Qiagen NV (QGEN) 2005 Q4 法說會逐字稿

(technical difficulty) -- CEO Peer Schatz and 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 Relatins section of our homepage at www.QIAGEN.com. During the call we will be making forward-looking statements. Such forward-looking statements are subject to risks and uncertainties. For a description of such risks and uncertainties, please refer to discussions and reports that QIAGEN has filed with the U.S. Securities and Exchange Commission.

Please note that there was a small calculation error in one line item of the consolidated statement of income attached to our press release yesterday announcing our financial results for our fourth-quarter 2005. The item "Total Other Income" was shown as $555,000 U.S. when it should have been 547,000 because of there was some (inaudible) minus $4000 U.S. not plus $4000 U.S. Total amount for income before provisions for income taxes and net income were correct as reported. We want to call this calculation error to everyone's attention to avoid confusion, and of course, our financial statements including in our Form 20-F will have the correct figure.

Now I would like to hand over to Peer Schatz.

Thanks and thank you to everybody who is joining in the conference call, and we welcome everybody who is here at our 2006 analyst day.

I would like to start out this presentation looking back at 2005 and how we did compared to the targets that we put out. In terms of the financial targets, we achieved $409 million in sales based on our foreign exchange rates that we gave at the time of the guidance. That compares to 405 to 407 million in net sales as we guided for November 8, 2005, so we exceeded that guidance in this fourth quarter. And compared to the guidance that we put out early February 2005, adjusted for acquisition divestitures and OEM sales, we came out that it would have had a comparable of 408 to $420 million also achieved that revenue target range for the full year 2005 in terms of net sales.

In terms of earnings per share, we achieved about $0.45 EPS compared to a guidance range here that we put out early February 2005. So about a year ago this -- a range of $0.44 to $0.47, so we came in well within that range of earnings per share. In terms of operating margin, we would guide for 24 to 26% in operating margin. We came in on the high end of 26% operating margin. So well on track in terms of our financial targets.

In terms of the strategic targets, it was really a very exciting year. We increased our market and technology leadership. In terms of market leadership, very clear we added a significant amount of sales both against competition and also against homebrew. We increased our technology leadership. There was a huge expansion in the IP portfolio, a very large expansion in terms of internally developed technologies and a lot of end licensing activity in 2005. We heard a little bit about that in (inaudible) presentation earlier today.

Very important and very exciting for everybody here at QIAGEN, we rapidly grew our molecular diagnostic business. We are today the number four company in the molecular diagnostic space. This is quite a dramatic number. This is a rapidly growing multibillion dollar market that is just starting to really show its true size and grow into quite some significant long-term growth rates. We are a major player in that space with great momentum.

We also have said that we want to show our innovation success on our rate of new product sales in relation to our overall revenues was a record 4%. This is a dramatic increase compared to previous years. It's also a huge increase -- a huge difference compared to the average of about 1% of sales that you would see at a typical company in our industry. So almost 4% of sales having come from product that we introduced in 2005.

We are executing on our strategy. We delivered a lot of our internal targets. The execution of this strategy is going very well. We also said we want to build more directed channels. We built a diagnostic sales channel or a significantly expanded that. This is going to continue. We heard about other market segments in earlier presentations today.

In terms of the product distribution, 88% of our sales come from consumables. We have a lot of success in new product introduction primarily in this area in 2005. There are a lot of new product lines that we expect to see in 2006. We have been focusing the Company; that is why the other product line has decreased. There were some services and nonrelated noncore businesses that we phased out, and it is now 2% of our sales. Instruments did very well in terms of QIAGEN branded instruments. We expect also good growth in 2006 in this area. Because there are OEM instruments that we sell to other parties in that 10% slice as well that did not do well in 2005, this number is -- the growth number is low, but the QIAGEN brand of instruments are clearly driving the growth in 2006.

In terms of the geographic revenue distribution, we generated about 9% of sales in Asia, especially Japan showed an improving outlook in the fourth quarter of 2005 with 4% growth, which for those of you who have been following that market segment over the last few quarters, it's a very significant improvement. Europe showed very nice growth, 18% growth in Europe. We saw a significant pickup in Europe in the fourth quarter. Especially Germany has been very positive for us, and North America with 46% of sales was about 6% growth. A lot of instrument OEM customers are in the United States. There was, however, a very strong finish for the year in North America as well.

If we look at the market segmentation by customers, about 40% of our sales come from academia -- universities and public research institutions. Europe was very strong, especially Germany as we said before. U.S. had a strong finish. What we think is going to be important going forward is the EU directive to focus on increasing R&D expenditures as a percentage of GDP up to possibly 3%. This is clearly something that is being talked about a lot, but we see a lot of action being put in place in some countries, and we are quite confident that we will see some tangible results from that going forward.

Japan is improving as I said; had a weak year 2005 but improving. Pharma biotech about 25% of our revenues. We saw stronger sales in the U.S., a little bit softer in Europe. QIAGEN is really very well positioned in that market. We have talked about Pharmacogenomics before. We talked about the targeted development processes Pharma companies are looking at right now, looking a lot more at molecular information. We have focused and created a very dedicated pharmaceutical key account management effort both in marketing and also in sales force terms and are looking forward to some very good developments in that sector.

