currencies, that revenues could be about comparable to Q3, in Q4 of 2003. I get from our consensus surveys - as this is about the consensus on the street. As I understand the consensus based on our surveys, consensus seems to be about US$0.32 per year.

This seems to be a reasonable estimate for the year. It could be a little bit higher than this. We're obviously still in an environment where there are some uncertainties. So we feel quite comfortable with the consensuses as they exist today.

Again, currency is not a big lift for us on the bottom line. Currency impacts our top line but because of our very distributed operating and manufacturing bases worldwide we have a very good buffer and insulation from currency swings on the bottom line.

2004 - there are many ways of looking at 2004. We are going to give detailed guidance for the year in January 2004. So in a few months. There are many trends happening. If the current indications get more support 2004 could actually be a very good year, but it's clearly too early to make a firm call.

One of these trends is certainly an improvement of the operating environment in the US. We're starting to get very positive signs. Some companies have already called this a rebound.

We think that even though we probably have one of the best outlooks in terms of our market developments, it's too early based on the financial market conditions today to start calling a improvement. But there's clearly an increasing support for that happening.

QIAGEN has such a fantastic organic growth rate. It's much higher than most other players in the life science supply industry. If there is a rebound, our elasticity to such a change - meaning our increase in growth on an increase in industry growth - could be very significant.

Street consensus for 2004 of about $385m in sales and about $0.40 seems very doable, but there could be an upside. Again, we would like to provide more details in January 2004, in our detailed 2004 conference call.

With that, I'd like to hand over to Metin. Thank you.

Yes, ladies and gentlemen, this is Metin Colpan speaking again. I will explain to you the management transition at QIAGEN.

As of January 1, I will hand over the CEO position to Peer Schatz, who will become CEO and President of QIAGEN. I will transition my role to become a member of the Supervisory Board and a Senior Technology Advisor to QIAGEN, consulting on technology and R&D projects.

I have been thinking about this quite some time and Peer and I have spent a lot of time and effort over the past few months to make this transition as fluent and natural as it is. The role as a CEO left me not enough time and freedom to focus on market development, technology, science and specific development projects.

As you know my real passion was always in technology and science, and my new role as Senior Technology Advisor to QIAGEN will allow me to pursue this passion.

After having seen the dilution of this scientific role over the past few years I'm now reducing my managerial role. I will be able to focus more on thinking about and pursuing technology ideas, and feed them into our world-class innovation machine.

QIAGEN's R&D team, which I'm referring to, has in the last few years shown spectacular creativity and productivity in providing QIAGEN, that have brought such productivity enhancements to our customers. I will be a proud contributor to it.

I was really missing the science focus in the last few years, and this move will give me the freedom and time to analyze and evaluate new market trends and scientific developments which can contribute to strengthening QIAGEN's technology and market leadership. I look forward to my continued involvement as a Senior Technology Advisor and Supervisory Board member, and intend also no significant change to my shareholding.

I'm very excited to be in this new role and, most importantly, I think QIAGEN and its employees are excited to welcome me into it. My heart is here at QIAGEN and my foremost goal and desire is to help move it into even greater success.

With this I would like to hand over to Peer again, who will explain the new management structure at QIAGEN.

Thanks Metin. As Metin just described, we believe that QIAGEN's opportunities for its world-class innovation and technology opportunities have really never been greater. There are so many things happening in our market. We have such a phenomenal technology base and opportunities, that the addition of Metin into these projects in certain roles, we think, will be a great contribution for QIAGEN.

As he's been describing before, it has been something that has really fallen short in the last few years, and we believe that the addition of him into this team will actually be a great contribution above and beyond the success that the R&D team has had in the last few years.

The process has been well planned. We started thinking about this about a year ago and started some time ago in actually putting it into place. It is fluent, has been very well accepted by our employees who have been informed throughout the world, and we think that going forward it will be a very strong basis for future growth.

QIAGEN is almost a 1,600 employee company, and I think that what was sometimes not always been visible was that there's actually a great management team in place. We have a phenomenal team of employees and a very seasoned QIAGEN management team, which has also been combined with some new arrivals recently. The team has led QIAGEN into its current re-accelerating momentum.

