Qiagen NV (QGEN) 2005 Q1 法說會逐字稿

Good morning and welcome to the QIAGEN first quarter 2005 results conference call. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Miss Solveigh Mahler. Ma'am, you may begin.

Thank you [Generro]. Good morning and hello everybody. Thank you very much for joining QIAGEN's first quarter 2005 earnings conference call.

QIAGEN has experienced a solid first quarter 2005, with revenues being in line with its projections and operating income, and net income being on the high end of the Company's expectations.

I am Dr. Solveigh Mahler, Director of Investor Relations at QIAGEN. With me on the call are QIAGEN's CEO, Peer 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 homepage 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.

Yes, thank you Solveigh. Good morning and thanks for joining our first quarter conference call.

It was a very good quarter for us, a quarter of solid financial performance. We came in in line with our revenue targets, at the high end of our profitability target. But much more importantly, it was an enormously important strategic quarter. It was the first quarter where we are now executing on the strategic plan that we signed off towards the end of 2004. And you already saw the first developments in that area.

It was a quarter where we had two fantastic new product launch dates, one in mid-January and one in mid-April. Innovation coming out of the programs that we put in place last year; we have about 130 R&D programs running and the majority were realigned over the course of 2004. This has shown tremendous success in this first quarter, doing very well.

We are also moving on our external programs and licensing and acquisition pipelines are full. You saw the first few developments now in this first quarter. It's going to be an exciting year for 2005, we believe, in this area as well.

With standardization, we are moving heavily into the regulated market. It's a major effort here at QIAGEN. We'll talk about that in a minute.

A very strong position. We have $245m in cash and marketable securities in the bank. A strong and very strongly growing cash flow, about 43% year-over-year growth there. And therefore, a very strong position to execute on our plans going forward.

So it was a good start into a strong 2005. We are reiterating our positive outlook for the year. And as Roland will describe later, we are also going to reiterate our guidance, which is obviously targeting the $414 to $422m of sales in 2005. We think we are very well on our way to reach those targets. We are executing, expanding and setting standards.

On the next slide, you see that in terms of the geographic mix, not really much has changed. But there are always developments in various regions that are important. Interesting here in the regions, I will start on the right-hand side, was Japan.

Japan, we're actually doing quite well. The year-over-year comparison was really one that had a major impact on the overall financials. We grew in Japan last year at over 30% and this year at 5%. So you clearly see there's a significant [inaudible] on the comp, which is also reducing the overall growth rate a little bit. The growth in Japan changed in the second quarter of 2004, so we should be going into easier comps going forward.

Also, very nice development here was Europe. Europe and North America, by the way, both of them doing very nicely in terms of performance. Japan as well. So very well within our plans.

Europe was exceptional in terms of the growth rate. As we recall, 2004 was a more difficult year in Europe and we are clearly on a very good growth path. The programs that we have put in place there are working very well.

In terms of the product mix, Consumables were on an 11% organic growth [inaudible], so fully in line with our full-year projections there. Especially exciting, a strong new series of product introductions, much more bundled, much more focused product introductions than we have been doing in the past. And we are certainly going to see effects of that going forward.

So we are very well on track to reach the growth targets for the fiscal year 2005, which are by the way very significant. Our growth targets that we have and that we're looking for are clearly evidencing a very strong organic engine that we have here and an innovation stream that we have been able to put in place.

In terms of Instruments, interesting information there. While we showed 7% year-over-year growth on the overall BioRobot product line, actually the number continues to show some delayed OEM sales, meaning that the products that QIAGEN sells, the so-called BioRobot, actually grew by 41%. So we are growing very, very nicely in this area. And this is clearly showing how important it is for our customers to leverage the combination of our Consumables and our Instruments.

In the other section, we had one fulfillment of a large gene therapy related sale. These are, in some cases, seven digit figures. That was delayed. These are typically lower-margin products. So overall, we're very pleased, especially with the performance of our field sales force with our products moving into the field. We are doing very nicely and have executed well on our plans and within our targets, or exceeded them.

In terms of the customer areas, academic customers, approximately 45% of revenues. No real change there. Solid in most countries. Nice developments in Europe in some countries. NIH continues to be a little bit -- or continued to be slow in the first quarter. There were obviously some delays there. And a tough 2004 comp in Japan, I just talked about.

