Qiagen NV (QGEN) 2006 Q3 法說會逐字稿

Good morning. My name is Jessica, and I will be your conference operator today. At this time I would like to welcome everyone to the Qiagen third quarter 2006 earnings 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, Jessica. Good morning and hello, everybody. Thank you very much for joining Qiagen's third quarter 2006 conference call. Qiagen experienced a successful third quarter with revenues being in line with the Company’s expectations and adjusted earnings per share being on the high end of the Company's projections.

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 20 minutes presentation, followed by a Q&A session. We will be using a presentation during the conference call which can be downloaded from the Investor Relations section of our homepage at www.qiagen.com.

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

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

Now I would like to hand over to Peer Schatz.

Yes, thanks, Solveigh. Hello, and thanks for joining this call. The third quarter 2006 was another strong quarter for Qiagen. Both in terms of strategic and financial performance, we advanced well.

As summarized on our third quarter Overview slide on page 3, we had guided for net sales between $115 to $118m for this quarter. We achieved $118m on reported rates, and $116m using the same rates we had used for our guidance. Measured in constant currencies, this represents a growth a rate of 17%.

Our operating margin came in, in line with our guidance range at 26%, while we at the same time are expanding rapidly our business. Most notably ramping up our distribution channels in customer areas as well as geographically, as well as integrating companies and building a strong pipeline of opportunities for the future.

We had guided for $0.13 to $0.14 adjusted EPS, and came in on the high end at a solid $0.14.

Out of the 20% reported currency growth rate, 7% came from acquisitions we had made in the trailing 12 months, most notably SuNyx, LumiCyte, the Eppendorf Consumables business, PG Biotech and Gentra. Our overall organic growth rate came in at about 10%, 11% for consumables. It continues to solidly outperform the industry that most of our sell side analysts are peering us with. This time by a factor of two.

The third quarter in 2006 had one day less than the same quarter in 2005, but the per day organic growth rate came in comparable to Q2 and Q1 of this year. We've continued to execute in a very disciplined way on our strategy. Number one, absolute leadership in sample technologies, number two, leadership in assay technologies and three, disseminating those leadership positioning -- positions into Life Sciences, Applied Testing and Molecular Diagnostics.

In the third quarter we expanded our market and technology leadership in Sample and Assay Technologies using our sales strength and innovations. Our innovation engine continues to perform very well. We launched 14 exciting new products I'll highlight to you later, and are excited about our strong pipeline for future quarters.

We also partnered actively, including with the British Veterinary Laboratories Agency, or VLA, which I believe to be a very interesting partnership. Also hear more later.

We also announced one acquisition since our last quarterly conference call, the acquisition of Genaco, and I will talk about this acquisition in more detail as well.

Turning to the next slide, slide four, a very comparable picture to previous quarters. Some highlights. We performed quite well with our Instrumentation business, 7% organic growth. Gentra added some Instrumentation products as well.

We continue to see very strong growth in Asia, primarily China, reflecting fruits of our investments in 2004 and 2005. We also have a strong performance in Europe.

On slide four -- slide five, excuse me, we show a breakdown of our growth into the various components. Highlights continue to be the strong innovation contribution, the 4% from new products, and the nice mix of organic and acquired growth. This is evidence of a strong, organic innovation fueled engine and catalytic contributions of acquired technologies from businesses.

On slide six, we have the sales analysis by customer area. Academia is such an incredibly important business for us. In this market our innovation leadership allows us to build positions and standards far before an application goes industrial, even before it goes into pharma research. Over 10,000 publications are published referencing Qiagen products per year. The market is in a long term growth trend in the single digits. We continue to outperform that.

Our pharma customer area is showing very strong demand for Qiagen products. We have created focused key account sales channels last year. The unmatched performance of Qiagen product is a very strong argument in this area where huge investments are being made in drug development validation and testing.

In Applied Testing, our focuses are on forensics, veterinary biodefense. We're seeing very strong organic growth. It is still a small business, but very promising.

Diagnostics. 25 to 30% of sales, continues to grow rapidly.

So in terms of product focus, it is a quite clear strategy - sample and assay technologies. In terms of customer areas, Life Sciences includes both Academic and Pharma, Applied Testing and Diagnostics, the three segments that we fell into.

In terms of geography, we go global, with new channels, Life Sciences, Applied Testing and Diagnostics worldwide.

On slide seven, a few words on our M&A strategy. This model was actually shown in early 2005. It might have sounded a bit academic back then, but when we now look at it, filled with examples, it becomes quite a bit clearer. Number one, we acquire to expand our leadership in sample technologies. Number two, we acquire to expand our sample technology leadership into other molecule areas. We call this Systems Biology. And number three, we acquire to disseminate our sample and assay technologies into emerging customer areas, such as Asia, molecular diagnostics were the focus there.

