Qiagen NV (QGEN) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Ian, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Quiagen first quarter 2006 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS]. It is now my pleasure to turn the floor over to your host, Solveigh Mahler. Ma'am, you may begin your conference.

Thank you very much, Ian. Good morning and hello, everybody. Thank you very much for joining Qiagen's first quarter 2006 earnings conference call. Qiagen experienced an exciting first quarter 2006, not only beating analysts but also its own targets for sales, operating income margins, and earnings per share.

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 home page at www.Qiagen.com.

The time of the conference call is set at one hour. We therefore would like to ask you to please limit yourself to only two questions during the Q&A session. If you have any additional questions or need any further information please don't hesitate to contact us after the call. As always, we will be more than happy to answer all your questions and provide you with any information you might need.

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

With this, I would like to hand over to Peer Schatz.

Yes, thank you, Solveigh. Yes, we experienced a very successful first quarter 2006 and started very well into this new year. We set out a target of 101 to 104 million in net sales and achieved 109. We set a target of $0.11 to $0.12 earnings per share and achieved $0.13. The operating margin also came in ahead of expectations.

But it was not only a quarter of strong financial performance, we also performed very well on our strategic targets. The acquisitions that we did in 2005 and also in 2006 were very successful also in the financial contribution rate. We achieved 7% of our sales in this first quarter from these acquired businesses, and I'll talk a little bit about these integrations a little bit later.

We are also increasing our market leadership. Clearly, our technology and market leadership is expanding. We have an organic growth rate of 15% in our consumables, 13% overall in the company -- really, a very strong organic growth is at the heart of this first quarter 2006 and certainly also core to Qiagen.

We also had a target to rapidly grow our molecular diagnostics business. In this first quarter, we rapidly expanded that business. Growth in revenues and also in strategic positions in this area has been very rapid, and we look forward, also, to a very successful year in 2006 in this area.

Certainly, innovation was, again, key. We launched 15 products in this first quarter. There are some very exciting products among them. I'll highlight a few a little bit later. We're executing on our strategy. We laid out a strategy a little bit more than a year ago to the investment community, and this has clearly been the theme for all of our activities in 2005 and also, as you know -- see in 2006.

The first quarter was also one where we had quite a few accomplishments in our goal of building channels, especially in the area of molecular diagnostics. We significantly expanded our reach and built very strong channels in a number of different areas.

So first quarter well on track, financial targets well exceeded but also strategically and very importantly so, also going forward, we think, a great start into 2006 -- a sign of strength of Qiagen.

On the next slide the revenue distribution that you're familiar with from previous presentations shows you on the left-hand side the breakdown of our products. The consumables came in at 91% of our sales reported 22% constant exchange rate growth, CER is constant exchange rate growth; and 15% organic -- so very strong growth in our consumables business. The instruments that, in many areas, are clearly interlinked and working together with the consumables showed 7% constant exchange rate growth with strong growth in our BioRobot product lines.

On the right-hand side, the geographic distribution shows you that Europe came in very strong, 43% of sales and 29% constant exchange rate growth -- strong growth in Europe. The North American sales at 44% of our overall revenue at 13% growth, and Asia, which is 10% of our sales, primarily Japan, came in at 5% growth, or 16% on a constant exchange rate basis. Japan, which had a constant exchange rate growth of 6% is showing an improving outlook as we see it. The rest of world sales came in at 3% overall.

On the next slide, Slide 5, the breakdown by customers -- the academic sales, again, approximately about 40% of our sales. Some of the highlights were a very strong performance in Europe and especially in Germany in the first quarter 2006. An improving outlook in Japan -- it was last quarter of the fiscal year in Japan, 6% growth at constant exchange rates in Japan.

Pharma Biotech -- approximately 25% of sales, strong in U.S. and in Europe. We saw a very good environment in the pharma and the biotech industries, and this could also have something to do with a strong focus on pharma and biomedical research that our company put in place in 2005 and certainly in 2006 with a very focused sales and marketing effort -- strong growth in pharma and biotech.

Applied testing -- about 10% of our sales -- small but very strong growth rates. Our initiatives -- I'll talk about a few a little bit later -- have been very successful.