Important, as always, in the academic sector, holidays. Easter was this year in the first quarter. We had a very early Easter. And in 2004 it was in the second quarter. So we had slightly fewer working days in 2005 than in 2004.

Pharma/Biotech. I will talk a little bit about what I think is an enormously important development for QIAGEN, which are the new FDA guidelines on pharmacogenomics. I will talk about that in a minute.

We are clearly executing on our increased selling focus in clinical research. QIAGEN is showing very nice growth and opportunities in the pharma and biotech space. We are strategic partners to almost every large pharma company out there and are very well also integrated into their development going forward.

In applied testing, an area which is somewhere between all of these sectors, but highly interesting in terms of growth. We are showing some very nice activities in biodefense and forensics and veterinary, food. Substantially expanding market shares in these sections. And we have won key customers in the first quarter [2001] and are going to see a lot more of that going forward. A lot of initiatives coming from a sales focus that we put on this in 2005. That will become more visible over the course of the year.

Diagnostics continues to perform very nicely, at about 20% of sales. The outlook is very strong. We had a slightly softer Q1, due to product phasing. But we are very well on track for the full-year outlook.

We built a new sales team and this was a tremendous effort where we actually created a totally new sales team, partially with QIAGEN sales representatives, but also put in new people into that team. And they are now fully up and running for the second quarter. So this is going to be a great development, I guess, for mostly the second half of the year.

Clearly the area of note -- of focus and a few alliances were created. And I'll talk about that in a minute. But first I would like to talk about Pharmacogenomics.

Now this has been talked about quite a bit. But what it really means is that the pharma companies are now suddenly able to do a lot more molecular analysis than they have been doing in the past, and actually submit that data without necessarily carrying too much risk.

What QIAGEN is offering in this area, and this is something that our sales force is totally geared towards at the moment, is showing the utility of our products in this area. So we are not a generic reagent supplier, but we create tremendously streamlined solutions that increase utility at patients by standardizing collections of samples, standardizing the whole pre-analytical process that they are using wherever they are in the world, whatever laboratory they're working in and whatever target molecule they're working in. And increasing the portfolio of regulatory products at the same time. So we are allowing our customers to avoid lengthy validations that typically cost a lot of time and money.

So it's a heavy focus, both on development and the sales side. The new guidelines that came out in the first quarter by the FDA are clearly showing that QIAGEN is exactly at the right spot with the right strategy and helping our customers in this area.

We are today in over 100 clinical trials for diagnostic products and over 50 clinical trials with PreAnalytiX products on top of that. But we are in many, many more clinical trials in the meantime for therapeutics, where we are helping pharma companies monitor patient progression and profiles like toxicology and others.

We are heavily active also in regulatory and lobbying initiatives, and we will see a lot more of that also going forward. So we are fuelling this whole development. We are a key player in Pharmacogenomics to actually set some of the standards that are today being used in those areas.

Another development I wanted to briefly touch on is an acquisition we did yesterday or announced yesterday - the acquisition of RNAture. RNAture was a company owned by Hitachi Chemical. And what they had created was an extremely smart coding technology where you can create capture surfaces, plastics, with various target molecules that capture specific sequences, and create on the same surface not only the isolation but also a CDNA synthesis or PCR and/or PCR reaction as well.

So it's an interesting -- very interesting product for high-throughput applications. It's really just the start of a few activities in this area. And a very nice high-throughput format already available out there in the market, which is used in Gene Silencing and Pharmacogenomics and drug discovery.

High-throughput gene expression products currently are very well established in this area. And we are going to take this into our product portfolio and grow it from there. It's a small product at the moment, but we think we can make a lot more out of this, using our focus and using our sales channels.

A further deal we announced yesterday was a deal with a company called Epigenomics. Epigenomics is one of the leaders in the area of methylation testing. It has a very strong portfolio, technology portfolio, in this space. And also a very strong sweep of partners, including Roche in the Diagnostics segment.

What Epigenomics is focusing on is methylation testing. Methylation is -- you compare that to being the fifth base on DNA. It's a further angle of information that you can extract from DNA. And it's becoming information content of tremendous importance, as there has been a lot of development and innovation in this area. And also science has mostly been focusing on oncology, but increasingly also on broader therapeutic and diagnostic targets.