Metin again, I think, will be a very valuable addition to our Board of Directors.

As you'll see on the next slide, we chose for our corporate governance a structure which has a so-called Executive Committee body. This Executive Committee is the executive body through which decisions are reached that have a material and/or global impact on QIAGEN's employees, business and future.

So clearly the most senior managerial committee within QIAGEN, that combines some of the most senior and seasoned managers within our company.

What is actually quite interesting to see is - as you'll see in the next slide - the seven members that will build the Executive Committee, starting January, have a combined QIAGEN experience of 51 years. As you'll see here, these are not people who have arrived recently. These are people who understand our culture, who understand our business extremely well. Including people that are in our Research and Development Vice President now Managing Director, Dr. Joachim Schorr, has been here for 12 years. Head of Instrumentation, Dr. Michael Collasius, for 12 years as well, and the others for quite some time.

So there is clearly a very seasoned and experienced team, also in terms of QIAGEN's opportunities and possibilities.

There will be a Managing Board obviously, as this is required by Dutch law. The Managing Board has the function to represent the Executive Board in the Supervisory Board meetings. There are a lot of often [legal] people and other formal responsibilities and requirements that are put on the Managing Board.

To understand the corporate governance better, we put in a slide on the next chart called Corporate Governance of QIAGEN NV. You'll see here that the Executive Committee is the body of the Senior Managers at QIAGEN that has this global strategic and operating decision-making role. There is a delegation called the Managing Board that has the formal responsibility vis-à-vis the Supervisory Board.

The Netherlands has a two-tier board system, so no member can be party to both boards and the separation is very important under Dutch law.

On the next slide you'll see our mission statement. I put this in because over the course of the last 24 hours I've been asked a lot what will change going forward. The answer is really pretty clear. We will be even more focused going forward. We do not wish to diversify or broaden. There's no need to. There is so much growth. There are phenomenal opportunities in our core competencies.

Great companies are built on focus and organic expansion. Our franchise is so solid and has great growth opportunities. Innovation and creativity is at our core. Our innovation engine is well and humming. Metin's creativity in this area will be a more positive contribution even.

With that, I'll hand back to Solveigh.

On the next slide, on the last slide, is your conference calendar and the financial calendar showing the conferences where we will be presenting during the next month, as well as the earnings dates for the year 2004.

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 two 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. Karen.

Thank you ma'am. At this time the floor is now open for questions. If you do have a question or a comment, please press the number '1' followed by '4' on your touch-tone telephone at this time. Once again, that is '1' followed by '4' on your touch-tone phone at this time. Please hold while we poll for questions.

Thank you, our first question is coming from Peter Welford, Merrill Lynch.

Hi. If I can just ask two questions? First of all could you possibly try and split out that rest of world 22% growth? I was just wondering if you could put a bit of light on Japan and Europe. You said it was good growth in Japan and Europe is close behind. I wondered if you could just quantify that a bit more?

Secondly, I wondered if you could perhaps just explain again what that other revenue line contains? I think you may have done that a bit earlier, and whether or not there was a gain booked at all for the Merial sale you mentioned?

Okay, two questions. First question on the growth rates.

Year-to-date both Europe and Japan show double-digit growth rates and this is on constant currencies. Whereas Europe was, on a year-to-date basis, quite a bit higher. So we're seeing very strong growth in Europe. We are not really feeling a lot of budgetary pressures and actually, vice versa, we even saw some acceleration in the third quarter.

Japan showed an acceleration in the third quarter vis-a-vis some time in the first half of the year. So has also been double-digit and in the high teens. So the US is clearly (and this is now on a constant currency basis) a very small fraction of the growth rate that we are showing in the rest of the world indicating that this is clearly a demand issue in the United States. Something that's probably less visible in other companies because the growth rates are not quite as high so the differential between the two geographic regions will not be quite as high.

In terms of the other line, others is there are three or four things that flow into the other line. There are services. There are mostly large DNA purification deals where we manufacture gram amounts of DNA for pharmaceutical customers under GMP quality. This employs our DNA purification technologies and infrastructure. There are smaller scale DNA purification services and related services that we supply and there are also sales of products, of services, or IP which are not consumables, oligos or instruments.

