Qiagen NV (QGEN) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Qiagen N.V. fourth quarter year end 2003 earnings conference call. (Operator instructions). It is now my pleasure to turn the floor over to your host, Solveigh Mahler.

Hello?

Yes, you may begin, Solveigh.

[inaudible]

Solveigh, your line is now live.

Thanks, Ian. Good morning and hello, everybody. Thank you very much for joining Qiagen's fourth quarter and year end 2003 earnings conference call. I am Solveigh Mahler, manager of investor relations of Qiagen. With me on the call are Qiagen's CEO, Peer Schatz and its new CFO, Roland Sackers. The conference call will cover a 20-minute presentation, followed by a Q&A session. We will be using a presentation during this conference call which can be downloaded from the investor relations section of our home page www.Qiagen.com. We understand that most of you have time restrictions. Therefore, please limit yourself to only two questions during the Q&A session.

During this call we will be making forward-looking statements. Such forward-looking statements are subject to risks and uncertainty. For the description of such risks and uncertainties, please refer to the discussions and reports that Qiagen has filed with the U.S. Securities and Exchange Commission. Now I would like to hand over to Peer.

Thanks, Solveigh, and thanks for joining this fourth quarter 2003 conference call. We are very excited to actually have today with us about 30 analysts/investors here in Hilden, in addition to obviously the participants internationally dialing in on the conference call.

We are also very excited to present to you the fourth quarter 2003 financial results. The results came out yesterday. The data is available on the Internet, as always, or available through our website.

Qiagen has a very clear mission. We spent some time before this conference call going through our vision of where the markets are going and our resources and how we employ them to, in an optimal way, address decisions. The fourth quarter of 2004 shows some quite exciting developments. We'll go into a little more detail when we talk about the market prices going forward.

But the revenues in the fourth quarter grew 21 percent, obviously there were currency benefits, we'll go into that in a little more detail. For the full year, 18 percent. We had operating income expansion, the operating income grew 33 percent for both the fourth quarter and the full year, and EPS came in at 9 cents, a 29 percent growth and 39 percent for the full year, 33 cents a share.

These numbers in terms of revenue were above our guidance that we gave in the fourth quarter, or the third quarter conference call early in November where we said we would probably expect somewhere in the range of $89 million in sales, with the currency effect it translated to about 91 to $92 million and it came in at about $95 million, so you clearly see that there was some very positive business being conducted in the fourth quarter.

Profitability also expanded and I think looking back now for the full year we can go back and look at what we projected early 2003. Meeting commitments is extremely important, we guided for 13 percent growth. We made this 13 percent growth despite a still very weak and much longer than originally expected weak market environment. We guided for a 20 percent operating margin, we came in at 22, so significantly exceeded our target.

Very exciting is our cash flow expansion. We said that we would have somewhat better cash flow than in year 2002, that was a little bit of a vague statement. In 2002 we had minus $11 million dollars in cash flow, and we came in with $54 million dollars in cash flow of which $23 million was generated in the fourth quarter alone. So a very significant expansion also on that side.

If we turn to our customer segment, they are clearly focused very heavily into the academic sector. Most public budgets happen to be released in the meantime. The year 2003 was certainly impacted by some delays early in the year. Budgets for the year 2004 have now been released and with very encouraging growth rates going forward. We'll get into that a little later.

Pharmaceutical industry continued a very weak 2003, off in the fourth quarter but started to reaccelerate. Already showed a much better trend than in the third quarter which was already much better than the second quarter, so it looks like the pharmaceutical industry really bottomed out in the late second quarter, early third quarter.

The biotech industry followed with a few months of delay trends and also looks quite hopeful going into 2004, and we are showing a very strong growth in what is about 20 percent of our sales, our diagnostic industry segment.

Our product breakdown is pretty comparable to what we saw in previous calls. The majority of our sales come from consumables. I would say actually all of our sales come from consumables, just some of our consumables are used on automated systems that we sell, so what drives our growth is not an instrument per se, it is a solution and we talked about that a little bit prior to this call as well. The growth of instrumentation was quite good in 2003, especially in the low and medium group segment. It is highly accretive, a very successful acquisition of Genovision that was translated into the new Qiagen BioRobot end product line late in 2002, so a very good growth.

In the fourth quarter of 2003 we saw somewhat lower growth on the automation side due to a very difficult comparison with the year 2002 where we launched the MBX product, which is actually for those of you here in the Hilden conference room, there is a version of that product here to the right that was launched in late 2002. We shipped quite a few of those instruments, so therefore the year-over-year comparison on the instrumentation product line is a little bit weaker in the fourth quarter of 2003.

Synthetic DNA growing quite nicely and we will get into more detail. It has to do with siRNA and our increasing focus on some of these content products. If we look at the growth by product line you continue to see quite a strong growth on the consumables, and you see a much higher volatility on the automation and also the synthetic nucleic acid side. This just has to do with the demand pockets for these types of products going into more rapid expansion and also contraction of funding. We clearly saw now in the fourth quarter a significant expansion of synthetic nucleic acid sales and will describe some of the drivers a little bit later.

North America still continues to be the weak market in terms of especially the pharmaceutical and the biotech industry. It's now the full year comparison. The growth in Europe is significantly higher than what we have in the United States. It simply has to do with a much higher portion of pharma and biotech sales into the United States. That segment is obviously quite weak in demand in 2003.

The geographic distribution of the fourth quarter shows that the U.S., however, started to pick up. Five percent growth is not a growth rate to jump up and down about, but it is clearly much better than what we saw in previous quarters where we actually in one quarter were at slight negative growth in the United States. So we clearly see that something is happening in the U.S. and we will get into that in a little more detail when we talk about 2004 guidance.

Let us talk a little bit about the accomplishments that we had in 2003, and I will also afterwards talk about some of the to do's that we still have on our list. We fully exceeded our revenue guidance. We saw a significant margin and cash flow expansion. I think this was quite clear from the numbers that we put forth that any comparison with our previously given guidance shows that we did very well in terms of meeting that commitment. We expanded our technology and market leadership. There is no question about that, in this market environment that we saw we were growing significantly faster than any other major supplier in the life science industry supply space, and therefore - and based also on our internal documentation and surveys that we have, clearly expanded our market leadership.

