Qiagen NV (QGEN) 2006 Q2 法說會逐字稿

Good morning. My name is Melissa and I will be your conference facilitator today. At this time I would like to welcome everyone to the Qiagen second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]. Thank you. It is now my pleasure to turn the floor over to your host, Ms Solveigh Mahler, Director of Investor Relations. Ma’am, you may begin your conference.

Thank you very much, Melissa. Good morning and hello, everybody. Thank you very much for joining Qiagen’s second quarter 2006 conference call. Qiagen experienced a successful second quarter 2006 with revenues exceeding Company’s expectations and earnings per share being on the high end of Company’s projections, leading to be on track to reach its targets set for 2006.

I am Dr. Solveigh Mahler, Director of Investor Relations at Qiagen. With me on the call are Qiagen’s CEO, Peer Schatz, and Qiagen’s CFO, Roland Sackers. The conference call will cover a 20 minute presentation followed by a Q&A session. We will be using a presentation during the conference call which can be downloaded from the Investor Relations section of our homepage at www.qiagen.com.

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 discussions and reports that Qiagen has filed with the U.S. Securities and Exchange Commission. With this, I would like now to hand over to Peer Schatz.

Thanks, Solveigh, and welcome to the second quarter 2006 conference call. It was a quarter of great successes here at the Company, both in terms of financial targets, strategic targets and other targets. We came in in line or above our targets that we set for this second quarter.

In terms of revenues, our guidance range was $108m to $111m in net sales, and we came in at $113m reported, or $112m using the currency rates as of January 31, 2006, which was also the currency rates that we used for our guidance. So clearly ahead of our net sales target range for the second quarter.

In terms of EPS, we guided for a $0.12 to $0.13 adjusted earnings per share. We came in at $0.13, at the high end of the guidance range. In terms of operating margin, we had guided for 25 to 27% operating margin, and hit 26%.

Our strategic targets were also very well in line. We achieved a very nice mix of organic and acquired growth in the second quarter, 13% overall growth, 3% from acquisitions, 10% organic. And evidence of expanding market leadership, also technology leadership, expanded significantly in the second quarter.

In terms of another strategic target that we set for the year, to grow our Molecular Diagnostics business, it continues to excel. We had again a very strong quarter in terms of sales in Molecular Diagnostics.

Our innovation success continued very strongly in the second quarter. We introduced 24 new products in the second quarter alone, achieved 4% of sales from products introduced within the last 12 months, which clearly is a very strong number.

In terms of our strategy execution, also a lot of exciting things happened. We acquired Gentra Systems. We talked about that in the first quarter conference call. But some of the events that are quite significant are the expansion of our Molecular Diagnostics sales channel. We talked about that in previous conference calls. That continues and actually accelerated in the second quarter.

We are seeing quite some success also from our new Applied Testing sales channel. We’re investing heavily in Asia. At the end of the first quarter 2005, we had about 50 people in Asia. We now have about 270. So dramatic expansion in Asia and we’re seeing also very good growth there.

We continued to have success in integrations, and I’ll give you a report card on the 12 month post-acquisition numbers for artus. So again, a strong second quarter. Qiagen is well on track.

Thank you. A breakdown that you have seen before. The consumables continued to have about 90% share of our sales. They are growing very nicely at about 15% constant exchange rate. Instruments about 3% constant exchange rate growth, especially good growth in our BioRobot product lines.

The geographic breakdown is similar to what we saw in previous quarters. What is very nice to see is a big jump in Asia, very strong growth in especially China, but also Japan continues to perform very nicely after a difficult period about two years ago and showing some good growth.

The next slide shows a development of our organic growth rate. The second quarter was a little bit different than previous quarters. There was a big difference in working days in the second quarter compared to the same period of the prior year, about two working days less in the second quarter. So, if we’d adjust for that, we are running at about the same organic growth rate as in the first quarter of 2006. We came in at about 10% organic growth rate, still well ahead of the industry trend, almost two, if not three times faster than the industry in general.

The breakdown of our organic growth rate, as we’ve shown also in previous quarters, here it comes from a certain price component, volume component. The 4% came from new products. This is again a demonstration of the success of our innovation engine. 3% came from acquisitions and we ended up with 13% overall growth.

On the next slide we have a breakdown of our markets by customer. Academia, about 40% of our sales, showed very strong numbers in Europe. We’re also seeing very good growth in Asia. In Europe, especially Germany and France, showed very strong growth. And in the Pharma sector, about 25% of our sales, we saw very strong growth across the board, both U.S. and in Europe. We have a big focus on Pharma here, which we initiated in 2006, especially in the area of biomedical research, and this is paying off very handsomely.