There was a small gain on the other line from Merial, but there were also expenses against that. So there was not a very significant impact on the bottom line.

Typically, the other line in general has quite a much lower gross margin than the other line items.

OK, thank you.

Thank you. Our next question is coming from Aaron Geist, Robert W. Baird.

Good morning, a few questions for you. Congratulations on making the structural changes within the company and generating a strong quarter.

If you could talk a little bit about the fundamental differences between the US market and the European market and the conviction that you have that potentially going forward into 2004 the US market might turn, that would be very helpful?

Yes. The fundamental differences between the European market and the US market, is first of all, that we see a very strong demand here in Europe from the academic market and also a very constant spending on the pharmaceutical side.

If we compare that with the US market we see the similar spending pattern and also strong growth on the academic side. But due to the fact that the US companies in the pharmaceutical sector are very closed in investing and spending at the moment and also the biotech market quite weak, we see the great differences between the two regions in the world. But we see also positive signs coming from these industrial customers and also addressing them on different sales channels, positive signs that the US market is coming back and will contribute to strong growth through the company.

If I remember correctly, for the second quarter you had about 2% growth in the US and for this quarter you reported 3% growth. At one point Peer had mentioned that it was based on easier comparisons.

Let's negate the easier comparisons and say that we have 100 basis points improvement in growth in the US sequentially from Q2 to Q3. Can you talk about what market within the US you feel improved sequentially?

What we have definitely seen is an improvement in the academic market and also a very strong improvement on the diagnostics market. Also what happens is basically that we have a much larger DNA Oligonucleotide business in the US, which depresses the US numbers in comparison to Europe where we have only a small DNA Oligonucleotide business.

All this together shows the US market is in a slightly weaker position than it really is.

Aaron I think your question is obviously driving at one of the hearts of the industry momentum at the moment, which is the pharmaceutical industry. The pharmaceutical industry is about 25% to 30% of our sales overall and obviously went through some difficult times in 2002 with declining growth rates.

Right now we are actually getting positive indications, we talked about that in the second quarter. Again here it's sometimes very difficult to interpret our R&D spending growth. There are some pharmaceutical companies that might not show very high growth of their overall R&D budget, but showed enormous increases in molecular biology spending and also in terms of sales that we are showing to them.

So it is very difficult to take a budget like Pfizer, which is many billions of dollars, and to assume that this is spent pro rata on every tool provider out there, or service provider. There are big differences in terms of momentum at the moment, depending on the companies.

What we're starting to see now for 2004 is that the budget allocations and the project definitions are being done, we're seeing good signs of momentum moving into our directions, where we can play a strong role. This has just increased compared to the second quarter. Obviously going from 2% to 3% growth in the US is not a phenomenal achievement yet but obviously it is faster than many other companies are growing in the US. It's a far cry from where we think it can be.

Thank you. Our next question is coming from Meirav Chovav, UBS.

Hi, good morning, this is Derik de Bruin. A couple of questions. When you looked, how much did FX affect your gross margins? Just discuss what the overall impact is, and are you expecting a similar impact in the fourth quarter? I guess, once again looking at currencies, how much are you expecting foreign currencies to impact going into 2004?

Well Derik, as you see in our press release, we always disclose very detailed constant currency and also reported numbers. You'll see from that chart that our gross margin reported was 65% but under constant currency was 67%.

So you see that our gross margin obviously is impacted from the fact that we have large manufacturing facilities also in Europe that are selling products into the dollar zone. This moves through the P&L and gets insulated through the various expense lines that follow the gross margin line.

In terms of currency, for 2004 the best estimate for 2004 currency is probably today's currency or some kind of a forecast. So right now, assuming that this currency would remain at this level, we do not see that the margins going forward would change very significantly.

As you see on the net income it took only 1% of sales on our bottom line, which is $800,000, which is about 0.5 cents EPS per quarter, so this is not a major impact for the full year even in this time of extremely volatile currencies. If we go into 2004 and assume a flat currency rate that difference will obviously go away, because then we would not have a differential compared to what we initially planned.

