Qiagen NV (QGEN) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Qiagen fourth quarter and year end 2006 results conference call. [OPERATOR INSTRUCTIONS].

Thank you. It is now my pleasure to turn the floor over to your host, Solveigh Mahler, Director of Investor Relations. Ma'am, you may begin.

Thank you very much, Natasha. Good morning, and hello, everybody. Thank you very much for joining Qiagen's fourth quarter and full year 2006 earnings and 2007 guidance call. I'm Solveigh Mahler, Director of Investor Relations here with Qiagen. With me on the call are Qiagen's CEO, Peer Schatz, and Qiagen's CFO, Roland Sackers.

The conference call will cover a 30-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 the discussions and report that Qiagen has filed with the U.S. Securities and Exchange Commission.

Now, I would like to hand over to Peer Schatz.

As always, this fourth quarter and year end and 2007 guidance call is held here as part of our analyst day. So, we have people here in the room and people on the phone.

I'll go over a short summary of what we accomplished in 2006, which was really a very exciting and successful year for our Company. In early 2006, we set out with financial targets, which we then increased in May to $453 to $462 million. We increased that target range, and we actually achieved $466 million or $459 million on our guidance rates. The operating margin we projected to be 26% to 28%. We came in at 26%. And earnings per share at $0.52 to $0.56, and we came in at $0.56. So, a very successful year in terms of also meeting and exceeding our financial targets.

It was also a year, however, where we invested heavily in a lot of activities that are providing growth going forward. First, our total and organic growth-- totaled 17%, 11% organic. We met and exceeded our targets for our growth rates at a very nice mix of two-thirds one-third, two-thirds organic one-third acquired growth. We increased our market leadership increased our market share as per all our estimates in these market and product areas. And we grew the growth areas of our business, including our molecular diagnostics business, which grew both in terms of size and also in terms of infrastructure and in terms of technology; for instance, also by adding multiplexing.

In general, we executed on our strategy that we laid out in 2005, so you're not going to hear a new strategy from me here today. But, you're going to see that we are executing on what we set out to do, that it's providing growth and value for our investors, and has a tremendous future in front of the Company.

We proved innovation success. Clearly, organic growth and innovation leadership has been key to our Company. We have put out 67 new products in 2006 and achieved a record 4% of sales from new products launched in 2006. This is, again, as we stated before, three times approximately, if not even four times, the industry average.

We used catalytic acquisitions to augment the value of our internal growth initiatives. We acquired Gentra early in 2006 and Genaco in October of 2006. Also, we're very active on strategic fronts with numerous partners in molecular diagnostic supply testing and also the life sciences. So, we believe we're well prepared for future growth also into 2007, which I'll talk about in a few minutes.

We spend a lot of time in this analyst day today to discuss our leadership and our focus on sample and assay technologies - what this means, what opportunities we have there, what types of technologies and capabilities we're interested in in the area of sample and assay technologies, and how we uniquely leverage that into three different market segments. Molecular diagnostics is a significant market - large size dynamic growth expected. Applied testing very similar. Again, this is forensics, veterinary, biodefense and other non-human diagnostic testing markets. And, life science research, which is, in academia, providing a tremendous amount of innovation for our Company in technology leadership and, in industry, pharma and biotech, showing a significant change in the way people are developing drugs and using our products to do that.

We talked on slide 5 about scale. Our Company is about scale. In all of our markets, we act like a $500 million company. We take technologies, and this slide shows a few of our product lines. This is just a few selected examples. And we typically take a product such as QIAamp, which is in the second line in the sample technology sector, and put it into all three markets to, in all three markets, use our R&D and technology capabilities and leverage them over multiple markets to create scale. This gives us the power of the $0.5 billion company we are into market segments that might actually be smaller or just emerging. This is tremendously valuable for us, and we do that, as you see, in all of the other areas as well.

On the next slide, a breakdown of these markets. Life sciences has two distinct segments. The academic segment came in at approx 38% of sales, very strong in Europe and Asia as well. Very fast growth in Asia, between 60% and 70% in Q4. And a big chunk of that academic revenue is increasingly now also biomedical research. So, it's not just pure basic research; it is also now research close to hospitals. This is a trend we're increasingly seeing in the United States very strong and also now much more visible in Europe. In the pharma and biotech area, about 24% of our sales, we are seeing very strong growth in both the U.S. and Europe in focus in biomedical research for industrial purposes. So, people are developing drugs using new molecular profiling techniques to make the drugs safer, to develop them faster and more efficiently, and make the drugs more effective.

Applied testing. Again, this is the use of the sample and assay technologies for the testing for all targets other than human diseases. This includes forensics, veterinary testing, biodefense and other market segments. There, we invested a lot. We heard a very exciting talk about veterinary diagnostics a little bit earlier today, and this has clearly been an area we've been investing into and, especially, expanding our assay portfolio. We expect to see this continue to get a lot of focus in 2007.

