Qiagen NV (QGEN) 2004 Q3 法說會逐字稿

It is now my pleasure to turn over the meeting to Solveigh Mahler. Ma'am, you may begin.

Thank you very much, Stephanie. Good morning and hello everybody. Thank you very much for joining QIAGEN's Third Quarter 2004 Conference Call. QIAGEN experienced a successful 3rd quarter, with revenues being line with the company's projections, and operating income and net income being on the high end of the company's expectations. I'm Dr. Solveigh Mahler, the Director of the IR at QUIGEN. 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 downloaded 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 don't hesitate to contact us after the call. As always, we will be more than happy to answer all your questions and provide you with any information you might need.

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

Yeah, thanks, Solveigh, and thanks for joining today's call. The third quarter was quite a successful for QIAGEN. We recorded revenue as we had guided for in August. We reach the high end of operating income guidance. We reached the high end of earnings per share guidance. We're reiterating guidance for 2004; Roland will have more details on that in his section. We believe we further expanded our product and technology leadership in an extremely focused core area and the company is now very, very well-positioned to go into 2005 and beyond.

If you look on the slide number five, you see that the projections for the fourth quarter- for the third quarter 2004 were $89m to $92m. This was communicated on August 3. We came in at exactly the middle of the range, at $90.4m. Gross margin clearly improved over 2003 and we came in on the high end of the EPS range which was 9 to 10 cents, also communicated on August 3, we recorded 10 cents.

In terms of the customer segments, we saw some quite exciting developments in the third quarter. The academic markets continued to be very stable and solid in the United States, a very good growth also evidenced there. Europe is clearly improving. There are differences between countries but as will we see later on the geographic split, Europe showed significantly higher growth in Q3 than what we saw in Q2.

Asia, clearly influenced by Japan currently still in a transition phase to a new purchasing procedure. However, we also saw improvement in Japan and therefore we are quite hopeful for 2005.

The pharmaceutical sector is clearly improving. There are a number of developments that are driving this. Most importantly, regulatory changes and also the increased use of molecular techniques in clinical trial work. The biotech environment with a small delay after the pharma market typically shows very similar trends and we are also starting to see good uptick there. And the diagnostics markets are clearly showing very nice growth and the position we have there is very exciting.

If we look at the revenue distribution that we have in the different markets, we tried to make a chart here; there are obviously some estimates going into this. About 39% of our consumables to into academia and about 28% in industrial research, and about 17% in diagnostics. You see the splits for the instruments and also for the other revenue components. All in all, everything sums up to 100% on the bottom right hand side. We thought this chart might be helpful to look at the business going forward and also the opportunities that we have.

In terms of the product breakdown, we clearly, with 84% of our sales in the consumables showed a very nice growth there: we had 15% organic growth year over year. On a constant currency basis, the growth was 10%: there were some larger shipments in Q3 in 2003 of SRNA consumables that are in this consumable sector now, so actually the growth rate that we showed on a constant currency basis is pretty much comparable to what we saw in Q2. The instruments very well on track here, we show 27% growth year over year. The growth was mostly fueled by diagnostic instruments, the MDX line; we will have some news on the product line a little bit later, and also Easyones, the small table top systems are also showing quite exciting growth.

Now in terms of instruments, we are very well on track with meeting our annual targets. We have over two-thirds or almost 70% of our annual target is already accomplished as of September 30. For an automation company, this is a great position moving into Q4, so we feel quite comfortable on our full year targets both in consumables and also automation.

In terms of our consumable business, what is important as you see on the next slide is 100% organic growth fueled by our innovation and marketing technology leadership. This is a business that is constantly expanding, it's the sum of a few hundred products based, it's based on almost 1,000 patents, it's using something like 80 different technology bases that we combine or use in stand alone ways in different ways in different areas. It's not a very homogeneous segment but one thing that is homogeneous about it is the definition of what these products do --they handle and they purify samples and this is where we are clearly building a great leadership. If you look at these growth rates and the general market out there and the market environment, I think it is very rare to see an automation company growing at 27% year over year and a consummables company at this base growing in the teens as well. So we have a very strong position going forward. The strategic as well as technological position we think continues to expand and improve.