Right, and also could you just discuss a little bit about what you're seeing for the tax rate. It was up again this quarter. I guess we had credits that appeared and is there some rate we can model going forward?

Well, if you have 25 jurisdictions the tax rate can jump a few percentages up and down. We typically give as a guidance 37%, 37.5% going forward, which it typically averages out to in the longer term, but within quarters it can fluctuate a little bit.

So I would use that number and the fluctuations are not really too meaningful on a short-term basis, and typically are not too major either. So in Q3 2003 we had 38%, so there was not a huge -- 38.2%. So we were 0.7% off our long-term guidance.

Thank you. Our next question is coming from Nick Turner, Jefferies International.

Thank you for taking the question. You talked quite extensively about the growth in Consumables being primarily organic, but I guess sales in GenoVision and Xeragon weren't terribly high in 2002. I just wondered if you could make some comment as to what contribution, in dollar terms, GenoVision and Xeragon made to the top line, and also maybe give some indication as to what level of sales one is now getting from the molecular diagnostics market?

If you'll indulge me with that being only one question, then the second question is you've said in the past that the delay in the release of the NIH budget to academia in the US has held back sales development. I've read in nature the suggestion that the NIH budget may only increase by 2% next year, and I was wondering if you could give me some sort of flavor as for what impact the NIH budget increase has on your top line. So if the NIH budget, for example, went up 10%, what might that mean to the top line of QIAGEN.

Okay, I think the first question was organic growth. Now if we look at GenoVision. GenoVision had a certain de-paneling technology to it. This was basically a technology acquisition that we did. The magnetic particles, i.e. the consumables, that are sold with the GenoVision instrumentation, these are products that we developed that are QIAGEN intellectual property and based on QIAGEN patents. So the consumables growth is exclusively organically.

The growth of the remaining GenoVision product lines was not really very high, as the company was really not too big at the time that we acquired it.

The Xeragon product line - again, here, Xeragon did last year something in the range of $200,000 per quarter. We acquired an intellectual property base, which was technology that allowed a very efficient manufacturing of synthetic RNA. Just as a note - with all intellectual property attached to it, so fully licensed from the required parties.

This product line was built by QIAGEN. We acquired a technology base and not a running established business. They were doing $200,000 in sales and are now substantially more. So that flows into the line of the Oligo business.

Your third question was clinical diagnostics or molecular diagnostics. It's approximately 20% of sales. That includes both the clinical research side, which is basically the same application, also using clinical diagnostic products and routine clinical diagnostics at big laboratory chains, or at companies like Roche or so, which is included then ultimately in their diagnostic platform.

The last question - Nick, can you help me on that one?

I think that was the questions.

Okay.

Thank you. Our next question is coming from Ravi Mehrotra, SG Cowen.

Thank you. My first question regards the profitability of the Oligonucleotide division. Can you just bring us up to date on where that is currently and more importantly going forward, how you expect your Ebitda from that division to expand?

My second question regards something you touched on, pricing power, specifically within the Consumables division. How much of that underlying 12% sales is unit driven and how much of it is pricing driven? Thank you.

Good question, the second one, unit and price driven.

QIAGEN pursues a strategy in which we ensure our customers that we will never utilize our pricing power to create short-term benefits on our top line. So we increase our prices with the rate of inflation typically, and these are price increases that go over well.

So you can assume that the rate of inflation in the respective country, which was obviously very low in most countries in 2002, went into price increases for 2003.

The second question was on the Oligonucleotide business, on the profitability. Oligonucleotides on a running rate would probably do north of $3m in Ebit. This is quite substantial so if we would - on an annualized basis - if we assume that just on a pure dilution basis QIAGEN diluted through the acquisition of the Oligonucleotide business by about 2% you see that this is a highly accretive acquisition.

Even though obviously this business is not showing a very high growth rate at the moment it's a very attractive business to have, it was very important for QIAGEN to do. It was an extremely accretive acquisition ultimately, but it's clearly returned back to profitability.

Thank you. Our next question is coming from Ed Godber, Lehman Brothers.

Hi there. I have just a couple of questions. The first one - I wondered if you could bring together two of the statements you made. One on your outlook for 2004 and the net sales guidance being very do-able, and the other about saying it's too early to say whether or not an improvement has occurred in the market.