Methylation, as attractive as the information content is, one of the problems was that methylation analysis needed very -- or needs very complex and cumbersome pre-analytical steps, that the target of so-called bisulfate modification of the DNA, very cumbersome. It's currently not really standardized. There's no very streamlined solution for it. And clearly, as the pre-analytical leader, QIAGEN is going to now put something into the market, which we think will make this whole area a lot easier to work in.

And on top of that, as part of that deal we acquire the exclusive rights of the bisulfate pre-analytical technology in both research and in diagnostics. In diagnostics we will market it for use with the Epigenomics assays, which are coming into the market soon.

And we also got an exclusive worldwide license for Epigenomics Methylight assays, which are the assay technology, which fits very nicely to our Gene Expression and Gene Silencing portfolio that we also launched in the first quarter of 2005. So you see these are various angles here coming together also in this one alliance.

On top of that, Epigenomics will be using QIAGEN products under OEM agreements for their own diagnostic endeavors, which are highly promising. So clearly also here setting a pre-analytical standard in what we think is a very exciting area of science and diagnostics methylation testing.

In Diagnostics, a lot of activity anyway. A few things we can talk about. A lot of them, unfortunately, as typical always under confidentiality. But we signed what we think is a very promising relationship with Veridex, a J&J subsidiary, which has a very nice sweep of molecular diagnostic products that they are working on and are coming to market with. And QIAGEN products will help them in that and become part of their solution.

We also expanded our Roche relationship and included some new media kits into that. And, as the third bullet shows, also other activities here that we have been working on and closing on.

So today, over 15 partnerships ongoing and a significant number of clinical trials for diagnostic products, using QIAGEN solutions.

With that, I would like to hand over to Roland. Roland?

Thank you Peer. Let me take you through some of the key financial highlights of our first quarter 2005.

As Peer mentioned, QIAGEN experienced a positive first quarter in 2005. Reported revenues and earnings per share were in line with the Company's guidance and our outlook for 2005 is positive and very strong.

The guidance we provided to you on February 15 for Q1 2005 outlined our expectations for revenues in the range of US$95 to $97m, and operating margin between 21 and 23% of revenues and diluted earnings per share of approximately 9 cents per share.

We came into the revenues range with US$95m in net sales during the first quarter, and operating margin range at 23%. Diluted earnings per share was also in the high end with expectations, at 9 cents per share. Some of you noticed it was about 9.4 cents.

On an adjusted basis, excluding acquisition-related charges and expenses, we had earnings per share of 10 cents, with an increase of 25% from Q1 2004, and cash EPS of 14 cents, an increase of 75% year over year.

Let me break these numbers down for you now. We recorded US$95m in net sales this quarter, compared to US$85.7m for the same period in 2004, which would reflect an 11% growth rate. We reported net sales in Q1 2004 of $96.1m, which included our synthetic DNA business unit, which we subsequently sold in Q2 2004. So I am excluding those related sales in 2004 to reach US$85.7m in revenues.

Reported operating income for the first quarter 2005 increased 18% to US$21.4m from US$18.1m in 2004. Excluding relocation and restructuring related charges, as well as amortization of acquisition related intangibles, operating income increased 14% to US$22m from US$19.3m.

Reported net income, including charges, increased 22% to US$13.9m in 2004. However, excluding the aforementioned charges, net income increased 17% to US$14.3m from US$12.2m, and diluted earnings per share increased 25%, 10 cents from 8 cents in the comparable period in 2004.

A word to our revenue distribution. In Q1 2005, our Consumables business, which accounts for approximately 89% of our total revenues, grew by 11%, excluding currencies by 9%. We are still targeting 17% for the financial year 2005 here, and it is still very well on track by having met our numbers for the first quarter with 11% revenue growth.

Consistent with past quarters, we see clear indications that demand from pharmaceutical customers is still improving. A major growth driver for the Consumables business will be also molecular diagnostics, which is still showing increased penetration of existing tests and launches of new tests for infectious diseases and cancer.

Instruments revenues grew 7%. Instrument sales consist of sales of BioRobot instruments sold by QIAGEN, and sales of instruments to third parties, mostly diagnostic companies - so-called OEM sales. We continue to see strong sales of our BioRobot systems, with a growth rate of approximately 41% for the first quarter of 2005. Some of our OEM customers are continuing to delay some shipments.