Applied testing, we talked about a lot. This is a very segmented area. A lot of different subsegments in applied testing. We saw strong growth rates. We have created sales and marketing channels in this space, targeted development efforts, and our initiatives are making an impact, and we are expecting good growth in this. It is a very rapidly growing market segment also in 2006.

And in diagnostics clearly a very substantial position in the meantime for QIAGEN about 25% of revenues overall. So, as you have been following these numbers, it has actually been increasing now quite substantially. Recently we are building a substantial presence, and we are today one of the largest molecular diagnostic companies worldwide, possibly at number four position overall in this molecular diagnostics market, which is growing rapidly and just starting to change the way diagnostics are being done.

So we are focusing on key areas of growth, and we are doing -- we are focusing that -- we are doing that by focusing on areas in a very conscious, why not in an opportunistic way, but using our resources and trying to use them wisely to address what we believe are the most successful or the most promising areas for QIAGEN.

To summarize, what we have done in 2005 and what we expect in 2006 is use the segmentation around preanalytical solutions on one side, which is about 70% of our sales is our collecting, stabilizing, purifying nucleic acids in various markets. Then the molecular diagnostics industry and the applied testing industry as the three segments that I wanted to look at in detail. And in each of those segments, we have three strategic options as we discussed a little bit more in detail before, we can develop, partner or acquire. And looking at 2005 to take preanalytical solutions first, our mission -- absolute leadership in this space. We developed, and we are very successful there, a record of 4% of sales coming from new products. It is a very big increase compared to previous years, and what makes us even more proud is that the pipeline for 2006 is very promising and especially all for 2007.

So we are doing very nicely in terms of developing our capabilities in this area and also developing products and future revenues.

In terms of partnering, we added about 15 new R&D alliances in this space with academic and industrial institutions. We want to enhance that going forward. We often talked about reaching out much more to customers doing co-development with academic partners with industrial partners. This is something that we are trying to set up the right infrastructures for expanding the infrastructures we have in place for.

In terms of acquisitions, we see acquisitions as a catalytic event to amplify our organic growth rate. QIAGEN had an organic growth rate of 9% in 2005, which is almost two times the industry average. Previously we were growing almost at a 50% premium, maybe a little bit more to the average industry participant. Now we are growing at about twice the industry average in terms of organic growth rate. Acquisitions are, however, a more important part of our growth strategy going forward than they were in the past, and this was also shown in 2005.

In preanalytical solutions, we did 60 [oath] alone. Overall we did eight deals in 2005. In 2005 six of them were in preanalytical solutions. We had a very good deal execution. I will detail that a little bit later. We want to continue that going forward and aggressively expand our absolute leadership position in the area of preanalytical solutions.

In molecular diagnostics, the second segment in terms of developing we added over 30 new products in this space, including 510-K and a lot of CE Mark products. We have a very substantial regulatory track record in the meantime. Have a clear intent to build out our asset portfolio as we talked about before in 2006. We have a three digit -- our asset portfolio now includes about 150 assays both from ARTUS and from PG, and we won't take (indiscernible) that significantly going forward.

In terms of partnering, we have about 15 R&D alliances in this space that are very active and about four were announced in 2005. We want to add more in this space, and there's a lot of interest as the complexity of prehree analytical solutions and assays are seen to be so critical for a lot of molecular diagnostic participants. This is exactly what we can give to them, and we are expecting more partnerships also in 2006. More and more also along the assay side of the value chain or including the assay side.

In terms of acquisitions, we did two very key deals. I can't overemphasize how important they were. The ARTUS acquisition gave us a phenomenal team. It gave us a huge IP portfolio that we can use together with the team that has come on board at QIAGEN and have already shown very good success in the second half of 2005 and expect a lot going forward. So there is a lot that we will also see in 2006 in this area. We are not stopping here. We have a substantial revenue component in molecular diagnostics, and we want to build it out. We want to build it out in areas that we can serve, and we expect more in this space.

In terms of applied testing, again a segmented market, we developed a lot. Forensics was a focused area in terms of development in 2005, has a broad portfolio in forensics. Also, avian flu. We are today probably the largest supplier of tools for avian flu surveillance worldwide. We have a broad portfolio of tests that are in many countries -- the only regulated tests that are used. We have a broad set of tools that are used in key protocols in this space, but often other pathogens and genetic testing areas like veterinary testing or food testing, we have a great position. We want to build that in 2006 more aggressively.

In terms of partnering, we have not been doing anything big in 2005 in this space. A number of smaller partnerships. We want to do more in 2006. We are very open to alliances and partnerships in 2006 in the area of applied testing. The acquisitions we did in molecular diagnostics also gave us veterinary and other applied testing capabilities. So they were also seen as an applied testing acquisition, and we expect that to continue also as a catalytic tool to expand our position in applied testing.