Applied Testing, a small but very dynamic area of growth. We are focusing here on forensics and veterinary testing and bio-warfare detection. This is an area of very rapid growth, about 10% of sales, as I said. We established new channels into this sector in 2006 and are seeing quite some success.

Diagnostics, about 25% of our sales, continues to perform very nicely. Again, I’m reiterating this, we’re addressing today’s market with pathogens, but have a lot of opportunities and activities in areas such as bio-markers and others. We have created significant accomplishments also in the second quarter, especially in the second quarter, in building and expanding our sales channel, and we feel very good about our position also going forward in this sector of strong growth.

So clearly we’re focusing our resources on growth areas. We’re creating and building momentum going forward.

I’m very often asked what products we’re developing, what exactly it is that we’re launching and how we go about defining what we want to launch and how we position it in the portfolio. And I’m using this case study here, in the area of gene expression. Now, gene expression analysis is a rapidly growing market. It is -- there’s an increasing need for sample stabilization, especially in pharmacogenomics.

As we all know, there were new FDA guidelines for the industry on providing genetic information, monitoring patients also, to increase the efficacy and efficiency of drug development. This is an area of increasing interest, as I said, and especially in some of the areas such as oncology, the processing of complex samples is extremely tedious and difficult.

Qiagen is of course a very strong market and technology leader in the space. We’re already in the area of purification. We have about a third of the market for the RNA processing in this area. The rest is primarily using homebrew.

Now, in the second quarter we launched a number of products that are very uniquely focused on solving the chain in gene expression. We launched a number of stabilization products which contain novel chemistries in some cases. And I’d like to highlight the RNeasy Protect Saliva Kit that stabilizes RNA expression patterns in saliva, an increasingly important area of sample collection due to the fact that it’s obviously easy to collect them, for some patients the only way to collect the sample. In addition, we launched the RNeasy Protect Cell Kit, which stabilizes RNA patterns in cells.

If we go then to the next step, into sample disruption, we launched a product called TissueRuptor, which is a small hand-held device that disrupts cells and breaks up the cells and releases the content. It releases the content for subsequent purification, which -- where in this area we clearly have very successful product lines, a whole family of RNeasy and MagAttract products.

But we launched in the second quarter a very interesting product in the area of micro-RNA purification called miRNeasy, which addresses, obviously, a rapidly growing area of research in micro-RNA.

And then downstream processing and gene expression is performed typically using micro arrays, or RT PCR, and we launched a number of products in the area of RT PCR based gene expression technologies and products.

So clearly, you see we go about this in a very consistent manner. This is a growth area. We had certain needs in this area. We developed them specifically -- developed products specifically addressing those needs, and have a very, very complete product offering in the area of gene expression.

Now, we have once before already given you a 12-month report card on acquisitions, 12 months post-transaction. And I want to do this today with artus. We acquired artus in May of 2005. It was a small company, a very successful acquisition for Qiagen. It brought us heavily into the Molecular Diagnostics market. The market clearly is very attractive. It’s a $2b market growing at about 20%. Qiagen is a leader in PCR-based testing in this market today.

We had guided for revenues for fiscal 2006 of $15m. And I can disclose that for the first six months of 2006, so half of the year 2006, we already achieved $9m in sales. We launched a whole suite of products addressing certain assays for pathogens, such as CMV, West Nile Virus, influenza, also the Avian influenza targeted product, tuberculosis, chlamydia, HSV and a number of others.

The integration was completed in February of 2006. Qiagen Hamburg, the former atrus location, is today Qiagen’s assay development center of excellence and has actually been expanded. The acquisition was very catalytic. We’re linking pre-analytical with assay technologies very successfully. We mirrored that capability with the acquisition of PG Biotech in China, and have now a complete set of assays and pre-analytical solutions that we’re rolling out globally.

Now, artus was more than just a small diagnostics company. It gave us a complete suite of intellectual property and technologies that we’re rolling out into Molecular Diagnostics, but also into Applied Testing, especially into the veterinary area, where we have a number of activities.

So if we look at this, both in terms of financial targets as well as also strategic targets, we believe this is a very impressive one year post-deal report card for the artus GmbH acquisition.

On the next slide some stats that we put together for our annual report, which we think are quite impressive. We did some analysis and it turned out that we are actually the Company with the broadest portfolio of Molecular Diagnostic assays in the world today. We have over 85 products, including 31 CE marked and 10 SFDA marked products, in addition to that a number of other products that we’re marketing actively in various countries in the world. We also have select assays for genotyping and veterinary medicine and a strong pipeline of complete biomarker panels for certain disease profiles.

So a very, very interesting acquisition, very catalytic into our assay and sample technology base here at Qiagen.