In Diagnostics, about 25% of our sales were very well on track. Maybe here is some background information -- the whole area of molecular diagnostics is clearly one that is showing a lot of excitement and attraction, and the word is very often used. It's very often, also, used for -- as another term for biomarker activity. And biomarkers is clearly a very attractive area of potential future diagnostics, but the majority of today's molecular diagnostics markets are in the area of pathogens, genetic diseases. So we're actually addressing, with our sales, a market, which is very, very real today, which is a multi-billion dollar market today, where we are gaining share and with our sample preparation solutions have an absolute market standard.

At the same time, we are also active in a number of biomarker initiatives. They are in pharma and academic settings. There are many such initiatives where we are key; we can work with these partners to develop the right platforms for their biomarker testing systems and basically work with them through to a diagnostic product. As I said before, in Diagnostics we also saw significant success in building our sales channels.

On the next slide you see a slide with organic growth trends over the last two years. What is really interesting that we have been able to expand our premium to the average market in terms of organic growth, and this first quarter 2006 showed a very strong performance. Now, as always, there is fluctuation in organic growth within a year, but, clearly, you see it's pretty similar to what the industry sees, and we have been able to achieve a premium not only now in this first quarter but also in previous quarters in terms of organic growth.

On the next slide, a breakdown of the growth shows you that the organic growth comes from three different components; it is price, 2%; volume, 6%; and new products about 5%. The acquisitions and divestments added another 7% to our sales -- the exchange rates took 6% to achieve a reported revenue growth of 14% on our overall sales.

One exciting development that we announced a few days ago was the launch of our bisulfite treatment solution, which is a totally integrated preanalytical solution for Epigenetics. Epigenetics, we think, is one of the most exciting areas of today's research. It is the research of the fifth base in DNA, or it can be described as such, and the analysis of these methylation patterns in DNA, they are very exciting, but they have one complex step; namely, the pretreatment, which previously has been a bottleneck for that type of research to really gain a lot of traction.

We are now launching, or we have launched in April, what we think is a radical improvement in performance in this whole area of bisulfite treatment, which is a preanalytical step in Epigenetics, and we think that this will unlock a lot of research opportunities and also allow next-generation molecular diagnostics products using Epigenetic pattern to have a very useable commercial front-end solution and to pave the way for their success.

We also announced last week the acquisition of Gentra Systems. Now, Gentra has been a very formidable competitor of Qiagen now for the last 15 years. It actually became a leader in two niches in clinical nucleic acid purification. These two niches, Qiagen has not really placed focus and maybe wrongly so. This was the area of biobanking and DNA archiving. In those two niches, Gentra has achieved a very remarkable market share and a very attractive market position. These are smaller niches, but we think that they are about to grow, going forward, because biobanking and DNA archiving are more and more used in the whole area of translational medicine. Translational medicine is about accelerating research, bringing research closer to the patient. And very often it's much easier to bring the patient to research by using biobanking, adjacent or near the research facilities.

This trend, we think, will accelerate these biobanks, going forward, and the acquisition of Gentra is very complementary to that strategy and also to our focus on biomedical research that I described before.

This acquisition brings to Qiagen complementary technologies, proprietary, non-solid phase nucleic acid purification technologies, basically purifying nucleic acid with liquids whereas Qiagen's technologies very often are around using particles, beads, surface coatings, or filters or resins.

It's a complementary product to a lot of Qiagen products. The area of biobanking in Gentra is over 100 installations and customers that are using these types of systems. They are typically using downstream PCR-based genotyping products where we clearly have a very strong position, and PCR-based molecular testing products, where we clearly are also a leader. They are also using whole genome amplification technologies to immortalize their rare samples to basically ensure that they have enough DNA from a sample that was taken some time ago to perform a lot of tests on.

So this acquisition perfectly fits into our strategy. It expands our technology and our market leadership and brings to us an absolute leadership position in large volume, preanalytical sample preparations.

The outsource manufacturing of most of the products that Gentra sells should allow rapid integration, and we're looking forward to working with the Gentra teams jointly to address the market opportunities that we think are increasingly attractive in the areas they have created strong positions in.

On the next slide you see some of the financials -- we paid $38 million in cash. Again, quite interesting here are 2.7 times sales, going forward. Again, a very reasonable multiple and it fits very well into Qiagen's history of being very prudent in these acquisitions in terms of multiples and also in terms of ensuring a very, very close strategic fit.