And, in human molecular diagnostics, about 27% of our sales, we have a rapidly expanding technology portfolio. We added multiplexing in the fourth quarter of last year, and we just yesterday evening announced a very substantial increase of our license portfolio in real-time PCR through license agreements with Roche and Ortho. We're addressing future opportunities. The panel approach in molecular diagnostics using the multiplexing technologies from Genaco are really an extremely unique capability that we have. It sets us apart from other companies in this space and gives us opportunities not only in diagnostics but also in pharmaceutical research. This area will continue to get high investments, especially in the area of regulation and regulatory initiatives in 2007. So, we're taking a core capability, and we're focusing on growth segments.

These growth segments are clearly delivering quite exciting numbers for us. They've, in terms of consumables growth, fueled 17% growth in consumables and 11% organic growth. Our instrumentation, which is about 10% of our sales, showed 19% growth, of which 13% was organic. So, you see a very, very interesting growth trend in instrumentation. We also talked about the QIAcube. Clearly, we are focusing heavily on instrumentation of our consumable technologies, and we expect to see more such launches in 2007.

Asia continues to be an extremely high growth segment for us, driven by China organically, but also through the addition of further activities. We talked about that, and Victor gave an overview of our initiatives there. We expect that to continue in 2007. And North America, about 44% of sales, 12% growth. And, Europe continues to perform extremely nicely with 17% constant exchange rate growth, a very, very interesting market.

As always, here is a breakdown of our growth, 17% overall. About a third of that came from acquisitions. That leaves us 11% growth. Here you see the 4% growth from new products highlighted. These products have been launched in 2006. This is extremely unique. You have very often a growth curve which starts very slow as people first start evaluating a technology, reading about it and maybe testing it; and then going into routine use of a product maybe 12 months down the road. This is something that, looking at these numbers, is a great basis for growth going forward, as we have achieved rapid adoption of new products, contributing 4% from them. Volume was 5% growth; price was 2%. This organic growth clearly outperforms the industry by a factor of approximately two. We continue to place a very high focus on innovation and also new product revenues going forward.

I'll talk a little bit about our regulatory strategy because this is going to be very important in 2007. We have a broad portfolio of products in regulated formats. We have sample technologies, including de novo 510(K) approval. We have assay technologies that are used in regulated formats by a number of other companies and institutions throughout the world that are putting them into regulated formats themselves. And, we also have our artus real-time and endpoint PCR assays. We have today about 40 CE-marked assays in this space and a broad, regulated portfolio. We also have Genaco assays, the so-called QIAplexes, they're now called, assays that I want to talk about a little bit more, because this is an extremely unique feature that we think will benefit a lot from having a regulatory approval putting that on high priority. There are two assays that will be submitted to the FDA. The H5N1 assay, which detects a dozen or so different subtypes of H5N1, with a very high sensitivity and, obviously, the various genotypes as well, the Staphplex product, which has a number of bacterial targets. And in 2008 we have two respiratory panels that we expect to be submitting to the FDA. And, at the same time -- and hospital-acquired infections -- and in Europe we will be CE marking all of these panels over the 2007/2008 time frame.

Just to understand what does it mean-- what are the regulatory hurdles to introduce a diagnostic product. It's very different to a therapeutic product. You're probably all very familiar with that therapeutic regulatory process. In the United States, the typical approval is a 510(K). There are various formats of approval, but the majority of our products would probably be 510(K) approvals. The total time expected is about 26 months from start of development through to approval in getting a 510(K) clearance. If you start as an ASR, and, again, we have today a broad number of ASRs that we sell - dozens of ASRs, which are already diagnostic-quality kits that are basically sold under certain exemptions and under certain marketing restrictions. There, the period is about 6 to 12 months to get full clearance. So we have, clearly, a lot of regulatory work to do, but the important work of the internal and external studies and validation-- a lot of that work has already been performed or is underway.

In Europe it's slightly different. The declaration of conformity, the so-called CE launch, [simplified spoken], is a much shorter process. Typically, it's about 22 months and, starting as an ASR, again, is about 6 to 12 months. It can be as low as 6 to 12 months. There is a difference in terms of who validates this, and, typically, in Europe it is a self declaration.

Now, in terms of the project expenses, if you look at the various stages of the regulatory work, the internal validation work, which includes production set up, quality control, product shelf life, the internal design verification and so on, it's about to $1 to $1.5 million in expense. The external clinical trial is about $0.5 to $1 million. That leaves you with about $1.5 to $2.5 million for the complete regulatory work. These are estimates, again. These numbers can vary. The total project cost starting as an ASR, and, again, we have a broad portfolio of ASRs currently, is about $0.5 to $0.7 million.

With that, I'll hand over to Roland to walk over some of the financial results for the year.

On several levels, the fourth quarter proved to be another period of very solid performance for Qiagen, not only in terms of revenue growth in consumables but, more interestingly, in our instrumentation business, which demonstrated significant growth.