As always, we are showing a multi-year comparison of the growth rates--they always fluctuate a little bit as we said in Q2, Europe can be weaker in a quarter and then comes roaring back-we'll see the growth rates, also for Europe in Q3 growing from 4% in the second quarter to now 11% in the 3rd-so good developments can happen on these short bases. The long term trends are very positive, we think.

In terms of geography as we just touched about that, on the next slide, you see the geographical distribution of our sales--North America 49% of sales, 14% growth. This is again, organic growth-growth driven from our core so we think that the business is extremely strong and from my information it is quite rare to see companies in this space growing at these growth rates. In Europe, 40% of our sales, 22% growth on a constant currency basis it is 11% growth, up from 4% in Q2, where we clearly saw some issues in Germany, so a significant acceleration of growth rates in Europe.

In Japan, which is clearly still going through a transition phase, this is actually Japan and Asia-excuse me, this is just Japan, 9% of sales, 7% of growth on a constant currency basis this is actually a slightly positive growth rate compared to a slightly negative growth rate in Q2. So while we were flat or slightly negative in Q2, where it went up into flat or slightly positive in Q3, the outlook does look quite good for Japan also for 2005.

Innovation is clearly what drives QIAGEN. We have a number of new product launches that we completed in Q3, and here are just a few of them - we launched quite a revolutionary system called the BioRobot MDx DSP system-I will talk about that in a second. We also launched a number of large-scale genomic DNA purification products that can be used on very simple vacuum manifold. So a very interesting QIAGEN product line extension there. We launched new cards for our Easyone. As I said in recent conference calls, instrumentation sales are not necessarily only driven by new instruments coming into the product portfolio--they are mostly driven by new consumables becoming available. DNA bacteria cards here now becoming available for Easyone and M48 are clearly also very important product line for pathogen protection or in other areas such as quality control. We launched quite an exciting multi-plex PCR kit that brings a new dimension in terms of efficiency and also capabilities to multi-plex and PCR. We launched a number of consumables for the automation product line from Autogen, which manufactures a significant automation system that can be used for the DNA purification. We created a consumable product line for that platform and we also launched some products for our liquid chip platform.

Let me focus a little bit on the next slide on the launch of the first [CE Mark] stand alone automated sample preparation system for [bio-nucleic] acids. This system is something like, is a very important milestone in our CE marking and also FDA regulatory pathway that we are going through with a lot of our products. We launched quite a few already, we're going to launch a lot more in the future. This is now a first automation platform combined with a consumable solution package that has been CE marked for diagnostic use. As we know this CE marking is something like a regulatory approval that is used in the European Union; we have similar processes also underway for US FDA approval from both manual and automated packages.

With that, I would like to hand over to Roland for more detailed description of the financials. Roland?

Thank you. I will start today by taking you through some of the key financial highlights for both the 3rd quarter and the first 9 months of 2004. I follow this with guidance for the remainder of the year and an overview of our strong position in terms of cash flow and cash. Our guidance for Q3 2004 revenues of between $89m and $92m and operating margin between 24% and 26% of revenues. EPS guidance was between 9 and 10 cents. We achieved our revenue guidance with Q3 of $90.4m, and exceeded our operating margins guidance with a Q3 operating margin of 26.2%, excluding charges. Additionally, EPS which at 10 cents- the high end of our guidance. Q3 was therefore, another very successful quarter for QIAGEN.

As you know, we sold in Operon in June, 2004. It generated between 10 and 14% of our sales, so I will compare this quarter with pro forma sales numbers for 2003 which also include the Operon business-excludes the Operon business.

Net sales in Q3 increased by 17% to $90.4m as compared to $77.2m in the same quarter in 2003 adjusted for the Operon sale. Reported operating income for the 3rd quarter of 2004 increased 8% to $20.9m from $19.3m in the same period for Q3 for 2003. Reported figures for Q3 2004 include relocation and restructuring charges as well as charges related to the acquisition of certain assets of Molecular Staging Inc. Acquisition charges of $2m and relocation and restructuring charges were approximately $700,000 are consistent with previous guidance.