We increased our focus, so while many companies are diversifying to grow we have on the other side actually increased our focus, we have streamlined R&D programs, we have a very exciting pipeline for 2004. We have created in 2003 a portfolio team structure for focused strategy and innovation that combines our corporate strategy people with our R&D people and our tactical marketing people to develop innovative approaches and technology solutions for their markets.

We discontinued products, actually, with up to $5 million in 2004 revenues because we thought that the resources in our sales marketing area are better spent in the core areas where we can get higher conversions. We enhanced innovation, we are strengthening our technology vision for the next seven years. There are clearly a lot of opportunities for us going forward. The technology developments are quite rapid and actually moving very well in our favor as we talked about before. The technology requirements are increasing, the quality requirements are increasing the demands on a broad technology portfolio are increasing and all of these trends are moving in the direction of a technology leader which is clearly us.

We created, to more optimally manage the company, a so-called executive committee which is the most senior decision-making body here at Qiagen and added new positions. Thomas Schweins joined a few days ago, actually, we put out a press release yesterday night announcing him as well, a very important position, VP, Corporate Strategy. Noel Doheny brings to Qiagen an immense, invaluable, very long experience in the diagnostics and also in the molecular diagnostics industry, almost 25 years of experience and a tremendous network that is now added to this very exciting technology and product portfolio we have in molecular diagnostics, so you clearly see in this molecular diagnostics sector we are actually fortifying it, we are building a very clear position in this market as it expands.

We have created and completed in many areas a comprehensive e-commerce solution globally, and fully linked with our SAP Enterprise solutions which are the backbone throughout Qiagen. We are using one system to standardize interfaces and seamlessly link our customers with our system.

We relocated to have benefits going forward, both in terms of communication and also in terms of utilizing our new facilities in Maryland. Our sales and marketing operations from Maryland to Valencia, we are very excited to say that our talented individuals in Valencia joined in on this move and also are joining us here in Maryland.

The move to call centers that we have, this immensely valuable group that we have that keeps contacting our customers by telephone, this group we decided to keep in Valencia, that makes a lot of sense logistically, and we've moved to a new long-term location that is just up the road. We completed these moves as well.

There is a seven-year plan, but a much more detailed three-year plan that we implemented for the first time in 2003. Fully integrated with our IT systems and rolling with a very detailed annual budget. We have daily updated, dashboard-like information just like for those of you here in the room that were present in the first part of the presentation you saw, a glimpse of some of the tools that we use to manage this business. This is very, very critical in our industry, things happen typically on a small scale and if something has a big impact it is already far beyond, very often far beyond the time where a correction could be made in a very harmless way, so monitoring these things very early on is absolutely critical and I think we have spent a lot of time and put a lot of money into a superb system to help manage the company.

We have pioneered and led integrated siRNA offerings. We have created this concept, basically, and created everything from sample reagent stabilization product that links with the siRNA product offering that we have. Two PCR solutions and also [pre-eligible] solutions for micro-arrays for a broader product offering.

Important here is the siRNA molecule itself, and really the key element is the integrating product for Qiagen, they allow a fast conversion from the sample reagent side due to the significant benefits they bring to this type of application.

What will we want to focus on for 2004? We want to increase operational excellence. We'd want to maintain gross margins despite an increase in automation sales. We expect strong growth in automation, basically look at the trends that we saw in the previous quarters, with the exception of Q4 where we have significant sales in 2002 we feel quite strong about our automated solutions, of which many are newly introduced. We want to reduce inventory days to approximately 145 days currency-adjusted. And if you recall, we were hovering around 200 days in the fourth quarter at 165 days, so we've fulfilled also on that promise, that we gave between the lines in the conference call, I think it was in the second quarter, and we will continue to reduce that number.

We are not really comparable to most other suppliers in the industry because we do have automation and automation typically requires longer and slower inventories. We have increased, we want to increase operating income margins to over 23 percent, so you see that we want to fulfill or work on our long-term plan and long-term commitment also to save 1 percent to 2 percent out of our operating model, operating spend and operating cost model going forward and add that to the operating margin. That's also something that we want to look at for 2004.

We want to finalize our worldwide data warehouse, we talked about the operational management systems that we have here internally, a so-called data warehouse which I think a lot of you are familiar with that actually is working in the IT area. This is a very complex project, a very, very important project for an ultimate touch button type system.

We want to increase goal harmonization on a company-wide scale, and internal visibility, but we are working also on making sure that everybody knows exactly what he's doing towards our mission. We not only created a very clear mission in the last few months, but we also want to make sure that everybody knows what they are working towards. I think we can already say today that that is a project that we already are very far on.

We want to continue strong innovation. We want to launch a product that generate about 3 percent of sales within 2004. We want to grow 2003 and 2004 product launches to approximately 8 percent of sales, and we will launch a suite of CE mark products and IDT targeted products during the next few months. The first such product we announced yesterday and [inaudible].

We will look actively at acquisitions, and also business development, but we are always looking at leveraging on, focusing on our core mission. Our core mission is so well defined going forward, I think we will see some of the types of transactions you saw in 2002. The acquisition of Xeragon, highly attractive, we grew these sales mostly in the last 12 months after acquiring a company with hardly any sales. We bought it for $8 million dollars in sales, very often I think this is not quite understood, what this company was doing, but this week as Fisher acquired Dharmacon for $80 million and clearly we are on a leadership path in the sector, I think it became quite visible what we did. The same also for GenoVision.

This is a summary, as always we provide constant currencies throughout our segments as well as also the reported currencies. We think that's important. Also going forward we will do that in times of turbulent currencies as we are clearly seeing at the moment. The total growth was about 12 percent on a constant currency basis, 30 percent on consumables. You see the increments having a difficult quarter-over-quarter comparison. The fourth quarter is typically a stronger instrument quarter and this year it was a very strong quarter for the [inaudible], especially the siRNA product.

Gross margin expanded and obviously EPS expanded quite significantly. We'll talk about that in a little bit more detail in the financial section. Right now I will turn it over to Roland and be back later for the guidance for 2004.