Let me take you now through some of the key financial highlights of the fourth quarter and then the full year before providing you with an outlook for the year 2007.

The guidance we increased on May 9 last year outlined our revenue expectations in the range of $121 to $124 million. We are pleased that we had another great quarter with reported revenues of $126 million for the fourth quarter 2006. Based on guidance exchange rates, this would be $123 million. We achieved an operating income margin of 27%, which is in line with the guidance we provided of 27% to 29%. We exclude from these adjusted figures, as well from our guidance, any acquisition integration and relocation-related charges, as well as amortization of acquired IP and equity-based compensation. It has, in fact, exceeded our guidance. Where we had guided for $0.14 to $0.15 a share, we achieved $0.16 a share. Both guidance and achieved EPS are on an adjusted basis as well. Cash EPS, calculated using net cash from operations divided by the number of the fully diluted shares, was $0.16.

A breakdown by product line shows that, for fourth quarter 2006, we not only pressed ahead aggressively with our consumables business, which accounts for approximately 89% of our total revenues, but, as I just mentioned, delivered really high growth with our instrumentation products. In the third quarter, we already saw signs of the uptick here with a 13% growth rate. But, this quarter, I think, really shines with 47% growth under constant exchange rates. The reasons behind this increase over the previous quarters are mainly twofold. First, strong organic growth in what is a very important quarter for our instruments. We have a complete spectrum from low- to high-throughput instruments, and this, together with consumables, provides ready to use solutions. Secondly, we are seeing a significant level of sales coming from the instrumentation products acquired in the Gentra transaction. Just a note on consumables here - growth here was driven significantly by assay technology consumables, primarily PCR, as well as for assays for the molecular testing market.

Overall, the fourth quarter numbers break down as follows. We once again recorded strong top line growth. Our net sales of $125.9 million this quarter compared to $104.3 million in the same period in 2005 reflects a solid growth rate of 21%. For data comparability, we also provide data on our financial performance on an adjusted basis. We see here that our operating margin demonstrated approximately 9% growth over the fourth quarter 2005, impacted by factors as the Genaco acquisition and investing in regulatory activities, higher instrumentation sales and the continued growth of our Asia-focused investment.

Our net income showed a very strong growth of 23%. However, just a note here that our tax rate is also lower, 30% versus 36% in the fourth quarter 2005. Amongst the factors that contributed to this was a larger share from revenues in Asia, the tax rates outside Japan are lower, and a lower tax rate in Switzerland, the hub where most of our instrumentation business is conducted, the latter point obviously emphasized even more because of the strong quarter we had in instrument sales. Please note that, in a stronger instrument quarter, there's a certain negative impact on gross margin and operating income margin but has a positive impact on our tax rate so that, on earnings per share, the impact is less significant. In respect of diluted earnings per share, we had an increase of 23% to $0.16 a share, up from $0.13 in the comparable quarter 2005.

Now shifting gears to our results for the fiscal year 2006. Based on revised guidance we gave in May last year, we had another very strong and successful year, with revenues of $465.8 million. We were in line for our operating margin, and it came in at the high end of the guidance range of EPS. The range had actually been increased by $0.01 at the upper end in May from the original guidance given in February last year of $0.52 to $0.55. Therefore, just to highlight, revenues for the year of 2006 were $459 million, under guidance rate, a high operating margin of 26% and adjusted EPS of $0.56, which is a 22% increase over fiscal 2005. Cash EPS, which we compute using net cash from operations divided by numbers of fully diluted shares, was $0.61 for the full year.

The year as a whole tells a similar story at the fourth quarter breakdown by product lines. Consumable and instrument growth was quite strong. We had guided for consumables growth to come in at approximately 14%. In fact, in 2006, this business area grew by 17%. In instrumentation, the jump is even larger. Where we had guided for 9%, we grew by 18% under constant exchange rates.

Overall, we are running at a strong sustainable organic growth rate of 11% for the year, which is clearly higher than our peers are averaging. In particular, our consumables organic growth rate of 11% remains, in large part, due to a continuous push in innovation. We are able to use our continued focus in 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 contribution of about 6% to our overall growth, and they are providing catalytics to our organic activities, indicating that our acquisition strategy in the past is clearly delivering.

To summarize, 2006 net sales of $465.8 million for the year compared to $398.4 million reflects a very solid growth rate of 17%. Taking our adjusted financial performance numbers, in terms of our operating margin, we are still solid with 26%, a growth of 15% over fiscal 2005. In the third and fourth quarter, we saw the impacts mainly from our Genaco acquisition, investments in Asia and good instrument sales. We also invested in 2006 heavily in sales channels for molecular diagnostics and applied testing, as well as in key account management for pharma. Despite an increase of 34% in sales [inaudible], the sales and marketing expenses increased only 23%, and this still leaves a lot of room for future leverage. With our net income, we saw a very strong growth of 23%, from $69.2 million in 2005 to $85.3 million in 2006. Also for diluted earnings per share, as I mentioned already, an increase of 22%, from $0.46 to $0.56 in 2006.