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 second quarter 2006. The guidance we provided you on February 14 outlined our revenue expectations in the range of US$108m to US$111m. We were pleased to announce that we were able to exceed this guidance range with reported revenues coming in at US$113m for the second quarter 2006 and, on a constant exchange rate, based on January 31, 2006 exchange rates, this would be US$112m.

We achieved an operating income margin of 26%, which is fully in line with the guidance we provided of 25 to 27%. We exclude from this adjusted figures, as well from our guidance any acquisition, integration and relocation-related charges, as well as amortization of acquired IT and equity-based compensation. We do this to show true operating performance in a period of very active acquisition activity.

Our EPS, in fact, also came in at the high end of our guidance. Where we had guided for $0.12 to $0.13 a share, we achieved a solid $0.13 per share. Both guided and achieved EPS was on an adjusted basis. Cash EPS, calculated using cash from operations divided by the number of fully diluted shares, was $0.15 a share.

Breaking these figures down, the revenue segment in the second quarter 2006, our Consumables business, which accounts for approximately 90% of total revenues, grew by 15% excluding foreign currency translation effects. This growth was driven mainly by an increasing demand in assay technology and real-time PCR related consumables. With 3% growth under constant currencies, we are seeing growth in shares of key Qiagen BioRobot instrument product lines.

Given the multiple acquisitions we have made in the recent months and the fact that we have been able to maintain good organic growth, we would like to show this next slide to depict these numbers for you, both on an actual and on a constant currency basis.

Overall, we are running at a strong organic growth rate of 10% in the second quarter. In particular, our Consumables organic growth rate of 11% is in large part due to what we always have described as our innovation engine. We are able to use our continued focus on our core business to accelerate growth in new and expanding markets, such as Molecular Diagnostics and Applied Testing.

Our organic growth rate is one of the fastest in the industry. However, at the same time, our acquisitions are demonstrating contributions of about 3% of our overall growth.

We regularly report adjusted results to provide you with an additional insight into our financial performance, as you can see from the next slide. The adjustments in the second quarter are slightly higher than expected. This is mainly due to foreign exchange rates and faster integration of acquired businesses.

With regards to amortization of acquired IP, we do foresee a current run rate of US$2.5m pre-tax for each of the quarters three and four this year, including the Gentra acquisition.

Overall, the second quarter numbers break down as follows. We continue to have strong top-line growth with significant operating income growth, delivering earnings out-performance. Our net sales of US$113.2m this quarter compared to US$100.4m for the same period in 2005 reflects a solid growth rate of 13%.

For better comparability, looking at our financial performance on an adjusted basis, our operating income demonstrated approximately 50% growth over the second quarter 2005, our reported net income also demonstrating a very strong growth of 21%. Also, with regards to diluted earnings per share, an increase of 18% to $0.13, up from $0.11 for the comparable quarter in 2005.

We are consistently delivering a strong gross margin and this quarter is no different, with a growth rate of 19% on an adjusted basis, up to 71%. We continue to gain efficiencies through different product mixes and economy of scale, in addition to [borderline] distribution of higher margin to Molecular Diagnostic products. This is a clear estimation that we are on track in growing the Company by focusing on stronger high margin consumables and putting less focus on such areas as lower margin services businesses.

As graphical support of what I have just described, we typically show you this slide showing our margin development. Gross margin was primarily driven by our increased high margin Consumables business. We achieved 67% in the second quarter 2005 and 71% this quarter.

In terms of our operating income margin, we are using our positive strategic momentum to invest aggressively in growth areas such as China or Asia in general, as well as in establishing an Applied Testing sales force and expanding our Molecular Diagnostics sales channel. Despite this investment, we were still able to achieve operating margin numbers solidly in the middle of our guidance range. We feel, given our strong revenue outlook, these additional investments can be leveraged quite successfully in the near future.

Let me switch gears here for a moment and show you how we compare on a first year half -- on a first half-year basis. We believe our performance for the first six months to be a good indicator that we are well on track for a successful 2006 with growth of 14% in net sales, 19% in gross margin, 20% in operating income margin and 24% in EPS, all on an adjusted basis.

Just to highlight our operating cash flow of US$23.5m in the second quarter, a slight decrease to the same quarter last year but an increase over Q1 2006, where we had US$22.3m. Also to note our free cash flow for the quarter of US$17.7m, with a second quarter of 2005 of US$22.2m and still showing a strong cash EPS of $0.15 a share.

One of our key strategies in expanding our positive cash flow is active management of inventory levels and day sales and accounts receivable. Our inventory days came in at 160 this quarter, slightly higher, mainly due to foreign exchange impacts. Staying on par with last quarter, our receivables DSO was 62. Also higher than in comparison to last year, our CapEx remains in line with our yearly projections.