Yes, thank you, Peer. I would like to give you an overview on the financial results for the fourth quarter 2003 and for the fiscal year 2003. Coming to the fourth quarter of 2003, we increased our revenues up to $95 million, which is an increase of 21 percent. We improved our operating margins up to 22 percent compared to 20 percent the year before.

This calculates an absolute amount, gross operating margins, from $21 million, which is an increase of 33 percent compared to the fourth quarter of 2002. Net income actually is up $30 million, which is also an increase of 34 percent compared to the fourth quarter 2002. This calculates then to EPS of 9 cents for the fourth quarter 2003, so we will exceed our guidance for the fourth quarter, and the revenues and inaudible] our guidance for the EPS for the fourth quarter.

I would like to give you a breakdown on our revenues for the fourth quarter of 2003. Our consumer business still shows very strong organic growth from 22 percent, and even excluding currency effects, we have a growth rate from 13 percent for the quarter. Our instrumentation business shows a slight decrease in the fourth quarter, but what you should have in mind is what Peer mentioned before, that we launch in the fourth quarter 2004 the [inaudible] instrument which will use the pipeline which we [actively propose], so relatively we are at a very good instrument sales quarter also in Q4 2003.

Our Oligo business in the fourth quarter with an increase of 42 percent, and even excluding currency impacts, the impact was 34 percent. This is mainly due to two reasons, as mentioned before the siRNA sales are doing quite well and also we introduced some new Oligo set in the DNA business which exactly hits customer demand.

In other, we are including mainly services which Qiagen is providing to their customers, it is mainly contract production service and some [inaudible] services we are still doing which actually increased by 47 percent over the year, and excluding currency effect still at 26 percent. This is overall a pretty small number of the total [inaudible]. So totally, again, we increased our revenues by 21 percent for the quarter.

Looking on the fourth quarter at constant currencies. The revenues increased by 12 percent, which is a purely 100 percent organic growth. Also our gross margin is at a solid 68 percent. Operating income actually we achieved the highest number ever as calculated under a constant currency it was 25 percent. This clearly shows that we improved our gross margin over the last two years and that we also expect that something will be coming later on to [inaudible] going forward.

On a net income base, we increased our net income also with 30 percent under constant currency, and also EPS under constant currency are calculating to 9 cents per share. So the message here is that Qiagen'sbottom line is pretty well-protected against currency impacts.

On the next slide I would like to walk you through the adjustments we made in the fourth quarter 2002 as well as in the fourth quarter 2003. In 2002 as you may know, we closed our Qiagen genomics facility in Seattle. In the fourth quarter 2003 we had two impacts, one was the relocation of our senior marketing people from California to Maryland to the Qiagen North American headquarters, and the discontinuation of some products in the detection, OA detection business. Those effects together account for $5 million in the fourth quarter 2003.

Coming to the fiscal year 2003. We increased our revenues up to $351 million. It is a growth rate of 18 percent over the year. Also on the yearly basis we improved our gross margin, the operating income margin to 22 percent, which is up from 20 percent from 19% percent from the year before.

Operating income, in actual amount, stands at $75 million, which is an increase of 33 percent over the year. And also net income achieved $64 million, which is an increase of 39 percent over the year. So EPS for the full year, 32 cents, again this is something that is in the guidance we gave before and revenues above the guidance we gave before.

Something that I would like to emphasis is really the strength of our balance sheet. Cash and cash equivalents for the year and with approximately $100 million, which is more than double than the year before. In the same time, we decreased our net debt down to $18 million compared to $50 million the year end before.

Breaking down the revenues for the full year 2003. Also in the full year received very strong organic growth on the consumables business, with an overall growth rate of 20 percent and excluding currencies of 12 percent for the year. Also our Oligo business had an exciting year over the year, with 16 percent growth rate and 10 percent excluding currency impact. Also the year, of course, has been mainly driven by very strong siRNA business which are coming out of the Xeragon acquisitionwhich we did in 2002 and now really improving our revenues quite dramatically.

The next slide I would like to walk you through to our adjusted figures for the full year 2002 and the full year 2003. In the full year 2002 we had two impacts which were adjusted. One was the acquisition of Xeragon and GenoVision in Norway and the second one was the closure of the Qiagen genomics facility in Seattle. In 2003 we had another two topics which we adjusted in our P&L, one is the relocation of our marketing people as mentioned before from Valencia, California to Maryland and the second one is the discontinuing of our micro-array detection business in the fourth quarter.

Coming to our cash flow. We had a very strong operating cash flow over the year. Our operating cash flow ends with $64 million compared to $36 million. Our investment, investing cash flow decreased to $40 million compared to $64 million the year before. This is mainly due to the finalization of our building activities here in Hilden as well as in Germantown, Maryland that is our North American headquarters. So at the end we had a net cash flow for the year 2003 of $54 million, calculating to a net cash flow margin of 15 percent.

Focusing on two other topics which drove the strength of our balance sheet. One is we managed our inventory turnover quite well over the year. We started in the first quarter with inventory days from 215 days and entered year 2003 with inventory days of 166 days. Also the DSOs, the management of the accounts receivable, we still kept the high level we are doing there with an overall days from 63 at the year end. It is slightly up for the third quarter and it is mainly due to the holidays at the year end. Our growth for the inventory days for 2004 is approximately 154 days, for DSOs the mid-50's, 50 to mid-50's.

Something that I would really like to emphasis is the improvement of our operating margin over the last two years. We really managed to improve our gross margin from 17 percent in the year 2002 up to 25 percent now in the fourth quarter in 2003. This clearly shows that we are continuing to improve our gross margin and we are seeing a lot of possibilities to do this all in 2004 and beyond.

Coming to our employees. For the year 2003 you see a slight decrease in head count. This is mainly due to the closing of our Qiagen genomics facility in Seattle at the end of last and the beginning of this year. You also can see that we have two large operations in the U.S. and in Germany with approximately 750 people here in Hilden and our legal facility in Cologne and in the U.S. with three locations; San Francisco, Los Angeles and Washington D.C. totaling approximately 500 people. With this I would like to hand over again to Peer for the guidance for 2004.