Our Others segment includes services such as plasma DNA contact production for gene therapy customers. This grew by approximately 1% and represents approximately 2% - only a small portion of our overall revenues as we continue to commit to focus on our core business.

We delivered a solid top line this quarter, but we also increased our operating income by 18%. QIAGEN's adjusted operating margin improved by 14% to 23% of net sales. We are therefore well on track in terms of our operating margin targets. Excluding charges and amortization of acquisition-related IP and based on constant currencies, our operating margin achieved 24% of revenues.

Net income, as reported, improved by 22%. Also 22% with constant currencies, which demonstrates that any advantage or disadvantage in currency fluctuations relative to the U.S. dollar has not had a significant impact on our net income. This is a result of the natural hedge that QIAGEN has with dollar operations in Europe and in the U.S.

Earnings per share on an adjusted basis, with actual and constant currencies, increased by 25% to 10 cents per share.

We continue to demonstrate increasing operating profitability and expect this to continue going forward. This is a very positive direction for the Company as a whole and you can see this clearly on the slide, operating margin improvement that compared to first quarter of 2005 and 2004 on gross margin, operating income margin and net income margin.

In all three, on an adjusted basis, we are demonstrating that our Company is focused and increasing in profitability. And attaining this is our commitment to invest in R&D and keeping the organization lean in sales, marketing and administration expenditure.

We have steadily increased our R&D spending quarter over quarter. We typically allocate approximately 20% of our total operational expenditures to this area because we believe that part of QIAGEN's ongoing success is based on innovations sought internally.

We have a stronger pipeline than ever. Our innovation engine is giving us many high net present value opportunities and we are funding them. At the same time, under the clear strategic plan, we expect to see more M&A and business development in 2005.

We have a very solid cash position with more than US$245m in cash and marketable securities. This strong cash flow position gives us the ability to react quickly to technology opportunities and accretive acquisitions, which we have stated as part of the strategic planning we underwent last year.

On the next slide, just to highlight our operational cash flow of US$20.7m in Q1 2005, versus US$12.4m in Q1 2004. And looking at our free cash flow for the quarter, we see a steady increase from US$9.6m to US$17.8m in this quarter.

One of our key strategies in expanding our positive cash flow position is active management of inventory levels and day sales and account receivables. We see it staying flat in our DSOs in comparison to Q1 2004, but a slight decrease already to the last quarter. So we believe, generally, we are in a positive trend here.

Inventory days continue to decrease, currently down to 160 days, which we believe is a very positive trend and will continue going forward as well.

A glance at our employee numbers will show that overall we have reduced our headcount by 16%, largely reflective of the sale of our synthetic DNA business unit, but also making this organization clearer or leaner while keeping a strong focus on our core competencies and ensuring we drive innovation forward.

I think we can confidently say we have been gathering strategic momentum already in Q1, evidenced by the various announcements of product launches, licenses and collaborations, which firmly places us in the key global market.

QIAGEN showed a very solid quarter, with results in line with guidance. Based on this, we reiterate our guidance for the full year 2005 as follows. We see revenues between US$414 and $422m, operating margin between 24 and 26% of revenues, and earnings per share between 44 and 47 cents EPS.

With this, I hand back to Solveigh.

Thank you very much Roland. We are now looking forward to discussing your questions. I would like to open the Q&A session by handing over to the operator. Genarro?

[OPERATOR INSTRUCTIONS]. Our first question will be coming from Sam Williams from Lehman Brothers. Please pose your question.

Afternoon. I just had a couple of questions. One, can you outline, Peer, just so we've got this clear, in the Consumables, within that business, can you just outline exactly what launches are due to come for the rest of the year?

And then second question was Japan. Obviously was strong in Q1 and so that does make the comp difficult this quarter. Can you give us -- and you may not have this at hand -- to hand, but can you give us what the local currency growth would have been in terms of revenues for Q1 this year had Japan grown at 5% in Q1 '04. So what I'm trying to get is a like-for-like comparison of the local currency growth in Q1 this year.

And then just a last one for Roland, 68% gross margin. Is that sustainable for the rest of this year? Thanks.