A quick glance at our employee numbers show that overall we have increased our headcount by 23% versus the same quarter last year. With the integration process well underway of our Asian acquisitions, our staff size in Asia has increased significantly from 102 in the second quarter 2005.

So with 1,841 employees globally, we have expanded capacity but at the same time are running a lean, tightly controlled organization. We’re maintaining a strong focus on our core competencies and ensuring we drive innovation and growth forward.

With this, I hand back to Peer.

Thanks, Roland. So you see a strong second quarter for Qiagen. We exceeded our revenue targets. Our EPS came in at the high end of our guidance range, and our EPS year to date, of $0.26, 24% growth compared to 2005. Our operating income margins were in line with the guidance of 26% adjusted, but importantly, our strategic positioning is very strong and the momentum as well.

We are building and expanding our position in Molecular Diagnostics, in Applied Testing. We’re focusing on our core competencies. We have that very well defined here at Qiagen, and both the internal and external growth initiatives all focus around these sets of core competencies that we have here at the Company.

We’re present in key markets directly, both in terms of customer market segments but also in terms of geographic market segments. We clearly invested heavily in 2005 into expanding our footprint in Asia, and we’re seeing the fruit of that in the year 2006.

So a strong growth engine. We continue with our development-focused strategy. We have 24 new products we introduced in Q2. I gave you a case study on how we go about selecting and introducing such products. 4% of sales came from products introduced in the trailing 12 months, clearly a very strong number, significantly up to previous years at Qiagen. We’re continuing the strong performance that we’ve seen now for a few quarters.

We continue very actively in partnering, have over 50 academic and over 50 commercial partnerships ongoing to develop and introduce products together with partners. We did one acquisition in the second quarter, acquired Gentra Systems, an accretive and highly focused and core acquisition for the Company. The integration there is already going very well.

Also, the integration success in general, I showed you our artus 12 month post-deal scorecard, which clearly is quite impressive.

We’re reiterating our guidance here in this call. This guidance was increased in our May 9, 2006 conference call. So what we can sum up is that the Company is clearly here executing on its plans. The Company is expanding. We’re setting standards and we look forward to building our business going forward.

With that, I’d like to hand back to Solveigh.

Thank you very much, Peer. We are now looking forward to discussing your questions. I would like to open the Q&A session by handing over to the Operator. Melissa?

[OPERATOR INSTRUCTIONS]. Your first question is coming from Quintin Lai with Robert W Baird.

Hello, nice quarter.

Thanks.

With respect to the quarter, could you tell us a little bit about how your Molecular Diagnostics franchise grew in the quarter?

Sure, Quintin. We never really split out that number specifically; our primary reporting is on geographic regions. But the second quarter continued to be very strong in the Molecular Diagnostics business. It’s growing about twice as fast as the overall business here at Qiagen. And so clearly gaining market share in the pathogen area, which is probably the market growing at about 15%.

But the reason why I ask that, Peer, is that as we look at the second quarter reporting in the Life Sciences, most companies have been reporting 6% organic growth and your 10% organic growth is well above that. And one of the pieces that it seems like Qiagen has that other companies don’t have is the Molecular Diagnostics and Applied Testing market. So I’m just trying to decouple what you’re seeing in your core Life Science research products, and how the other two markets are helping to enhance your growth above market.

I can’t say we are seeing an organic growth rate in the other markets in excess of that average growth rate, which we understand is around 4% on average, depending on who you include or exclude. So we’re well in excess of that. And I think the secret behind that is a very focused strategy that’s around a set of core competencies and heavily focused on innovation. And that, as we show from the breakdown in our organic growth rates, is clearly the main driver of our organic growth rate.

Now, on Molecular Diagnostics, it’s both a mix of innovation and also a strong market growth. You might want to say that half of that premium that we have in organic growth rate might be coming from a focus on higher-growth market segments. Also Applied Testing is growing rapidly. And the other half is simply a premium that we’re growing at in the Life Science research markets.

Thank you. Congratulations on a nice quarter.

Thanks, Quintin.

Thank you. Your next question is coming from Erica Whittaker with Merrill Lynch.

Hi there. I’ve just got a few questions. Regarding the growth of instrument sales, in the first two quarters it was low single digit. Would we expect that to be a similar growth rate in the second half?

Looking at spending on sales and marketing, the first half trended at about 25% of sales. And again, I’m wondering if that’s a level that you’d like to maintain in the second half of the year as well.

And regarding artus, your sales were, in the first half from that business, were ahead of what you were expecting. Is that mainly because the product launches were ahead of schedule or if you could explain a bit more what you think is driving that better performance?

And then finally, for Roland, I just wanted to clarify what you said about acquisition-related costs. Did you say that there would be about $2.5m per quarter in the third and fourth quarter relating to cost of acquisitions you’ve made earlier in the year, or did I completely mishear that?