Thanks, Roland. We put together a few slides that outline some of our thoughts that went into our 2004 guidance. I think looking at the industry it becomes quite clear, also an analysis of our fourth quarter results, but also an analysis of most of the other suppliers to the life science industry in general that we are starting to see an improving environment, and this is coming out from a very, very weak 2002 and very, very weak 2003, at least the first half of the year was very weak.

The pharmaceutical industry is faced with certainly a challenge to build a pipeline. This has to be done through innovation, through research, the biotech industry has been very well-fueled through the secondary market mainly, especially in the year 2003. There was a significant amount of money available also for a biotech company. Biotech for Qiagen is not a small biotech company with 50 to 100 employees, primarily, these are very important customers to Qiagen, but the majority of our biotech sales come from biotech companies that are probably north of 500 to 700 employees and clearly they have a totally different financing opportunity than the smaller firms.

And third, we clearly see solid public funding budgets in the United States. We sought clear guidance on the numbers going forward. A lot of the European and also Asian countries have also given numbers that are pretty comparable to what we saw in 2003 and in many cases already are quite a bit better.

Important at Qiagen clearly is the word innovation. We are an innovation driven company. Our research and development is at the core of Qiagen, that's the heart of Qiagen and it gives us the fuel to meet our customers' needs, not only today but also in the future. We have an extremely strong, internally generated pipeline. Our focus is clearly paying off. Approximately 3 percent of 2004 sales are new product introductions. Now clearly we could do a lot more new product introductions, but our products typically go far beyond the 80 percent customer satisfaction, our goal is to always have absolutely premium product and to be first in every market area as [inaudible] described before in his research and development outline prior to this conference call.

We are focusing on pre-analytical processes and this allows us to move also strategically without diluting our brand equity. Our brand equity is one of the strongest, we think, in the life sciences bio industry, and by clearly defining what we want to do it is also allowing us to act more strategic than maybe even going forward than we did in the past. Our acquisitions are not focused necessarily just purely on size or just to get accretion. Accretion is obviously very important, but our acquisitions are a very, very important focus also on technology.

Again, the example of our siRNA acquisition which we did only a few months after that industry emerged and after the technology came up. That probably was not quite clear to everybody what exactly the promise of this technology was. Today SRNA is probably seen universally as one of the most fundamental technologies in life science research, and we acquired an absolutely leading technology at [inaudible].

We are clearly expanding our market and technology leadership within our field, that's our goal. We have a very, very clear mission. We have defined what we want to do to ensure our long-term vision, and that will be the driving force for our actions not only in the 2004 but also in the longer term.

If we turn to the next slide and look at some of these funding sources that we try to summarize here, and again there are a lot of budgets in Europe or in Asia that are not on this slide, but some of the numbers that came out in recent weeks were actually, if one looks at them in greater detail, were actually significantly better than the 2003 numbers that we saw. Take the NIH, the 2.7 percent growth number seems to be a very visible number, but if one goes to the NIH web site one can clearly see that a lot of the facility spending was put in there and if you cut that out it is actually 7 percent growth available for consumables and also labor.

If you look at the National Institutes of Allergy and Infectious Disease there is clearly an area that is very attractive for Qiagen products. Infectious disease research is highly, also linked with sample preparation and sample handling technologies, 17 percent growth at that budget. Now if you look at that budget alone, the growth of that one budget is more than Qiagen has in revenues, and that's really not a very big budget in the scheme of the big world of life science research. So this is just to show that some of these budgets are actually quite - the Department of Defense, 13 percent growth, a lot of bioterrorism research being conducted there, which a lot of it is also infectious disease research.

But most surprisingly was the guidance by the industry and associations in biotech and U.S. pharma that came out with numbers in early February, late January, that showed that the U.S. biotech industry was expecting to expand its research and development budget and also the preclinical research and development budgets by about 16.4 percent overall, and U.S. pharma 8.3 percent. Now why is this important for us?

In 2003 we grew in both of these sectors negatively. We had negative growth in the U.S. biotech industry segment and we had negative growth in U.S. pharma, double digits, and clearly this rebound could be a very, very significant snap back to higher growth. In academic sectors we grew at well in the double-digit numbers in the year 2003, also in the United States. So you clearly see the U.S. was a very, very difficult to interpret environment in 2002 and 2003. It looked pretty easy to understand on the overall picture, but the detail was much more complex, and these numbers indicate that something is happening that could be very positive.

So we are clearly getting signs from the pharmaceutical industry that preclinical R&D, but also clinical R&D were, by the way, increasingly large slices of our sales are going into - we are not only a preclinical R&D company, but a lot of our spending flows that are available to us are also in the clinical area. The pharma sector is increasing. The preclinical R&D spending is increasing in biotech. Public funding continues robust growth. Stable as expected going forward, and markets, we believe, in such an environment will become much more open to conversion from homebrew. Homebrew, as we talked about extensively a little bit early on, is the majority of the market. So there is also perception change that we think could come hand in hand with this change in the funding flows.

We feel quite positive here about this whole environment change, and we also feel very positive about 2004 guidance. There is the solid top line growth planned, strong cash flow, strong EPS expansion also projected. We plan, however, that this guidance has an upside. Clearly we are not factoring in a lot of these improvements because we think that this industry has to come up and show us the money, basically, and show that the projected budget increases will translate into ultimate revenue growth for Qiagen, but we are kind of holding off calling out for higher numbers for 2004. We will update in the first quarter conference call and give extensive detail also on our developments in this first quarter and also possibly then take the liberty to give newer guidance and fresher guidance at that point in time.

We have a broader window than in previous years, you might have noticed that. We gave a little bit more detail than in last year, but there is a broader window. We are allowing also for potential changes to this going forward.

We clearly see that there are acquisition opportunities out there. The private sectors, which are the majority of our preferred targets would be private companies, smaller, technology-driven companies that we can combine with Qiagen's technologies and solutions and as we saw with GenoVision and Xeragon in a very, very short time brings a huge accretion to leveraging our core competencies internally. But these acquisition opportunities are not built into any guidance, so we will not project anything that we have not inked, and all in all I would say from the resources that we have, from the infrastructure, and especially from the pride and the passion of the people here at Qiagen, we are very well-prepared for 2004, given also what it could bring and with that being said, I would like to maybe turn over to more concrete numbers that Roland is going to present to you. Thank you.