I just want to point out on this next slide the trends we are seeing in revenues and EPS over the last four years. With a compounded annual growth rate of 15% for revenues and 21% for EPS between 2003 and 2006, we are seeing an acceleration of our growth rate of 17% in revenues and 22% in EPS. Qiagen has delivered year over year significant revenue as well as earnings increases, and we will continue to do so.

Turning to our cash flow statement, our operating cash flow of $93.6 million in 2006 versus 2005, where we had $91.2 million, which is mainly driven by a strong net income. The change in the line item [inaudible] here is mainly due to an increase in tax payments in the amount of approximately $10 million.

Having made a very strong push to grow Qiagen and execute on the strategic plan we had introduced back in 2005, our business has changed somewhat. There's an ever-increasing focus on new markets and regions over the last two years. We have been allocating additional capital to areas of faster growth. We accelerated the pace somewhat of our investments, one of them being the logistics center here in Hilden, as well as focusing on the Asian structure of our business. Free cash flow is therefore down slightly from $77.5 million to $64.6 million for the year 2006.

A quick glance at our employee numbers shows that, overall, we have increased our headcount by 23% in 2006 over 2005, largely reflective of the addition to our sales division, where we had an overall growth of 34% since January 1, 2006. We have mentioned in the previous quarters that we're focusing on a dedicated sales force in molecular diagnostics, applied testing and pharma. I think the results of the year really are showing that these efforts are paying off. We also had a significant headcount increase in Asia, again, part of our investment strategy as we are making part of our business in this area which is demonstrating success already. So, with 1,945 employees globally, we have expanded capacity so this will not sway us from keeping the organization lean by maintaining a strong focus on our core competencies.

As Peer has elaborated to you on how we are approaching 2007 and outlined the tactics for executing our strategy, I wanted to speak briefly on the financial drivers that will allow us to keep growing and provide you with our guidance for the year 2007.

As many of you have evidenced from the past years, Qiagen has had a very strong history of meeting and exceeding our financial targets. Starting with 2007, we have decided to modify our guidance practice, and we're providing guidance for the current fiscal year and not for the quarters. We will place more emphasis on the highlighting trends and activities. We are convinced that this guidance policy will share its benefits on our stakeholders and follow suit with the going trends as we're seeing in the industry to move away from short term vision and really focus everyone's efforts on long term goals and the underlying business and operating trends that have an impact on our financials.

Capturing the key financials from our income statement, we expect revenues in the range of $518 to $535 million, approximately 13% growth over the past year, and this includes about 10% organic growth, an operating margin of approximately 27% and adjusted diluted earnings per share between $0.60 and $0.63. In each case, using the exchange rates of January 31, 2007. These figures are excluding acquisition integration and relocation-related charges, as well as amortization on acquired IP and equity-based compensation.

We have listed a number of assumptions here to frame some items more precisely. Organic growth, as I already mentioned-- we are looking for approximately 10% here. In terms of adjustment to operating income, to note, our stock options and the respective stock unit grants, which will have a non-cash impact of about $750,000 to $1.25 million per quarter in 2007, amortization of acquired IP, approximately $2.7 million per quarter, and restructuring costs for acquisitions from the prior year, approximately $750,000 per quarter. Future acquisitions will come in for all aspects on top in terms of revenue, profit, but also on one-time charges.

We are optimistic that our tax rates will remain similar to 2006, but, as a precautionary guidance measure, we are providing a range of 35% to 37%. This is mainly due to tax impacts which are based on acquisitions and regional revenue allocation.

The Genaco acquisition will be dilutive to EPS by up to $0.03 in 2007, largely due to the costs associated with conducting clinical trials and filing for regulatory approval for infectious disease panels. But, this is nothing new to you, as we provided this information at the time of announcing the acquisition in October 2006. So, excluding the Genaco acquisition, adjusted EPS growth would be at the mid range of 15% and at 18% for the upper end of the guidance.

Finally, as I mentioned already, for the fourth quarter, we really picked up the pace of our investment. This is also true as a starting basis for 2007. We have commenced investment in clinical trials for a number of molecular diagnostic products, as well as investing in sales and marketing in this area, and would expect, therefore, Q1 EPS to be lower by approximately 20%.

So, with this, I'll hand back to Peer.

Just to sum up, 2006 was a very successful year for our Company financially - a strong financial performance that exceeded our financial targets for the full year. Two quarters significantly exceeded the guidances and increased the guidance in May 2006.