Excluding the effects of these charges, Q3 2004 operating income increased 23% to $23.7m from $90.3m in the same quarter in 2003. Net income increased 22% to $14.4m from $11.8m in the same quarter 2003 and diluted EPS increased 25% from 10 cents to 8 cents in 2003.

QIAGEN's increasing revenues continue to be driven by our strong organic growth in our consummables business, which represents nearly 85% of our overall revenues. We experienced 17% growth in Q3 2004 versus the same period in 2003 in total net sales, which includes a currency affect of approximately 5% [points] This is also a significant increase from our Q2 2004 growth rate of 40% and 10% calculated with constant currencies. We see a clear indication pointing forward and improved demand from pharmaceutical customers, a major growth for the consumer business continues to be molecular diagnostics with increased penetration of existing tests and launches of new tests for infectious diseases and cancer.

Instrument revenues grew 27% year over year. Traditionally, this segment is stronger during the 2nd half of the year, and we expect further acceleration in Q4 of 2004. With more than two thirds of our annual target already recorded in Q1 to Q3, we are well under way.

Our other segment includes sequencing services and contact production. Also, this represents only a small portion of our overall revenues, it increased an impressive 51% year over year.

Not only did we demonstrate top line success this quarter--but we also increased our operating income by 23%. On a constant currency basis, we improved our operating income by 22%--up to 27% of total net sales. Q3 2004 operating income therefore continued to show another significant improvement. Net income improved by 22% on both as reported and constant currency basis, which demonstrates that any advantage or disadvantage in currency situations relative to the US dollar does not have a significant impact to our net income. This, due to this natural edge, QIAGEN has this balanced operation in Europe and the US.

Our gross margin increased from 65% in the 3rd quarter. 2003 up to 68% for the 3rd quarter 2004, a significant improvement. R&D expenses came in at 8.5% of revenue which was slightly below our projection, mainly driven by the vacation season in Europe and therefore reduce R&D activities at QAIGEN in Germany. We still believe that our mid term guidance for our R&D expenses should be 9 and 9.5% of revenues.

For the first 9 months of 2004, QAIGEN's revenues increased 11% to $285m, all organic growth, and our operating income increased 70% to $62m. Excluding Q3 2003 DNA revenues, which makes year over year results more comparable, our 2004 year increased ytd revenues 17%. Operating income increased 24% to $67.4m and net income increased 23% to $40.9m excluding charges. EPS excluding charges increased 22% in the first 9 months of 2004 to 28 cents per share, up from 23 cents per share during the same period 2003. We continue to show improvement in operating income and expect this to continue going forward. Strategic management decisions such as selling the DNA business and purchasing key assets of Molecular Staging Inc. will continue driving this margin improvement. This is very positive direction and development for the company as a whole. We are reiterating our guidance for the full year with revenues projected between $376m and $381m and operating margin for the full year projected at 24% to 25% of revenues. EPS will be from 36 to 38 cents.

QAIGEN continues to show strong positive cash flow. Our positive net cash flow for the first 9 months is $107m and our net cash flow margin has increased to 37%. This strong cash flow position gives us the ability to act quickly to acquisitions and technology opportunities.

We have generated substantial value with this acquisition of (Ceragon Generation) and believe Molecular Staging will be exceptional. A key strategy in expending our positive cash flow position is active management of inventory levels, and day sales in Accounts Receivable. We see a slight increase in our DSO but we believe that this is a temporary impact and will have no change to the general and very positive trend. It is mainly driven by a pick up of revenues in the 2nd half of September. As promised in our discussion, we have used a large part of the proceeds to pay back short-term high interest rate debt optimizing QAIGEN's balance sheet structure. We are committed to maintaining a strong cash flow position to facilitate our ability to act aggressively when exciting acquisition opportunities arise.

QAIGEN is a truly international company with a strong presence of 350 employees in the US, including our US headquarters in Maryland. We have about 700 employees in our operations in Germany with approximately 1,350 worldwide. The decrease in headcount in Q3 is mainly related to the management buyout of our synthetic (oil) legal business unit. With this I would like to hand over to Peer.