Okay. The first question was on the new product introductions. And obviously often -- well, it is very sensitive information because we, as you noticed on the first two launch dates of the year, we came out with complete product lines with a bang.

So we, for instance, in the first quarter or in the January launch, we had the complete suite of protein purification products that came out. The second quarter we had a complete suite of gene expression and siRNA products genome wide, which is really a huge -- a huge portfolio. So there will be more of that in the third and the fourth quarters.

So I would say some of the highlights maybe of the April quarter that I think were noteworthy, we launched some very interesting siRNA-related products, a revolutionary new transfection technology called HiPerFect, which dramatically increases utility.

In this step we launched a CDNA synthesis product which basically allows you just to put on raw samples a reagent. And directly enriches and amplifies the nucleic acid out of a crude lysate. Very interesting product as well.

We also launched a new line of gene expression related pre-analytical products. So that is going to be the tone of this going forward. But typically, if you look at any one of these products, it's not one product. It's a whole suite of products. So we're giving our sales people -- different than we did in the past where we trickled in products, we're giving them complete suite at four launch dates in the year.

The second question regarding Japan. What if Japan would have been 5% last year.

Yes, what's the -- obviously you got hit a bit by the fact that comp in fiscal -- I'm just trying to get what would the growth have been in Q1 this year had the growth rate in Japan been the same. Do you see what I mean?

Well I guess you could run the math. And it's not quite in my head. But just trying to do that approximately, I would assume that we would probably have had at least 2 to 3% more growth on the top line overall if this would have been -- probably in the high end of that if Japan would have been on the same level last year.

It's a significant market for us and the growth was extremely fast last year. It was actually the fastest-growing region.

Roland, the last question was --

Yes, on the gross margin. Hi Sam. Your question was if this 68% of gross margin is sustainable for the rest of the year. And what we see at the moment is that with the launch of the new products, but also the gain in utilization of our current production facilities, we believe that gross margin on the current level is also something what we will see going forward.

And we even believe that with increasing utilization of our production facilities in Germany as well as in the U.S. and Switzerland, we believe that this is something where we can improve as well.

Because I noticed going onto your web -- your commercial website, you seem to be offering quite a lot of discounts. And I just wondered, is that an ongoing part of your business?

I think it's interesting that you note that. This was actually the first quarter 2005 where QIAGEN did not -- did not participate in the industry-typical end-of-the-quarter discounting. We abolished that. And we think it is not reflecting the strength of our technology leadership and also our market leadership.

So actually in the first quarter, also if you look at the -- that also probably contributed somewhat to the margins, but our average discounts are down significantly compared to last year. So what we typically do, some of the discounts are some introductory things. But we don't do broad-base discounting which is very widely seen in this industry.

Okay. Thanks very much.

Thank you. Your next question is coming from Mr. Charles Weston from Morgan Stanley. Sir, please pose your question.

Good afternoon and congratulations on your results. I had two questions. The first of them on the BioRobot sales. I just wanted to ask, is the EZ1 part of the BioRobot range that you've been talking about? And could you give some color on the installed base of BioRobot you have now and the relevant reagent pull-through?

And the second question relates to the tax repatriation dollars that a lot of the big pharma are bringing in. Are you likely to see increasing investment in capital goods and consumables from these tax dollars. And is there any way you can position yourself to take advantage of this sizeable chunk of money?

Yes, the first question was related to EZ1. And yes, EZ1 is part of our BioRobot product line. The product name is BioRobot EZ1. And it is the low-throughput system that we have. And this is a very nice product. It fits very nicely also with the higher-end systems running the same chemistry. We launched a complete suite of new chemistries also for that product line in January. So it is an integral part.

They today have somewhere in the range of 1,600, 1,700 instruments out there. Some of them are already being replaced - some of the older versions. So we are party with some systems on the replacements cycles, the old 9600s and 9604s are gradually being replaced. And we will certainly see a good innovation stream loss on this front going forward.

It's a very nice product. But the nice aspect is that it runs the same chemistry as the higher-throughput versions. And they get everything from one supplier.

The second question was on tax repatriation. That is a little bit inconclusive. You get different answers to that where they will spend their money. But it definitely is positive. And clearly some companies that have been doing research in Europe or in Asia might be showing a slightly lower expenditure in those countries versus the United States. But overall it should have a positive impact.