Thank you, Peer. I would like to give you a more detailed overview of the financials and our guidance for 2004. We expect our revenues for the fiscal year 2004 in the range of $395 -403 million, which is approximately an increase of 13 percent.

For the operating income for the year 2004, we are expecting a total amount of $90 million to $94 million U.S. dollars, which is an increase of approximately 22 percent for the full year. On the EPS we expect EPS between 37 and up to 40 cents for the year 2004, with a clear upside, which is approximately 19 percent growth compared to 2003.

What I would like to emphasize is it is the guidance from today compared to the guidance we gave in the third quarter conference call that is actually an improving one. So we see instead of 12 to 13 percent growth rate in the revenue and growth rate from the [13 plus percent]. Now it is on the operating margin improvement, you see at least 1 percent to 2 percent improvement. You will probably see some upside, if you want see some more detail information in the first quarter conference call. So our operating margins improved certainly above 23 percent for the full year.

Breaking down this guidance in the quarter, your next slide. What you clearly can see as a trend, our revenues improved from quarter to quarter in the year 2004 and this will break through the $100 million revenues within the third quarter. Our operating income margin will end at least at 26 percent for the year end. However, for our growth rate it is mainly our strong organic consumables business, with an expected growth rate of approximately 13 percent for the year 2004. Instrumentation business, we expect a huge increase up to 39 percent in revenues for the full year. This is mainly due to two reasons, one is the focus of our marketing activities in 2004 and with the launch of several new applications for our implementation solutions in 2004. And synthetic DNA business, we expect to slightly decrease for the year 2004 to be a very conservative year, which is mainly due to quieter work in the U.S.

So focusing on our operating margin, we also believe that we can improve our operating margin in 2004 and beyond. This is mainly driven by two factors. One is the further increase of our efficiency in R&D and SG&A. Second, we expect huge economies of scale in managed [inaudible] in the year 2004 and beyond. With this I would like to hand over to Peer, actually Solveigh.

Thank you very much, Roland. We are now looking forward to discussing your questions. As Peer already mentioned at the beginning of this call, Qiagen is linking this conference call to an analysts meeting which is taking place simultaneously in our European headquarters, and therefore I would like to start the Q&A session with the first three questions here. The first question from Hilden comes from Sam Williams, Lehman Brothers.

Hi. Could you just outline some of the assumptions behind the operating margin? Quite aggressive outlook for operating margin during the successive quarters of this year. And then also give us some idea, the gross margin obviously jumped quite nicely in Q4, but I believe - or I assume - partly that was due to higher sales of siRNA product which I believe have higher gross margins, but instruments are probably down. Can you give us an idea of what we should be looking for during the course of this year? Thanks.

Answering your question on the gross margin, you are absolutely right. The fourth quarter is mainly driven by the product mix, saying that, there are increases in store in the consumables and as well in the siRNA business which have pretty higher gross margin. And then going forward for the year 2004, we expect at least that we will keep to gross margins at the level we are achieving now.

So the operating margin, clearly projecting 1 percent to 2 percent now for quite some time. As you know, at the 23 percent operating margin that we have for the fourth quarter is actually below what we are showing it for the fourth quarter - sorry, the 2004 operating margin projected is below the fourth quarter operating margin that we are already showing therein 2003.

So I think it is a path that that we have just been conducting now over the last few years. If you look at our operating expenses, we are still significantly above most of the buyers to the life science industry, the innovative life science industry's volume. We take pride in that in many ways, because we do have a team approach; research and development and marketing very closely linked and also premium value-added that we want to provide through that. But there are certainly opportunities over the next few years, certainly, of again we've had as guidance, very long-term guidance in the range of 30 percent maybe over four or five years. This is a clear path of 1-2 percent a year, and that would bring us down still above what most other suppliers of the life science industry are [inaudible].

The next question comes from Aaron Geist of Baird.

Thank you for taking my question. Can you talk a little bit more about the growth in forecasting for the instrument market? I'm looking at about a $10 million improvement. Even if you look at 2003 you were down 1 percent on a constant currency basis. Can you talk a little bit about where you see the instruments going? Is that a back end loaded expectation, or is it based on, is it going to happen do you think at the beginning of -[the year] ?

With instrumentation there is a longer lead time, and we often get the question of how long our lead time is, and it is typically 24 hours, as most of our customers expect overnight shipment. For the automation area we see a very strong pipeline going into 2004 from customer interactions that are typically much longer term, we usually have a six to nine month selling time on some of these things and the feedback that we are getting is very positive in this area. Again, over the last two years automation was very negative and very weak. We do have a whole suite of new products in the automation area launched. A&B, there are a lot of pockets of users that are in the functional genomics area now going into automation and higher throughput [of pitch sales], especially in diagnostics. Those two areas have given us feedback that they would be very aggressive buyers of these types of products in 2004.

Can you segment a little bit more between instrument upgrades, of existing customers upgrading their systems to some of the new automation products, and some of the new products going into different customer bases?

We have not really been very - we have not really seen a lot of sales on upgrades because that is not a very big product line for us. There are certain upgrade products that we have that, for instance, upgrade an 8000 to a genomic DNA platform to an RNA expression analysis platform, but the majority of sales are typically to accounts that do not have a system yet or need higher capacity.

In terms of the customer breakdown, we do have significant diagnostic sales. There's a large crossover also in clinical research that is probably it is something that can change quite significantly from quarter to quarter, so it is difficult to give a trend on a quarterly basis going forward, but you'd probably see maybe about a third of that being in diagnostics or clinical research.

The next question comes from Peter Welford at Merrill Lynch.

Hi, just coming back to the operating margin a minute. Do I take from that that you can grow the operating margin to approaching 30 percent over the next three years or so, and just on that, in the fourth quarter the R&D seemed to be relatively high and at the same time G&A quite low. Could you just sort of elaborate perhaps on those two points?