Yeah, thanks Roland. With that, just to sum up, our 3rd quarter was very successful for QAIGEN, both strategically and also financially. We acquired Molecular Staging, an extremely exciting product portfolio right in our core area of sample handling and purification. We raised $150m and repaid very expensive short-term debt, putting the company in a very strong position going forward. The terms of this senior convertible note are extremely attractive and avoid any dilution to shareholders on a net basis up to a stock price in the mid $20's. We launched the first automated diagnostic DNA and RNA purification system, the MDx DSP platform. There were a number of other consumables and automation products launched also in the 3rd quarter. Our commitment to innovation is clearly very strong and the success I think speaks for itself. There were also a number of scientific discussions going on in the 3rd quarter - scientific accomplishments that we will continue to report on going forward. I would like to maybe stop here and hand over to Solveigh to open up the floor for discussions.

Thank you very Peer, we are now looking forward to discussing your questions, I would like to open the Q&A session by handing over to the operator.

[Operator Instructions] [Lachlan Tauer], UBS.

My first question is just a (clarifying) one. For the benefit of those of us who want to calculate underlying growth rates for Q4, could you tell us how much if any of the Q3 revenue other revenue figure was allocated to the (Autogen) business that you since sold? And my second question is regarding the margins-you mentioned comments to German the press about reaching a 30% EBIT margin, could you just elaborate on that and give us some kind of timeline for that target? Thanks.

The first question was if there was anything on the other product line that was allocated to the (Autogen) (inaudible) business. I'll hand over to Roland for that one.

In terms of any guidance on EBIT margin going forward, there were certainly some projections in the press that I also saw, that also, based on some information that seemed to come from the company. We never officially have given guidance in that long-term direction, but we clearly think that if you look at the operating expense base that we have, we are spending significantly more than most other suppliers to the industry, because we certainly want to have a higher premium approach, we have a higher gross margin. If you take this forward, however and you move into operating expense levels that are comparable with other suppliers to the industry, then you will see that the 30% is actually do able if we continue to take 1% to 1.5% operating margin every year. For the revenue question, Roland, do you want to comment?

Yeah, absolutely. Thanks for the question. If might recall we sold the Operon unit at the end of June in the management buyout and this included also the activities which we had in Japan where we had antibody and peptide business which were involved and also embedded into our Operon business and the revenues for this also have shown in the (inaudible) and the other line, so there is also a certain amount in the other line, which was sold during the MBO. And therefore, we gave also guidance in our presentation, the last conference call presentation, what the numbers looked like for Operon for the quarter before.

[Erin Geist], Robert W. Baird.

First, can you talk a little bit about the market response that you saw in the quarter, no longer selling the (Alagos). Has it hurt your selling capability--has it improved the selling abilities of the sales force? Just a little bit of color there would be helpful.

Very good question. That was certainly something we were looking forward to see and the feedback was, internally, in terms of feedback from our sales people, they were extremely excited about the ability to focus on the nucleic acid purification handling products. The (inaudible) nucleotide business was going in a different direction and they thought it was stretching the selling approaches too far, selling a very high value-added product in the consummable space and on the other side having a product that pontentially compares with a product that someone else also has out there on the market. It's a different selling approach, so the sales force was very relieved and thought it was a great move.

In terms of customers, it has actually gone quite well. The new Operon has been very successful in taking this forward. I understand they're also successfully now transitioning everything and that they are very quite pleased on how this business is developing for them.

My second question is on the instrument side. Can you talk about the pull through that you anticipate with the instrument systems. I remember that the Easyone has very high margin consumables. Can you talk about, what we should anticipate given the fact that we you had so robust Easyone placements in the quarter?