2006 was a very important year in acquisitions, and we have built great capabilities in the area of M&A. We have a great team that is focused on bringing in technology. That is the goal. It is headed by Dr. [Willy Shriek] who is actually sitting over there. He has a team of people who work in licensing and also in acquisitions. Acquisitions are for us not a goal by itself, but they are again -- they are catalytic. We look at these types of opportunities in addition and as an amplification to our internal capabilities.

If we look at this chart, at the acquisitions we did in 2006, just the number might look like it is a diverse universe. But if we run down the names, our nature -- a small acquisition was a sample preparation company. [Chinwuy], a sample preparation company. [Nextile], a sample preparation company. [Sunex], a sample preparation company. [Lumicide], a sample preparation company. Eppendorf 5-Prime, a sample preparation company. So if we summarize that and that was a little bit repetitive deliberately, a very focused acquisition strategy.

If we look at the two other acquisitions, they gave us core competencies, and interestingly enough all these deals were accretive within a short period of time, and if we look at the integration update, we see our nature and Chinwuy are actually completed. Chinwuy is well on track. Sunex is the only acquisition where we had a product delay based on some manufacturing transfers that we had to do. So it's a two-month delay compared to an aggressive January induction timeline. We applied acquired the company in August.

Lumicide was acquired also in August well on track. A great product there as well. Eppendorf 5-Prime, that acquisition was just done a few weeks ago, so the integration just started. ARTUS is well on track. We expect to complete the integration and move over into routine day-to-day work there end of February, early March. PG Biotech has not closed yet, so we look forward to that integration. It is one we have prepared very well we think.

Looking at all of these transactions, we are actually going to see $33 million in sales from these transactions, and we purchased them including upfront plus milestones of $80 million. So bought them at a multiple of 2.4 times sales. This is a very attractive multiple, so I think there's a lot of credit that goes to our team for finding not only the right targets in the right area, but also getting them at a very attractive price.

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

Thank you, Peer. Let me take you through some of the key financial highlights for the fourth quarter and also for the fiscal 2005. I will then provide you with an overview of our guidance for the year 2006.

QIAGEN has a great tradition of growth, and on several levels the fourth quarter proved to be another period of solid performance for QIAGEN both in terms organic growth and gaining operational momentum. The guidance we provided you on the 8th of November outlined our revenue expectations at the rate of 106 to $108 million U.S. Revenues for the fourth quarter was $109.8 million U.S. This is using identical foreign exchange rates as given for the Company's guidance on February 15, 2005, as well as on November 8th.

During the fourth quarter, excluding acquisition restructuring, integration and related charges, which are also excluded from our guidance, achieved an operating income of 28%, which is at the high-end of the guidance we provided at 26 to 28% and diluted EPS of $0.13 a share, which is solidly in the middle of the range which we had forecasted between $0.12 and $0.13.

On an adjusted basis, net earnings per share of $0.13 was an increase of 80% over Q4 2004. Cash EPS computed using cash from operations divided by number of fully diluted shares was $0.18.

Overall the fourth-quarter numbers tells you the following story. We continue to have a strong earnings engine driving our overall performance. On a constant exchange rate basis, our net sales of $109.8 million U.S. this quarter compared to 95.5 million for the same period in 2004 reflects a very solid growth rate of 15%. For better comparability, taking our financial performance numbers and excluding acquisition restructuring integration-related charges, as well as amortization on acquired IT, in terms of operating income we demonstrated 33% growth over Q4 2004, and similarly our reported net income has very strong group of 80% from $16.8 million U.S. to $19.9 million U.S. this past quarter, as well as with diluted earnings per share, an increase of 18% to $0.30 from 11% for the comparable period of 2005 and 20045.

One can see that in terms of revenues in non U.S. currencies there was a foreign currency impact of slightly over 5%. We applied a eurodollar exchange rate of 130, which we provided back in February as our guidance, and as you know, this past quarter the dollar did, in fact, get stronger, so the average was more along 119 to the euro. In addition, the foreign currency effect was also (indiscernible) this past quarter. As we have stressed in the past, our operating income and net income are, however, protected by a natural hedge.

In Q4 2005 our (indiscernible) business, which accounts for approximately 88% of our total revenues, grew by 16%, excluding foreign currency translation effects. This growth development last year Q1 through Q3 of respectively 9, 12 and 15%. This is a trend we feel is sustainable, and just for comparison on a year-to-date basis, again the (inaudible) 30% growth for this segment.

As we mentioned on the earlier quarterly calls, for our instrument segment, we do continue to see OEM orders still (inaudible) through the delayed product launches of some of our partners in molecular diagnostics.

It bears well to highlight here our gross margin, which reflects how we have been able to read their efficiencies from the dirt out of our computer business and how we have converted customers to upgrade product, leaving here our CE label products. This reflects that we continue to focus the Company by cutting back on such areas as the lower margin services businesses. In fact, you could see it is a collective effort of good product mix, strong margins in our computer business and improvements in the economies of our licenses and supply agreement.

Now shifting gears to our results for the fiscal year 2005. Based on guidance we gave when we reported our Q3 numbers, we have exceeded revenue expectations. We came in at the high-end of our operation margins, and we are in line with our EPS base on the guidance we provided you in February 2005, which remained unchanged throughout the year.

