Qiagen NV (QGEN) 2004 Q2 法說會逐字稿

Welcome to the QIAGEN second quarter 2004 earnings conference call. [Operator's instructions] It is now my pleasure to turn the floor over to your host, Solveigh Mahler, Director of IR.

Thank you very much, Matt. Good morning and hello everybody. Thank you very much for joining QIAGEN's second quarter 2004 Earnings Conference Call. QIAGEN experienced a successful second quarter 2004, in which it exceeded its revenue and operating income projections, and came in on the high end of its guidance on EPS. I am Solveigh Mahler, Director of Investor Relations at QIAGEN. With me on the call are QIAGEN's CEO, Peer M. Schatz, and QIAGEN's 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 the conference call, which can be down loaded from the investor relations section of our home page at www.qiagen.com. The time of the conference call is set at one hour. We therefore would like to ask you to please limit yourself to only two questions during the Q&A session.

If you have any additional questions or need any further information, please do not 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 Peer Schatz who will start this presentation by giving you a short back-up on the market. Peer?

Thank you, Solveigh. Welcome to this second quarter conference call. It was a very exciting quarter for QIAGEN. We exceeded our revenue guidance targets. We reached the high end of our EPS guidance. We exceeded our operating margin targets, and we are raising 2004 full year revenue guidance slightly once again, and narrowing the range on the EPS.

We are executing on our mission. This is not necessarily visible directly from the numbers but there are a lot of activities going on at QIAGEN, that are building this exciting Company into the company of the next generation. We are building value - I will talk about a few of our initiatives in this presentation. I think we are extremely well-positioned for the third and the fourth quarter but much more important, we are extremely well-positioned for 2005 and beyond.

Looking at the second quarter snapshot, we achieved revenues of $98.6m. We had guided for $96m to $98m, so clearly above that guidance range. Our gross margin came in very strong, indicative of our strong pricing ability and our leading position in our markets. Our operating margin came in significantly stronger than originally guided for.

We had guided for 22-23%, we came in at 25%. That is up from 21% in Q1 and up from 20% in the second quarter of the prior year. In terms of EPS, we came in at $0.10 a share. We had guided for $0.09-0.10 and the prior year was $0.08. Roland will be giving a lot more detail on the numbers then in his section.

On the next slide you see a snapshot of the growth numbers. We achieved growth of about 14% on the top line; about 32% on the operating margin; 43% on the operating margin excluding the one-time charges; and 25% on EPS.

The next slide shows the year-to-date numbers. We are at $194.7m in sales for this first half of the year 2004 - this is up 17% compared to the comparable period in 2003. EPS operating margin all showing very nice growth. This growth is organic - it is driven by our innovation power. It is driven by the position that we have in the market. Clearly, a very strong core taking us into 2004, and building a great basis for the periods to come.

In terms of our customer segments, we saw that [indiscernible] is about 45% of our total net sales. In the United States we saw quite a solid market. In Europe there were differences between various countries. Very strong growth, for instance, in the United Kingdom, some other countries as well. Germany, for instance, a little bit weaker due to some reforms that have been instituted, that should be temporary - most of the effects at least.

And in Asia, we saw that the movement over to a new purchasing procedure has caused some confusion to most suppliers - was definitely a more weaker market for academic revenues in Japan in this second quarter. But this also there seems to be a more temporary effect that should turn around in Q3 and Q4.

The pharmaceutical industry, which is about 25% of our sales, clearly improving, especially in the United States. Now this is a trend that we had always predicted, and it was pretty clear that it would come back at some point in time. We are stronger purchasing power. We are seeing purchasing activity in the pharmaceutical industry. We are seeing also that our ability to service the pharmaceutical industry is very strong.

We are a global player - very strong standards. And the Novartis agreement that we also announced yesterday is a small indication of that. We actually have quite a few such global supply agreements, where customers who had been purchasing on a very decentralized way from QIAGEN, have now decided to standardized around QIAGEN products on a global scale. And thereby give benefits and-- of standardization to the whole corporation.

The Biotech market is improving. It is lagging a little bit, the pharmaceutical market, in terms of its development. So, maybe about 6 years behind in terms of its rate of improvement. Especially in the United States we are seeing some quite good progress. And very strong as well, as compared to, for instance the first and also the full year 2003 diagnostics, running at a very high rate.

We are really in an extremely exciting position though. This has been confirmed, for instance, by our performance at the AACC. A very significant conference in Los Angeles for the diagnostic industry, where our products clearly were received extremely well. And, most importantly also, the position for QIAGEN in the future, was confirmed through our multiple relationships and discussions with the partners that we had there.

In terms of customer-- in terms of product breakdown, you see here that it is comparable to what we had in previous periods. 76% of our sales, consumables 16% organic growth year-over-year. Slightly lower revenues in Japan, due to the transition of universities to the independent Administrative Agency Status. That is this new purchasing procedure or purchasing-- or procedure that universities have to now comply with. This has created, as I said, some confusion. Q3 and Q4 should see a turnaround of that.