The transaction is expected to close at the end of the second quarter in 2006 and should contribute for the second half of the year, $6 million; and for 2007, about $14 million in sales; and should be accretive in 2007 as described here.

So an interesting addition to Qiagen, a consumable and instrument solution provider with a very strong brand name in what we think is a growing niche, going forward, and a great asset, great valuation combination.

The next slide shows you how this acquisition fits into our strategy. We have three main initiatives here at the company. One is standardization of preanalytical sample preparation, the other one disseminating reach of our core capabilities into markets in geographical regions. And in the third area, the whole convergence theme that is what we call "systems biology." And you see that Gentra fits very nicely into the standardization of preanalytical sample preparation. We are giving seamless solutions for a number of different applications and allowing standardized interfaces for customers, standardized processing.

On the next slide, Slide 12, you see how these acquisitions add up. And it's quite interesting to note, you know, when we do these transactions, I think the feedback we're getting is these are great deals that were very relevant for our strategy, and they fit very nicely and are done at a very attractive price, but they're small. Typically, we have not precluded larger transactions, but we just didn't see the value creation possibility that we have in the past with smaller transactions. This doesn't mean anything will necessarily have to be small to be interesting for us. There's no limit on size, but I'd like to highlight how successful we were in the past. If we sum up all of these transactions that we did over the last 12 months, we have almost $50 million in sales that we're contributing in 2006, a little bit less -- 45. And we bought those at 2.7 times sales, and are generation accretion. I think if a company were out there, a $45 million sales company, that would be acquired at 2.7 times sales that is growing somewhere between 20 and 30%, I think that would be an extremely exciting transaction, and we are very, very pleased with the acquisitions we've done over the last 12 months, and we continue to see very attractive opportunities for us, going forward.

As a summary of the first quarter 2006, on the next slide, Slide 13, we were very active in developing products with preanalytical solutions, have a very strong pipeline. We partnered quite a bit. Some of these partnerships we also announced, we also acquired, and, most recently, acquisition of Gentra -- I think a great fit for the company, and we are looking forward to a lot of success with that.

In Molecular Diagnostics, we continue to develop assays. We have two major new assays that we launched in this first quarter 2006, and we're continuing to build out the assay portfolio. In terms of partnerships, a number of partnership activity in the first quarter, again, I'd like to highlight as one of the results of one of the partnerships that we have with Epigenomics, the launch of our EpiTect Bisulfite Kit, I really think this is scientifically very interesting and commercially, also, going forward -- a very early stage of this scientific breakthrough of Epigenetics.

In the Applied Testing area, also a lot of activity there. Clearly, avian flu continues to be very dynamic, a lot of demand there. Our products are absolutely essential for the surveillance of avian flu throughout the world. There are components that we sell, the products, the tests that we sell. We have phenomenal results from valuations at a number of institutes including Institut Pasteur for certain of our tests. There have been tests introduced that are also FDA-approved that include our components and that we -- I think it's just a sign how important our components and our solutions are for the whole area of pathogen detection of which avian flu, I think, is clearly one which is creating headlines. But it's certainly not the only area where we have tremendous importance.

So we are continuing to seek more alliances in this area, as we said before, this is a very dynamic area.

With that, I'd like to hand over to Roland.

Thank you, Peer. Let me take you through some of the key financial highlights of our first quarter 2006. The guidance we provided you on February 14th outlined our value expectations in the range of US$101 million to US$104 million. We are pleased to announce that we were able to have significantly exceeded this range. Our revenues came in at US$108.7 million for the first quarter 2006 to about 7%, or $6 million higher than the mid range.

We achieved an operating income margin of 26%, which clearly surpassed the guidance we provided of 23 to 25%. We exclude from these figures and from our guidance any acquisition and integration-related charges as well as amortization of acquired IP and equity-based compensation.

Our EPS, in fact, also exceeded guidance. Where we had guided for $0.11 to $0.12 a share, we achieved $0.13 a share. Both guided and achieved EPS were also on adjusted basis. Cash EPS calculated using from operations divided by the number of fully diluted shares was $0.15.