Okay. I’ll take one and three, and Roland two and four. So the first question was regarding the instrument growth rate.

Yes.

We had targeted for the year a growth rate in instrumentation of about 9%. And we feel pretty good about the growth rates in instrumentation going into the second half of the year, with the number that we have today. If you look at the third and the fourth quarters of instrumentation sales in 2005, you will see that they were quite low. So if you would continue at this level and increase it only slightly, we should be well on track to make our targets for the year.

So 9% for the whole year then, which means quite an up-tick in the second half?

Well, again, it’s a mix of previous year, or comparing a previous quarter, and also the second half of the year being a period which is typically a little bit stronger.

Yes, okay.

The second question was around artus and, yes, we are very pleased with the performance at artus. It’s difficult to separate these two. And I think any good acquisition, or 12 months into an acquisition, it would be very difficult to separate what is really artus and what is really Qiagen. So what we did is we actually excluded more from the artus numbers. We actually have a number of products that we launched through an artus platform which were actually Qiagen-developed products.

But it is a mix of new product introductions, yes. It is also a mix of simply a good combination of linking the pre-analytical and the assay technologies that we’re seeing quite some success in. So the Qiagen brand name fits very well with the artus brand name. And our customers really like that combination because they can rely on a complete functioning chain from raw sample to amplified analyte, and that is going across very well.

And do you have a similar number of product launches expected from artus in the second half?

We have a number of product launches for the second half. We don’t detail those but we will certainly announce them when they come out. But there is a very strong pipeline at artus. And we did actually expand the assay development base quite a bit, and I can also say that the assay development center of excellence, which is Hamburg, is now closely linking up with our Chinese assay development center in Shenzhen and we are starting integrated projects there, already such projects are underway. So we’re leveraging quite a bit what we have in terms of firepower, innovation firepower, and we feel quite good about our pipeline going forward. So we have actually invested quite a bit into assay development.

Hi, Erica.

Hi.

I think I am starting with your last question. I was actually referring to the amortization of acquisition-related intangibles, so the number for the quarter was 1.9.

Yes.

And for the third and fourth quarter, they will be around 2.5 for each quarter, as this includes then Gentra.

Okay, super. Okay, that’s great, thanks.

And on the sales and marketing expenses, as I mentioned before, the reason why we probably are slightly diluted here in the second quarter is as we had seen a large strategic momentum in the first and second quarter, and we heavily invested in Asia, as you know. While the PG Biotech is the first time included in the same time for a period. And therefore, unfortunately not all companies are efficient as Qiagen, so it takes us probably another quite a bit to bring them up to our leverage factor. But again, given the momentum we’re seeing on our revenue outlook, we expect this will happen in the quite near future.

Okay. So were you saying that some of the second quarter sales and marketing costs were one-offs, trying to improve infrastructure?

No. For example, we acquired PG Biotech end of last quarter. And one of the reasons what you are doing is you streamline that, and you integrate it in Qiagen Asia’s structure. But this takes some time. Of course, you want to do it in a controlled way. And so on the one hand side you have one-offs. On the other way, you have an existing organization which you can’t ramp down from one day to another day.

No, okay.

It takes you at least three months. And as we had done a lot of acquisitions, I think that is one of the impacts. But again, given that, we still are in a very good position in the middle of our guidance. I feel quite confident for the third and fourth quarter that we will see some success here.

Okay. Thank you.

Thank you.

Thank you. Your next question is coming from Maykin Ho with Goldman Sachs.

Hi. I have a couple of questions about Asia. You’re investing quite a bit in it. At this point, is the Asian business profitable? And, if not, when do you expect it to be profitable? Number one.

Number two, at this point it’s less than 10% of the sales. If you look out in the next three to five years, obviously with a fast growth rate it should be a pretty significant part of the business. What do we expect that to be in three to five years?

Yes. Hi, Maykin. The first question is the profitability of the business that we have there. When we acquired TianGen with about 50 people, and that has increased also in the meantime, in 2005 we said that would be accretive 12 months out. So we’re there now. And that would be something that we also can give an update on maybe in the next conference call.

And with PG we said something very similar and both companies are going quite nicely. We have said that they would be neutral on an overall basis to the Company in the first year post acquisition. And we do also have our own distribution infrastructure in Asia. So we’re not losing money. We’re just investing some of the rapidly expanding margin that we have in Asia back into our sales and marketing infrastructure and also into manufacturing infrastructure there.

We feel quite bullish on the outlook going forward. There are some differences between the research and the diagnostics markets. The diagnostic markets in China are quite advanced. The use of molecular techniques is widespread. In the meantime it’s focused on certain labs. But it is pretty standardized. The Chinese FDA is very well advanced in the regulation of these types of techniques. And we have a great position there as one of the only companies, for instance, licensed by the SFDA for blood banking.