Is your assessment that 2004 figures are doable contingent upon you being able to claim in January that there has been an improvement in the market?

Secondly - in terms of the gross margin, I'm wondering whether your expansion and growth in Japan in particular and in Europe as well has meant that you've had to increase your number of distributors and whether or not that will affect the gross margins at all.

Okay, the first question on the outlook. The current consensus on the outlook based on about 25 analysts that we surveyed here is about $385m, $386m. If you take the number that we are currently running at you'll see this is about 12% growth, so we're obviously still in a weaker environment and the signs are moving up.

So this guidance would mean nothing other than the same market environment in 2004 that we have today. So this is why we are clearly saying should these signs be more certain then this will clearly allow us significant increase in this revenue estimate.

The second question was?

To do with the distributors and your margins?

No, we don't. We have very long-standing and good relationships with our distributors. This would be something that would be publicly available in terms of information. We did not change distributors in this third quarter and distributors are only a small percentage of our sales.

OK, thank you.

Thanks.

Thank you. Our next question is coming from Daniel Mahony, Morgan Stanley.

Hi. I have a couple of related questions. Peer, you talked about that you have visibility that certain product areas should be quite strong, particularly from US Pharma. Can you elaborate on what those product areas are, and where your competitive position is on those?

Also, perhaps related to that, could Metin talk a little bit about - in his new role - where he sees some real growth opportunities are for QIAGEN on a, say, two to three year basis, based on what he perceives customer needs or demands are right now?

Yes, I think first to the products. What we're seeing enjoying especially interesting opportunities or growth already in the pharmaceutical sector, are very often products that have clinical relevance or are very close to the functional genomics area.

So these are - as we described earlier this year - what we clearly see as the major trend happening in the market. The RNA and also genomic DNA handling, or collection, handling and purification (in some cases also stabilization) products and technologies.

On top of that what we're seeing is that some of these applications are just becoming more complex and yet more routine, so they're looking for automation and also lower-throughput automation in these types of things. That's also where we're seeing a very strong consumables growth.

So it is very much along the line of what we initially described earlier this year. If you look at the NIH releases that recently came out, you'll see that the NIH is clearly extremely focused on - and this is the question we had before - the NIH is extremely focused on putting a lot of money behind very clinically relevant research.

What does this mean? This means a lot of patient samples being collected. This means a lot of sample handling systems. This means archiving of samples. This means also very efficient purification systems because these samples are often very different from patient to patient and still have to have a very comparable extraction, handling and purification routine.

So the overall growth at the NIH is really not too much of our concern. The question - I think it was Nick who asked that before - the real concern is how certain projects are being funded going forward vis-à-vis to previously, and that's something we're monitoring very actively at the moment.

We are getting pretty good indications that within that NIH growth again a smallest shift in spending of a $25b budget can mean that certain product areas can go through the roof at QIAGEN. This is what being focused really is all about, about identifying these opportunities and making sure that we have the best product available when this takes off.

Metin?

Yes, I think in terms of where growth will be - let's say, over the period of the next two to three years - there are two ways to look at it.

Number one is to look from a customer segmentation perspective. Customer segmentation would mean research, academic research, industrial research and also research or (let's say) customers being in molecular diagnostics, routine molecular diagnostics.

We definitely see a lot of opportunities in research. In different areas it's definitely not the same type of research done five years ago. It's different, it's more going on to functional genomics, (as Peer said) clinical samples even in academic accounts, definitely in pharmaceutical areas, and also original human samples in molecular diagnostics.

I would say that even the molecular diagnostics is growing at a faster pace than the research market. In our portfolio I think there are a lot of opportunities in the research market.

Number two is - from a different angle - you have to look into (let's say) applications or product segments or technology segments.

I think there is a lot of room still left, and it is by far not penetrated, in nucleic acid purification. It is not a simple plasmid purification, as we had five years ago, it is growing into much more complex samples. We are talking about tissue samples, original human and animal samples for gene expression, genome typing and this type of application, which is in great demand.