And I guess a lot of companies are still trying to figure out exactly how they should allocate it. I'm not really sure if it will go significantly into operating expenses. But we have actually seen a higher propensity to CapEx in certain areas.

Thanks very much.

Thank you. Our next question is coming from Mr. Aaron Geist of Robert W Baird. Please pose your question sir.

Good morning everyone. With the 12% growth that you're forecasting for the instrument segment for 2005, is that predicated on the OEM contract coming in at the back half of the year? And what's your comfort there?

Well, we're growing very nicely at the moment with our BioRobot product line. And so our target should be -- we're growing at 41% with the BioRobot line, and outlooks for the year are quite good.

If we look at the OEM business as an overall product or revenue opportunity, it is really pretty -- it's very small. So if you have, let's say, overall BioRobot business of, let's say, $40m, the OEM businesses might be like 10% of that or less. But on a quarter basis it can clearly make a difference.

So we're not talking about huge numbers required to make the end of the year forecast, we're just talking about some movement between quarters of $1m or $1m or $2m that should even out over the course of the year.

Peer, could you spend a couple of minutes talking about where the BioRobots went in the current quarter and where you anticipate most of the instruments going in 2005 in terms of end markets?

We saw -- good question. We saw a very strong growth in the applied testing markets. So biodefense, especially forensics, food, these types of markets. Still very small but growing very nicely.

A lot of areas, also in [plant breeding]. So we launched a complete suite of new products in that area in January. So that is picking up very nicely. So a lot of these applied testing areas contributed to the high growth rates.

We saw continued good growth in the Diagnostic segment. It was a little bit slower in the first quarter on the Instruments side because some key protocols had been coming out late in the quarter.

But the academic market continues to be not a big buyer of instrumentation products. The more they go into clinical research and into pharma-related activities the more you start seeing it.

So clinical research, we think, will be an attractive area for our products going forward. Also fuelled by this new pharmacogenomics guideline from the FDA.

Are you seeing any different growth rates by geography? Can you provide a little bit more color on geographic growth for instrumentation?

Yes, we saw actually quite nice growth on instrumentation in Europe. And also some good growth in Asia. U.S. was good, but the -- we had some exceptional performances in those geographic regions.

Okay. Final question. You talk about M&A and business development in 2005 accelerating. Can you provide a little bit more color on that? And is there a plan to provide cash EPS guidance in the future?

I'm a big believer in U.S. GAAP. And for different reasons there is a depreciation of intangibles. And over time that has to be renewed. So we will continue to place a heavy emphasis on U.S. GAAP figures going forward.

But clearly with the whole industry being very focused on these numbers, it's -- I think it's very important to see on a cash EPS basis, QIAGEN is clearly at a significant discount to peers. And that is therefore just, I guess, a number of additional flavors that we want to put in.

In terms of business development activities, 2004 was really a year of planning. And we went through a tremendous effort in understanding exactly what we want to do on the long-term horizon. This Company's pulled through the long haul. We're not looking at short-term [prophesies]. But this is something that we're starting to execute on right now. And you're staring to see now the first developments in that area.

I guess it's going to be an exciting year. QIAGEN's certainly going to be a different company, a much stronger company a year from now if we execute well this year.

Thank you very much.

Thanks then.

Thank you. Your next question is coming from Mr. Derik De Bruin from UBS. Sir, please pose your question.

Hi. Good morning.

Hi Derik.

Nice quarter. Just a couple of questions. So can you just talk about what's your hearing in terms of the comments now coming out of pharma on the pharmacogenomics area? Has the conversation changed now that the guidelines have been out substantially?

Yes, it's somewhat -- a few years ago pharmacogenomics has been more an academic discussion and was even turned into a bad word, certainly for a certain time period. And now suddenly it is very evident that this is the way to go. So the whole discussion around biomarkers and how to set up the research strategies is absolutely essential to the whole clinical research area at the moment.

And what we're seeing is that there is tremendous experience within the pharma companies that are trying to now incorporate these types of strategies better based on some of these new flexibilities they have that the FDA gave them. And this is going to make significant changes now over the next two or three years, I think.