And so we think that this growth will continue going forward for quite some time, especially out of the diagnostics markets. And it’s difficult to say where we are in five years. But the outlook that we’re getting from our people on the ground as well as from, I’d say, the various sources of intelligence in this space is that we should probably see at three to five-year horizon comparable growth rates to what we see today.

Right. So you still expect over 30% growth in three to five years?

Yes. And one of the reasons is that China is often focused on but there’s a lot more outside China. And we have a nice base. We’re not just importing into China, but we’re actually manufacturing in China and have a broad portfolio of products that we can expand into the complete Eastern/South Eastern Asia area. And so I wouldn’t focus only on China as that growth engine, but more or less that whole region, yes.

And [when you] look at the operating margin is lower year over year because of the investment. When should we expect it to start to expand, meaning that the investment would at least not drag down the operating margin?

Hi, Maykin. Roland here. I expect something what we should see also in a shorter timeframe. Again, given our expectation for the third and fourth quarter and then probably also the mid-term outlook, I would assume that is something which shouldn’t take too long.

Okay. That’s good. Thank you.

Thanks.

Thank you. Your next question is coming from Peter Welford of Lehman Brothers.

Hi. Two questions. Firstly, could you please outline the operating or adjustment for acquisitions, the one-offs you anticipate in the third and fourth quarter? Because I think it looks as though you closed some of the acquisitions a little bit earlier than we expected, so the 7m was a little bit higher than most people thought for the second quarter. Could you just outline what you anticipate at the moment for the third and fourth quarter, assuming no additional acquisitions at this stage?

And the second question is just on R&D. It looks as though the absolute amount of money you spent on R&D in the first half of this year is very similar to that spent in the first half of last year. So could you just perhaps outline how, perhaps, that spend has perhaps been used more efficiently or what you’re doing with that spend, given that it doesn’t seem to be growing very much, certainly in line with the sales growth we’ve seen during the comparable two periods? Thank you.

Hi, Peter. Roland. I will probably go ahead with the first question and Peer take the second question. As mentioned before, what we’re normally doing is, when we are announcing deals, we try to summarize all the acquisition-related costs and announce and get them as fast as possible in our books. I think the second quarter was a very good example that we were able to drive these integrations even faster than we expected. And therefore I think this is a very good example for our integration strategy at all.

What we expect for the third and fourth quarter is that we have seen probably most of our integration and relocation. Of course, there might be some amounts coming through the pipeline. But again, it’s -- furthermore it’s not included in our guidance and certainly, again, we normally drive it that we have everything in line once we close a deal.

The second question, Peter, I’m not quite sure I completely understand it. We had the first quarter -- in the second quarter of 2005 8.729m in R&D expense, and in the second quarter 2006, 10.235m. And also for the six months ended June 30, we had, in 2005, 18.245m in R&D expense, and in the second quarter -- in the first half of 2006, 20.423m. So this is on the P&L attached to the press release.

Okay. I think we -- the number we had for the second quarter was higher than that. Maybe the second quarter ’05 has been restated. I’m just looking back.

No restatements. I’ll hand to Roland for that.

I think one thing to note, what we did as of January 1 this year is we have an additional line with the acquired -- with the amortization of acquired related intangibles. So we -- overall, the numbers, of course, are the same and there was no restatement. But we pulled out of research development, cost of sales, SG&A and [whatever was] amortization of the acquired IP into a separate line item. And we did this, of course, for every year that you have, that you compare apples to apples.

Okay. Thank you.

Thank you.

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

Hi there. Good afternoon.

Hi, Brian.

A couple of fairly general questions, to be honest. I just wondered if you’re focusing again on Molecular Diagnostics and Applied Testing. These are pretty high growth areas for the Company. Can you give us an idea of what proportion of new products you’re targeting for these areas?

And then secondly, obviously it needs to be a good thing to increase your exposure to these areas, and therefore does it makes sense to sacrifice some of the near-term margin improvements to put more effort behind developing your market leadership in these areas?

Yes, good questions, Brian. I think the second question targets exactly what I think we’re seeing here in the second quarter. We have been very selective in choosing our growth opportunities but now we’re aggressively pursuing them. And in 2006 we did create an own sales channel for Applied Testing, focusing on especially veterinary, forensics and bio-defense. And we also created or expanded our Molecular Diagnostics sales channel quite significantly actually. And that is also visible in the expansion of the sales and marketing expenses in this second quarter.

So we are well on track. The revenues are growing very -- coming along very nicely at a very high growth rate. We feel very confident about our innovation pipeline. And we’re using this to invest into further growth in terms of market segments, and Applied Testing and Molecular Diagnostics are clearly very important here. Also the geographic expansion into Asia, which started in 2005 and accelerated now in 2006 with the acquisition of PG.