Therefore, just to highlight, revenues for the year 2005 were $408.5 million U.S., and the guidance currency is a high operating margin of 26% and EPS of $0.45, excluding acquisition, restructuring, integration and related charges. Adjusted in addition to our modernization on acquired assets or our adjusted EPS was $0.46 and the cash EPS, which we compute using cash from operations divided by number of fully diluted shares was $0.61 cash (inaudible).

To summarize 2005, net sales of $398.4 million U.S. for the year compared to 60.3, just like the very solid growth rate of 11%. This is excluding the sales of our (technical difficulty) unit, which happened in Q2 2004. A better number to use for comparability would exclude the divestment of the TI line, as well as the shift of revenues from (inaudible) as announced in August 2005. This growth rate would calculate to 13%.

Taking our financial performance numbers and excluding acquisition, restructuring, integration and related charges, as well as amortization on acquired IT in terms of our operating margins, we demonstrated a 15% growth over fiscal 2004 and similarly with our net income a very strong growth of 18%, as well as diluted earnings per share an increase of 18% to $0.46 from 39 for the comparable period of 2005 and 2004. I think we can confidently say we have been leveraging our strategic momentum evidenced by the various announcements for product launches, licenses, (indiscernible) and acquisitions, which firmly placed that in all the key global markets and particularly the Asian markets right now.

In terms of revenues in non U.S. currency, there's a foreign currency impact of slightly over 2.5% over the year, which is approximately $10 million U.S. Our operating income or net income are, however, as mentioned before protected by a natural hedge.

Focusing on our businesses also means having clear efficiencies in running them. For instance, in leveraging and proof utilization and manufacturing depicted on the slight showing our margin development as a clear comparison of the three key drivers of our profitability for 2004 and 2005. In particular for our operating income margins, where we organized our sales and marketing structure by introducing specialized teams for key account management, as well as pharma applied testing and molecular diagnostics. We have also been able to demonstrate the impact of economies of scale here.

Just to highlight our operating cash flow of $91.2 million U.S. in 2005, there was 2004 where we had $53.6 million U.S., an increase of 70%. We had an operating cash flow margin of 23%. Looking at our free cash flow for the year, we see an increase to $77.5 million U.S. and a strong cash EPS of $0.51 per share.

Working capital improved in 2005 compared to 2004 for two reasons. There was a significant improvement in inventory days and DSO receivables. Due to the outstanding gross margin in Q4 and due to the average over 12 months, one would actually see 158 inventory days.

A quick glance at our employees number shows that overall we have increased our headcount by 20% in Q4 2005 over Q4 2004. Last year reflective of the additional headcount from acquisitions and the financing of our sales and marketing division, where we had an overall growth of combined 28% since the third quarter of 2005. So with 1589 employees globally, we had expanded capacity (inaudible) way from keeping the organization lean by maintaining a strong focus on our core competencies and ensuring we drive innovation forward. QIAGEN was also recognized in 2006 as among the top 10 best companies to work for.

Guidance 2006. As Peer has elaborated to you on how we are approaching 2006 substantively and outlined the tactics for executing our strategies, particularly with regard to molecular diagnostics, I want to speak briefly on the financial drivers that will allow us to keep developing, partnering and acquiring and provide you with our guidance for 2006.

We expect this year to demonstrate growth between 13 and 16%, excluding foreign exchange translation effects. This foreign exchange effects I expected to reduce the revenue growth by approximately 2% but have no significant impact on (indiscernible).

On the basis of year-to-date 2005 exchange prices, for better comparability you would never expect revenues in the range of 448 to $460 million U.S. However, on the basis of foreign currency exchange rates as of January 31, 2006, we would see revenues in the range of 439 to $451 million U.S.

To calculate our underlying organic business growth, we expected our acquisition as well as our divestment. For that reason, we excluded revenues from the business unit, which we sold in Q2 2004 as a divestment of the (inaudible) alliance business and to shift the tax revenue to PG. We also exclude the acquisition found on (technical difficulty) in 2005 and in 2006 in addition PG Biotech.

I think this slide is helpful for the explanation I just provided. Highlighting (indiscernible) where we continue to believe strongly in the potential of QIAGEN's organic growth and this to be around 10% for 2006. We are one of the fastest organically growing companies in the sector.

Just showing the key features from our income statement we expect revenues as mentioned in the range of 439 to $451 million U.S. Operating margin of 26 to 28% of revenues, which translates to approximately 18% growth and adjusted diluted earnings per share between $0.52 and $0.55 per share. In each case, using the exchange rate of January 31, 2006. These figures are excluding acquisition integration and restructuring related charges, as well as amortization on acquired IT and (inaudible) compensation.

This slide on our quarterly guidance breaks out each quarter into the well arranged revenues, operating margins and EPS. I won't go through each number, but rather draw your attention to the upward steady trend we predict in our EPS from $0.11 to $0.12 in Q1 moving to about $0.15 to $0.16 by end of the year, which has been an ongoing trend as well in the past.