There are a number of companies that are already heavily involved in it. A lot of them have already been doing stuff in this direction. But they're just starting to do it now in accordance with some of these guidelines. And a lot of companies are now gearing up to do it and will put it in place over the near future.

So it will be a process. It won't be black and white. But we will see a phase over the next few years. And clearly utility, also the public utility of this whole concept has been very widely proven, based on the various developments in 2004 with the [Vioxes] and others. So we think it's here to stay now. And it's going to be an ongoing driver of growth opportunities for us.

It's important for QIAGEN to be in there. And we are heavily active. We have been one of the leaders for a long time in this space. And we are doing everything we can to make sure that it is as easy as possible for our customers to move into this space.

Okay. That's helpful. Looking at the -- what are you expectations for interest income and expense this year?

Our expectation for interest income for the year, of course also depending on the speed we are going to close deals, but assuming going forward I would -- excluding these assumptions, I would take the Q1 level as I don't expect a [two plus] increase on interest levels for the U.S. dollar in the next couple of months.

Okay. And I just -- final question on the R&D. Do you see any acceleration in your R&D spend?

Given the increase, what we have seen also in Q4 and Q1, I think we are now on a level which we have also guided for the full year 2005. So based on revenues, between 10 and 10.5% of total revenues, something where we feel quite comfortable as an investment in our innovation.

Okay. Thank you very much.

Our next question is coming from Miss Erica Whittaker of Merrill Lynch. Please pose your question.

Hi there. I wonder if you could just give the local currency sales growth for the European region you mentioned, and I believe that is clearly ex the DNA [Allegos] business just so that we could compare it with the 9% North American growth in sales please.

Hi Erica.

Hello.

Yes, Europe and Japan on the local currency basis is Japan was actually in the low digit area. And Europe was actually around 10% of growth on a local-currency basis. So Europe was quite strong in the first quarter 2005. So even a little bit above North America.

Okay. Thank you. And also could I just ask you, should we be assuming that the SASB delays will mean that any expenses for stock option compensation will be put through your P&L in early '06 and not from mid '05?

Yes, two comments to this Erica. First of all, our guidance for 2005 excluded stock option expenses. But overall, this is anyway not material for us. We put it in a footnote. The total amounts for us are not much yield so I don't expect big changes between also starting going forward 2006.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. Your next question is coming from Ilan Chaitowitz from Cazenove. Please pose your question.

Hi, this is Ilan Chaitowitz from Cazenove.

Hi there.

Hi there. Just a question on the diagnostics clinical trials. I was wondering first of all have you -- how much of that have you backed into your forecast for this year? Have you forecast much upside in your current guidance or do you have no view on that at all?

And the second question relates to the same thing, is how soon do you think we might get some news flow or feel for how that part of your business is doing?

Yes, definitely good question. We have not really been factoring in major sales from approved products that we are part of going forward. The reason for that is that in diagnostic, a little bit other than a therapeutic doesn't really start with a bang. And you don't go into the tens of millions of dollars of sales within a few days and then shoot up.

But it really is something that moves into the market more gradually, but therefore has a much stickier presence in the market. So the standardization is really the message that we want to show by this, that just how broadly we are accepted as the standard in this whole pre-analytical phase.

We think that the year 2005 will start showing a lot more, let's say, tangible evidence of the market activity in this area. So not only infectious diseases and certain genetic diseases, but you're going to see a lot more new assays coming to the market.

And just evidenced by also the number of tests that you're starting to see now in the various trade shows, rocketing basically at very high growth rates. We are trying to see if we can put together some kind of a tracking system that will give you more clarity in what our presence is.

Right now it's sometimes even that case that the products that we sell are used in concert with a downstream assay. And it's difficult for us to say which assay it exactly is one to one, because the customer buys our product and we know he uses it for these two or three assays but we can't really allocate it to a specific one.

In some cases we have an OEM relationship. In some cases we have a targeted sample perhaps that only works for a specific diagnostic problem. So we're working on that. And we clearly heard the high level of interest in getting more detail on this and we will try to work on it.

Thanks very much.

Thanks.

Thank you. Our next question is coming from Maykin Ho from Goldman Sachs. Please pose your question.