And of the instrumentation products grew at about 8% year-over-year - lower growth than forecast, and now for the full year basis there were some delays on OEM business that we saw in this segment also. Two product introductions were delayed a little bit. Growth has certainly been focused very strong for Q3 and Q4. If you look at the numbers, the differences in growth rates are quite big, compared to the projections we gave early in the year.

But we are already at about 43% of the full year number that we have to achieve. Again, we are talking about a very small percentage of our overall sales - 10% of our overall sales. So a good quarter, which typically occurs in late Q3 or Q4, is immediately in a position to make this number for the full year work. So, we are actually-- we introduced quite a few good products in this area.

Our BioSprint product lines are target prep product lines for [affrometrics] users. And a number of products, consumable products mostly, that increase the abilities of our current instrument product line, should drive growth very nicely, also in Q3 and Q4, For the last time, synthetic nucleic acids now still in our portfolio in the second quarter - about 10% of sales. Slack growth year-over-year. siRNA certainly showing very high growth. In a very strong position this business, we divested it as of June 30. We talked about that in the prior-- in a conference call on July 1.

So our consumables business, to summarize, is growing very nicely. We showed 16% year-over-year growth in this business. There is a tremendous product pipeline that in this area is going to come to market over the next period, that should drive growth going forward. And, especially due to the underlying growth in our customer segments, we are quite confident for many years to come, that this is an extremely exciting business for us to be in.

As always you have, on the next slide, the lines where you see the long-term growth performance here. Consumables typically hovering around the 20% growth product-- growth line. You see the other businesses typically more volatile. Now, in terms of the geographical distribution of net sales, as you see on the next slide, there were significant differences.

In the United States we were able to achieve 51% of our sales, and growth 19% there. This is the first time in 2 years that the United States was the fastest growing segment within our geographic portfolio. It is 51% of sales after being less than 50% for quite some time. So, clearly, the United States is coming back to some strength. We are very excited to see this trend.

We talked about Japan - 10% of our sales, 2% growth. Now this is significantly lower than we had-- what we had in the first quarter, which Japan was almost 10 times that growth rate. And it clearly shows to you that we are in some transition period in Japan. I think a lot of conference calls have talked about this effect in Japan. We are quite confident that over time this will now even out over the next few months.

Europe - about 37% of sales, 12% growth. Big differences by-- country by country. It is-- The second quarter is typically one where you have such variability from country to country. We think that, going forward, Europe is a very stable environment and we are very confident that the growth rate will contribute to the overall growth rate of QIAGEN.

On the next slide you see our margin improvements that we have been able to achieve over the past few quarters. Our operating margin, as we had predicted, in a very strong upward path. We exceeded 25% operating margin, coming from under 20% actually in the fourth quarter of last year. So, clearly, a significant improvement. I think there is a lot of room still to come. We are clearly a premium spender in terms of the quality of our services that we provide to our customers - in terms also of our R&D spend.

This is something that we are committed to going forward but the operating margin clearly on a very nice upward trend. In terms of the [offer and buy] technologies and divestment - a lot has been talked about this in our last conference call. Divestment is a clear sign that we are executing on our mission. We have a clearly defined, razor sharp focus. This focus is surrounding a very, very powerful core set of technologies, that is able to drive the Company in rapid growth into the next few years.

We clearly believe that this focus is extremely valuable. It is more valuable compared to size and size alone. So this decision, I think, was a very strong move. We have been able to strengthen our strategic mission very well in this, and it has been a very positive move for the Company. The restructuring is going extremely well, and we have a very good relationship with offer and buy technologies going forward.

Innovation is at the core of QIAGEN. We consider ourselves an extremely innovative company. We think about innovation, we think about scientific excellence, day in and day out. These innovations have to be brought into new products. They have to be brought to our customers. In the second quarter, we launched a whole suite of new products - very diverse but all surrounding nucleic acid handling, preparation, purification, storage and application products.

We launched a number of new RNAi products. We launched a number of new diagnostic products - purification products for diagnostic applications. We launched a number of new automation products - I talked about that before. Our Target Prep system, for instance - which is a very significant piece of instrumentation - has been launched in the second quarter with extremely exciting feedback. Our BioSprint - very low-cost systems for DNA and RNA purification, including kits - have been launched in the second quarter as well.

We launched a number of products for our existing M48 and EasyOne product lines - including an extremely novel, interesting new chemistry for viral RNA and viral DNA purification. We launched a number of our PCR products - including [IKI] to Multiplex PCR kit, which is an extremely innovative product that has already created some very significant, positive feedback in the scientific community.

So, innovations product pipeline absolutely the core of QIAGEN, and I think this is only a glimpse of what is still to come. We are building that pipeline very significantly at the moment. And I think for 2005 we will be able to talk about some very new and exciting product launches when time comes.