Yes, you're right, the Easyone is a little bit over $20,000 system, it's a low throughput automation platform and uses simple cartridges that can be put into the system so it's basically usable without any lab skill at all. It has protocols punched into a credit card, or programmed on a credit card that you stick into the system. The consumables are therefore a lot more expensive than the consumable you use for a manual procedure. They can easily be twice as expensive. So while the gross margins for these consumables are not quite as high as we have on the manual system, the dollar amount that we achieve is actually higher. However, if you at this and you assume we are selling a few hundred of these Easyones a year and they are running a certain throughput of, let's say, 5 to 10 cartridges per day, it would take a long time for it to materially impact the gross margin line. For us, these systems are a way to solidify customers and to bring them actually into molecular biology. If you look where these products are placed, they are often placed in environments that are not necessarily doing molecular biology on a routine basis, a very important area. For instance, forensics -- if look at the recent "CSI" movies, you will actually see an Easyone running in the back and that is a typical environment where people are using these platforms, and are willing to pay a premium price because of the ease of use. It won't necessarily have a huge dollar and percent impact on the gross margin.

Given that you brought up the forensics, there has been an initiative in the US where the government has put about a billion dollars on the table for the past 5 years to clear the DNA backlog and they are allocating an awful lot to forensic laboratories to clear that backlog. Have you seen an acceleration in demand into that market and do you anticipate seeing an acceleration for the remainder of the year and into next as though labs start to spend the new allocation from the federal government here?

Yes, you are correct, there is a boost of funding into forensics-it is still a small market we have an extremely strong position in forensics and we are basically the up front sample handling for any downstream forensic case that you hear and read about in the press. And, certainly, we are also looking forward to this funding being released and effectively go into higher numbers. But the forensics market is luckily not too big if you look at the criminals that are out there that have to be tested-we are talking about a few million samples or maybe 10's of millions of samples over the long period of time. If you assume a price per sample - maybe $2 to $3 it is something also for a period of time which is meaningful to us, we have focused sales marketing efforts in this area and have specialized sales people as well. But it is not necessarily something that will give us a substantial revenue increase. So, interesting, a very important part of our business. Are we in there? Absolutely. Are we working on it? Absolutely. Could it give us a few percent more growth in the next few years? Absolutely.

You mentioned that the gross margin is not as high on the cartridges as they are on the Easyone on the traditional reagents. As the number of system placements increase for Easyone, are you able to capture or cover more of the fixed costs associated with manufacturing these cartridges and be able to bring up the gross margins for those re-agents to similar levels to your existing traditional products?

Absolutely, if you look at the cartridges that we saw through Easyone, they are very complex products because of the high value added and ease of use component in it. And it's really a volume business. We are very happy with that product line and we will be able to significantly reduce the cost of sales as units go up, absolutely.

Can you tell us, Roland, what you were anticipating for the fourth quarter for Operon sales so that we can project and predict what you're year to year grow is going to look like?

You said Operen sales are-

Correct - what the Operon sales were in the fourth quarter of of 2003.

I think as we stated (inaudible) last time in the presentation, just-

Total net sales, including synthetic DNA business, have been $85m.

Right, 85-- $85m and therefore 85% consumables and 11% instruments.

[Peter Wellford], Merrill Lynch.

Firstly, on the R&D spend, I noticed that you said that the holidays in Europe resulted in lower R&D spend. But just wondered if you could you comment on the fact, I mean, staff numbers looked to be up 3% year on year in R&D, in fact it seems to be the only area that you seem to be recruiting, and in addition, and sure with the holidays, you still pay things like expenses, salaries, etc. So could you just explain what's going to happen to R&D, perhaps going into the 4th quarter and going on from that? Where you see R&D going?

Yes, certainly we are paying our people during vacation time, but of course one big difference is the number of materials and the amount we are spending for that material which is a significant amount, is of course is down mainly during the month of August and that is one of the major impacts we are seeing here. And therefore, I probably expect for the 4rh quarter, a slight increase probably going back close to 9% of revenues.

Just on the cash flow from operations, it looks as if in the 3rd quarter this was negative, and I haven't got a full cash flow, so I'm making a bit of a guess. But could you just possibly talk about why that was negative and how that will change going into the 4th quarter as well?

Actually, it was not negative, but one impact we had in the 4th quarter was we paid our taxes in Germany and the US which was a larger amount and this had an impact on the 3rd quarter cash flow. And of course it was a (inaudible) a quarters before and accidentally, this quarter has stayed together in all major subsidiaries that had to pay during the third quarter, so the tax payments were pretty high during this quarter. And therefore we will see probably a big turnaround also in the 4th quarter, but of course it was still a very positive cash flow.