On the next slide, you will see that QIAGEN's quarter to quarter profitability has increased significantly over the last two years. We will continue our track record of improving both margin and EPS. These EPS figures are not only based on the revenue expectations for the year, but just as important to consider is the underlying trend and how we are improving our profitability. Economies of scale and efficiencies in our manufacturing will continue to be important factors for 2006.

One of the reasons for our foreign cash flow is excellent management of our working investment. We decreased our inventory base from 185 days in 2003 to 165 days in 2005. We believe that we could further decrease it down to 155 days within the next 12 months. Our DSO decreased in 2005 to 58, impressive by industry standards which are around 70 days.

At the cornerstone of our innovation, we expect to increase our R&D expenses to $40 million U.S. or around 9% of total revenues. CapEx will also increase for this reason to 7 to 8% of revenues. Depreciation is expected to be flat at approximately 6% of revenues.

The main driver for our growth rate is continued strong performance of our consumer business. We expect to see in the past a steady growth rate of approximately 40% for the year 2006. Putting this number in perspective, for the year 2005 we had 13% growth in our consumer business, and more specifically the third and fourth quarter numbers reflected 15 and 16% growth respectively. In the instrumentation business, we expect an increase of 9% in revenues for the full year, mainly driven by shares of our BioRobot.

As our revenues will continue to remain insignificant to QIAGEN, as we continue our business focus that we pursued aggressively all through 2005.

To summarize, 2006 we believe will be another year of significant margin improvement, 100 to 200 basis points per year reflecting an average in 2005 and 2004. We are able to achieve this by decreasing our costs through cost efficiency programs, a very effective sales structure and investing in future growth.

So before I hand back to (indiscernible), I think Peer wants summarize for you what testing is (inaudible) in 2005 and a strong outlook for 2006.

Thank you, Roland. So as to summary, 2005 was a year of strong financial performance. We continued our and expanded our position as an absolute leader in the area of preanalytical solutions. We capitalized on strong growth in this core business and fueled eight transactions for catalytic growth. We gained strong strategic momentum and are shaping the molecular diagnostics markets. We expanded our market penetration in Asia, and beyond that, there were obviously thousands of things going on, and I would like to take this opportunity to thank everybody here at the Company for an amazing job that they put in in 2005 to make this happen and to build this great basis for the year 2006.

In 2006 we are expecting strong growth in molecular diagnostics. We expect to expand our position as an injury leader in the areas that we occupy and leverage that operational and marketing and other strengths into other areas and improve our margin's improved profitability. We expect to be developing and acquiring and partnering as actively as we were in 2005, and we are looking forward to a successful year. With that, I hand back to (indiscernible).

Thank you very much, Peer. We are now looking for discussing your questions. QIAGEN is linking this conference call to an analyst meeting, which is taking place simultaneously here in our European headquarters in Udine. I would like to open the Q&A session by stopping herein. Our first question comes from Dan Mahony, Morgan Stanley.

Could you give us a sense of you said that 4% of sales came from new products in 2005. I presume that is for the whole year. Could you give us a sense what that was for Q4 because if I remember you did 4% in Q3, so I guess you must be up to nearly 7 or $8 million in the fourth quarter. Could you give us a sense of what that batch of new products might do next year when we increase about growth rate, probably not, and also given the product line that you've got coming through right now, do you think you can replicate to really thinking that you can do maybe 4% of sales next year from new products?

Good very detailed questions. The information on the fourth-quarter new product sales was one -- these are very young products, they are growing rapidly, and we are clearly trying to protect them in any way we can. But you are absolutely right. The fourth quarter is by far the best. And just if you look at the eight, we do four launches a year. We bundle that now to quarterly launches, and the fourth quarter launch happens in the fourth quarter. So the fourth quarter gets the benefit not only in those products, but also from the fact that the first-quarter products and second-quarter products have been ramping up. So it is by far the largest number, and you are right with your assessment that it must be substantially higher than 4%.

If we look at 2006 going forward, we really think that the company has made a fundamental change in 2004 the way we are developing and that we can replicate that. 4% is definitely a stellar number. I wouldn't want to give a commitment on that number. Again, the industry average is out, say, 1% plus minus, and we were running a little bit better than that, but nowhere near the 4%. So we hope to -- this is definitely a target. Let's see if we can make it or beat, but it is definitely a high one.

Erica Whittaker, Merrill Lynch.

You're talking a lot about operating efficiencies to help drive the operating margin, and I was just wondering if you could comment a little bit on the potential for gross margin expansion and what your current manufacturing capacity utilization is and how you see that growing this year?

Thanks for the question. Starting with the gross margin, I think the way we are addressing on the (inaudible) what you are seeing in fourth quarter are improvement of our gross margins we do forward. If you recall, we invested now three to four years ago more than $150 million U.S. in production, as well in R&D facilities in Udine, as well in U.S. in Maryland. We are running at the moment a current utilization rate of around 65%. I think over the next couple of years, there is a lot of room to go into.

What we also do is now with our VP of Operations, Douglas Liu, who recently joined QIAGEN to really go into each different location looking for possibilities to improve it or to (indiscernible) on certain congregation factors. So I think that also decides utilization. Also we are starting renegotiations supply agreement a lot of little long-term (indiscernible) get them.