We are leading. We're focused. We're focused on sample and assay technologies in that area. We are clearly leading the market in terms of technology and also market leadership. We're leveraging our core competency into growth opportunities, so we're taking this growth engine and these capabilities and these presences and infrastructures that we have and are putting them into growth opportunities, investing very clearly into areas-- deliberately into areas where we are seeing very long term and significant growth going forward. We're increasing our strategic momentum. For instance, in molecular diagnostics, we accelerated our expansion of our sales forces in 2006. We have a fantastic sales team throughout the world that-- a lot of them actually joined in the second half of 2006. We expanded our market penetration in Asia. We heard about that before. This is clearly a very strong growth segment for us.

And, in 2007, what can you expect from our Company? I'm not going to give you a new strategy here or a totally new perspective on the Company. We are going to continue to implement what we talked about in early 2005, what we delivered in 2005, what we delivered in 2006, and what has given us above-market growth rates and a very, very strong base for very long term growth. In 2007, we'll continue in innovation in sample and assay technologies. We are going to continue to place a very high focus on exceeding market expectations with our technologies. We're going to launch a number of products, including a number of products in automation of sample and assay technologies. We all heard about the QIAcube today. We're also going to launch a major initiative in regulated products for molecular diagnostics, primarily in the United States and Europe. And, these organic engines will all be augmented using catalytic acquisitions, which we'll continue to consider as part of our strategy going forward. And the targets are primarily looking at sample and assay technologies and also to expand our regional footprint.

With that, I'd like to hand back to Solveigh to open the Q&A session.

We are now looking forward to discussing your questions. Qiagen is linking this conference call to the analyst meeting which is taking place simultaneously here in our European headquarters in Hilden. I would like to open the Q&A session by starting here in Hilden. The first question comes from Dan Mahony of Morgan Stanley.

I've got a question about new products. I guess new products in '06 are actually around $15 million. And, I guess, last year, you reported-- I think it was about $12 or $13 million in sales from products launched in '05. Just give us a sense of how these product portfolios can grow. What was the percentage of sales in '06 from those products which were launched in '05?

And, as a supplementary question, when you talk about organic growth of 10%-- I suppose, this year, you reported 11% with 2% from price, 5% from volume, and 4% from new products. What percentage should new products be this year, because if I just do back of envelope on QIAcube, I can get to sort of-- I could easily do $9 or $10 million this year. So, what do you think the rest of your new product portfolio could do vis a vis (indiscernible) this year?

Okay. Good questions. Obviously, it's difficult to answer some of them because some of the information we try to protect a little bit. But, the second year of new product is typically significantly above the first year. You can easily see growth of our portfolio of new products being north of 50%. So, if you look at a two-year horizon, you can easily be in the double digits in terms of overall contribution.

In terms of 2007, new product targets can vary, obviously, due to new product introductions. But a product like QIAcube will definitely take some time to move into the market. We did not give out targets for the year 2006. We think the market opportunity is huge. But we would be cautious on putting a hurdle out there until we see market uptake. Maybe that's something we could do in the second half of the year. But, the underlying growth of the consumables is definitely going to be comparable to what we saw in 2006 in terms of new product contributions. Were those those three questions?

Thanks.

Okay. The next question comes from Philippa Gardner at Lehman.

I have a couple of questions, if I could, firstly on the Genaco acquisition. How should we think about phasing the R&D spend over the quarters in 2007? And, secondly, what are your EPS expectations in 2008, and when might it become accretive to earnings? And, then, my last question is just your thoughts on dividends and share buybacks, given your current cash pile.

Genaco. That will really spread it quite linear over the four quarters, probably a little bit-- actually, I think it's the best way to do it. There might be certain fluctuations, but it will not be like 30% in the first two quarters and then 70% in the second two quarters. So, I would probably spread it in that way.

EPS. On 2008, we will give guidance EPS here exactly in one year. But, what we always have said is that, on the long term growth rates, it will be, as said before, which is, in profitability. We assume that we can at least improve operating margin by 100 basis points year over year. This is for 2008 true, as it is for 2007 true. Looking backwards, it is something which we quite well delivered.

On dividends and stock buybacks, I think, if you look at the consolidation going on in the market, you're seeing the active role Qiagen played over the last two years. We acquired ten companies within the last two years. Actually, looking at our pipeline right now, I do believe there are interesting targets still out in the market, and we believe that we can create more value at the moment for our shareholders by further driving the consolidation of the market. I think it is the view we have at the moment.

The next question comes from Daniel Wendorff of WestLB.

Two questions, if I may, one regarding your margins on the QIAcube. Are they any different from your current instrumentation automation portfolio? The second question, also relating to the instrumentation segment - given the introduction of the QIAcube, what is the right to assume that your growth rate for the instrumentation segment will be somewhat different in a positive sense from what we saw in 2006? Thanks.

Let me start the first one, and Peer will probably take the second question. I think, actually, the margins are quite similar to our typical instrument margins. We actually believe, going forward, with getting a larger volume and getting some more time on-- that we actually see a certain improvement in margin over time. But at the moment, it's already [inaudible] of Qiagen instrument margin.