Richard Parks, ING.

I think you talked about some unusual buying trends in the SRNA in consumables in the 3rd quarter of last year, which makes the comparisons of consumables sales difficult. Could you just elaborate on that and also could you confirm that Japanese growth, constant currency, you said that was flat or slightly positive, is that correct?

Yes, thanks for the questions. I will start with the second one. We were slightly negative to flat in Q2 in Japan and now we are slightly positive or flat in Q3. There is an increase of a few percentage points upwards--and especially the trends we are seeing in Japan make us think that this is actually something that people are getting a little more accustomed to now in Japan and gives us hope for 2005 actually to be quite positive. We should recall that Japan was growing in the high teens to the low 20's in the 1st quarter of this year. So it would be quite unusual for this to suddenly just disappear in the long term because of the administrative change.

In terms of the prior numbers, yes, we had some large bulk deals that we signed in 2003 in the SRNA area and those tipped the percentage points a little bit so the constant currency percentage growth for consumables in Q3, which includes SRNA's were about 10% --we had 12% in Q2. If you look at all the rounding and take into account this one effect, you will actually see that the growth rates are pretty comparable. We are clearly focusing also significantly in 2004 on the automation side because we think we have a tremendous competitive advantage there, so looking at the way these instruments are placed. Again, I do not know of company at this size in the automation space growing at these growth rates. And the way we are moving our automation systems into the market reflects also the focus we had on these products this year which had for our sales people the model from manual to automation, so this just reflects some of these efforts that we have been doing and we're quite hopeful that this now balances out the consumables through put on these instruments kicks in.

[Markus Metzger] of [Bank Vontobel].

I'd like to come back to the nice uptick in sales growth in Europe, in local currencies. Do you actually see this as a steady process, as a trend, which we expect to accelerate going forward? And if yes, and what are the reasons the R&D budgets in the pharmaceutical industry shifting back to preclinical and yes, can you give us a bit more color on this issue, please?

In Europe our sales mix is a little bit different than it is in the US. The difficulty that we or the softness that was seen by a lot of companies including ourselves in the 2nd quarter this year was mainly coming from Germany-which went through some funding process and funding allocation changes that hit the industry in the short term. Germany is mostly purchasing through academic laboratories and so any hit to public funding in Germany would hit QIAGEN as well. There were some fluctuations or some softness in the 1st half of the year in Germany mainly and we think that the outlook for 2005 is actually quite positive for many of those who are in Germany will see that a lot of tax discussions are going on that will actually fund research and in quite a significant way if you look at the numbers and in the EU level discussions of reaching 3% of GNP for R&D spending could actually mean enormous increases over the next few years in R&D spending growth. So, we are still quite cautious at this time. We do not think that Germany will go into the high teens growth next year, but we think that the worst is over and that the environment is definitely starting to improve.

Some countries are doing very nicely. We have above 20% growth rates in quite a few countries in Europe and some of the larger ones are actually feeling quite comfortable and on an overall mix there is not really any major trend that is really impacting anybody I think in the business at the moment.

William Baker, [Garp Research].

Yes, I was wondering if you ca you give some color on the molecular diagnostics growth? I get the impression that the growth is really generated by the infectious disease side and if you could confirm that and tell me a little about the penetration on that side that might be the driver, or if I am wrong, please let me know if there is some enormous uptake in cancer or something like that that is even more cutting edge?

You are absolutely right. Infectious diseases are still a huge part of the business. It is both qualitative and quantitative. On the quantitative asseys have been around for quite some time to measure viral load levels for HIV or Hepatitis C patients, this is a significant market. However, but the growth is on the qualitative tests on the infectious disease side-that is where we are seeing quite interesting growth. Growth rates in this area are in the medium to long term, almost (inaudible) by all participants projected to be from between 20% and 30% and we are talking a 6 to 7 year (CAGR). This projection comes from most of these diagnostic companies that sell the analyzers. We see comparable high growth rates in the infectious testing and that is actually why we launched the first automated solution package, a viral nucleic acid purification system that feeds exactly these infectious disease downstream assays.