On the operation, on the expense side, it has also seen a nice trend over the last two years. We also believe that we can do this going forward. I think it is kind of on their scale a big driver there, especially in certain marketing, as well as the administration area. We just started last year a congregation of our IP infrastructure. Once we have completed this, I think this will be another big step for us. So also in this area, there is a lot of possibility.

Patrick Fuchs, DZ Bank.

I have a question regarding the diagnostic kits. The question is, are they able to get there or to make the same profit margins on a gross margin basis as the rest of your consumables, keeping in mind that royalty payments for the (indiscernible) license is necessary? Or is this then overachieved by high margins in the other preanalytical diagnostic products?

The second question is, on Japan we saw weak demand due to restructuring. Could you just comment a little bit on what the situation was there? Was it price pressure? Was it new market entrants? Was it a change in research policy, and is there a danger that things like that could happen also in parts of the U.S.?

I will take the first one on the margins. I think what we see in general in the north on a product level, but what the general cities in molecular diagnostics higher gross margin. So overall because the kick price in the north, the asset price and average, of course, also leveraged our sample pack reimbursement pack. So I think in overall the gross margins there is definitely higher than what we see in average at QIAGEN, and so also this additional license payment is factored into that. So I am really not too concerned on license payment in this regard.

The development of a diagnostic product including the regulatory work is more extensive than the development of a research tool. So that is why there is more upfront cost to it, which is expense. That is recuperated through a slightly higher gross margin typically. That's not unusual that you actually see the same product at a higher price in the diagnostics market compared to the same product in the research market. As we saw before, many of these products are actually pretty much the same or very comparable.

In terms of Japan, what happened in 2003 I think it was was regulatory -- early 2004, excuse me -- a regulatory change where the universities had a different purchasing process imposed on them, and that created a lot of confusion. People did not know how to purchase, and then the decentralization finally took affect, and what hit then was the government kept on hitting on that sector. For instance, demanding that they can't have carryover debts as they used to have, so they had to repay their debts. That was again a factor in 2004, and in 2005 the budgets came in very low.

What Japan has seen now in 2005 was how a resurging stock market, you know, the industry outlook is a little bit better. They have a lot of money that was supposed to go or is going into the researcher authentication system. The privatization of the postal system was one factor for instance. All these things show give a little bit a better outlook.

I think finally everybody will know after the new budget come in place after April, the fiscal year ends in March, and we remain cautious on Japan. The outlook that we have put into our guidance is cautious. We see a little bit better than 2005, but the fourth quarter clearly showed a very promising picture. But again, I wouldn't really overinterpret that quarterly performance. The real impact and data will come out in the second and third quarter.

That's 8% of our sales, by the way.

Daniel Wendorff, WestLB.

I have two questions, one regarding one of your strategic targets you elaborated on at the beginning. You said regarding the molecular diagnostic business, you grew into the number four in the market in the market. So I was just wondering what you all include when you say in market, and what companies are ahead of you, and what is the kind of growth rate? So that would be my questions regarding this point.

And second point regarding your operating margin targets, I think I recall that you have set yourself target of 30% operating margins, somewhere between '07 and '08, and does this also include all exceptional items, as well as amortization of acquired IT and equity-based compensation, or is that not included in this original operating margin target?

First question was on our diagnostics business could we did have a slide with some detail numbers in the first part of today's presentation. The business the molecular diagnostics industry depending on to you talk or what survey you use is an industry slightly over $1 billion, maybe up to $1.5 billion with one major player, which clearly Roche to mention that name, which is doing a formable job and leading the industry, and it is also a partner of ours. We also have a number of other partners in the space. The number two is a coming more focused on the blood banking side of the industry, which is about half the size of Roche. And then there are a number of counties between 100 and $130 million in sales, and that is where we are, and I think everybody is doing a very good job in this space and trying to make it grow, and everybody has been positioning at least in these larger players, there is a very compatible and synergistic way of working together, and we are very happy to be one of those players that is helping fuel that.

In terms of the overall growth, at least from what the public numbers say that have come out from other companies on 2005, we are growing substantially faster. So it maybe has to do with we went from where we have size advantages or other factors, but I think we are just addressing a few things very nicely and are addressing a market need, which has not really than satisfied,, and I've created a good position as (indiscernible) described before in certain segments of the market that typically are ones that the larger ones do not address or one to address with us.

(MULTIPLE SPEAKERS)

Operating margins we don't get that. I think the way I see this we improved our margin significantly over the year, so taking the numbers out Q1 to Q2 is 24, 25, 27 to 29%. And even if I include all the charges, actually we had a large acquisition in the fourth quarter, we entered the 25% of total revenue. So also looking forward, I think these are the numbers to take advantage of going forward, and the way I see improving our margins 100, 200 points is starting on this level.

Which basically would mean that you could achieve higher than the 30% operating margin if you exclude everything?

If we had 29% in the fourth quarter this year.