The acquisition of Genaco was the acquisition of an assay technology targeting use primarily in Molecular Diagnostics.

On slide eight, some details on the Genaco transaction. We are very excited about this acquisition for the following reasons. Genaco's multiplexing technology, and I'll describe it in a minute, is highly complimentary in cross-fertilizing for a Molecular Diagnostics business. It already employs Qiagen components. So like Artus, Genaco has already been using our technologies and this allows faster integration.

Multiplexing is an emerging trend. Customers want to do more than one test per run, and PCR traditionally has limitations in multiplexing, or if it is done, significant sacrifices had to be made in terms of sensitivity. While multiplexing is used in genetic testing widely, where sensitivity is less of an issue, in infectious disease testing it has fallen far short. Genaco's approach represents a new dimension in sensitivity in multiplexing, and therefore allows a breakthrough in this area.

Genaco is early stage, but surprisingly advanced. We are planning at least two 510k submissions with the FDA next year, and want to initiate some more clinical trials. The majority of the expenses in the model that we laid forth when we acquired Genaco on the press release are targeting regulatory work.

On slide nine, a few more technical details. Genaco's proprietary Templex technology is basically an assay design technology which performs with PCR. It uses a combination of forward and reverse super-primers to avoid sensitivity inhibitors in a normal PCR. Detection of the results can be made on arrays or on Luminex. It is not tied to one detection system, whereby the current panels are optimized for use on the widely available Luminex platform, which Qiagen already has in its portfolio since quite some time.

We'll focus on targeting diagnostic applications with this technology. However, our teams in Applied Testing and Life Sciences have also identified some very interesting potential applications for Genaco's multiplexing technology.

On slide 10, we show why we see a lot of synergy in this acquisition. If you imagine a patient presenting symptoms in a doctor's office, traditional testing requires a quick diagnosis by the doctor, and the choice by him of a number of different tests he can choose from. These are then performed on PCR or on other platforms. With multiplexing, the choice of what tests should be performed is guided, allowing co-infections to be discovered, and also limiting the burden on the doctor to choose a test even though various pathogens could be the cause of one symptom.

To confirm the results of a multiplex assay, here Human Metapnemovirus, a qPCR test, which is the one from Qiagen, can be performed to confirm and or quantify the presence of the virus.

On the next slide, you see the acquisition -- that the acquisition of Genaco adds a series of steps towards a complete and entire change for multiplexing. Genaco basically adds an assay technology, and licenses for Luminex detection of the targets we've been talking about.

On slide 12, you see the deal terms. $22m in cash and 125,000 restricted shares to the Scientific Founder who has joined Qiagen, and we very much look forward to working with him to expand this technology in the future. There are additional milestone payments, but those are primarily based on the receipt of grant funds in the same amount as our milestone payment.

The majority of our investments and expenses will be for significant initiatives to get FDA and CE clearance on key test panels. The sales are still small until we get those approvals. $3m are expected in 2007, and the number is however, are expected to rapidly ramp up thereafter.

This deal will dilute Q4 2006 by $0.01, and the new guidance is there for $0.14 to $0.15 adjusted earnings per share. And the deal will dilute 2007 by $0.03 and be accretive falling in 2008. This reflects primarily, as I said before, works in the regulatory area.

Let me briefly turn, on our next slide, to the VLA collaboration. We announced this a few weeks ago. We had outlined our Applied Testing strategy in detail in our February analysts' meeting. VLA is a very prestigious institution in the United Kingdom. 16 labs and a network. It's the executing agency for the Department of the Environmental Feed and Rural. They have a broad test panel of veterinary tests. We acquired exclusive rights to seven assays and built a great basis for a partnership, and we are looking forward to a good pipeline of new tests, and have rights to such -- for the tests emerging in the future.

Vet testing is an interesting market. We define it as a sub-area of Applied Testing. It is about $100m in size and growing rapidly. We have a strong position in this early market, and look forward to expanding it, going forward.

On another note, on slide 14, we are often asked what our regulatory strategy looks like. We today have many products targeting use in regulated areas. They include our sample technologies. An example for that is our 510k approved packaging product, our assays, for example given our Artus or PT assays, and now also our multiplexing panels. We have a clear pathway for assays.

We also have a strong regulatory group which we built starting a few years ago, with experienced professionals from the diagnostics industry. This is a very big investment, and important for us.

We are in close contact with the regulatory agencies throughout the world, primarily in the United States, in Europe, in China and Japan. In the United States, we are selling some products as ASRs. The condition is being tightened currently, and Qiagen, like quite a few others, also very large diagnostic companies, have been contacted by the FDA and are now working with them to ensure compliance with the increased scrutiny of the ASR code.

The products that the FDA highlighted to us in a recent letter were former Artus products that had not yet undergone full integration, and generated only about $250,000 in sales, so not material. We are, however, taking our quality leadership very seriously and believe that also those products will be integrated into Qiagen standards and made compliant in a very short period of time.