Innovation internally is certainly very important. Our acquisitions in the last 2 years have been extremely successful. Our acquisitions in the area of sample handing, separation and purification have generated extremely significant value for our shareholders. The acquisition of Genovision allowed us to increase that product line-- product lines revenues from $10m to $30m over 2 years. The tripling of revenues in this product line over 2 years. A very strong sign of synergy and of the strength that we were able to unleash out of that acquisition.

The acquisition of Xeragon - it was very little understood, I think, at the time when we acquired that company. We increased the revenues from $1m to the teens of millions within 2 years. This is a sensitive number in terms of competitive information, so I cannot put in the exact number but it is very significant. We are growing very rapidly in this sector.

Our acquisition focus is as follows. Our core is extremely strong. There is no need to buy strength. We are looking at accelerators of our core. Our focus is preanalytical solutions. We have synergy opportunities increasing, and the pricing is-- prices are coming down on targets. This is a very interesting time for us to be in, with the strength that we have in our core. And the ability to put that into products and solutions, and ultimately into revenues. With that I will hand over to Roland. Roland?

Yes, thank you Peer. Let me take you through of some of the key financials highlights for both the second quarter, and the first six months of QIAGEN on slide 18. Then I will discuss our new increased guidance range for the remainder of 2004. Our February 18 guidance called for second quarter 2004 revenues between $96m and $98m, and operating margin between 22% and 23% of sales. Guidance for the earnings per share which was between $0.09-0.10.

We exceeded our revenue guidance with Q2 revenues of $99m, and also exceeded our operating margin guidance with a Q2 operating margin of 25% excluding charges. Additionally, earnings per share reached $0.10, the high end of our guidance. Q2 was another very successful quarter for QIAGEN, meeting and exceeding our guidance.

For the second quarter, net sales increased 14% to $98.6m from $86.3m for the same period in 2003, as you can see on slide 19. Reported operating income for the second quarter 2004 increased 32% to $22.9m from $17.3m in the comparable period in 2003. Reported figures for the second quarter of 2004 include relocation and restructuring expenses, amounting to approximately $1.8m, as well as net charges of approximately $4.7m. Related to the buyout of certain former members of the management of QIAGEN synthetic DNA business unit during the second quarter of 2004.

[Conditioned] with our guidance of $0.02-0.03 per share for Operon and $0.01 per share for relocation and restructuring. Excluding the effect of these charges, operating income for the second quarter of 2004 increased 43% to $24.7m, from $17.3m the comparable period in 2003. Net income increased 31% to $14.6m from $11.1m in the same quarter of 2003, and diluted earnings per share increased 25%, up to $0.10 from $0.08 in 2003.

A part of net income included the charges, decreased 21% to $8.8m from $11.1m in 2003. And diluted earnings per share decreased 25% to $0.06 from $0.08 of the comparable period in 2003. The revenue growth was driven by strong organic growth of 16% in our consumables business, which represents nearly 80% of our overall revenues, as you can see on slide 20. [indiscernible] about 7% of that. We see a clear indication for the demand from pharmaceutical customers is improving.

A major growth product for the consumer business continues to be molecular diagnostics, with increased penetration of their existing test, and launches of new test for infectious disease and cancer. Instrument revenues grew 8% year-over-year. Traditionally this segment is reproduced in the first half of the year but we expect growth to further [pull up introduction] in the second half of 2004. We had some delays of shipment of systems in the diagnostic area but overall the prospects for new product introductions, such as the Target Prep and the BioSprint systems, is good.

Revenues in synthetic nucleic acid revolve flat year-to-year. However, our siRNA business showed very high two digit growth rates. We expect strong growth to continue on siRNA going forward. This promising new product introductions for gene silencing applications. Core other segment includes services and contract production. These represent only a small proportion of our overall revenues with 3% of revenues.

Coming to the next slide - not only did we demonstrate top line success this quarter but we also increased our gross margin by 18%, and our operating income by 32%. We increase efficiency in nearly all operation departments. Based on constant currencies, QIAGEN improved its gross margin to 67% and operating margin, excluding charges, up to 26%. This is a significant improvement to the second quarter 2003 but also to the first quarter 2004.

Important to note is that any advantage or disadvantage in currency fluctuations relative to the [indiscernible] [launch], does not have a significant impact on our net income, due to the natural hedge QIAGEN has with balanced operations in Europe and in US.

For the first 6 months of 2004, QIAGEN revenues increased 70% from $195m. Our operating income increased 25% to $44m, and our net income increased 23% to 27%-- 23% to $27m, excluding relocation and management buyout charges, as you can see on slide 22. Earnings per share, excluding these charges, increased 20% in the first 6 months of 2004, up to $0.18 per share, up from $0.15 during the same period in 2003.