So that’s exactly what we’re doing. But we’re being very, very cognizant. We have -- we’re a growth company. We have top-line growth. We are expanding our operating margins also in this year. We have been meeting or exceeding our operating margin targets now for quite a few quarters in a row. And this is evidence of a very strict discipline here at the Company in terms of managing our expenses and our expansion.

In terms of the MDX growth, it is certainly an area of -- where I think it’s a mix of a few things where this growth is coming from. It’s, first of all, the expansion of the channel was very important. Also the fact that we are now in the market not only with the preparation products, it’s that pre-analytical process, basically taking raw samples and ending with the purified analyte. But we’re now ending actually with an amplified target analyte, so including the molecular diagnostic test, actually.

And that clearly has been very catalytic and sparked a growth not only with the assay products, but also with the sample processing and instrumentation products around that. So it’s fulfilled our expectations very nicely and that’s really the secret behind this success in our Molecular Diagnostics business.

Okay. That’s clear. Thanks, Peer.

Thanks.

[OPERATOR INSTRUCTIONS]. Your next question is coming from Derik de Bruin with UBS.

Hi. Good morning.

Hi, Derik.

A lot of the specific questions I had have been answered. I guess just -- could you just talk about what you’re seeing in terms of just academic spending and what’s going on, I guess both U.S. and if there’s been any pick up in the European economic spending briefly.

We’re actually seeing, as you see from the numbers, very good growth in Europe, and have been very successful in targeting what we think are growth opportunities within these huge budgets. I think the difference -- we’re not basically riding a market. We’re focusing on growth areas within very substantial budgets that are allocated in the various countries. And that gives us an opportunity to grow, I wouldn’t say independently of budget developments, but to have a certain degree of flexibility or independence in a way at least.

And so we’re seeing good growth in some of the segments in Europe for molecular testing-related areas and the States is a little bit slower. [DNA] spending is clearly slow on the academic side. But there we’re focusing more on biomedical research areas which are semi-academic, but semi-drug development. And one of the themes that we’re seeing very attractive opportunities for us are bridging this academic drug development barrier and creating products or offering products that facilitate drug development processes.

So that’s really a segment where we not only created a separate sales focus, as with a marketing focus in 2006 on, but there we’re also seeing very good growth in.

And so truly a mixed bag by country. I could go through the various countries that -- I’d say one of the highlights has clearly been Japan, which is back into growth. It’s single digit, but not bad single-digit growth and clearly a lot better than it was about two years ago. And Europe is clearly performing very nicely. And I highlighted the U.K. and Germany. And France has also been doing very nicely.

And so we don’t really expect a big change overall. Individual countries might change going forward but this is just a great market. And we’re spending a lot of resources on it because every year there are like 10,000 or 12,000 papers written using Qiagen products. And this is an area where standardization occurs. And people who want to use Applied Testing products or Molecular Testing products in diagnostics, they will very often resort to what academics are using. And this overwhelming number of Qiagen citations in the areas that we focus on is clearly an extremely important area for us.

Okay. Thank you.

Thanks.

Thank you. Your next question is coming from John Sullivan with Leerink Swann.

Hi, guys. Good morning.

Morning.

A couple of quick ones. First of all, are there any trends that you’re observing in your business in the growth rates of work for nucleic acid analysis versus the growth rate of the work for protein analysis? Any changes in trend in those two broad areas?

That’s an interesting question but it would be very, very tough to answer because there are so many different analytical techniques. So I would really have to try to generalize here. And we clearly sell sample processing also for protein analysis or for [inaudible] of mass-spec products, also the crystallization products. Some of the pockets are showing extremely high growth. Some of the products are in comparable growth rates to the nucleic acid area.

So, in general, not a huge difference. It really depends on the area of growth or the area of products. There are certain product areas that -- I would say there are quite a few very attractive areas in proteomics. It’s a more diverse and segmented market compared to the nucleic acid area. But certain of these areas are very attractive. I wouldn’t really make a big differentiation overall.

Okay. Thanks very much. And then secondly, can you speak for a moment about your products for sample prep for microarray based genotyping analysis? And can you speak about whether you have new products lined up for this activity?

Sure. Well, to process a sample for downstream genotyping, be it using a microarray or mass-spec or other types of techniques, the upstream sample processing is very critical. And depending on what -- if you pick out microarrays, depending on what product you’re using, there will be very complex sample processing steps.

We have a number of products in this space. First of all, what is increasingly used, for instance in pharmaceutical drug testing, is our PAXgene DNA collection device. We also have a collection device for DNA. There are also some important factors -- biological chemical factors to be considered when collecting DNA.