Our next slide, innovation, key to Qiagen, and there's some really novel products that we launched in the third quarter, and I would like to highlight two, Fast Cycling and -- Fast Cycling PCR and FlexiPlate. Now, Fast Cycling is putting PCR into very rapid fast forward. The assays perform at the same quality, just four times faster. We have patent applications on this process and this is really exciting. Taking PCR from over an hour to 15 to 20 minutes is pretty dramatic and at all comparable quality.

FlexiPlate, on the other hand, is one more expansion of our leadership in RNAi. We were proud to see the Nobel Prize go to Craig Mello and Andy Fire for their work in RNAi. What also made us very proud was the widely used picture of Craig in his lab, and we took the liberty to highlight the blue and red boxes on -- in his lab, on this slide, as you see here on the left-hand side.

RNAi is a very important assay technology for Qiagen. With FlexiPlate, we're using novel manufacturing and design technology to create a new dimension and flexibility. While previously customers had to order a given set of tests, and amount of such tests, we are putting away with those limitations with FlexiPlate.

On the next slide, a further area I would like to highlight our Biomedical Tissue Management Systems. We have a big focus on biobanking and biomedical research overall. With Gentra, we added a technology for large volume blood processing, very often used in blood banking, and we are now here launching the corresponding DNA, RNA and protein processing technologies for tissues in tissue banks.

So, all in all, another exciting quarter for Qiagen. Another quarter of exciting developments. And with this I'll hand over to Roland who will outline how this is reflected in our financials. Roland.

Thank you, Peer. On several levels, the third quarter proved to be another period of solid performance for Qiagen, particularly in terms of growth in our Consumables business area, as well as in our Instrumentation products, which had been slow in previous quarters.

Let me take you now through some of the key financial highlights of the third quarter 2006 that support this development. The guidance we increased on May 9 outlined our revenue expectations in the range of $115 to $118m. We are pleased to announce that we came in strongly with this guidance range, with reported revenues of $118m for the third quarter 2006. Based on guidance exchange rates, this would be $116m.

We achieved an operating income margin of 26%, which is also in line with the guidance we provided of 26 to 28%. We exclude from this adjusted figures, as well as from our guidance, any acquisitions, integration and relocation related charges as well as amortization of acquired IP and equity based compensation.

Our EPS in fact came in at the high end of our guidance. There we had guided for $0.13 to $0.14 a share. We achieved a solid $0.14 per share. Both guided and achieved EPS are on an adjusted basis.

Cash EPS, calculated using cash from operations divided by the fully number of diluted shares was $0.15.

We feel, overall, that we are well on track to meet our full year 2006 guidance as this quarter again was quite strong on several fronts, including a 20% overall growth rate and one of the highest organic growth rates amongst our peers of 7%.

Breaking these figures down by business areas, in the third quarter 2006 we continued to press ahead aggressively with our Consumables business, which accounts for approximately 90% of total revenues. We regularly introduce new products to address new market opportunities. During this past quarter we introduced 14 new products, including sample and assay technologies in the areas of gene expression, mRNA research, gene silencing, protein research and molecular diagnostics.

4% of sales growth alone in the third quarter came from new products. The growth we have seen in our Consumables this quarter of 20% is particularly strong, considering that the last four quarters we had growth rates of 15%, 11%, 16% and 14% sequentially. This is mainly driven by the strong demand for our PCR related consumables and assays.

As Peer already noted, we have seen a significant jump also in our Instruments sales of 15% over the third quarter 2005. 13% under constant currencies. This, however, is also one of the factors that has impacted our gross margins. The type of instruments being demanded mainly fall within our Bio-Robot product line, in particular our low and medium throughput robots.

Overall, we are running at a strong organic growth rate of 10% in the third quarter. Staying on par with what we have demonstrated in the second quarter, but clearly higher than what our peers are averaging this quarter. In particular, our Consumables organic growth rate of 11% is in large part due to what we have always 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.

However, at the same time, our acquisitions are also providing contributions of about 7% to our overall growth, indicating that our acquisition strategy is clearly delivering.

Overall the third quarter numbers break down as follows. We continue to have strong top line growth with significant income growth delivering earnings outperformance. Our net sales of $118m this quarter compared to $99m for the same period in 2005, reflects a solid growth rate of 20%.

For better comparability, looking at our financial performance on an adjusted basis, our operating income demonstrated approximately 12% growth over the third quarter 2005. Factoring in here is that the growth we had in Asia with the headcount that is up from 113 to 309.

Our net income showed a very strong growth of 18%. However, our tax rate is slightly lower year to date, 35% rather than 36% year to date 2005. Amongst the factors that contributed to this was a larger revenue share in Asia where tax rates outside Japan, are lower.