We are, however, also starting to see a lot of growth in the areas of cancer. HPV is like a crossover between infectious disease testing but is a cancer target - it has clearly shown some quite nice growth rates even though some of the larger players have been delaying their product introductions due to regulatory and other reasons. But it is certainly a high growth market and we see growth in other markers that have been developed for cancer that are now running on a routine basis for different indications such as colon cancer or others. Cystic Fibrosis identification, for instance, a big market, HLA testing, also a few million test every year--so there are different pockets, but the fast pockets of growth are in disease testing viruses and bacteria.

Maybe some more on the qualitative tests- what is new and different and the penetration of that?

Well, right now, we think the industry has gone through-I think the best way to understand this is to take maybe 5 steps back and look at the industry and see what is happening. If you look at the 70's, the amino assay, diagnostic industry, started developing tests and they were asking what can we test for? In the 80's, Abbott mainly took the lead and started deducing highly automated platforms. And in the 90's, we finally had efficient tests.

In the 90's, molecular testing started asking "What can we do? And in this decade, people are asking "how can we automate it?"-and we are starting to see the first tests coming to market that are using this first wave of analyzers and preparation systems--and we think that the big break-through will finally be when we have the efficient platforms which will be a few years out and the intermediary phase will be explosive growth but not in the billions of dollars or assays--it will clearly ramp up more slowly in lower numbers before then the efficient systems kick in. But still, the growth rates in the diagnostics industry that everybody will be seeing over the next few years are in the very high 20's. It is a very exciting, expanding business that is just starting to take off. We see in terms of qualitative tests, just a number of-- most of the people are focusing on the key culprits such as HIV, HPV, HCV and similar and also bacterial tests. What we are also starting to see is dissemination into areas where you would look at other bacterial contaminations and viral contaminations that might have a lower throughput use. That's why one of the main trends that people is seeing right now is the dissemination of these systems into smaller environments. It's not anymore everything done in the core labs, but we are seeing a trickle out into the hospitals.

Nick Turner, [Geoffrey International].

I see that there is some suggestion that NIH budget may not be disbursed, the budget of 2005 which was due in October, may not get disbursed until January or perhaps even beyond. When this has happened in the past, it has had a significant impact on QIAGEN revenue growth in the subsequent quarters, and I just wondered if you were to-if we were to see a situation where we don't get disbursements of the budgets until shortly after the elections--what do you think, if anything, this might impact would this have on your Q4 revenues figures, both in consumables and instruments, and maybe the growth going forward into the first half of next year, if you could comment on that?

The situation with the NIH (inaudible) what we have seen in the past, for Q4, we do not expect any influence because they're still reviewing the 2004 budget, but for 2005 budget what we normally do is (inaudible) 80% of the proposed budget and I think over the next couple of weeks the indications we are getting from our people- and you know, we have, also, of course, we have the highest interest in getting the newest information, and of course every day people are going in and out to the NIH, people leave and this information, we're having, dealing with it at the moment, that we are expected a budget that at least after a time and meaning, more or less, after the election is done.

It's something that has been discussed, Nick, every year, and there's always some delay until the Senate gets around to approving everything and all formatlities being completed. We actually got-the budget was approved last year in Jan or early Feb so I think that it is something that most of the NIH scientists have become very accustomed to. It was an impact a few years ago where it happened for the first time, after the Vietnam War, I think it was, scientists were extremely uncomfortable with the situation but now they have learned to deal with it. It is not a big thing anymore.

But certainly, within the last 2 or 3 years, there was certainly a delay in budgetary release that was used by QIAGEN to explain the quite dramatic slowing of the consumable instruments sales in the US. I think it was a couple of years ago-

It was 2001.

2001, was it? So clearly this could have a significant impact if there is a substantial delay, perhaps through into next year, but you don't foresee that?

No, excuse me, it was 2002 and it was because some of these tax issues and other things-there were significant delays. No, I think that we have seen that most of the scientists have become quite accustomed to these delays and they've happened almost every year after that. It should not have as much of a significant impact as it had in prior years. We should not forget that the NIH budget is not necessarily a big growth driver. And the growth we are seeing in the US is coming mostly from pharma and biotech and diagnostic industries that are not really exposed to the NIH budgets.

