Qiagen NV (QGEN) 2007 Q1 法說會逐字稿

Good morning, my name is Coretta, and I will be your conference operator today. At this time I would like to welcome everyone to the Qiagen first quarter 2007 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) It is now my pleasure to turn the floor over to hour host, Director, Investor Relations, Solveigh Mahler. Ma'am, you may begin your conference.

Thank you very much, Coretta. Good morning and hello, everybody, thank you very much for joining Qiagen's first quarter 2007 earnings conference call. Qiagen's experienced a strong start into 2007 with a strong revenue growth and exciting momentum and its strategic positioning.

I am Solveigh Maher, Director of Investor Relations here at Qiagen. With me on the call are Qiagen's Chief Executive Officer, Peer Schatz, and Qiagen's Chief Financial Officer, Roland Sackers. The conference call will cover a 20-minute presentation followed by a Q&A session. We will be using a presentation during the conference call, which can be downloaded from the Investor Relations section of our home page at Qiagen.com.

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

During the call, we will be making forward-looking statements. Such forward-looking statements are subject risks and uncertainties. For the descriptions of such risks and uncertainties, please refer to the discussions and report that Qiagen has filed with the U.S. Securities and Exchange Commission. With this, I would like to hand over to Peer Schatz. Peer?

Yes, Solveigh, thank you. Yes, as Solveigh just said, we are very pleased how we started into 2007 and have a positive outlook, going forward. Our revenues came in just shy of $128 million in sales, EPS at $0.14, 17% net income growth.

Overall, revenue growth was very strong -- 18% overall driven by 11% organic revenue growth. We increased our market leadership and share by all accounts available to us, and we are executing on our strategy, and the first quarter, again, we demonstrated impressive success and innovation, launched 13 new products in Q1 alone -- some very products within that new portfolio.

We also continued on our path of catalytic access -- we added eGene's separation and analysis technology, and we will, today, share with you a report card, the 12-month-out report card on the integration of Gentra, which is also quite successful.

So, overall, a strong first quarter and a very positive outlook.

Moving to slide number 4, we have various ways in which we can look at our business. One is by product group, one is by geographic regions, and a third by customer groups. And we segmented and sliced the revenues in these various formats. The product group pie chart that you see to the left shows you that we continue to show about 90% of our sales in the consumable area.

Instrumentation is, however, a very important part of our business, as it is addressing certain high-growth market segments and creating very exciting opportunities for future consumable revenue streams. Our investments in this area are clearly paying off. We had very high growth in this first quarter and continue to remain very positive on instrumentation sales, going forward.

By geographic region, we have about 46% of sales coming from Europe and 39% from North America. Asia continues to grow very rapidly. It is now 13% of our sales, and the rest of the world and growing very high growth rates -- 48% growth on constant exchange rates, and the rest of world showed 2% of sales.

North America showed a growth rate of about 5% due to timing of certain large pharmaceutical orders but also due to a continued soft academic market, which we also had planned for the year 2007.

By customer groups, molecular diagnostics is today the largest single customer group. If we look at the research segment, which represents about 38% of our sales, half of it is approximately biomedical associated research, and half of it basic. So by customer profile, molecular diagnostics, due to a very fast organic growth and a very strong positioning of our company has now achieved the number-one size in terms of customer segments -- the pharmaceutical industry, 24%; applied testing, 11%.

On slide 5, we have a breakdown as we have also shown in previous presentations -- how we delivered our organic growth rate, which is one of the highest in the industry. We achieved or were able to recognize 2% from price increases, 5% from volume increases, 4% from new products. Again, here, a very impressive number, which is 2 or 3 times faster -- or more additional growth than most peer companies demonstrate.

The acquisitions contributed about 2%; this was primarily the acquisition of Gentra. And the exchange rates contributed 5% -- so very strong organic growth rate, which is fueling our overall growth rate of 18% year-over-year.

On slide 6, here, just a summary of some of the products that we introduced in this first quarter 2007. In the area of sample technologies, we have sample technologies for DNA processing, which include a number of different products. Sample technologies for protein processing, automated solutions for sample technologies have a very exciting addition to our BioRobot EZ1 product line, the diagnostic sample preparation instrument, and also now launched the Qiagen-ized version of the AutoPure instrument, which we acquired in the Gentra acquisition.