And in respect of diluted our extra share, they had an increase of 17% to $0.14 a share, up from $0.12 for the comparable quarter in 2005.

Just to highlight our operating cash flow of $23.6m in the third quarter, an increase over the same quarter last year. Also to note, our free cash flow for the quarter of $16m versus the third quarter 2005 of $16.6m.

An annotation to this point. In the third quarter we began construction of a new European distribution and logistics center, located here in the Netherlands. Therefore we made third quarter prepayments of $3.7m. We are excited about this new facility, which will occupy approximately 48,000 square feet. The total investment will be in the single digit millions, and it is expected to be completed in the second half – in the first half of 2007. Therefore, although higher in comparison to the last year of this time, our CapEx still remains in line with our yearly projection.

Last, but not least, we are still showing a strong cash EPS of $0.15 per share. One of our key strategies in expanding our positive cash flow position is active management of the inventory levels and day sales and account receivables.

Our inventory days came in at 148 and 145 days under current exchange rates. Staying on par with last quarter, our receivable DSOs were 62, also under current exchange rates.

Let me switch gears here for a moment and show you how we compare on a first nine months basis. With growth of 16% in net sales, 19% in gross margins, 17% in operating income and net income growth of 23%, all on an adjusted basis, we believe our performance for the first nine months to be a good indicator that we are well on track for a successful 2006.

With this, I hand back to Peer.

Yes, in sum we had a solid third quarter. We came in, in line with our revenue targets. Our EPS reached the high end of our guidance at $0.14 and showed strong net income growth, adjusted 23% year to date.

Most importantly, the strategic positioning and the momentum are very strong. In Molecular Diagnostics we're showing good growth and exciting acquisitions to report with Genaco. In Applied Testing, all of the year is strong growth, and we announced our VLA alliance. We are focused on our core account competencies in Sample and Assay Technologies. And our growth engine is clearly performing very well. We developed 14 new products in Q3, 4% of sales, and again this is a few times the industry average coming from products launched in the last 12 months. Most importantly, a very strong pipeline for the quarters to come.

With that, I'd like to hand over 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. Jessica?

[OPERATOR INSTRUCTIONS]. Your first question comes from Quintin Lai of Robert W. Baird.

Hi, congratulations on an excellent quarter.

Hey, Quintin, thanks.

As we look at your organic growth, 10%, it is significantly above the Life Sciences industry peers, and it seems to us that it's your Molecular Diagnostics strategy that's helping you outperform. Could you break out a little bit of that organic growth on how much is coming from some of your core Life Sciences business and how much is coming from Molecular Diagnostics?

Sure, Quintin, and again, I'd always like to just put a note of caution in there because the allocation of these accounts is sometimes there are grey areas, and so we have to make choices on how to allocate accounts, and that's why keeping precise numbers always looks difficult. But I can give you approximate numbers for each of the segments.

In the Academic sector, we're seeing growth in the mid single digits. The growth -- industry growth is typically seen about 2 to 3% and we're seeing up to twice that. It depends very much on the country. As you know, public funding is very different in the various countries.

The second area within Life Sciences is the Pharma sector, and there we're showing very rapid growth. This is one of our fast growing segments. It is probably twice as fast as the overall growth of the Company, organic growth, and it is primarily driven by increased use of our products in the clinical environment. Not preclinical use, but clinical use. And what we have been talking about for quite some time, the increased trend towards monitoring patients on a molecular basis and the use of personalized medicine strategies, this is clearly showing quite some impact. And we expect that trend to continue as the budgets are very big in the clinical sector versus the preclinical phase.

The Applied Testing area is small and is growing about that same rate, about twice the overall growth of the Company. This fluctuates very widely. Can be 20% a quarter and then 40% a quarter. This is on very small numbers still, and smaller -- our deals – our larger deals within that customer area can clearly be of big significance on a quarterly basis.

And the Molecular Diagnostics business is also about two times the organic growth rate. Can be three times depending on the quarter. Fluctuates within that range. So we are definitely gaining share in all of this segment and it -- again, this is certainly impacted by the fact that almost half of our business in the academic or research related businesses are in the single digits.

Thank you sir, does that answer your question?

Yes, yes it does.

Thank you.

Thanks, Quintin.

Your next question comes from Dan Leonard of First Analysis.

Hi, everyone.

Hi.

How are you, Dan.

First question. If I am interpreting your fourth quarter guidance correctly, you're looking for an acceleration in organic growth versus the 10% you just reported in the third quarter. What gets you to that acceleration in the fourth quarter?

Roland, do you want take that one?

Yes, absolutely. Hi Dan, how are you? I think if you're looking on our fourth quarter guidance you'll see that there's a slight impact on our organic growth rate and actually there are possibilities that we stay to our guidance and also mentioned by Peer. We see zero impact. First of all, we have seen that actually the third quarter was actually a little bit stronger. As reported, as Peer mentioned as well that the third quarter was actually one working day less than last year. So if you factor this in you actually come to the same number as you probably now have in mind for the fourth quarter.