I said 30 percent, I didn't say three years. We said over -

Are you saying 1 percent to 2 percent -

I'll try to give you - we are clearly seeing that path available. If you just run the operating expenses compared to the industry averages you will see that 30 percent is not, with the gross margins that we have and also the leverage that we have going forward, we just completed larger facilities, manufacturing facilities, going forward we should have a better utilization. It depends very much on the product mix of the gross margin. Going forward we really believe that we can drive down the operating expenses every year, not aggressively, just we're not cutting costs, I think that is very, very important. We are not cutting costs, we are just growing expense a little bit slower than we are growing revenues, and we are in the mode of hiring. We will, in 2004, also hire a three-digit number of people. As our expansion plan, aggressive movementin certain areas., Aggressive marketing activity is planned. So we are an expanding company.

If you look at the model, that 1 percent to 2 percent a year in operating margin and calculate it out, if you say above 23 percent in 2004, if you say four years out, five years out, that was the number I was giving you.

I would like to hand over to the operator for the next three questions. Ian.

Thank you. (Operator instructions) Our first question comes from Derik de Bruin. Please state your affiliation.

Hi, this is Derik de Bruin with UBS, and thank you for taking my question. Just a couple of points. What are you looking for in terms of [arresting] for the FX impact in 2004 and I guess along those lines also, does your price increases come in typically in the first quarter, and what is going to be the average increase this year? Also, your cash flow projection for 2004?

The first question was FX? I will defer to Roland for that. The price increases are typically done in the first quarter and they are typically the rate of inflation. We will keep them very low in 2004. We will typically have them around or in some cases even below the national inflation rate in certain areas. But it is just something that we have been doing quite successfully going forward. We have been keeping very moderate price increases but have reduced, actually, discount rates in 2003 significantly from 2002 and have, I think that is something that not only our sales people like very much but also our customers.

For the foreign exchange, I will refer to Roland to take that question.

The foreign exchange rate for our guidance, 2004 we used the exchange rates which were actually in January 2004 so it this is the kind of basis for this.

Okay. And the cash flow projection for 2004?

The cash flow projection for 2004 is that at least it will be something around $70 million for the full year.

Great, and just one final thing, I guess this is more theoretical. Just looking at the molecular diagnostic market and could you give us just some idea of where you envision that as being a percentage of revenues in the 2004/2005 timeframe? Is there any significant difference on the gross margin for the diagnostic products versus the rest of your product lines?

Derik, I'll just maybe add something to the FX question that you had. I think that's extremely interesting to note if you look at Qiagen'soperating model you will see that we are extremely well hedged on the bottom line. So the efforts that we have gone through in '99 and 2000 and 2001 where we built the manufacturing facility in the U.S. is not giving us this bang that everybody else sees, these manufacturers in the United States, but at the same time if these currency rates that we have right now are protecting us very well from swings in the other direction.

So the operating model, while on the top line we have fluctuations on the sales, if you look at the constant currency EPS numbers you will see only minor impact, even on a constant currency basis. We think that's the conservative way to go, the best hedge is always matching inflows and outflows.

In terms of your molecular diagnostics question, the gross margins can be higher, yes. They depend very much on the product. You know, it's something we do in partnership with our customers and customers have to rely on a supplier and having excessive gross margins is not the way we want to go. We like the short-term effect, but that's not what we are after.

We enter into long-term partnerships with customers and we have comparable gross margins. They might be a little bit higher because of certain standardization requirements that one has, and because the unit volumes of a specific product typically can go very high compared to a more, let's say diversified, research market where the products may be as a single product would not have the same unit volume as the diagnostics space.

In terms of a percent of sales, there are different interpretations of that. We today have a stunning market share in this sector. We have a significant portfolio of partnerships of which only a few are known. We publish the [Roche] relationship, we publish also a few others, but there is a significantly broader presence also in direct interactions. So if this market takes off, this could be major and we could in a near timeframe be a predominantly molecular diagnostics focused company. If it is slower to take off, which it has been in the last few years, then this will grow more gradually. But we are showing very fast growth rates in this area, despite no real major market segment really being converted yet to molecular other than a few infectious disease segments and a few esoteric tests that are currently the majority of the market.

Great. Thank you very much, very helpful.

So there's a big, big, big swing and if I give you a number you are going to put it in your model and in five years you are going to come back and bite us. But if I give you the window you will see that there are clearly very big numbers on the upside, ultimately - we have an internal scenario, but we'd like to have the market progress more before we pinpoint. It will be very major, we're pretty sure about that.

Our next question comes from Karen Rossbremer. Please state your affiliation. Hi, Karen? One moment. Our next question comes from [VivekVivek Kanna]. Please state your affiliation.

Hi, Argus Partners. I just had a question, in terms of the guidance for the first quarter, it looks like you are guiding a little more conservatively on the organic growth rate in the first quarter, because I am assuming FX rates haven't deteriorated. Just can you give us your thinking on that and then my next question, just to follow up, is on the last from equity method. Can you just remind us what that is and when do you expect that line to be profitable? Thanks.

Sure. Hi, Vivek, this is Peer speaking. The first question on the guidance for 2004, yes we are clearly guiding a little bit more conservatively in the first quarter. You might note that revenues are below the fourth quarter revenues and EPS are below the fourth quarter EPS - this is something that we want to be a little bit more conservative on, because again, we clearly believe a trend is starting to happen but we want to make sure that we are a little bit further into the year before we put a little bit more strength into that flowing into our numbers. So the first quarter is one where we are trying to be a little bit more conservative. The second question I will hand over to Roland.

What you are referring to is the joint venture we have with PreAnalytiX and but what you should understand is this is quite complicated, a joint venture where Qiagen is doing the sales, so saying that, that means that the revenue is going in our top line, but mainly the R&D expense and also the marketing expenses which were still on a [certain] basis, it was a joint venture. And then flows into our P&L [inaudible].

And when do you expect - so does that mean, do you expect that to, you know, it's about $2 million, it's hurting you, do you expect that to turn profitable anytime soon, or not really?

I think the thing to understand this line, it is as Roland said, very complex. I understand that it is looking, if you - the model is, it's actually, however, quite simple. We developed a product within a joint venture. We sell parts of the developed product line and BD sells part of the developed product line. Qiagen recognizes profit in our operating income side from products from this joint venture, and BD recognizes profit from products coming from that joint venture.

In addition, we have 50 percent of the joint venture. In this case, this is flowing through the minority interest line. So if you add the profits that we make out of the joint venture with the minority interest losses, they are still very profitable. So this joint venture that we have with BD called PreAnalytiX is accretive to Qiagen, is very profitable and especially strategically very important.