QIAGEN successfully completed the relocation of the US sales and marketing organization from California to Maryland, and we therefore do not expect any material charges going forward. As you can see on chart-- slide 23, we took a charge of $1.8m in the second quarter, and a total charge of $2.8m in the first 6 months of this year for this relocation. This is in line with our guidance if $0.01 impact on EPS. We also completed the MBO of the Operon Group in the second quarter. So, after tax impact on this deal, calculates to $4.7m, in line with our guidance of $0.02-0.03 EPS, as announced in our conference call on July 1 2004.

Guidance for the third quarter is revenues between $89m and $92m, and operating margin of 24-26% - an increase on the second quarter. Earnings per share will be from $0.09-0.10. We have seen acceleration of our operating profitability and expect this to continue going forward. Based on this, our guidance for the fourth quarter is revenues between $92m and $95m. Operating margin between 24-27% of revenues and earnings per share of $0.09-0.10.

For the year, as you can see on slide 25, we expect total revenues to come in between $376m and $381m, up from our earlier guidance of $373m to £380m. We expect an increased operating margin to 24% of revenues, and EPS between $0.36 and $0.38, up from the previous guidance of $0.35-0.38per share. This is a very positive direction and development for the Company as a whole.

On the next slide we extracted for your reference, DNA business sold in the MBO. We will include the siRNA revenues in consumables and I am going to do so going forward. As you can see on slide 27, QIAGEN continues to show a strong, positive cash flow. Our net cash flow for the quarter amounts-- for year-to-date amounts to $46m, including the proceeds from the Operon deal. This strong cash flow gives QIAGEN the ability to act quickly to acquisition and current technology opportunities as we are always screening the market.

On 28, you can see that one of our key strategies in expending our positive cash flow, is that we are actively managing our inventory levels and [day sales] in our accounts receivable. QIAGEN is a truly international company with a strong presence of 500 employees in our US bases, including our US headquarter in Maryland. We have about 700 people in our operational headquarter in Germany, and approximately 1,570 people worldwide. With this, I would like to hand over to Peer.

Yes, thanks Roland. Just to summarize a few highlights of the quarter. There were a lot of activities, certainly in the market. The pharmaceutical industry has started to show some comeback and, actually seen quite strong growth rates in certain segments.

Indicative of that, we signed a significant global supply agreement with Novartis Pharma. This is kind of like a sign of how these relationships are going forward in the future. Global supply agreement that standardizes around our products for the stabilization, separation and purification of nucleic acids. In addition, we saw strong growth in the siRNA area, which for us is not really only siRNA, but it also the RNA purification.

It is the expression of products in general that we have, and it is a whole product suite that is increasingly being more and more integrated. Indicative of that, we signed a significant supply agreement with AstraZeneca. There were a lot of other transactions as well - this one was announced. Most importantly, I think, for me at least, is this very strong innovation stream that we have here at QIAGEN.

Coming from a very strong core, we launched a series of new products in the area of stabilization, separation and purification, and handling of nucleic acids. It is including also preanalytical consumables and also automated sample preparation systems. A whole number of different automation solutions have been launched and a whole family of new instruments [speeds], so-called BioSprint family, was launched in the second quarter.

Very importantly also, we talked about that, we sold our synthetic DNA business. QIAGEN today with an extremely sharp focus, with a very clear mission out there. We have a great position, we are taking that forward. We have a partnership now with an independent synthetic DNA company. It is probably the most preferred solutions of all. So we are very excited to each focus on our businesses.

On May 15, we opened up a new subsidiary in the Balearics countries with directors and supports. We are very excited to be close to our customers in this area, and going forward we see this is a very strong base also for future growth. With that I will hand back to Solveigh.

Thank you very much Peer. We are now looking forward to discussing your questions. Again, we really would like to ask you to limit your questions to a maximum of 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. Matt?

Thank you. [Operator's instructions] Our first question is coming from Sam Williams with Lehman Brothers.

Hi, Peer and Solveigh. Thanks for taking the questions. A couple of-- well, obviously I am only allowed a couple of questions. Firstly on the Oligos, I am trying-- I guess I am trying to work out, get a more precise figure for the siRNA component of that. And I understand for competitive reasons that you do not break that out. But well - first of all can you break it out for us, so we can get an idea if that is growing quarter-to-quarter, or give us some rough indication of that?

Because what I find difficult at the moment, taking the-- at least the approximate numbers I have for the overall business in Q1 and Q2, is seeing how both siRNA and synthetic DNA can both be growing at the same time. And it seems to me one or the other is growing, and I guess for the ongoing health of the business I would rather it was siRNA. But maybe you can put me right on that?

And then the second question if I-- I will just quickly ask it. I see that on-- in a Reuters interview you have talked about guidance in 2005. I do not know if it is formal guidance that you have said that your are comfortable with revenues of about $400m. And that to me looks a little bit conservative based on your guidance this year. It looks like once you exclude Operon on revenue from 2004, you are looking at about 12% growth, which I would have thought might be a little bit conservative. Maybe you could just clarify that?