The biggest driver is definitely also on the Molecular Diagnostics side. Quarter over quarter, given the growth rate you see there, it had an impact.

Okay, thank you. And then my second question. When you look at the 10% growth you reported in the third quarter, it was the same as your organic growth in the second quarter. Many companies in your peer group reported an acceleration of growth in the third quarter versus the second quarter. So what is it about your business that would I guess buffer you from the seasonality that everybody else saw?

Good question Dan. I think if you look at the acceleration that a lot of Company saw, there was a very heavy focus on instrumentation. And the third quarter and especially the fourth quarter are then very strong quarters in terms of instrumentation. There were some consumable companies that showed changes in the organic growth rate in the third quarter. But for most of them it was not quite as dramatic. It was certainly -- a big focus was on the instrumentation side.

Okay. Thank you very much.

Thanks. By the way, we also saw a big increase in growth in Instrumentation from Q2 to Q3.

Your next question comes from Maykin Ho of Goldman Sachs.

Hi, I have a question about the operating margin. I think that in the last quarter you mentioned that the operating margin will be expanding soon. When should we expect to see that?

Hi, Maykin. Roland. The operating margin, actually, in the third quarter, was in line with what we expected. So we are -- feel very confident about the trends we're seeing, or the trends we have seen, during the year 2006. The third quarter, as Peer mentioned, we have now of course seen a strong increase in our Instrumentation business, which too has an impact on our cost margins, and so it's one of the reasons why it is slightly less in the second quarter, but still above our first quarter, for example.

And I think, given the impact overall, and seeing the efficiency we are getting on operating expenses, I do believe that we will see what we also said going forward - an improvement of operating income levels by approximately 100 basis points year over year.

And a question on, I guess a Board question maybe for Peer. With the announcement yesterday on the potential acquisition of [Solexa] by [Alumina], how do you see that changing the landscape of the industry and especially in relation to what you're doing?

That's a good question. Clearly, whole genome sequencing technology is a breakthrough technology that will have a lot of uses in the future. There is a big difference to sequencing a whole genome at a price range which, even in very aggressive scenarios, is still in the thousands of dollars, and maybe at some point in time, will maybe go into the hundreds of dollars, and identifying, for instance, a pathogen or a point mutation for $25. The PCR reaction or -- and its comparable, targeted test, is very inexpensive, whereas these whole genome scans will always be magnitudes more expensive.

The two really, of course, are -- work very much in tandem. We, for instance, use whole genome sequencing here to sequence complete pathogens to find the right targets for tests -- for our tests to basically hinge on. We also see whole genome sequencing as an interesting and good technology and potentially in some time in the future for a genomic testing scan, more or less. But again, there's -- it's a very different testing approach, and we actually see it fertilizing and amplifying the need for these targeted molecular tests, more than anything.

What we certainly welcome is there are number of different players now in the whole genome sequencing phase with pharmacing technologies. It proves the door has been opened now and the race is on and it's not our business. We supply products to companies doing whole genome sequencing. We supply to customers doing whole genome sequencing. They still have to prepare samples. They still have to go through amplification steps in many cases. And let's see in the diagnostic world it's a very different type of diagnostic testing approach.

And lastly on [inaudible]. What are the two 510k that you are filing in 2007 and other [inaudible]?

Okay, well I deliberately left this out. There is some choice on that. One product that we did highlight was the Avian Implanter product which has a number of other pathogens included in the package to ensure discrimination of other pathogens against the human implant and various sub-type. And that's one which been a high priority due to a number of partners showing very aggressive interest in this product. The real breakthrough thing here is that for first sensitivity marries multiplexing and with the traditional technologies this is not possible and this is something that we can offer with this product. Therefore these types of outbreak monitoring systems it is very, very promising.

But we have a number of other products that we mentioned in the press release, respiratory panels and also acquired infections and we are currently prioritizing that. But two are going to this multiplex phase. I'm pretty sure that one of them will be the avian implant.

Thank you very much.

Thanks.

Your next question comes from [Anna Sitova] of Morgan Stanley.

Actually it's Dan Mahoney from Morgan Stanley. Afternoon everybody. You talked a bit about your regulatory strategy and you just mentioned a couple of 510ks. When we see these 510k's come through, I suppose two questions really, how does it tie in with what you're already doing with Artus on some of the respiratory panels and what sort of impact could it have on revenues maybe less in '07 and more in '08? What do think these sorts of products can do in terms of those sales?

Well if you look at -- that's a very, very good question and it was a big part of our modeling exercises. Because and I'll take this out from a European prospective. We have a large number of products already earmarked in Europe. We clearly are going to move very aggressively on CE marking the Genaco panels, the existing ones and the future ones. We have a number of ideas and actually ongoing projects already in future panels.