Our guidance was always that we wanted to add a percent or maybe more a year in operating margin, and looking over the last 10 years, we have been doing that. In 1996 we were at 13% operating margin, and so if you calculate back, it is about 1.5% a year, and that has been a very steady trend. If you take that forward, you can clearly do the math at some point in time. You go into very high margins. But we clearly think there is a lot -- at some point in time, they cross. But there's clearly still a lot of room upward. We have good gross margins, and by the way, I would say if you look at our gross margins, they've been moving up. This is a sign of very good job in our operations team. We are leveraging in our operations group. It has been professionalized a lot, and the leadership of Doug now taking a totally new phase. And we going forward expect that this is an area that we will continue to do very nicely. Including the pricing power, 2005 was a good year in gross margins.

Richard Parkes, ING Financial Markets.

Just got a couple of questions. One is strategic question and a second financial question. So I'm just trying to understand in terms of your molecular diagnostics assay strategy, I think you said you had 150 assays already, and you were looking to build that out in 2006. And I'm just wondering if you could give us some color on the opportunities and likely strategy for acquisitions in the area. How far up the value chain would you consider moving or would consider looking at proprietary diagnostic markers, etc.? And I also noted that most of your assays are currently CE Marked. Are there any plans to look for FDA approvals of those products?

You had a second question you mentioned?

Yes, the second question was just a financial question in terms of operating efficiencies. Looking at the range of earnings you had given -- some $0.52 to $0.55, I was wondering how far towards the upper end of that range you could get simply through organic growth, and how much would be required from the acquisitions you made in 2005 begin to have a positive impact on the bottom line?

The first question on the diagnostics, we do have -- (inaudible) was mentioning about 90 assays in the ARTUS portfolio. We do have a little bit of larger number actually in the PG portfolio. So if you combine those two together, you get a substantial assay portfolio. There is some overlap clearly.

This is something we used to be challenged as we said before. So we clearly could imagine that if we look at the acquisition strategy, we do have proprietary targets, okay? We do have proprietary content, and you would actually be surprised that unfortunately a lot of that is confidential. But, we have been in this market for a long time, and we've actually developed assays for other companies a long time, also, prior to merging with ARTUS, and there are assays out there that are based on our technologies that are used on a routine basis we have developed.

And would we be interested in proprietary content? We have been and we are. And we do have proprietary content in some of the areas. But it is important in diagnostics to have a complete portfolio. We've described the panels before where you might want to have 15 different targets for let's respiratory or a gastrointestinal whatever people want to look at. So that completeness is important. So, you add nonproprietary with proprietary.

To your question on margin contribution, if you will recall, our revenue guidance is 439 to $451 million U.S. Your conditions are on 33 million within the 78%. I think on the margin side, most of our margin would rather come from our existing business, and we normally don't budget any synergies into our numbers because there's something that we want to get on top because there could be delays, something like that. So it's just not improving there.

I would like to hand over to the operator. Tony?

(Operator Instructions). [Clinton Light], Robert W. Baird.

With respect to your instrument guidance for 2006 growth, you are seeing 9%. How much of that has got OEM business in it?

The OEM business is one which we have not been focusing on too much in terms of putting into our guidance. The OEM business is on the diagnostics side in the meantime about 10% of our overall diagnostic sales. We do have some codevelopments with diagnostic partners that pay us for those codevelopments, and that's another 5% approximately of our sales. So out of the diagnostic sales, it's a maximum of 15%. But we typically only budget what is pretty much already in the bag in terms of contractual arrangements on the research guide and on the selling of instruments to third-party customers. Under OEM agreements, we were trying to be very conservative.

That's about as I suspected. And then with respect to stock option expensing, have you -- will you have to start including some of that in your numbers as you reported in 2006? And if so, do you have an approximation of what the yearly impact might be?

Yes, we are, of course, reporting on a U.S. GAAP. We're starting to adopt this this year, and our guidance, first of all, is excluding equity-based compensation effect, and as we have produced significantly over the last three years, the grand of stock options we believe that the impacts for us in 2006 are less significant. We expect maximum something between $0.01 to $0.02 EPS probably more -- something between.

Brian White, Deutsche Bank.

Just a couple of questions. First of all, strategically we've seen lots of small bite size acquisitions in 2005. Can we expect more of a similar size in '06, and just how many of these can you do without becoming a little bit more fragmented than it has been so far?

And then just separately, on the market growth, I think the rules in general regarding the routine testing of poultry for avian influenza. Is that something that QIAGEN is bidding for; is that something of interest to you?

Thanks, Brian. Good question. The smaller acquisitions that -- if we sum them all, we acquired $33 million in sales at about $90 million, so about 2.4 times sales. We see acquisitions as catalytic, and clearly in the preanalytical area, we are so much a market leader there that there are very few targets that are north of $2 million of sales. So we will definitely continue to do those going forward.

What I like about them is a), they catalyze -- they can have significant cultural impact. But, they don't dilute your culture, and they are easier to integrate. We definitely will continue on that path, and clearly we're looking at larger things. We did look at a lot of larger things in 2005. But integration, speed and risk to our underlying overall growth rates are important determinants if we want to do a deal or not.