What gets more and more important is to combine these consumables with the second step which is more in the (I would call it) PCR type of application, combining this with gene silencing, which are all integrated products. What is also important is to adapt these manual methods into automated systems and to integrate them more.

These I think are the key drivers that [makes still] nucleic acid purification combined with PCR, and this type of application, on instrument platforms. I see great opportunities for us in the future with basically no threatening competitor about. What the customers are looking for are mainly integrated solutions, more and more, rather than a simple reagent here and a simple reagent there.

As you see Dan there are really a lot of things that we're looking at, maybe give you an example. We have a very active [micropholytics] program, where we are looking at sample preparation systems that are [micropholytic] themselves. We are also addressing downstream [micropholytic] platforms and we already are today quite active in selling products for these applications.

There are a lot of opportunities to look at, various scientific or technological approaches for the chemistry, or the automation around it, to be optimized for next-generation techniques. This requires a lot of interaction and of studying what is being done in the market and looking at various chemistries.

So I think this is something that Metin really excels in. This is going to therefore be a valuable contribution alongside to our R&D and feeding in interesting opportunities that we see from this work, into our R&D and our product development.

Ladies and gentlemen, I would like to remind you that only ten minutes remain of your conference.

Thank you. Our next question is coming from Simon Elliot, Lehman Brothers.

Hi. My question's going back to the sales to the distributors. If I've got it correct, I think last quarter you said your sales made up about 7% to 8% to distributors. Would it be right to assume that it's the same this quarter, or have they increased or decreased?

YEAR-TO-DATE it was around that percentage, yes. Didn't increase or decrease in a major way.

If I can just ask one more - going back to consumables growth. In the past you've given the indication that perhaps 20% would be a good target to reach for Consumables growth. Do you feel that there's any way - and historically you've been able to achieve this growth - is there any way that this growth can be achieved again?

Well first, to your first question. The growth was actually 7 Pharma %, so it's exactly what's in the guidance. I just ran the numbers, so exactly along the line of what we always had in terms of sales to distributors.

The growth rates going forward, as you see from our growth rate in Europe, we're showing these growth rates. It's quite simple, it has nothing to do with applications, and it has nothing to do with anything related to competition or these types of things. It clearly just has to do with a demand issue that the US is currently re-emerging from.

So going forward there are clearly opportunities for us to go to these growth rates. The market is huge, if we just look at some of the market opportunities that we're addressing. Our diagnostic business, for instance, is growing faster than this average of 20%, indeed much faster, and has the opportunity to do so for many years.

So, that said, yes, but it is something that we wouldn't want to call right now because the US - as we showed from the numbers - is clearly still in a very difficult position. Signs are good, but do we want to call this a sunny day? No, I think it's probably too early.

Thank you. Our next question is coming from Thomas Allen, Fidelity Investments. Mr. Allen, your line is live if you'd like to pose your question.

Hello. Okay.

Once again the floor is open for questions. If you do have a question please press the numbers '1' followed by '4' on your touch-tone telephones at this time. We do have a question coming from Daniel Wendorff, WestLB Equity Market.

Yes, hi there. I actually have two questions. Number one is concerning the Oligonucleotide business. I wonder whether you could elaborate a bit on what part the siRNA business forms of the Oligonucleotide.

The second question is again referring to the consumables. I wonder whether the growth you saw in Q3 is attributable to a specific sub area. Thank you.

Okay, good questions.

siRNA. Obviously this is an area that is - we would really like to keep this information protected. It's a business which is showing a phenomenal growth rate, it had $1m in sales last year, and it will have many times that this year.

I think there were estimates out there showing that going to double-digit millions. That probably includes some of the related products, but it's clearly very attractive.

It is growing because of our integrated product offerings, and it's growing because we are by far the largest sales and marketing power out there that has fully licensed siRNA product lines that pharmaceutical companies can purchase without risking getting into patent issues with some of their customers.

So this freedom to operate is very important, and this is why we see deals like we've entered into with Novartis, coming into QIAGEN, and there are also quite a few others that have already been entered into or will come in the future. So it's quite a bit above the sales on an annualized basis, we're certainly running into the double-digit area.