Basically what happens is that if you can sell a panel which gives a hit, a semi-quantitative hit actually which is really unique, most people would want to follow up with a confirmatory QPCR assay. And that should lead to what we've seen in a lot of different environments and that would mean that having the bundle of CE marked panels and the CE marked QPCR assay, the two in tandem and modeled on with still data sets showing the combination, that's a very, very strong argument. So we definitely see it not only generating sales of panels but also of making it easier to link and reference and also create reimbursement strategies by linking it to the QPCR product.

And a similar strategy you can assume for the U.S., but clearly there it's just a 510k product and that's the way we're going with these panels.

So it could be for the end user you kind of pay $50 and for that you get a panel plus the relevant 1 QPCR thrown in free as it were?

Absolutely, so. You could, for instance, if you are at a doctor instead of him basically doing a shotgun approach and throwing a number of different $25 to $30 tests at you, you could do one panel and then package in a selective, or the test of choice that the panel suggested. And then confirm simply. And that not only gives him a much lower risk profile but it also gives him the likelihood of identifying coinfections and potentially also takes away the risk of him actually missing the right assumptions by simply executing a QPCR test. So doing a screen and then following up with a precise confirmation we've seen has very cross-fertilizing and potentially also creating a lot easier reimbursement.

And what do you see as the revenue opportunities say for a respiratory product bundle in the U.S.?

If you think of it the implications could be very significant. At this point in time we are projecting this conservatively because clearly it is a novel approach. Traditionally people have been a lot more selective in choosing the assay that they ultimately want to perform. So it was often a little bit of trial and error approach. So we believe that these products have very significant opportunities going forward, but at this point in time I would not clearly want to quantify that. I prefer to quantify it once we have the regulatory claim and also reimbursement strategy that we could announce in tandem. But now clearly it's not only the panel itself which is important, it is also the corresponding QPCR and of course also the sample processing revenues that we're getting from all of this.

Great, thanks very much.

Your next question comes from Patrick Fuchs of DZ Bank.

Hello everybody. I have a question regarding the tax rate going forward. Originally you gave us guidance from 36 to 37% around that. Can we write that downwards in a way?

Second question is could you -- you mentioned that the RT-PCR product line is growing quite nicely at Qiagen. What are actually there the core growth rates if you are able to disclose it?

And the last question regards the margin development in Q4. As you must have quite a view on year end Instrument sales, can we expect there the margin to be the same in Q4 '05 and '06? Or do we expect there a deterioration of this lower gross margin? Thanks.

On the tax rate, yes you are right, we are seeing actually a slight decrease over the first nine months down from 36 to 35% due to several facts including also that we have no longer having a share in Asia. But also, of course, Instruments had a certain impact selling more instruments meaning also having more profit in Switzerland. As I said a combination of impact but I think overall, I guess, this year's guidance or the number you mentioned for going forward something between 36 and 37%. I think that is a good basis. Probably the lower number might be a better number. This is really hard to say at the moment and a little bit on the regional distribution of our earnings out in 2007. We will clearly give detailed guidance on our Analysts' Day as we do always at the beginning of the year.

And it also leads me then to your second question, on the Q4 margin development and also going forward. I think percentage wise I do expect that the fourth quarter will be again quite similar, might be a slightly better quarter then the third quarter. Again there's no further guidance, as mentioned my Peer. And Instrumentation was already strong in the third quarter so I don't expect a significant either way.

And then the growth rate regarding in RT-PCR business which you mentioned as a growth driver itself.

Yes, for the sample technology that -- or the assay technology that is related to our RT-PCR. It goes into multiple different sectors. This is clearly in Life Sciences but also in Molecular Diagnostics and Applied Testing. The growth rates are different in every sector.

So in the diagnostic space, more or less our growth rate there because the majority of the assays are based on that assay.

In research however we're seeing a very nice growth rate in this space and we're seeing growth that's taking market share in this space as well. We have some very interesting new products that we launched this year. In the Geneic Fresh and Air, we launched Gene Globe, RARI combo packages, but also novel -- a number of novel chemistries that are quite exciting and there is RT-PCR

And in Applied Testing the same thing. A lot of these assays that we are talking about here they are based on RT-PCR technology. So the growth rate is very high. It's one of our fast growing spaces and it -- wouldn't want to break that product line out, but you can assume it is [inaudible] in the overall growth rate.

You wouldn't report a lower growth rate compared to competitors in that area, ADI that you mentioned cooperates there?

Actually the same or -- that's a multi $100m business, okay. So for us it's an excellent Group instrumentation. I would say on the re-agent side we have a strong position, let's put it this way, and we feel very comfortable that we're consolidating the space in terms of technology and also our growth is certainly very exciting.

Okay, thank you.