Okay, maybe the first question. Remember the Operon business was not only synthetic DNA but there were also some flanking products. And if you look at Roland's chart where he splits out prior periods, pre and post-Operon, there is one slide where that is done in his section. Then you will see that there are also the components to that. Definitely the siRNA business is growing but it is not a big business.

And it is, in terms of sales, we gave one indication in the presentation saying that we took Xeragon from $1m the teens this year. And this could be $12m or it could be $13m, this could be now $19m. So it is somewhere in between that but that is really just a rounding error on $360m in sales.

So if you take these numbers, that is not a big enough business to really drive that. Even-- it is not even big enough to drive the total Oligo type businesses, at least in this second quarter, in terms of its total impact. So, that maybe referred to that one slide that we have one-- in the financial sections.

In terms of any guidance for 2005, we have not given any guidance whatsoever. These headlines always occur in some way and we definitely did not give any firm guidance. The right way to give guidance is geared towards in a full audience, and we will stick with this policy, also going forward. Definitely for 2005, we see quite a good opportunity for us in the market, and the way we are growing right now can certainly be translated into the future, with some modifications.

We are remaining very cautious right now because of volatilities in the market but I think the Company is positioning itself better and better, and for 2005. I think at this point in time I would not be-- put any concrete number out there but other than say that, whatever Reuters said about $400m is certainly not an aggressive number.

Can I very quickly ask one other thing? The- You mention in your acquisition strategy slide that, on the one hand you do not need to buy strength but also the target prices are coming down. I am sort of getting a bit of a mixed message. Are you saying that you are no longer interested in acquisitions or you are and things are getting attractive? What-- I just did not understand that.

I think for us here at QIAGEN innovation is key. In this space, if you supply customers who are striving towards scientific excellence, one has to be very innovative and ensure that they have the best tools possible. Now this innovation can either be done internally, and we are very fortunate that we have a very strong core business that-- where we also have an extremely strong innovation engine that is giving us new products going forward.

But on top of that, there can always be situations where you might want to bring in technologies or products. And probably in that ranking - technologies or companies I mean - that you might want to integrate So, for us, acquisitions are always an ability-- also an ability to increase the strength of our core. We are not looking towards just adding a bolt-on business, that is not necessarily in direct relationship with ours

And this is indicative also with the success we had with the acquisitions that we did in the core businesses, from our automation product line, which is absolutely key to QIAGEN's growth currently through the acquisition of Rosys 1998. Through the acquisition of [Pieragon] about 2 years. These have been extremely successful.

Okay, thanks Peer. Thanks a lot.

Thanks.

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

[Inaudible - silence] products. Could you give us an idea of what percentage of revenues in 2004 should come from products that have been launched in, say, the last 2 to 3 years, and what you expect that number to be in 2005? And the second question is, it looks as though QIAGEN is - certainly beginning next year - you are going to be generating quite significant amounts of cash from the organic business.

Presumably you are going to be paying down some of the debt that is due in July 2005, if I remember correctly. What is going to be use of cash going forward? Are you going to look to start buying back shares? What are you going to start doing with that cash flow?

The first product was related to the number of new products in this area. We distinguish between products that are basically just incremental innovation, and products that are basic innovation. We have a sliding scale from one to five, and that is how we internally measure, and also incentivize innovations in the process. It is actually quite a complex process to monitor and to incentivize, and to stimulate creativity along this whole path.

We-- depending on how you look at it, most companies in this industry typically have innovation over the last 3, 4 years, so being 20% of their sales base. In our industry, products typically have quite a long lifecycle but they have some facelifts that happen in the meantime. So we are around those numbers but this is definitely a number that I think we can push up even further, and it is certainly in this market environment.

Based on the re-invigorated focus that we have created this year, I think the opportunities are just streaming in at the moment for us to put up that number even higher. The second question relates to the financial structure. Roland, do you want to take that?

Yes. I think on the financial structure, I think QIAGEN has at the moment approximately [$170m] in cash, [$100m] on balance sheet. And we have in the past reviewed our financial position, and will continue to do so, also going forward, and also in the context of future acquisitions.

But there is debt due to be paid back in the middle of next year, is that correct?

Yes, this is correct, yes.

Okay, thanks very much.

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

Hi there, good afternoon. Just a quick question on margins and then one on growth rates. Looking towards moving the operating margin towards 27% potentially, towards the end of this year. I just wondered what the long-term target was? I think QIAGEN-- how far you can push those operating margins?

And the second question is a very quick one in terms of the molecular diagnostics business. Maybe I missed it in the call but that seems to be similar in 20% of sales. Does that mean that it is growing roughly the same rate as the rest of the business or does it continue to grow at the fairly high rates previously you have mentioned - about 40% growth rates year-over-year?

Probably I take the first one. We guided for the year end an operating income margin between 24-27%. And I think, going forward over the next 2 to 3 years, I clearly can see the possibilities and ways to getting more efficient in lower operating expense. That we improve our operating margin by at least 1% or 2% year-over-year.