Breaking these figures down by revenue segment, in the first quarter 2006, our consumer business, which accounts for approximately 91% of total revenues grew by 22% excluding foreign currency translation effects. In 2005, Q1 through Q4, we effectively demonstrated this trend with 9, 12, 15, and 16% growth, respectively, under constant currencies. So quarter over quarter, we continue to show that we can achieve strong growth in our core business, and this period was no different. Consumables organic growth of 15% and contributions from our successful acquisitions lie at the heart of this.

With 7% growth under constant currencies, all organic, by the way, we are seeing stronger growth in sales of major BioRobot product lines and our OM business is hitting a level of stability. This is up from 2% in the fourth quarter of last year.

Using Q1 2005 exchange rates, revenues in non-U.S. currencies had a foreign currency impact of nearly 5% for the quarter, which was approximately US$5.4 million. Given the multiple acquisitions we had made in recent months and the fact that we have been able to achieve a strong organic growth, we thought it would be worthwhile highlighting these numbers for you both on an actual and a constant currency basis.

As you can see, our consumable organic growth rate of 15% is clearly strong and a result of what we always refer to as our innovation engine. We are able to use our continuous focus on our core business to accelerate growth using the principle of debt, the strength of our product pipelines. We apply this philosophy against major element of growth -- technology, customer value, brand excellence, geographic reach, and innovation.

Our organic growth is about two to three times the weight of the industry. At the same time, our acquisitions have demonstrated great success and contributed 7% to our overall growth.

Let me just [indiscernible] explaining how we treat the growth rate from acquisitions and the timing of conversion to organic growth. This is on a 12-month rolling basis. For Molecular Staging, for instance, which we acquired in September 2004, fits into our organic growth rate here, whereas, Artus, acquired in May of 2005, they are not until the end of the second quarter this year.

Internally, we typically look at a three-year rolling period, as we believe that is a better indicator for success of our positions and integration process, but the financial markets have agreed on a one-year rolling period, and we are also using that here.

Overall, the first quarter, the numbers tells you the following story -- we continue to have strong top-line growth with significant operation margin improvement delivering earnings and performance. Our net sales of US$108.7 million this quarter compared to US$95 million for the same period in 2005 reflects a very solid growth rate of 14%; on a constant currency basis, 20%. For better comparability, taking our financial performance numbers and excluding acquisition integration-related charges as well as amortization and acquired IP and equity-based compensation, in terms of our operating income, we demonstrated 26% growth over the first quarter 2005 and similarly with our report on net income, a very strong growth of 34%. Similarly, with diluted earnings per share, an increase of 30% to $0.13, up from $0.10, which was achieved in 2005.

For the first quarter 2006, we have implemented some changes in the reporting of adjusted results. This is in accordance with the adoption of the revised Statement of Financial Accounting Standards number 123 on compensation costs due to the equity-based compensation. In fact, the impact on operating income and EPS is only marginal, as you can see on this slide, where we are contrasting the reported and adjusted results.

We are consistently delivering a strong gross margin with a reported growth rate of 17% this quarter -- 27 under constant currencies; slightly more if one excludes acquisition and integration-related charges as well as amortization and acquired IP and equity-based compensation. These efficiencies gained for different product mixes and price increases of 2% in addition to broadened distribution of higher-margin Molecular Diagnostic products, it's a clear affirmation that we are on track in growing the company by focusing on stronger higher-margin consumables and cutting back on such areas as lower-margin services businesses.

As you may recall, we typically show you this slide highlighting our margin development. In a quarter-to-quarter comparison, the three key drivers of our profitability are depicted -- cost margin, for example, which was driven by the higher gross margins, we were able to achieve in our consumable business was 68% in Q1 2005 and 70% this quarter. Our operating income margin numbers highlight that we have been able to reap the efficiencies not only from integration of acquisitions while reassuring their positive effect here but also investments we made last year in our sales force -- a 20% increase in headcount as well as restructuring and adding a specific molecular diagnostics sales channel.

Also, if you recall, in recent years we invested more than US$150 million in production as well as on the facilities here in Hilden and in Maryland in the U.S. At the moment, we are running at a current utilization of approximately 65% and I think that there is room to expand.