If I may use this break to quickly get back to one of the questions before that Dan had on the respiratory panels, respiratory testing. I maybe missed that question a little bit before.

It is clearly a very substantive market. So there are about between 8m and 12m tests performed every year in respiratory testing and about 7 in the States -- 7m tests. And this is a market that is expected to grow going forward and clearly there's a lot of immunel assay testing, but with a very limited capability. So as this goes molecular, these types of numbers, this is a very substantial market opportunity for molecular and it's barely penetrated yet. There are billions of respiratory infections in the United States every year and therefore it's clearly a very interesting target for Molecular Testing because it's a market that needs sensitivity and it needs multiplexing at the same time. And that's why the Genaco product for instance that you asked about, Dan, before is seen as very interesting now.

Thank you. Your next question comes from Derik de Bruin of UBS.

Good morning.

Good morning Derik.

Just a couple of quick questions. So, I guess could you give us a little bit more color on your discussions with the FDA on how the whole ASR situation is evolving right now?

Sure, yes. We have discussions with the regulatory agencies all the time and actually the discussions emerged from an audit that was performed -- a routine audit that was performed at our Hamburg site this summer. What was extremely remarkable there was not a single 483 -- not a single issue that was raised in terms of our manufacturing quality control system. This is extremely rare. So we were manufacturing in high qualities and have our investments that we need in this space.

Certain of the ASR requirements are being interpreted more strictly going forward and the number of companies and I can't mention their names here but they're semi-public including very large diagnostic companies have -- are in touch also with the FDA regarding the tightening of the ASR exemptions or regulations. Now, to understand what an ASR is, is very simple. Basically it's a diagnostic test that is not sold as a diagnostic test but has to be assembled by a customer who has a certain qualification. And the test should not include all of the components and it should be basically individual components that are sold by a party with no marketing mentioning of the integration of that into a complete test. So it's a little bit complex but I think it's been a successful area for Diagnostic Testing in the United States and very many, by far the majority of all molecular tests are sold under ASR currently.

The major issue is always the package or the packaging. Some of the old Artus tests they included a lot of different components in one box. Ad this, for instance, is not what is understood under this code and therefore we basically broke some of the individual components out and separated them and ensured that all marketing materials are compliant. Now certain of the products, as any integration goes, have been left behind a little bit as they were low sellers and these letters always get published but in terms of sales its $250,000 sales these products. They were on back burner but we clearly put them very quickly on very high priority and we're putting everything in line.

Going forward we think it's actually a good thing and we're working closely with the FDA on this. Regulatory standards are very important and we're investing heavily in this space. And we as a market and a technology leader in this space probably can justify these investments on a big revenue base. So there is something like a benefit for us and we're therefore taking this very seriously, working, as all of the companies are as well, very closely with the FDA to understand what has to be done and do it. And we think we're in a very good path to have this close out very shortly. But again this is not revenue wise and it does not have any materiality.

Okay. And I just wanted to get a little bit more on your [inaudible] that you have mentioned [inaudible]. Want to know how you're looking at the potential players there [inaudible]? How does it fit in with your [Saphite] [inaudible].

Derik, you're very much in our thinking here. There are -- clearly the Templex technology as it is today which is using Luminex technology which is not too much, at least current format not a multiplex technology -- not a point of care technology in terms of protection. But the PCR technology is Templex. The Genaco Templex technology can be leveraged onto many different platforms and we think Luminex is a great performance with our current panel.

Taking that the next step forward and replacing the Qiagen samples by enzymes that are currently being used and putting a fast cycling enzyme into that and potentially then taking a format which can go point of care, yes, that is highly exciting. And we're getting a lot of interest for this MPCR. We've kind of hidden this technology and the interest is to go multiplexing into different environments. And also point of care there's some interest because it is platform independent in the use in many different types of environment. So you could for instance put it on a two dimensional array or detect on a two dimensional array as well, which you can clearly [administer] an item and put in a micro [liquidic] format.

So the problem always the chemistry, the assay technology. And with 10PCR we're finally multiplexing assay technology it allows you to go small and it allows you to go multiplexing and still keeps the sensitivity that people are used to from low multiplexes and singleplex assays.

Great, thanks a lot.

Thanks Derik.

Your next question comes from Peter Welford of Lehman Brothers.

Hi, just two very quick questions actually on finances. Can you just quickly run through the financial income line because we see very big numbers that cancel one another out?

And the second question, can you give us some insight into what the cost of capital you use when you look at acquisitions in and how you actually look at the companies when you assess whether or not to make the technology acquisition that you made in the past? Thank you.

Peter can you elaborate a little bit on your first question.

Well yes, it just seems the financial income you seem to have, I think you've got two big numbers, $8m and $8m that give you the ballpark normal number you get, the $1m net interest. It seems that those two big numbers rather than the usual numbers that cancel one another out.