[Marcus Wideprecht], Main First Bank.

I have two currency related questions, please. The first is maybe the easier one. What are your underlying currency exchange rate assumptions, U.S. dollar/Euro, to come up with your top line assumptions for 2005? And the second question, where you actually see your natural hedge you mentioned and if I look at the split of your cost base, which is, I guess, still is in the majority of the euro area and maybe 26-27% in the US dollar area and it is more or less vice versa on the revenue base. Where do you see the natural hedge and how should we see this develop in the future?

Starting with the first question, I think for the budget 2005, when we are giving guidance for the 2005 currencies and when we are giving guidance for the 2005 numbers, but we are not only dealing with actual (words).

But-and the second part of your question, actually what you should have in mind is that we have of course have a large part of inter-company transactions and we actually are increasing production in the US going forward and so actually the cost splitting (inaudible) is a major part of our sales and marketing activities in the meanwhile, also in the US. So therefore, we are actually on quite good terms between costs and revenues in the US. You are right, we have a slow (inaudible) on the cost side with the euro. However, if you are willing to go back to the last couple of quarter's which actually high volatility in a currency, on a constant currency, as we report it every quarter, we don't have any issue on our operating income as well as our net income line.

It has to do with the price or cost of some of the infrastructure that we have in the US versus the costs and infrastructure we have in Europe. So while we do have a lot of manufacturing personnel also in Europe, the larger sales marketing component moves that cost base a little bit more also into the United States. We do have a gap, but it's only a few percentage points, and evidenced by the numbers we've shown in the previous.

[Karen Rose Bremner, Shaker Investments].

I was wondering if you could you remind us of the instrument guidance that you had, you said that you were about 70% there, but I was wondering what that guidance was for the year?

OK, we guided for the growth rate and if you look at the numbers, it would amount to a number of around $40m. And we are a little bit over two thirds already there, so there is an automation company that would be actually a great position to go into Q4. We feel quite confident that the guidance that we gave early in the year would be achievable. There are some significant prior year impacts that always change the growth exchange rates around, but we look at the absolute over a year over year number.

Your DSO's seem to have picked up a little bit this quarter, at least sequentially, and I was just wondering if you could comment on where you expect that to go, going forward?

Yeah, we believe that there is not a change on the long term trend which was quite successful over the last couple of quarters and you are absolutely right, it went up slightly from 61 to 65 which is still in line with our previous numbers and it's mainly due to the edge where we are seeing a pick up in revenues late September, so that I don't think it is something which will change-which is definitely going down---into the low 60's.

Charles Westin, Morgan Stanley.

Could you give us an idea of the expected ramp up in revenues from the MDxDSP and consumables, please?

It's not really a product where we would-- because of the competitive nature, the confidentiality of this kind of information-we would not really want to put that out too broadly. This is an instrument that is addressing medium to high input laboratories in infectious disease testing and that if you look at the number of labs that you have out there-there would be a potential market opportunity of a few hundred - maybe up to 1,000 placements. This is clearly something that would have to be installed over time, so we are looking forward to seeing sales certainly less than 100 of these types of systems, per year, probably, as people are moving into this regulated use of nucleic acid testing. But clearly the uptake could be a lot faster on these types of systems. It's an approximately a $120,000 system so clearly compared to some of the other automation platforms that we sell which are as low as $20,000 or as low as $15,000, even, are typically in the range of between $35,000 to $50,000 and clearly has a premium capability to it for a diagnostic environment, it's actually a very attractive price. And we really have to see how the uptake is on it. The market opportunity, in theory, could be very significant but we want to see how it moves into the market and I really would not want to guide on any numbers yet until we have more information on this.

There are no further questions at this time.

Ok, since there are no further questions at this time, I would like to close the conference call and thank you all for participating. We hope to welcome you again in our Q4 2004 earnings conference call on Monday, February 14, 2005. If you have any additional questions, please do not hesitate to contact us. Again, thank you very much and have a nice day.