And the second question in terms of the growth rate of instrumentation. We think it could be a good instrumentation year. It started out very well. The fourth quarter was very strong. But, remember, the first half of the year 2006 was not a strong half year for instrumentation. So, typically, it picks up in the second half of the year. We typically have more visibility in the second quarter of the year. I would hope-- at the moment, all signs are that it will probably be a good instrumentation year. But that will become more visible sometime in the second half.

Okay. After the next question, I would like to hand over to the operator. But, here-- the last question here in Hilden comes from Marcus Wieprecht of MainFirst.

Two quick questions. I still have a little bit the impression you are too conservative on your guidance; I mean, compared to the 10% organic growth with the 34% more salespeople. There's not really signs of any weakness in your current product portfolio, even coming new products on top - QIAcube, et cetera. And, why should I assume that the organic growth rate shouldn't be more than the 10% you assume? A second quick question on the tax rate you assume of 35% to 37%. Given the strong growth in Asia, which should reside in a lower tax rate, and, also, some instruments business coming on top, which is taxed in Switzerland, so why? And, in the full year, I think you had something like 33% or 34%. So, why is that higher than in the full year '06 with the strong growth in Asia?

Giving guidance is always tough. It's a little bit projections, it's experience, and it's a little bit crystal ball. So, the outlook for the year 2006, sitting here now in 2007, sitting here now in the beginning of 2007, is clearly quite good. We think we're executing well in our plan and that it has faster growth in front of it. But, at this point in time, the guidance that we are putting forth reflects all of these things and puts out a prudent guidance. Last year, we did increase guidance. We came out ahead of that guidance, as well. That's the way it should be in a perfect world. So, for guidance purposes, I think this is a very good set of numbers and a good framework for us to look at sitting here now in February 2007.

And, on the tax rate, all your points and topics are absolutely right. I do believe that we do have some potential to be in the same range as this year. But you also should, please, have in mind that we had also in 2006 a very strong year in Europe; and Europe is still doing very well. So, meaning, just coming from a larger base-- take Germany with a much higher tax rate-- it has an impact as well, which could offset this. So, I would assume the tax rate as guided for, but I clearly hope that we see some upside here, especially looking on the German tax reform that is coming through. It will not be true for 2007, but it could be a significant upside for 2008 and beyond.

Thank you. With this, I would like to hand over to the operator for the next four questions. Natasha?

[OPERATOR INSTRUCTIONS]. Your first question comes from Dan Leonard of First Analysis.

I only have a quick question. Peer, how do you expect, if at all, Genaco's relationship with Luminex could change now that Luminex has acquired its own [chemistry pharma]?

Okay, the question was-- now you see the other side, for once, here. The question was, if I understood you correctly-- we have some audio problems-- the relationship with Luminex. We are a partner of Luminex, and we sell Luminex systems for use with Genaco assays. In general, we have a good relationship with Luminex. It is an open relationship. We discuss openly about our plans and opportunities, and we think it's a very strong platform. There are thousands of placements, it's well accepted, and the technology that we have around multiplexing fits very well onto the Luminex system. We believe in this industry that partnering is something that benefits everybody and that the relationship should simply be very open.

Going forward, we clearly see that the Luminex technology has benefits. I would like to say in parentheses that the Genaco assay technology can be applied also to many other different detection technologies. So, the Luminex technology is a detection technology. And the technologies from PM, for instance, are not really very much overlapping with the Genaco capabilities. It's much higher sensitivity. It's also targeting different targets. It's more a pathogen-related panel or portfolio that we're looking at, whereas the majority of the sales from TM are in the genetic area based on the technology differences.

So, I think it is something that can work well. It requires all partners to be very open. We announced a license relationship today with Roche. With Roche, we work very well together in many spaces. We worked very well with Abbot together. We worked very well with Ortho together. All three you saw in the last few days a lot of announcements around. I think it's something that can be managed. It's something we're used to doing in our partnerships.

Okay. Thank you very much.

Your next question comes from Alastair Mackay of GARP Research and Securities.

I wanted to go back and talk a little bit about the regulatory pathway in the U.S. from an ASR/analytic specific reagent to a 510K. In particular, it seems like a timeline of 6 to 12 months is pretty aggressive, especially when one considers we're talking about multiplexed assays for [H5F1] and Staphplex. There's been some turmoil at the FDA recently about approvals of multiplexed molecular diagnostics assays. So, if I was to say that 12 months seems rather too aggressive in terms of a realistic timeline, Peer, I wonder what you'd say.

An excellent question. I probably was not quite clear on that. The majority of our assays we sell today are real-time PCR assays that detect one or, maybe, two targets in one assay. The Genaco panels are not sold as ASRs. They are currently prepared, they're validated, they're going through the full works that we described on these slides. A lot, actually, already has been performed. So, the Genaco panels don't start as an ASR; they start on the other scale from period zero, of which, again, a lot has already been performed.