Yes, I think also, if you look at this first quarter performance, you see that there is a variability within a year on the operating margins. So you can have a very strong quarter and then a little bit of a weaker one. So 27% is clearly the trend that we moving into but, for the full year it is a lower number, which we just increased now in terms of guidance. But going forward ,we look at it more as a-- as operating expenses as a percent of sales.

And if you look at what QIAGEN is spending to maintain this infrastructuring. Also considering the fact that we have a razor sharp positioning also in front of the customer, that allows us to have a more streamlined and more efficient access to the customer. This number clearly has a lot of abilities to move down.

So, even at 24% of sales at a gross margin of 70% or so, you clearly see that there is a lot of room to move into the low 30s, as a percent of sales that a lot of customers have in terms of operating expenses. Now it obviously has a lot to do with size, and this is what we are working on - to increase the size and thereby also reduce that one number.

Now in terms of the molecular diagnostics industry, for us, as we described in previous conference calls, it is very difficult for us to give an exact-- to pinpoint an exact number on this molecular diagnostics business. For the reason, simply because a lot of our products are used-- are dual-use products that are used under certain exemptions, where we are not-- actually not selling a regulated product. But a for research use product that is used and self-validated.

So, the exact size of this molecular diagnostics business at QIAGEN - it is difficult to pinpoint and it is somewhere around 20%. So, if we would give growth rates on those estimates that we have, then obviously it would be very difficult for us always to substantiate. And in some cases we also have, let us say, hospital purchasing products in they use the same, or maybe even buy one kit. And they use some preparations for a research application, and then the rest, somebody down in a diagnostics lab comes up and gets. He will then use them on a routine diagnostic application.

So these types of things are happening at the moment, as this industry is moving into more standardization but the growth rate there is extremely strong. It is-- if you look at the industry guidance you get from players such as the big diagnostic companies, they are all highlighting growth rates in this area. Medium, long-term growth rates of a whole industry which is already today in the multi-billions of about 25%.

And volumes will slew up, prices on the assays will come down. We are more interested in units obviously. So volumes increases are tremendous for us because with every unit we also have a parallel increase in unit use of QIAGEN products.

Okay, that is very helpful. Thank you.

Thank you.

Our next question is coming from Richard Parkes from ING.

Good afternoon. Just had a couple of quick questions. Firstly, on molecular diagnostics again You highlight that you can see the tip of the iceberg in terms of molecular diagnostics market. I just wondered if you could give a bit more color on that. Are there any particular product launches that you could see in the near future, that would be particularly strong drivers for appetite of your products?

Or are you seeing further standardization amongst maybe the centralized laboratories or hospitals? Just a bit more color on that. The second question was just a simple financial question. I was wondering if there would be any further relocation or restructuring charges expected in the second half?

Okay, I will take the first part. You were hitting exactly the right topics. We are seeing a lot of trends happening at the moment. It is a combination of increased standardization that we are starting to see in the marketplace. Increased number of tests being validated around the use of our products. Increased number of partnerships that we are in to create, or to supply our products into diagnostic offerings, or into diagnostic companies for further resale.

So all of these things are just showing increased momentum at this point in time. With the tip of the iceberg we referred to - the activity level that is actually visible on the outside is only a small part of what is actually going on here at QIAGEN. This is a tremendous initiative here at QIAGEN, where we actually develop or put in place a whole new division. We have a very aggressive boost in activity in this base, in the R&D as well as in the marketing area, and in the business development area.

And it all has to do with the use of our products - the increased standardization of newly developed or existing assays around use with our products. In addition to that, we have a pretty strong innovation stream, and also a very strong regulatory effort that is going on. We talked about that in a recent conference call. There are a number of clinical trials going on with our products, both for CE markings, also automation solutions targeting CE markings - that will be coming out in a few weeks actually.

And we also have some FDA clinical trials going on for certain products and they certainly create an additional benefit of using our products. While in diagnostics, one can certainly start using a, not yet approved products in certain areas for certain type of work. The regulatory benefits are quite significant. It is a tremendous marketing advantage. So all of these things are going on at the same time. And, on top of a very strong growth rate, as more and more assays are coming to market.

What has started really to grow very significantly in the last few months is the area of clinical research, and this is a grey area between research and diagnostics. And in this area, thanks to a lot of genomic information coming out - we all read the [Oressa] and other press releases - where genetic information had association with the benefit or usefulness of certain drugs. These types of studies are now increasingly being looked at and used in the pharmaceutical industry.

And that is providing tremendous opportunity for us with the diagnostics vision that QIAGEN has. And, at the same time, the strength in the research market to allow very early stage innovation. At the same time, coupling that with the vision of ultimately becoming a diagnostic product, and us accompanying these companies as they move down that path. So we bridge that very nicely. And this is certainly also an area where we see quite significant growth.