If you look at that minority interest line, it is basically just 50 percent of the R&D expenses. For simplicity reasons, that's the way you can look at it, 50 percent of the R&D expenses that we're allocating into the JV, minus some profit allocation that we have to, for tax reasons, contribute into this joint venture. Do we expect it to turn around? If these revenues move up, we expect R&D expenses in PreAnalytiX to remain rather flat. We are continuing to do research, actually at a very high pace there, and as the revenues move up they will just kind of like take that into the black also on that one line. But as an overall joint venture, it is profitable.

Thank you very much.

The next question comes from Anja Seyfried; Morgan Stanley.

Thank you. I just have a question for the synthetic NA guidance. The 6 percent looks quite drastic, also. Can you give a little bit more explanation where this is coming from, the negative 6 percent I should say. Is there some pricing pressure or how can you explain this?

Anja, thanks for pointing that out. I think that's a number that we certainly should highlight. Qiagen is completely focusing on applications that are close to its core. We see that some parts of the Oligonucleotide business are under, of the DNA Oligonucleotide business it is very important to distinguish the DNA Oligonucleotide business, is continuing to be very weak and we are building in some continued price erosion in that sector.

We are in that sector because of customer commitments and because it gives us a great platform to manufacture the attractive DNA Oligonucleotide product. There are actually attractive DNA Oligonucleotide - very attractive products called delay ready Oligonucleotide sets. These are sets where we sell to the customer 30,000 to 40,000 genes or plates that they use for micro-array or for gene expression work. These products are growing fantastically. We have major market shares, especially in Europe, but also the United States, a very good position in that area, and they use the same machines that we use for plain vanilla Oligonucleotides. So we are planning a little bit more conservatively on these plain vanilla Oligonucleotide but on the array-ready Oligonucleotide sets business for 2004 we expect quite solid growth.

sRNA is very attractive, it is growing very rapidly. We don't expect price erosion, nether in array-ready Oligonucleotide sets nor in sRNA sets compared to this year, not in a major way, on the DNA side.

The next question comes from Ravi Mehrotra from SG Cowen.

Thank you. With regard to Qiagen's specific offering, molecular diagnostics, what one factor do you think could provide the market with the greatest upside? Conversely, what do you think is the biggest risk in your strategy going forward?

Well there are always risks and opportunities. We tend to look at the opportunities, and I think on one slide we saw - times are challenging, people see difficulties, but I think people break through to see the opportunities. [Inaudible] If you manage business, you have to manage both, so that question is clearly very important.

We see two risks and two opportunities that I'd like to highlight here. Risk number 1 is regulatory standards. We think that this is at the same time an opportunity because it creates a barrier to entry, but it is important to understand where the regulatory agencies are going. The recent announcements from the FDA and guidance from the FDA were extremely positive in the fourth quarter, there was actually pronounced that our guidance coming out from the FDA saying that molecular diagnostics assay providers can split the sample preparations from their diagnostic platform, thereby allowing references into standard sample preparation systems. That is a great piece of news for us, because as the standard on the pre-analytical side it will be so much easier for diagnostic companies just to refer into the standard on the front-end].

But it will be important for us to ensure that we have fulfilled these requirements also going forward. The second aspect that we think is certainly important that could be a risk going forward is that the technology changes occur in some ways that the point of care diagnostics could become more prevalent and the sample preparation module basically has been purely encapsulated. It could still be a Qiagen module and most likely would be, but it would be encapsulated in a product that would be sold to the end users by somebody else.

We think it is important to understand what the end user wants, and we think that anybody who works with Qiagen sees the importance in us understanding the customer. That's - we, you know, OM is an important business for us, and direct sales are important for us however as well, so those are two trends that we are looking at.

Upsides are that we are clearly seeing a very strong link on the collection side. The challenges on the collection side are growing exponentially. [Inaudible] showed you some of the technology challenges that go into some of these products. This is amazing. You know, for somebody who does not really understand this - and we get very excited about it, so don't accuse us if we bore you, but if you look at some of these collection devices, just the way these devices are designed, there are years and years of experience going into it. There is an immense amount of technology.

Look into some of these things, the design of these devices, chemistry, the interactions, the standardization if you want to have at the same time you have the complexity on the downstream, it is just enormous. And for us, the second risk I would like to maybe refer to, the ability to standardize that, which will ultimately be the benefit for the users in this market. More complex again, the more different types of solutions there would be. And our goal and I think every customer's goal will be to have simplicity on the front end.

So we hope that the market moves towards simplicity. It wouldn't necessarily mean a disadvantage for Qiagen, but it would mean more R&D work and more smaller product lines. What we would like to have is larger, standardized product lines.

The next question comes from Sam Williams, Lehman Brothers.

Thanks. Just on siRNA, can you maybe you could help. What I'm trying to look for here is when siRNA, which is obviously a very rapidly growing part of your business and quite an exciting part of it, is going to break out of that Oligo line, and we are going to see some pretty strong growth going forward. So to help me with that, could you possibly for the last four quarters break out what percent of just what the absolute sales figures of your siRNA products were in each of those quarters?

We are kind of shying away from that a little bit because of the competitive nature. You saw that Dharmacon was bought by Fisher, the numbers came out for that business. They basically, in terms of its RNA sales were, the total company was about $17 million but there were also other product lines in there.

You know, so I think when I said before that we are moving into a leadership position in this segment, we are not far away from it, it is a little bit of an indication of where we are at the moment. That's about as precise as I want to get. We are really guiding for sRNA not to be a standalone business and a major driver of growth, per se. I think that is the wrong strategy for any supplier to take, giving free advice to potential other companies, but the way to look at this is really integrating this with another product where the customer might be open to conversion from previous methods and through the integration get the benefit. That's the tool that we want, the benefit that we want to provide to the customer.

The next question comes from Patrick FuchsFuchs; DZ Bank.

Hello, I have a question regarding the write-off that you have done this year. You mentioned that it came from micro-array detection systems. Was it really extraordinary coming from maybe [separate] products that you are discontinuing, and is it something that we have to calculate going forward in 2004 and on as other companies also do with discontinued products?