And we then have the purification device. We also have the whole genome amplification product. That’s for minute samples, which is very often the case in pharmaceutical companies where they have large sample databases and want to do post-trial genotyping, or even during the trial doing genotyping. We have the whole genome amplification products that amplify smallest amounts of DNA to extremely high quantities for unlimited downstream processing.

So those are really key products in that area. Then you could think about amplification-related products, depending on the downstream detection technique used. So DNA processing for downstream genotyping, using sequencing, using microarrays, using mass-spec, using other types of techniques, yes, Qiagen is very present there.

Thank you.

Thanks.

Thank you. Your next question is coming from Daniel Wendorff with WestLB.

Yes. Hi there. I had a question regarding the oper -- sorry, the gross margin development. This has improved quite reasonable year on year. I’m just wondering how far that can go, also depending on the importance of Molecular Diagnostics and the Applied Testing setting.

And if Asia becomes even more important for your overall geographical revenue split, does this also have an impact on your gross margin?

Yes. Hello. Yes, you are absolutely right. I think it’s now the third or the fourth quarter where our gross margin is clear above 70% and up from, even looking at the second quarter, 71% compared to 67%, quite a significant difference. And it’s driven by several factors. I think one driver is definitely, as you know, we -- Qiagen is able to improve prices every year. We did this also beginning of this year. This always has an impact. We do this quite carefully. Given the market share we have, you do this always in a careful way. It’s probably something around 2% on average.

Second, we still see a lot of possibilities in the production area. We’re still running on a current utilization rate of probably around 60, 65%. We did significant investment now, I think, three years ago and we will probably -- we probably don’t have to do significant investment for another three years. So this will help us driving the margins.

I don’t think that the Asia expansion itself should have any positive or negative impact. Prices we’re seeing there are not much different on what we’re seeing in other countries.

And in terms of the level to which that can go, so is it like a 1% improvement year on year? Is that reasonable?

Yes. I think our goal is focusing more on operating margin itself. And we’re achieving something like 100 to 200 basis points year on year, I think. And definitely a certain portion of it is coming from gross margin as well. I think we are well on track.

Okay. Thank you.

Thank you.

Please be prepared for the last question.

Thank you. Your last question is coming from Patrick Fuchs, with DZ Bank.

Okay. I seem to be the last one. I have a question on -- you mentioned the revenues coming from artus over-exceeded your goals. What about the profitability that you expected there? Can it be allocated in the Qiagen setting? That’s the question.

And another question is you mentioned in your Molecular Diagnostic part that you’re going to develop or launch complete biomarker panel disease -- or panels for certain diseases. Can you specify in which area it will be?

And this relates then also on a possible acquisition strategy or what is mentioned, that you might be active in the area of Molecular Diagnostics. Will it be then more technology-based acquisitions in that field, or do you expect also to acquire significant revenue in that area?

Yes, good questions. We definitely have a very active content strategy. And we announced in our Analysts Day in February of 2006 our panel approach, where you, for instance, have a respiratory panel where you’d have influenza, RSD, [inaudible] virus, [then the virus] SARS, various bacteria, like bordetella, microplasmic pneumonia, which we just launched, chlamydia pneumonia, which we also just launched, [degenello] and microbacterial tuberculosis.

And this was -- is a complete panel that you can more or less run in parallel if you basically don’t know exactly what the patient has. And this has been a great success for us. So this panel approach is something that we will continue to do. And we have a transplantation panel, so diverse infections after transplantation. We have a respiratory panel. We have an encephalitis panel. We have a gastrointestinal panel and a blood panel. And there could be more going forward.

So the -- that is what we’re calling a panel approach. But yes, we are actively in-licensing and acquiring technology for further panels and also getting them in-house. Now, most of the pathogens are not patent-protected, so they’re not very expensive to get access to. I’d say most of them. There are certain exceptions, clearly.

In terms of the profitability of artus, it’s very difficult to say because we immediately integrate -- completely integrated the sales and marketing channel into our channel. We completely integrated the manufacturing processes. And the R&D infrastructure completely merged with Qiagen’s. The companies are not far apart and we have a number of people going back and forth here in Germany between the two sites.

So it’s difficult to completely separate that out. We did a very rough analysis in the second quarter for internal 12 months post-acquisition analysis, and we were very pleased with that result. So clearly we exceeded on the revenue line and -- or at least the first six months of this year. And the bottom line expectation is to be accretive. Post 12 months out, we feel very comfortable.

Okay. Thanks.

Thanks, Patrick.

I would like to close this conference call by thanking you all for participating. We hope to welcome you again to our Q3 results conference call on Tuesday November 14, 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 bye-bye. Have a nice day.

This concludes today’s Qiagen conference call. You may now disconnect.