Okay. Great. Thanks. This is perhaps a related question. If you look out a couple of years and you consider customers in, say, hospital labs and reference laboratories, do you think of them in terms of the assays and the regulated kits that they'll be buying - that Qiagen will be a major supplier under the Qiagen brand of these diagnostic kits, as opposed to today, where Qiagen is best known in the pre-analytics field.

Well, we certainly think so. It's a major part of our strategy going forward, which we successfully implemented in many countries in the world. In molecular diagnostics in Europe, where we have a very large portfolio there, more than 40 CE-marked assays that we sell. So, with the complete regulatory approval in the States, the mix is significantly skewed towards the assays. In some Asian countries, we are selling more than half of our sales in that country in molecular diagnostics, of which the majority is, again, assays. So, the United States is certainly very different here, and we welcome all initiatives that are currently on its way, and we're also supporting a lot of them to make sure that good diagnostics can come to market with the quality and also the speed required by the public and also the regulatory authorities. So, right now in the United States, the assay sales are smaller than the pre-analytical sales; but this is different, the other way around in Europe and also in Asia.

Great. Thank you very much.

Your next question comes from May-Kin Ho of Goldman Sachs.

I have two questions. The first is that, recently, a number of pharma companies are trying to commence an R&D [cycle in groups]. What do you think the impact would be on the sales of your products? Second is on diagnostics. How much of the sales outside of the U.S.-- if you look down the road a few years from now, some of these tend to be approved in the U.S.-- could we imagine that [clinical] diagnostics would be close to half of sales? What would the impact be on gross margins and operating margins?

Okay. The second question is related to assuming the molecular diagnostics continue to grow as they do, what happens with the margins going forward? Is that correct, May-Kin?

The second question is that-- I think that, right now, most of the molecular diagnostic sales are outside of the U.S. Of course, you are trying to get approvals on a number of them. I wanted to see whether it's related to [technical difficulty].

I hope I understood you correctly. But, we had some projections in our package that we will also have available on the website which show theoretical projections of the revenue and revenue base by customer segments. So if we go into the margins pie by customer segment, they are very comparable. So, the margins typically are higher on our regulated product, but, therefore, the up-front cost is higher. So, you basically accrue the up-front cost over the time period you sell the regulated product. You could come to very comparable gross and EBIT margins. I don't see a big change there going forward.

And the second question was, I think, related to capitalization of R&D costs. Did we hear you correctly?

No. I'm sorry. I was saying that a lot of the pharma companies are trying to--

You know, under IFRS, there are some capitalization clauses. But, Roland, I'd like to refer that to you.

Not on U.S. GAAP. So, R&D is just straightforward expenses.

Sorry. Hello? Can you hear me?

Straightforward expense.

Okay. The next question comes from Hilden again. Markus Metzger of Vontobel.

A couple of housekeeping questions, please. Can you provide, please, the growth rates in molecular diagnostics and lab testing for the fourth quarter in 2006-- maybe I missed it-- and, also, the total revenue share for Asia, ex Japan, if possible?

I don't have the very precise number just in front of me, but I would say that Asia, for the year, was 10% to 11% overall. I would still assume that Japan is somewhere between 5% or 6%. And, we don't break out typically on the growth rate on a [qualitative] basis on each business unit or business area. But, I would assume that there's no change in the fourth quarter to what we have said for the full year.

Japan is very comparable to other areas, with the exception that the first quarter in Japan is comparable to the fourth quarter in other countries because the fiscal year ends on March 31 in Japan versus, in other countries, on December 31. It's otherwise very comparable.

Dan Mahony of Morgan Stanley.

I guess in previous sessions like this, you talked a lot about applied market. I know you mentioned some of that earlier today. But, a lot of the focus at the moment with the Company is in diagnostics. What are you doing in applied markets outside forensics? I know you talked a little about some veterinary stuff earlier. But, when should we really begin to start focusing on that in terms of impact it could have on numbers in terms of meaningful growth? In some of those ten-year projections, it's a fast-growing market. So, how do you intend to target that, and when will we begin to see it?

Right. It's difficult to talk about applied testing as a homogenous market because there are so many different sub-segments. So, we showed you where we want to focus, which includes veterinary testing. And we told you it's about 10% of our sales, and we told you it's growing at about 20%. Now, if we have 10% of our sales, let's say $50 million growing at 20%, it adds $10 million to our sales on an overall of $50 million organic growth that we're adding in 2007. We're taking approximate numbers now. So, this is clearly an important part. It contributes about 25% of our absolute dollar growth. It is coming from a number of different segments. Forensics continues to be very strong for us. We had a strong year in 2006 in forensics and I expect that to also be the case in 2007. There's a lot of catch-up work to be done. So, the first part of your question - when is it meaningful in terms of the dollar contribution? It is already contributing about 25% of the absolute dollar growth.