The QIAcube started shipping late April and primarily to demo sites and to distributors, and we're starting to roll out larger manufacturing -- or larger capacity-filling in the coming weeks.

In terms of asset technologies, some exciting additions in the molecular diagnostics area of HLA; also, some very interesting asset technologies for gene expression that we launched. We also launched yesterday, also, through an announcement, a very exciting portfolio in the area of micro RNA, which is probably one of the fastest-growing areas of today's research, and potentially molecular diagnostics, and we think we have a groundbreaking technology there for RNA assays, micro RNA assays.

On the next slide, just to update you on the progress in our expansion of our logistics capabilities. As you know, we had initiated a project about seven, eight months ago to expand our logistics capabilities at our Hilden, Germany, site, and within seven months we were able to put in place quite an impressive logistics and manufacturing center was an investment of about EUR9 million or $11.7 million, the size of over 60,000 square feet, and it integrates a completely automated logistics and assembly capability to significantly expand our capacity to over 6,000 kits a day in this one site alone.

So we are clearly preparing for future growth, as well, and have done that in a very impressive way in terms of integrating software, hardware, and novel logistics and manufacturing capabilities. We are striving to even better serve our customers' requests and we're meeting higher standards and demands in regulatory safety and environmental care areas.

On the next slide, the graph that you've seen a few times now, our M&A strategy falls into three categories -- the standardization of sample and assay technologies. We did a number of transactions there over the last two years. The second area is dissemination of our reach of our core capabilities, i.e., geographical or customer segment-wise; and the third is creating pre-analytical solutions for systems biology, and we primarily focused on protein sample preparation in the acquisition strategy and primarily there in 2005.

In 2006, we acquired Gentra, about a year ago, and with the announcement of our first quarter 2006 we also announced the acquisition of Gentra, or shortly before, and we are here now supplying, on slide 9, a report card on how this acquisition went and the value that we created for Qiagen by doing this transaction.

The acquisition of Gentra brought to Qiagen and extremely complementary technology within a segment of nucleic acid purification they had create a market leadership position where they had a share, which was higher than ours in the area of large volume blood samples. Very often in biobanking and DNA archiving but also in comparative genomic hybridization studies, people want to work with large volumes of DNA, 5, 10 milliliters of blood and, in very gentle manners, extract nucleic acids for downstream archiving or processing.

While Gentra was acquired in April 2006, and we had guided for about $6 million in sales in the second half of 2006, we actually achieved 7.7 million. This is 30% more than we had actually guided for, and the transaction is clearly accretive -- so a very nice addition.

We were conservative in how we planned this transaction. We were very diligent in how we did the integration, very quick in integrating the company. The integration was actually completed a few weeks ago, formally completed, and Qiagen is today clearly recognized as a [deal] leader in this space, and has very nicely been able to integrate the Gentra capabilities of the Gentra following, customer following, into the Qiagen family of customers.

We have achieved a leading position in biobanking and DNA archiving market segments, so this transaction clearly exceeded expectations, and we're very happy with this transaction.

As I said before, we acquired, or announced the agreement to acquire eGene a few weeks ago. eGene is a very exciting addition to Qiagen. They're an HDA DNA analyzer system significantly improves the speed for nucleic acid separation and analysis, and this is particularly important and interesting for us because it provides Qiagen with an in-house quality-control tool that our customers can use to measure the performance of the Qiagen sample technologies. This is very often done subsequent to using one of our products.

In addition, it is a very convenience product and very sensitive and precise product to read out the Qiagen asset technologies that we today sell. PCR endpoint detection or also multiplexing detection can be done on the same platform. So it's really addressing two core areas of Qiagen, the sampling and the assay technology space.

It has very broad potential and application market segments that we are in and that are very core to us in molecular diagnostics, which is the prime target for us, but also in biomedical research and in the pharmaceutical industry.

Focused technology and product performance are very similar in terms of nature to Qiagen's. It's primarily a consumable stream, these cartridges that you see on the top left-hand of the slide, and the instrument and the corresponding software that you see on the bottom. So it's clearly an acquisition that follows our strategy, it's focused, and it's consistent, and we look forward to creating value with this transaction.