The second thing is, I mean obviously the monitoring diagnostics really is an important, growing important portion of your business. Last year you named 20 percent of total business to be diagnostics, this year also. But I mean, 20 percent can be 16 or can be 24 - can you give me a feeling about where that is?

I'll take the second question first. The reason why we are a little bit vague on the diagnostics business is simply because we can't give you a precise percentage. I'll give you an example. If let's say Harvard University buys a QIAamp Virus Nucleic Acid Extraction Kit from us, they buy it through a certain purchasing office and we do not always get the information on where that product goes. Now that product could be used for a routine HIV virus diagnostic or it could be used for virus research. We talked about infectious disease research being a very important area of research in the United States, essentially.

So that is the reason why we are a little bit vague on these numbers, because if we give you a precise number we have to have the clear mechanism of deciding it. We fully now, with regulated products will have the opportunity going forward on that. They will start converting away from the use of non-regulated products into regulated products as we also address new opportunities beyond that. So once that becomes a sizeable piece and clearly identifiable then we will split it out. We're thinking a lot about ways on how - because it is in our interest to show this to you, because it is quite an exciting part of our business.

In terms of our detection businesses that we decided to exit, we basically used the opportunity in the last few months to sharpen our focus and we believe that while certain of these products are highly exciting and they make a lot of sense for us, we thought that they would not necessarily leverage our core competency or bring our customer a benefit and allow a faster conversion in our core market.

This has to do with, in some of these markets great technologies do not succeed, or they will always become niche technologies, and we are not in the business of selling niche technologies, we are in the business of selling, with huge leadership, leading technologies.

This is,for instance, has to do with some these [inaudible] technologies that we did in line with [inaudible]. What we said, it's an interesting business but we don't think that this is something that we want to keep as an aggressive position on our balance sheet going forward, we want to be a little bit more conservative on. We will continue to support that technology going forward, but it is not one that we are going to aggressively promote. Will we expect that to happen going forward? I think the first time we really do that, but I think going forward we actually see no need to put anything else on this.

The last question here fromHilden comes from Daniel Wendorff of WestLB.

Thank you for taking my question. In terms of consumables growth of 13 percent you expect for 2004, where do you think this will mainly come from? Is it in the customers or is it already due to acceleration of U.S. pharma, biotech companies?

I really thank you for putting this question in. We are not, for the sake of our forecast, we are not projecting a significant acceleration in pharma and biotech. I really would like to put an emphasis on that note. The projections that we are giving for 2004 are assuming the same growth rates we saw in 2003. Did we see strong pharma and biotech in 2003? No. Are the projections therefore assuming a strong pharma and biotech market in 2004? No.

We have hopes, however, that we will see an upside in those two segments over the course of the next few months, which would allow then for this clarity. So the answer to your question is the majority of it would be coming from academic accounts and diagnostics.

With this, I would like to hand over to the operator again. Ian.

Thank you. (Operator instructions) Our first question comes from Nick Turner. Please state your affiliation.

Hello, this is Nick Turner from Jefferies. I wonder if you could give me some indication of what the local currency growth was in the rest of the world sales of consumables, and its comparable figure in the U.S., what was the U.S. consumables sales figure? In addition, I just wonder if you might also make some comment as to whether or not we are starting to see significant sales in magnetic bead separation technologies i.e. GenoVision and whether you could give a figure for GenoVision's sales? And then finally, I am intrigued to see your projections of DNA budget, and my reading it a little bit different, but that's by the by. I think that the figures I've seen would suggest that through to 2008 growth in the budget is likely to be barely ahead of inflation. I wonder what you believe that will do to consumable sales in the U.S. and from academia particularly. Do you think that in fact we won't see again very high, 20 percent sales growth that you have seen in the past and this 13 percent, 12 percent is going to be the norm going forward?

Nick, three questions that I distinguish here. Number 1 would be the U.S. sales portion of consumables and the growth rate that we had on consumables in the United States. We don't split those out, but you can assume that it's pretty comparable to the overall growth rate. So the product mix is not really very different between the U.S. and the rest of the world, so you can just take that one slide where we show the growth rate on the various slices, just split that down between Europe and the United States.

GenoVision acquisition we discussed prior to this conference call a little bit, and this was clearly something that was very attractive to Qiagen. We did launch, actually here in the room, there was an easy one put up and some of the attendees had their DNA extracted, I think, if I do recall, but we have been extremely successful with the magnetic bead portfolio. Again, GenoVision, a company with $1 million of DNA purification sales, when we acquired them I think it was not quite visible why we liked this deal, but we turned it in combination with Qiagen technologies into an almost 15 times larger revenue base for the magnetic bead solution. Magnetic beads are important for us going forward, they are not good for everything, it's just one technology of many. There is no one-trick pony in this area, there are so many different segments that require a different chemistry. We are totally independent from the chemistries and we have to have everything that makes sense. Magnetic beads make sense in one area, in a few areas, excuse me, but not in all.

The NIH on the long-term is always a little bit unclear what they give us for guidance. I still remember very dramatic numbers being projected for 2004. If you look at the numbers that came out, they were actually quite positive.

Now where research goes, we are in the beginning of a major and a fundamental shift in this area and the numbers going into molecular biology research in the total are not really too relevant, you still have this huge conversion opportunity in front of us and the shift within individual segments remains very positive on top of that.

So those are the two things we are really focused on, the overall growth of an economy or [inaudible] maybe short-term impact, but not a long-term one.

We stay prepared for the last question.

Our last question comes from Karen Rossbremer.

Yes, thank you for taking my questions, sorry about not being able to get through earlier. I was just wondering if you could give guidance for the tax rate that you are projection going forward?

Thanks, Karen, I'll turn over to Roland for that.

Our tax rate for the guidance of 2004 will be in the range of 38 percent. However, we do see some upside on the 36 to 37 percent, mainly driven by some kind of organization, what we are doing on [inaudible] finance company coming on.

Thank you very much.

I would like to close this conference call by thanking you all for participating. We hope to welcome you again to our Q1 results conference call on Tuesday, May 4th, 2004. If you have any business questions, please do not hesitate to contact us. Again, thank you very, very much and bye bye.