Okay, now on your second question. As we-- Our guidance call as of February 18, regarding on the relocation and restructuring expenses, and EPS impact of $0.01 for the period Q1 to third quarter 2004. And as you can see, as of June 30, we are very good within this guidance. And for the third quarter and for the fourth quarter, I do not expect any material additional relocation and restructuring charges which would let us be going out of this guidance.

So I do not see any material numbers coming through in Q3 and Q4.

Okay, perfect, thanks very much.

Our next question is coming from Derik de Bruin from UBS.

Hi and good morning. Could you just give us a little bit of more color on the margins? And can you just highlight any one particular thing or two particular things that occurred during the quarter to really give [indiscernible] boost sequentially?

I think there are a lot of different trends in this area. We certainly had a lot of events and transactions that were quite positive. Most importantly, I think we exceeded our top line estimate, and we have a quite a high operating leverage. So, with higher operating leverage, if we come in in the high end or even above our revenue targets, then it immediately has an impact on the operating margin side.

This is actually more significant compared to other companies, plus also we-- also we were in a faster growth rate. The underlying growth rate of the Company is faster. Those two effects coupled really lead to a much higher amplifier of any impact on the top line on the operating margin side. Other than that, I think there were a lot of things happening.

Obviously the larger transactions we had-- we had a lot of activity in that I would call just standard business. We sold our DNA synthesis business. We restructured, and we had the benefit of now having one location going forward, and a small call center in Valencia. So we moved ultimately into-- out of an old site in California, into newer and much smaller offices there. So there were a lot of smaller things, that just, I would say, management of the operating margin line, I would call it.

Okay, that is very helpful. And, when you look at-- just I have two really short questions. Then we are looking at the tax rate going forward, still between 37-38%?

Yes, I think if you calculate the tax rate between 37-38% is a pretty conservative number.

Okay. And just any-Could you just give us any color on what your are seeing for pull-through on the BioRobot for the affrometrics gene chip, Target Prep? I am just curious to see what the demand is for that, and just basically how-- what type of customers you are selling that product to?

Yes, for those on the call, we talked about that in the last call. But the Target Prep we called the BioRobot Gene Expression Target Prep system, is a system that takes purified nucleic acid. It does all modification and nucleic acid clean-up steps, and puts ultimately the nucleic acid into a format that can be directed and used on an affrometrics gene chip system.

This was traditionally not automated - had to be done in a very tedious fashion manually - and we created the first fully integrated and automated solution for that. It links with a RNA purification system upstream, so it is a fully integrated system. Now the users of these types of products are typically higher throughput gene chip users. Now we all know how many gene chip systems are out there, and if you look at how many customers ultimately could be a target of that, there are different estimates of that.

For us, it is not really a standalone product, a huge revenue opportunity. It is a $200,000 instrument approximately, depending on what configuration it comes in. And you might have, if one thinks very aggressively, a few hundred potential opportunities going forward. But the growth in this area is quite nice and the steps that it automates have been-- are very tedious, and especially if one goes into higher throughput. And also genotyping array, where this would certainly be a benefit to automate.

So the feedback we are getting from the market is very good. It definitely is a system that fits-- meets a need which is tremendous. We launched it on a global blitz a few months ago, and had packed audiences at our companies, with key opinion leaders in the space that are definitely looking for a solution like this. So we are quite excited about it. But, again, it is not-- for us it is not been a key product for us.

The key is the integration with the R&A purification. Then it becomes very key because it allows affrometrics users to take everything from the raw sample into the nucleic acid format that it can use on a gene chip. And that was simply not possible up to now, and so through the integration of that, we are giving also benefit for the RNA purification steps that we have optimal solutions for.

Thanks.

Thank you. Our next question is coming from Patrick Fuchs with DZ Bank.

Hello everybody. I have two question, one is regarding your instruments. Can you let us know what proportion of your instrument sales is actually coming from the newer generation instrument product line, versus the older, higher throughput instruments?

And the second question is regarding your diagnostic sales. Your supply agreement that you have with Roche, where you supply components of Roche [Amplicore] HPV cancer kit. How big is the impact of your diagnostic sales? How big is the impact of that launch of the Roche kit on your diagnostic sales? And are there possibly stocking effects connected with the launch of that product? Thanks.

Very good questions. The first was the products that are growing in our automation portfolio area. Definitely a very strong growth on the product that originated in some way in the Genovision acquisition a few years ago. So, we are seeing a very strong growth in the medium to low throughput product, automation products. The high throughput area is not necessarily a growth area. It is an area one has to have in order for us to be able to sell into high throughput consumable users.

It is certainly starting to come back as people are looking at more high throughput type of genetic analysis, most notably genotyping. So, it is important to have, especially in diagnostics, high throughput work is critical, and we have some key offerings. We have a lot of laboratories and diagnostics that do churn a very significant number of samples a day.