The second question was Consumables. Consumables really show some variability, typically in countries depending on vacation periods, let's say. The third quarter is very often a strong vacation period in some countries in Europe and comes then back very strong. In some other countries, for instance the US, September is typically very strong vis-à-vis August.

So there's not really a clear trend. We don't really see that it is very very different in trend from the second quarter. There wasn't, let's say, a big sale that suddenly contributed $2m or $3m in consumable sales vis-à-vis the last quarter or the last year.

Again, most of our customers are well below $100,000 a year in purchases. In some cases even are probably on average even below $10,000 to $15,000 a year.

All right, thank you.

Thank you.

Thank you. Our next question is coming from Diana Zill, First Analysis.

Good morning and congratulations.

Good morning, thank you.

I have a follow up question for your siRNA products. I was wondering if you could talk about which geographic area was the revenue growth mostly coming from. Is it North America, or Europe?

Interestingly we see a very strong growth in siRNA in Europe, in addition to the US. What is still a little bit behind is Japan, but we're really talking in any case of high three digit growth rates.

So it's difficult to say that one country is a little bit slower, because of the small base that we're looking at. But it's really such a fundamental tool that has been moving into the market that we have the opportunity to address not only the siRNA molecule itself - that's not really the big issue. It's the sample preparation, the stabilization, the probe, the PCR product that we sell in combination.

When we talk about focus, siRNA is really giving our focused products an enormous opportunity.

Other than your siRNA Oligo products, do you currently have commercialized siRNA factor products as well?

Yes, we have a number of products in that area and if you look at our website you'll see actually there are some existing products. There's also a pipeline of new products in that area.

QIAGEN has some very attractive transfection expertise and this has been employed also to the RNA product lines. What is very important as well is also the PCR products and the sample preparation products. What we're seeing now coming up is the automation of all of this, and this is really interesting because we can put this all on a BioRobot without too much effort.

Okay, thank you very much.

Thank you.

Please be prepared for the last question.

Thank you. Our final question is coming from Peter Welford, Merrill Lynch, a follow up question.

Hi there, it's Erica Whittaker here. Just two follow up questions.

First of all the algorithm for siRNA probes that you said was developed under the Novartis deal, is that going to be available commercially to other customers?

Secondly - just wondering what the pre-analytic sales were in the quarter, and also if you can confirm under your accounting for pre-analytics, whether those sales are actually included in your top line.

Well, pre-analytics, there's no change to previous accounting, either to sales or to Consumables, excluding the sales of the pure collection devices that are used for molecular testing under the pre-analytics protocols. Those are all under the QIAGEN Consumable top line, and an important pillar for our clinical product lines.

The sales for pre-analytics, as always we are not splitting them out as a separate product line. Including everything in there we are well on track on our target which we say includes the pre-analytics product lines and the protocol-related products to be in the teens.

The last question was? The algorithms from Novartis?

Yes, because as I understand the area, having a new algorithm could be quite important for being able to predict accurately what probe sequences will silence the genes. I'm just wondering if this algorithm is proprietary to the Novartis deal alone, or if you'll be able to use that with your other customers.

Well, this relationship with Novartis is very close. As you point out, an algorithm is one of the most important assets today to these types of things, and we are in a good position with Novartis to have access to these types of products.

You can assume that if we announce something like this - I don't think Novartis has an interest to announce it for their own internal purposes - but I think we'll provide further information when this product becomes available.

This is an R&D milestone that occurred, and again a press release or such a mentioning would certainly be accompanied by some kind of an interest that we could have for our customers going forward.

OK, but it's not defined yet whether you can actually commercialize that, is that it?

It is defined, but we would like to leave that for a press release. We think this is something which is quite interesting, and we would like to leave that for when this product becomes commercially available.

Thank you. This does conclude our Q&A portion of the call. At this time I'll turn the floor back over to our host for today.

OK, I would like to close this conference call by thanking all participating. We hope to talk with you again on our Q4 reserved conference call on Wednesday, February 17, 2004.

If you have any additional questions please do not hesitate to contact us. Again, thank you very much and have a nice day. Goodbye.

Thank you. This does conclude today's tele-conference. You may disconnect your lines at this time and have a wonderful day.