Veterinary testing, we believe, will be a very interesting market because we have real strong capabilities there - flexibility, openness, multi-parameter capabilities. Of these closed systems, diagnostics is typically [inaudible]. We talked about Professor [Peter Hans] using different types of samples - milk and blood and all kinds of samples for his veterinary testing. These flexibilities are something that Qiagen, probably, only can provide at this point in time. And we entered into an agreement with VLA to broaden our assay portfolio. What we need there are more assays. Right now, the assay portfolio is limited. We have some high sellers, like H5, but want to add more high volume assays in this space. That's what this agreement was for. That should continue to drive that growth and these numbers going forward, as this market is still a smaller part of these 10% of our sales. Veterinary testing is not a big chunk of the 10% yet.

If there aren't any further questions here in Hilden, I would like to hand over to the operator for the very last two questions of this conference call discussion.

Your next question comes from Peter Welford of Lehman Brothers.

I've just got a few housekeeping questions. You mentioned that gross margin is generally weaker when instruments sales are strong. But, actually, gross margin in the fourth quarter was actually quite good this year. I suppose if you could put that into context of the full year. I also just wanted to ask about the number of shares in your guidance. It seems to be 158 million, which is quite an increase. I just wanted to know when those [four] or, I guess, more shares than average will be issued this year and what they relate to. And, finally, can you just give any sort of guidance on new products for 2007 and what you expect them to contribute this year? Thank you.

I'll take the first two questions and then Peer, probably, the last one. On the gross margin, of course, you have already seen in the fourth quarter an impact on gross margin quarter over quarter. The gross margin slightly decreased by 200 basis points from 72% to 70%. 70% was still a strong gross margin. But, normally, if you look at the product mix in the fourth quarter, gross margins are normally quite high. Again, with a 47% growth rate in instruments, it has a certain impact on gross margins. So, going forward, I think, using the yearly average for 2006-- I haven't [done the] addition on it; it's probably a good assumption.

On the question on diluted numbers of shares, it's more or less totally coming from-- it's clear the dilution is coming from our two convertibles and are based, of course, on the strong increase of the stock price. There's no other impact on that. So, you can say the stock price increase of about $2 gets about $1 million additional shares. But, you should have in mind that the convertible still itself as a tool is not dilutive itself because we still have a very significant interest income on it-- even the spread on it. If you looking regarding on a U.S. dollar wise, we're getting at the moment about 5% interest income. And we do get [inaudible] for the first convertible, one at 50 basis points and for the second convertible, 325. So, if you group those together and do the math-- you don't see a calculation. But, if you just looking at total numbers of shares, of course, there's an increase out of that.

Peter, the question on new product is probably best answered by the overall guidance for organic growth, which is the 10%, plus or minus range. And, any number above 2% is a good number in new product introductions. We achieved 4% two years in a row. And the second year, to answer the question that Dan asked before, shows significant growth from that base again. So, I wouldn't want to pinpoint a specific number for 2007. I don't see it changing significantly for 2007. Any number between 2% and 4% would be good. But, I feel quite good about 2007 again.

Okay. Thank you.

Your next question comes from Quintin Lai of Robert W. Baird.

Peer, with respect to different countries doing pandemic preparations for flu, have you been approached by any of these agencies for your H5N1 panel and, potentially, bringing that to clinical labs before-- under like an IND or pre-market status?

There are multiple answers to that. We have real-time PCR assays. And you're talking about the United States now, I guess. So, in the United States, there have been a number of tenders going out, which are currently still in the process of being evaluated, some of them. If you're asking if we're participating, the answer is yes. There is a participation there. I can't give you more details because-- normally, we can't give you details when we're in there with a partner. So, that's maybe a small hint.

The second question was related to the panels and if we're in there with the panels. There, the answer is the panels we want to-- we are getting support. I can say so much for the panels. It's not insignificant support. And we see that the panels provide additional information compared to what the other parties are providing, including ourselves with real-time PCR. The panels give at the same time sub-typing of the virus versus just the yes/no and quantitative answer. It gives you a yes/no, it gives you which of the sub-type, and it also gives you a semi-quantitative answer. So, it gives you three parameters versus two. It's clearly a different set up. So, we see that adjacent and in addition to a real-time PCR assay. That's how the authorities that are supporting us are seeing it as well.

Thank you. And just a quick follow up. Roland, when you say 27% operating margin in 2007,is that inclusive of the Genaco R&D expense or exclusive of the Genaco R&D expense?

This is adjusted-- it includes operating expenses for Genaco, yes.

Okay. All right. Thank you very much.

Okay. With this, I would like to close the Q&A session. Thank you all for participating. We hope to welcome you again to our Q1 results conference call on Tuesday, May 7, 2007. As always, if you have any additional questions or need any additional information, please do not hesitate to contact us. Again, thank you very, very much, and have a nice day. Bye.

Thank you. This concludes today's Qiagen's fourth quarter and year end 2006 results conference call. You may now disconnect.