In terms of the diagnostic sales to specific customers - you mentioned Roche, the HPV collaboration that we have. There is-- Any such alliance I think would not necessarily be significant enough at this point in time, even in launch stages, for it to create enormous impact on our revenue. If you look at how many assays that these companies want to sell in early stages - they are not talking the tens of millions, they are talking in launch phases of hundreds of thousands or single digit millions.

So these are the type of ranges that people are talking about there. So they would not necessarily stock up in a way where you would see a huge blip on our revenue line. So it is coming quite gradually but not-- there are not really jumps in that revenue line due to companies coming in.

I think what will happen if HPV is very successful, and there are many players in the HPV field - Roche is obviously a very strong player that is entering. Then there could be a very significant growth on our overall diagnostic business coming from the acceleration of their sales.

Thank you. Our next question is coming from Daniel Wendorff with West LB.

Yes, thanks for taking my question. Actually, I have two. One is related to the Japan-- to Japan. If I got that right, it is more of an administrative thing, so I would assume that growth in that region will go back to levels we saw before? Or do you think there would be difference in the future?

And the second one would be concerning, well you just mentioned volatilities in the market you expect to see over the next quarters. And the growth in Europe, do you think when you set that-- the growth there would be stable? It would be stable at regions we saw in the second quarter or would you think there could be differences over the next quarters? Well, thanks.

Good question, Japan. It is quite a complex process that they are going through in Japan. What they are doing is-- the initiative as ultimately the goal to create entrepreneurial and more business-like purchasing behavior in the universities, compared to more administrative function. And there are certain rules on how purchasing has to be completed and gone through, and the universities are trying to learn that. And they are trying to understand how they can now allocate their budgets and how the purchasing process should work.

This is something that most other companies - we are still doing better than most other companies, at least from what I saw in terms of revenue growth in Japan But it is certainly not an area of growth, it is quite a weak growth. And what most people say is that this will take some time for them to really figure out how much money is available, and how they can go through the purchasing process.

And it should probably then kick in in Q3 and Q4. Japan was always doing very nicely up to Q1 - it was growing at a very high growth rate. So, we see this more as a temporary thing but I would not want to pinpoint the month, that is very difficult for us to say.

In terms of Europe, big regional differences. There are clearly very strong growth areas, most notably in our case it was the UK. Then you sometimes have some of the smaller companies growing very significantly. We are expecting to see good growth also in the Benelux countries, as we now have our own location there, and can move in with our direct marketing approach. So there was certain pockets of growth. It is very difficult to pinpoint which of them will ultimately bounce out, what the overall growth rate will be.

If we look at it more on a country basis, I think going forward Europe will probably lag the United States a little bit. The US is doing a little bit better than expected here in this year. Europe a little bit lower than expected. We had said, however, going into the year, that we expect Europe to be a little bit lower in 2004 compared to 2003, and the US probably better, and that trend is actually happening.

So this is nothing new - this is exactly what we had projected. Some of these highlights that we are giving on specific countries, most notably here Japan. These were things that, I think, as a standalone effect were quite significant. But most of the long-term, medium-term underlying trends were visible earlier in the year.

So you think the growth in North America could be stable over the next quarters at that level?

We are in a market where the ability to grow in certain areas is always one that one should look at with a little bit of caution, but we think our guidance reflects that caution. And if you look at how the guidance is put together, you clearly see that the United States is going to continue to grow quite significantly. 59% or a little bit less or a little bit more.

This, I think, is some latitude that we should give the Company here because there are always smaller regional differences that have to balance out overall. The Company has shown quite a stability over time, in terms of the revenue predictability, and this is also based on some experience that you have variability from country to country.

Thank you.

We have time for one more question. It is coming from Nick Turner from [Jefferies].

Hi, there. This is actually Mike [Vandelken] on behalf of Nick who had two questions. Firstly, in terms of organic growth in consumables, will you break out North America and Europe for us?

Yes. Our growth is, as we had not done acquisitions in this base for the last 2 years, 2.5 years now almost, we consider this all organic. They were all-- the growth came from nucleic acid, handling, separation and purification products. And this is comparable from between US and Europe, and the growth rate that you get on the overall company and on the individual segments, they reflect also organic growth rates.

Okay, and secondly could you clarify that the sales of siRNA were in Oligos?

Yes. Roland, do you want to take that?

Yes. Yes, it is right. For the second quarter of 2004, the-- we classified as siRNA revenues still in Oligos. Going forward, we reclassified them into - or going to classify them into the consumable area.

Okay, that is great. Thank you.

Thank you, that is all the time we have for questions today. I would now like to turn the floor back over to management for any further comments.

Yes, thank you very much, Matt. I would like to close this conference call by thanking you all for participating. We hope to welcome you again on our third quarter earnings conference call on Tuesday, October 25 2004. If you have any additional questions, please do not hesitate to contact us. Again thank you very much and have a nice day. Bye.

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