Just to highlight our operating cash flow of US$22.3 million in the first quarter this year versus the first quarter 2005, where we had US$20.7 million, an increase of 8%. And our free cash flow for the quarter remains the same from Q1 2005 to Q1 2006 at US$17.8 million, still showing a strong cash EPS of $0.15 per share.

On February 14th, we provided guidance on our expectations for the year -- revenues in the range of US$439 million to US$451 million, a year-over-year growth rate of approximately 12%. Organic growth will continue to be a significant contributor to our revenues evidenced by the strong quarter we just closed. In addition, revenue contributions from the Gentra acquisition will add to the change in guidance that we provided you today. We are increasing our revenue guidance for the full year 2006 from previously US$439 million to US$451 million to US$453 million to US$462 million and adjusted EPS from previously $0.52 to $0.55 to $0.52 to $0.56 for the full year 2006. We expect to book additional revenues contributions after the integration of Gentra in the third and fourth quarter of US$6 million. In addition to the US$5 million in better-than-expected revenues from Q1 provides the basis for this revised revenue range implying a year-over-year growth rate of approximately 15% with approximately 80% growth in adjusted EPS.

In spite of our efforts to continue streamlining and focusing our business, we anticipate closing our research facility in Oslo, Norway, but this will have no effect on our guidance, as our guidance is on the adjusted basis.

On a reported basis, we expect the one-time charge of US$700,000 after taxes in the second quarter this year.

As many of you have seen already, we announced last night US$220 million convertible bond offering. There is an option for an additional US$30 million targeted to institutional investors outside the U.S. under Reg S. The final pricing we just announced a few minutes ago. In light of the policy perception and to level of demand for the offering on the financial markets, we increased the size of the convertible note issuance from the previously announced US$220 million plus a purchaser option to acquire an additional US$30 million to US$270 million plus a US$30 million [clincher] option.

The terms were as follows -- the notes will be convertible into the company's common shares at a conversion price of US$20 subject to adjustment. We will pay a coupon of 3.25% payable semi-annually. The notes come due in 2026 in minimum denominations of $100,000. The structure of final maturity of 20 years; cannot be called for the first seven years, and are not callable thereafter subject to a provisional [indiscernible] of 130% of the conversion price. No totals will have an option to require Qiagen to redeem the option at 7, 11, and 16 years.

The proceeds from this offering will serve to optimize Qiagen's balance sheet, which may include the repayment of existing debt as well as to finance future acquisitions and for general corporate purposes.

We believe the timing for this offering was right given the attractive financing opportunities that the convertible and bond market could only offer us. Since our last convertible, we have been able to complete a number of acquisitions, which have cost in aggregate in excess of US$150 million and has been non-dilutive to the near-term earnings, reaffirming that we have maintained strong financial discipline.

As we look to the future, we continue to see attractive opportunities in selected areas of our industry. Against a background of strong operating performance, as highlighted by the past quarter, we think it is important that we continue to maintain our flexibility to pursue these opportunities as they come available.

So, in summary, the first quarter 2006 was a good quarter to start the year. We delivered a very solid financial performance, demonstrating exceptional organic growth of 13%. We exceeded revenue expectation and EPS guidance as well as demonstrated an impressive income margin improvement of 26%. We are holding steadfast to the strategic momentum that we have created with eight acquisitions last year to which we just added another one, Gentra.

For the rest of the year, we are expecting strong growth in Molecular Diagnostics. We expect to expand our opposition as the industry leader in the areas that we occupy, and leverage our operational and marketing strength as well as improve our margins and profitability. We expect to be developing, acquiring, and partnering as actively as we were in 2005 and look forward to this continuing to be a successful year for Qiagen.

With this, I would like to hand over 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. Ian?

[OPERATOR INSTRUCTIONS] Philippa Gardner, Lehman Brothers.

I have two questions, if I may. The first one is when you gave guidance in February for acquisitions, you said that you expected them to contribute 33 million this year, and with the 6 million from Gentra, I make that 39, but you've now increased that to 45. Is this because they're growing quicker than you expected them to, and they're contributing more to revenues? That's the first question.

And then the second question I have -- if I just do -- based on your 15% organic growth in consumables, if I do a very quick back-of-the-envelope calculation, if you sustain this growth rate for the rest of the year, it looks like you could beat your guidance. So I guess what I'm trying to get at in a roundabout way is do you see the organic growth rate in consumables contracting for the rest of the year or is it just to do with rolling the acquisitions into organic growth after a 12-month period? Thanks.