So I expect that trend to continue. This year it was only smaller things, but I wouldn't exclude anything. What I will absolutely exclude is doing something that is defocusing and not along the lines of the strategy that we have presented here. In 2005, we have been very clear on our strategic path, and we've executed on it and that will continue.

In terms of the routine testing for poultry, that's actually a substantial part of our business. So we are today by far the largest provider of poultry testing kits. They are primarily used in China, but also increasingly in other countries, and yes, we will certainly try to put in a bid for whatever is used there. And I can take it from different angles either through the component angle or through a kit angle depending on the regulatory requirements.

Maykin Ho, Goldman Sachs.

Congratulations on a good year. I wanted to ask you two questions. Number one, on molecular diagnostic tests. Should we expect any FDA approved tests for oncology in the next 12 to 18 months?

Good question, Maykin. Clearly we have a regulatory path for a number of assays in 2006, also, in the U.S. which would be 510(k)s. We do have tests that are used in oncology. We do have those, especially through partners. We have a number of partners in this space.

In terms of -- it is not our focus area. And the reason is the following. In oncology, the development of content and also the clinical trial is very complex because you have to go deep into the pathology of the disease. With pathogens or with genetic testing, what we can look for is simply something that should not be there. That is an easier starting point and an easier entry for us. We do have a lot of partners we work together with in oncology, and for instance, we announced an agreement with Veridex, which is a Johnson & Johnson subsidiary, which has a very interesting strategy in this space. But I would not expect from QIAGEN an FDA approved molecular diagnostic product in 2005 to be a top priority for us at the moment.

And a second question is a little bit I guess off the topic we were discussing maybe. Recently, there has been quite a bit of discussion I guess in scientific journals about single molecule sequencing, you know, that's non-segment-based, and Roche is also involved in that. Would that have any impact on the growth of your sample prep market, as well as the molecular diagnostic market in the future?

Definitely, and it's an exciting trend. So the idea is simply to sequence a whole genome in a short period of time, and certainly there would be a lot of information you could pull out there for pharmacogenetics or SNPs in general. The problem is that a lot of these assays -- to sequence a whole genome is multiple tens of thousands of dollars versus a PCR assay that finds specific [sniplets] costing only $20. There is, over the next decade -- there's really nobody out there that thinks that a whole genome can be sequenced for a three-digit number. So, we -- there is clearly a segmentation of the market. One side, sequencing the whole thing, spending a lot of money, and then on the other side, finding something very specific.

Also in the case of viruses or bacteria, you don't really need all that information. The genomes are just -- you just have to know if it's there or not, and you don't have to sequence the whole genome. So that would really be an overkill.

On top of that also for SNPs, you would -- if you know what SNP is important instead of sequencing the whole thing, you can just as well just go in and a look for the SNP directly. So, we think it's a super technology, and we actually see a benefit for us for it because a lot of these pathogens we have to sequence before we can develop assays for them and we're working together with partners who are using these types of technologies to do faster sequencing of these genomes to give us faster access to the data, so we can do faster assay development. So it's not necessarily a negative for us.

Peter Welford, Merrill Lynch.

Just a very simple question. If we exclude the impact of any potential future acquisitions you might do, can you just tell us at this stage what potential restructuring costs you could have going into 2006 judging by the current acquisitions? And also, could you just outline the both pre and post tax amortization related to acquisitions that we can now expect on an ongoing basis from the acquisitions you have done to this date?

Peter, on your question on which kind of expenses we are expecting in 2006 on the acquisitions we did in 2005, I think we announced already that we do expect expenses with the closing of PG Biotech, as well as Eppendorf. We do expect probably something between $0.01 and $0.02. It depends a little bit on certain costs of (inaudible) people, retention payments and so on, severance payments you have to pay. So I think totally we expect something between 1 and 2% -- $0.01 and $0.02 EPS.

And I think that there has been a difference to your second question.

Can you please prepare for the last question?

Our final question is coming from [Felipa Gartner], Lehman Brothers.

I just had (technical difficulty) -- just needs to contribute 33 million in 2006, and then you say the acquisition in 2005 contributed 16 million. But as these were made throughout the course of the year, what I'm trying to understand is what does the 33 million in 2006 imply in terms of an average like for like growth rate?

The growth rate of these various businesses -- a little runthrough -- we didn't average out the growth rate. You are right. So the 2005 annualized number versus the 2006 annualized number would be the number we would be looking for. We have to take out PG and look at the revenue sizes. A lot of these players are very small, so we would have to look at Eppendorf and ARTUS basically being the main drivers. And there it is -- the prime business as we said in the conference call was growing at about 15 to 20% in 2005. And ARTUS we said when we acquired them that they were growing somewhere in the range of 50% in the year 2006. So that (technical difficulty) is take those two numbers, it will clearly be in the '30s as an average.

I apologize. I can't give you the exact number here. I would have to just -- a range.

With this, I would like to close this conference call as well as the analyst meeting. We thanking you all for coming and participating. We would like to welcome you again on our first-quarter 2006 earnings release on Tuesday, May 8, 2006. If you have any additional questions, please do not hesitate to contact us. Again, thank you very much and have a nice day.

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