Okay, that's an easy one because as you know we do have $500m cash in our account and we do have, of course, certain liabilities to order for deductible bonds as well as those interest numbers related to them.

And on your other question on valuation of acquisitions, it is actually a very complex process that we're doing and one of the reasons why we always have quite a full pipeline of potential targets. And working on that, is that taking our due diligence process very carefully, not only on the technology side but also on the financial side. So we do not only the regular DCF models and valuations, we also clearly do dilutional net accretion valuation. And one of the reasons why we still take quite carefully multiples, just want to recall that we paid on our average acquisitions and on our last acquisition revenue multiple from 2.6 to 2.7 times revenues I think it clearly shows we take our costs quite serious.

So depend a little bit on what kind of target we are looking, if it is different one in Molecular Diagnostics or is it another architect, a sample preparation technology. So there is just not this one golden rule and one golden rule, it is clearly depending on what this year's future application.

Peter, on the cost to capital that is defined by two things. Cost of capital as cost of equity and that's something you pull on your Bloomberg, on your CapM. And the second one is cost to debt and that is published also in our tender -- in our filings, in our 20F and 6K. So that's basically a given for the cost of capital. The question is what risk factor we put onto the business. Our cost of capital is known but we clearly put additional risk. We have a range of different risk hurdles that we put on to a business that we are looking at. And if you look at it with hindsight, the acquired businesses, we gave a number for reports out on these business. Traditionally have been able to achieve in almost record time accretion and also positive cash flow contribution.

To do with Genaco, this is such a fundamental technology we're taking in two year payback, or two year accretion breakeven. So this is a longer term project that has a much broader implications.

Okay, thanks.

Thanks.

Your next question comes from Daniel Wendorff of WestLB.

Yes good afternoon. I have one question remaining, the Instrument treatment which has experienced quite a good growth rate in Q3. Is this something we should expect to accelerate in Q4 and if so what is the main driver behind that? Thank you.

Sure, Roland do you want to take that?

Hi Daniel. I think the main driver of the Instrument and the whole Instrument business is that overall the second half year is normally a larger Instrument business, main drivers of course especially in the public fund, the DIS, the budget situation. People want to know what is, how they are planning their budget through the year and going to invest larger dollars normally in the third and the fourth quarter. So we do expect a stronger Instrument quarter in the fourth quarter. And as I mentioned before I can -- I don't expect it to be much different then in the third quarter, might be a little bit better.

Okay, thank you.

Thank you. Your next question comes from Alexander Walsh of HLM.

Good morning. A question on margins, just to going back to Maykin's question. Just from my calculation the SG&A margin percentage here is up 100 basis points year over year, and the R&D margin was up 60 basis points. Indeed why you hit your margin guidance it was at the low end of the range. Was there something extraordinary that expanded R&D and SG&A for this quarter that we should not expect going forward or is there going to a higher level of spend as you make the investment rollout these new platforms going forward? And then I've got a follow up.

I think one way to approach this is when we give guidance for quarters and we give very detailed guidance for the year it doesn't reflect integrations that are ongoing. And the acquisitions have an upfront cost to that that is taken into a one time charge. But then going forward we have integration teams and there is ongoing work that is allocated to building these activities. This is clearly an impact.

But I'd like to highlight the nine month numbers and also the annual numbers on a track record. For the past 10 years we have taken every year 1 to 2% out of the operating margin starting from a high single digit operating margin and now in the mid 20s. There has always been volatility from one quarter to another even compared to the prior year, even compared to the prior quarter. And that is always because the expense page is not that big, but investments in one of the other areas can have a big impact. But on an annual basis there's a tremendously smooth increase and that's something that going forward is depending on the business model and the growth rate can have some fluctuations in it. But luckily it's not in the non-operating side very often due to the tax rate.

Roland do you want to add to that?

It shows here then the trend that you established over the last 10 years on a smooth basis to continue?

Yes, there are always three quarters with a little bit higher and a little bit lower but we feel very confident in the trend for a continuous take out percentage.

So if you look at the operating expense, because that's the real number, it's not the operating margin, it's the operating expense per dollar of sale, we are currently spending 44% for every dollar we sell in SG&A. Whereas the peer companies that we're very often peered to are in the mid 30s, low 30s, maybe high 30s but substantially below where we are right now. Now we are a premium Company. We invest more in R&D. We invest more in a very intense in sales and marketing interaction with our customers. But there is economy of scale in that model going forward and that's something that we've continued to show in the past years and I feel confident that there is still a lot of room to grow in this model.

Thank you. I will now turn the floor over to Miss Solveigh Mahler for closing remarks.

Thank you very much Jessica. I would like to close this conference call by thanking you all for participating. We hope to welcome you again to our full year 2006 results conference call on Tuesday February 13, 2007. If you have any additional questions please do not hesitate to contact us. Again, thank you very much and have a nice day. Bye.

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