The first question in terms of the guidance, where you said 33 million for the acquired sales, and now the acquired sales would be at 39 million. So basically Gentra as an acquired business within the 12-month rolling window would be considered acquired. So the guidance of 33 goes to 39. I'd have to check the 33, but I recall that we gave a number in that area, and Roland is checking right now.

Yeah, sure, but just on one of your slides you said that you expect acquisitions to contribute around 45 million in 2006.

Well, we have -- on which slide are you now?

That's on Slide 12.

Okay, the acquired revenues that we have -- well, obviously, Gentra comes in there, and we are well underway in terms of the acquired businesses, yes. And this is annualized, as I said before. So this is not calendar year but the annualized sales, which I would be using for a multiple to generate the valuation.

So within the year, we are sticking to our numbers that we gave -- this would be 33 plus 6 annualized because some of the transactions didn't close in the first quarter, and PG Biotech being one example, or late in the first quarter. This would not be annualized.

In terms of the second question, organic growth -- I guess you could put it that way, but organic growth is always fluctuating within a year, and what we see is that we're well on track for the year, and momentum is good, and our outlook is good, and we are slightly increasing guidance for the full year by almost 2.5% for the year, which is, I think, indicative of our positive outlook, and the guidances for organic growth rate, you can basically deduce from the guidances that Roland has given in his section.

And so, as always, we expect fluctuations in organic growth rates, simply by looking at the number of days that you have within a quarter during which you can conduct business. So the organic growth rate on a quarterly basis actually, for us, is less meaningful than an organic growth rate on a daily -- working daily basis. So on a quarterly basis, you'll always see fluctuations. So we're sticking to our guidance, as Roland has given it in his presentation.

May-Kin Ho, Goldman Sachs.

It looks like a very good quarter. I have a question about the guidance, also. You look at the revenue guidance that you gave us -- it certainly accounted for the $5 million upside for the quarter as well as that acquisition. But there is no increase basically in the organic revenues for the rest of the year -- or very little. And if you look at the earnings guidance is basically a little bit higher -- on the high end -- even though you beat by a penny in the first quarter. So essentially there is no increase in guidance for the rest of the year. How should we interpret that? Because it seemed like the growth rate of business is suddenly a little bit higher than what we thought.

Well, I think we can interpret it we are well underway. We were well underway in the first quarter, and, going forward, we continue to see momentum. Our company is growing at one of the highest organic growth -- or if not the highest organic growth rates in our industry, of any company of a comparable size.

Also, in terms of the growth on the EPS side are far in excess of industry averages on an organic basis and also are seeing good contribution from acquisitions. So clearly what this first quarter gives us is an increased confidence for the performance in the rest of the year. And, at this point in time, you know, we made a slight adjustment to the full year, but at this point in time, we continue to be conservative, and we're pleased that we outperformed our expectations in the first quarter, and it would be our goal to do that again.

So basically the guidance for the rest of the year has not increased even though it was a very good quarter?

Well, we added to the guidance for the full year, the outperformance in the first quarter, and there can always be that, by itself, is a sign of, I guess, being very positive because very often it could also be that you get a good performance in the first quarter, which is a little bit weaker in the second. No, we are leaving the guidance for the second quarter and also the third and the fourth, and increasing the full year by the outperformance in Q1 and by the Gentra acquisition.

Another question – it is a little bit more macro question is that yesterday we saw Thermo and Fisher in terms of acquisition and, of course, recently a lot of activities there including [indiscernible], and you certainly have been active as well, and if I look at kind of the consideration or the amount that you pay for the companies that you acquired, it seems that starting last year you are looking at things that are a little bit bigger. For example, the Artus acquisition and then, of course, now Gentra, which is kind of around the $40 million area. Should we expect the magnitude of these acquisitions to increase for you, going forward, and also what do you think the Thermo transaction will do in terms of dynamics for this market?

Thanks, it's an interesting question. Let’s just start out with Thermo and Fisher, it's obviously a very important deal for our industry, and I think what is one of the most important factors is that this industry now has a major player with $10 billion in sales with a very complete portfolio.