Hi Peer. It's a follow-up to some of the discussion on pharmacogenomics. What are you doing in the area of cancer diagnostics or looking at mutations to responses to some of the newer therapies, for example, EGFR inhibitors?

Absolutely, that's a good question. All of these types of therapeutic strategies are now increasingly using a diagnostic angle to them. And we are seeing that even in middle stages, and in one case we even saw very late stage development starting to very, very aggressively catch up on biomarker work. And make sure that also the predispositions and also potentially maybe even gene expression profiles, metabolic profiles and proteomic profiles of patients are captured and potentially even allow some kind of an optimization or safety net should something go wrong in the trial.

So this is -- I would probably even try to make you a very bold statement that in a couple of years from now you are probably going to have, like at some other companies already today, every single therapeutic clinical trial has a very significant biomarker activity on the side to potentially limit labels at some point in time should it be necessary, but potentially also to increase utility and to reduce toxicity and side effects. So it's currently a trend which is very, very broad.

And if you talk about cancer diagnostics, definitely pre-qualifications of patients, [indiscernible] is really already a very -- a pharmacogenomic drug. In a certain sense there is at least a diagnostic angle to it. So you need a certain cancer profile for the drug to work.

The same is now also true with [Irresa] as being looked at again and biopsies being looked at. Even as they are now being reevaluated under a diagnostic therapeutic regime. So it is definitely very broad.

But, for example, in the case of [Irresa], when the tests are being developed, how do you make sure that more products are part of the approval eventually?

Yes. It's -- this is what our -- what we describe in our [analysis], the mega-trend that we see is standardization. That's one of the three that we defined for us here. Standardization is all about increasing utility at a customer for using the same product that everybody else is used to using.

There's a certain obligation to have a very strong portfolio, continued innovation and a high degree of focus. But once you have a certain degree of standardization it becomes very much a natural.

So our presence in the academic labs, in the clinical research labs, and now extremely important also the diagnostic, the regulatory angle that we can provide to our customers, as really the only company out there, makes this extremely interesting for these types of customers because they say look, it becomes a diagnostic product at some point in time, I don't have to worry about the components that I used in my early stage clinical trials. I've got a regulated product already in use today. And I can seamlessly move into a diagnostic product at some point in time.

That's why the standardization of the tools, even in earlier research stages, is quite interesting to see right now. Even in academic settings, people are trying to standardize their reagents and their approaches and protocols to ensure that it seamlessly can move through the clinical pipeline into maybe even a diagnostic setting.

So that's -- we're not focusing on a specific company or a specific target. We are focusing on creating these broad utilities, and treating every company with highest levels of attention in this area.

Thank you.

Thank you. Ladies and gentlemen, we have time for one more question from Karen Masbremmer from Shaker Investments. Please pose your question ma'am.

Thank you. I was just curious if you could give us a little more color on -- you said NIH was slow. If you could give us ideas what the percentage of your academic revenue is coming from those labs that are being funded via the NIH?

And then perhaps, I'm not sure, maybe I missed this, the growth rate of that diagnostic segment.

Well the NIH is not really a too-big part of our sales. We typically have -- a few different NIH exposures you can have. There's an intramural exposure, meaning that you sell into a facility. That's a single-digit million number. These are the NIH-owned facilities.

Then you have the extramural activity, which is typically three or four times that. And so then you would go to the 20s. And that would be the direct NIH exposure.

Obviously some grants might have an NIH angle to them, so it would be more difficult to fund them if the funding is not yet coming in. But the direct exposure's really quite small. It's probably about 10% of our U.S. sales. So it would be about 5% of our overall sales.

That even includes reaching into so-called tainted areas that have co-funding or matching funding or so.

Okay. Thank you.

Oh, and the diagnostic sales. We expect to grow in the high 20s this year in this phase. We didn't put out -- we don't put out quarterly growth rates with individual segments. But we are very well on track to reach those numbers.

Great. Thanks.

Thanks.

With this, I would like to close the conference call by thanking you all for participating. We hope to welcome you again to our second quarter earnings conference call on Tuesday August 9 2005.

If you have any additional questions or need any further information, please don't hesitate to contact us. We will be more than happy to answer all your questions and provide you with any information you might need.

Again, thank you very much and have a nice day. Bye.

Thank you ladies and gentlemen. That does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.