We think that is definitely an industry impacting or changing transaction. We don't see this as negative for Qiagen. We don't necessarily see it as a positive. We think -- if you look at Qiagen, we have a very clear path where we are going at very high speed, and this is not necessarily served by being big. And that has always been our choice, to not sacrifice speed for size.

So I don't necessarily think that -- you know, one thing that you could see is that in this overall run for size, which you're seeing in the industry, that the industry has to continue to serve its customers by being very, very proactive and thinking long term in terms of choosing the right technologies and tools. This is a very long-term and a very visionary industry in many cases, because until you develop a tool and bring it to market, it can take quite some time, and you have to hit an early adopter with the product at a very early time. So you have to think very much into the future. It's not a very much now-and-here business; it definitely is one where long-term thinking is important.

I think that for us, if you look at the trend of acquisitions that we've done, and we have done transactions, which were south of $50 million in consideration. But the value generation we saw there was just spectacular, and the contributions for our strategy and also for our speed were significant as also evidenced by our performance in this first quarter.

I'm not saying we would shy away. We did look at larger transactions -- you know, there are always a number of transactions that go through the industry, but we traditionally have not necessarily seen the acceleration opportunity for our top line and the catalytic effect for the rest of our business as strongly as for these smaller transactions. But this -- I wouldn't say there's a trend, but there definitely were a few trends, actually, that were a little bit larger, but size is not an issue for us -- our strategic value and ultimately shareholder value creation is.

Erica Whittaker, Merrill Lynch.

Just a few questions -- first of all, you've now got the gain from the equity method investee, which I presume is the pre-analytics business becoming profitable now, and I just wanted to understand whether you expect that profitability to be similar for the next few quarters.

Secondly, I was just wondering what proportion of your guidance changes stem from the changing of exchange rates and U.S. dollar weakness.

Thirdly, again going back to the guidance and outlook for the year, this 30% local currency growth in Europe -- I just want to know what you think about that figure, going forward, in the next few quarters? You did mention that academia in Germany was very strong, but I'm wondering where else in the business mix -- can you explain that increase in growth rate in Europe?

And, finally, just a minor question, just wondering if you still expect $6 million in charges for the PG Biotech and Eppendorf acquisitions in the remainder of the year which, I guess, would be an extra $5 million from what was reported in the first quarter.

I'll take one and three, and Roland will take two and four. Number one, pre-analytics -- pre-analytics was profitable since a few years now. It's simply joint venture accounting. As we described that we develop these products together and then sell them through respective sales organizations. The profitability is recorded both on the Qiagen operating income side and in a joint venture. So you could be very profitable within one of the companies and still show a loss in the joint venture. This is clearly the accounting of these things and how the expenses are recorded. So this is a very profitable product, and it's growing very rapidly. We had 2005, again, a very successful year with pre-analytics, as we said, on February 14, and we expect this to continue.

Clearly, as you see, there are more and more gene-expression-based assays from blood that are coming up, and we're making a big difference there. If you put this into Google, you'll see that the pre-analytics product is absolutely key to a lot of these diagnostics.

In terms of sales in Europe, 30% local currency growth, and there is some acquired business in there, and for instance the Artus acquisition is recorded in Europe as -- it had a lot of sales in Europe and the rest of the world that are recorded out of there. We continue to see strong growth especially also in Diagnostics and also in Pharma in Europe, and it was definitely quite remarkable to see the academic growth come back, especially in the fourth quarter and the first quarter of this year.

For two and four, I'll hand back to Roland.

On the accounting impact guidance we gave now is all to business accounting what we used on the guidance column table on 14 so there's no impact there. On other charges, yes, you're absolutely right. The charges came in significantly lower, as we also expected. You know, they obviously wait for certain appraisals and so on in the time you announce a deal, so they only had small impact during the year, which we have to report on that.

Okay, so instead of --.

The Eppendorf was mainly -- we called it actually already in the fourth quarter and PG was mainly already this quarter. So I think, going forward, is only smaller, more or less, cost, which comes through to the year. It's nothing material.

Brian White, Deutsche Bank.

It's again a question on your acquisition strategy and your guidance. Certainly, in terms of acquisitions -- am I right in thinking that you're focusing a lot more on Molecular Diagnostics again, and is it a certain proportion of revenues, which you have -- can have an internal target for, which you can clearly get to a lot quicker by acquisition?

And, again, just looking at the guidance, what I can't get my hands around is that you clearly exceeded the operating margin guidance you gave for the first quarter. You haven't given any operating margin guidance for the rest of the year, but given the numbers you've given us, it looks as if you're expecting a contraction in operating margins for the rest of the year, which seems unlikely.

I'll take the first one, and Roland the second. Yes, in terms of acquisitions, what we are looking for is simply targets that can accelerate our growth and be very catalytic in terms of providing opportunities for Qiagen products to achieve more rapid growth. So this is very much dependent on the industry we're targeting. And as we look at the industries, there are two very rapidly growing industries; namely, Applied Testing and Molecular Diagnostics, and in those areas clearly the targets will make these hurdles a lot easier than in, let's say, some of the research industries where we're seeing slower growth, and where we also have phenomenal market shares and a very strong ongoing innovation ability and also the ability to put these products into the market.

So that's why you're seeing us leaning more into the Molecular Diagnostics and Applied Testing area, and the acquisition of 5-Prime from Eppendorf, for instance, was an acquisition that was more broadly allocated. There was also some Molecular Diagnostics pieces in it, you're right there, but there was also a big general research market business that has been very successful.

So I wouldn't now pinpoint a specific target number -- that would be going deep into our books here, but clearly we have targets, and the primary target is always organic, and the secondary target is then how can we accelerate that through partnerships and acquisitions?

Operating margin, Brian, we haven't necessarily increased the guidance there, but as you have seen in the first quarter, actually we clearly outperformed it. I think, as we gave a range on our guidance to the fourth quarter as well as for 2006, I think there is now, of course, a certain lean into that, and we are working on that as well.

Jason Weiss, Robert W. Baird.

I'm wondering if you could give a little color on the instrument uptick that we saw in Q1, specifically which customer market you may have seen this uptick in, if any?

That was definitely a very nice development in this first quarter. The instrument uptick was pretty much across the board. We saw especially good growth, interestingly, in pharmaceutical and biotech customers. There continues to be good growth in the Molecular Diagnostics and Applied Testing segments, but in pharma and biotech, I'd say that was probably one of the larger drivers in terms of change to previous periods.

What we also saw is the Applied Testing area, and there some instrumentation sales were also recorded along the avian flu and other pandemic surveillance initiatives, but this was not the main driver in terms of revenues, it was pharma/biotech.

As a second question, the convertible debt -- has that changed your guidance and, if so, what impact?

No, hi, Jason, the convertible debt, as we also announced today, will be probably accounted as the first convertible with debt meaning under treasury accounting method. That means we do not expect any dilution out of this deal up to the struck prices -- probably next year within the $40 area. We don't expect any dilution.

Derik de Bruin, UBS.

Since most of my questions have been answered, I'll be more broad-based one. Where do you see the adjusted operating margins and gross margin topping out [inaudible]?

I'll hand that over to Roland, but just to start -- we more look at operating expenses per sales dollar. That's a measure for efficiency. It depends on the gross margin of a product, ultimately what the operating margin ends up at, but the operating expenses per sales dollar are internal management control ratio that we use, and I'll hand over to Roland for specific guidance on that.

Yes, if you recall, we significantly improved cost margin over the last 12 months. It's more or less up from 67 beginning of last year now it was 70% in the first quarter this year. I think there are two drivers for this -- or actually, three drivers. One is definitely product mix. I think also selling more and more production in Molecular Diagnostics there and Applied Testing has been improving our gross margins. We still are able to improve our utilization of production equipment. I think it is also still a lot of space and time for us to go into the next two to three years without having a major investment request there. So I think -- and the third one is definitely a [certain] impact of pricing as we also laid out today. So I think given the combination of this, I think we are on track also on meeting our gross margin goals for this year.

At this time, I'd like to hand the floor back over to Solveigh Mahler for any closing remarks.

Okay, thank you very much, Ian. I would like to close this conference call by thanking you all for participating. We hope to welcome you again to our second quarter earnings conference call on Tuesday, August 8, 2006. 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-bye.

Thank you, this concludes today's Qiagen first quarter 2006 results conference call. You may now disconnect your lines and have a wonderful day.