On the next slide, the outline of the deal structure -- the aggregate purchase consideration is $34 million, and the eGene shareholders prefer to have Qiagen stock as part of this transaction, which we agreed to as part of the overall terms. So about a 50-50 split stock/cash. There will be certain acquisition-related charges as we migrate over into the Qiagen structure, and we expect this transaction also to be accretive in then beyond 2008 -- so the very typical 12-month-out accretion horizon, which, in the case of Gentra, we very handsomely beat this target and this project. We are looking forward to significant value creation as well.

So we think this is a great asset at a very attractive valuation and look forward to adding this organization to the Qiagen family.

And, with that, I'll hand over to Roland.

Thank you, Peer, and good afternoon, everyone in Europe and good morning to those joining from the U.S.

Our first quarter financial results are better than expected compared to the business outlook we provided at the time we gave you our yearly guidance back in February. On several fronts, this quarter proved to be a very good start to 2007.

We demonstrated solid performance not only in terms of goals in consumables but also in our instrumentation business. Much of our growth is being driven organically, but our acquisitions from the past two years are all integrating well and yielding good results.

Here, an overview of our key financial metrics. We had reported revenues in the first quarter of $128 million, which are up by 18% over the same period last year. There is only a marginal foreign currency impact on revenue growth using our guidance (indiscernible) from January 31, 2007.

So the impact on revenues between actual and our guidance was not significant at January 31, 2007, guidance was 1.30 for the U.S. dollar our ratio and the average rate for Q1 was 1.31.

We achieved an adjusted operating income margin of 26%, which we really feel is quite strong and a great starting point for the year. Our first quarter adjusted EPS is $0.14 a share is also better than we had forecasted at the time we gave guidance. We exclude from these adjusted figures any acquisition, integration, and relocation-related charges as well as amortization of acquired IP and equity-based compensation.

The breakdown by product line shows that in the first quarter 2007, we not only pressed ahead aggressively with our consumables business, which accounts for approximately 89% of total revenues, but also, as I mentioned, delivered really high growth in our implementation business.

We continue to a step up over the past few quarters, and this quarter is particularly strong with 40% growth and a constant exchange rate. The reasons for this are mainly twofold. Firstly, strong organic growth in instruments. Our implementation business, which now serves the whole spectrum from low to high throughput is showing really strong demand particularly in Europe and Asia. And here I mean the whole of Asia, which is the result of the efforts we have made in expanding our business in countries like China, Malaysia, Singapore, and Korea.

Secondly, we continue to see significant level of sales coming from the implementation products acquired in the Gentra transaction. AutoPure is delivering great results. We are leveraging our improved sales and lead management, particularly for newly introduced instruments.

Just a note on consumables -- growth in (indiscernible) technology was very solid in all market segments and across all product lines. For asset technologies, our PCR reagent and test demonstrated significant growth rates far above average.

A good example here is a newly launched [Quantifast] PCR kits launched in the first quarter. These kits cut in half the time required for real-time PCR, and we are really pleased about the market success we can ascribe to it already.

Overall, the first quarter numbers break down as follows -- we once again reported strong top-line growth. Our net sales of US$127.9 million this quarter compared to US$108.7 million for the same period in 2006 reflects a solid growth rate of 18%.

Looking at our numbers on an adjusted basis, our operating income demonstrated approximately 80% growth over the first quarter 2006. Our adjusted net income showed a strong growth of 17%, however, just a note here that our tax rate is also slightly lower because of the first quarter 2006.

Among the factors that contributed to this was a larger revenue share in Asia, where tax rates, also Japan, are lower and a lower tax rate in Switzerland that, where most of our instrument business is conducted. The latter point had a measurable impact because of the strong quarter we had in instrument sales. Please note that a stronger instrument quarter has a certain negative impact on gross margin and operating income margin but has a positive impact on our tax rate so that our net income, the net impact is less significant.

Also, this instrument fueled higher margin consumable sales as an instrument sales is the beginning of a future consumables twin. In respect of diluted earnings per share, we had an increase of 8% to $0.14 a share, up from $0.13 for the comparable quarter in 2006 and above our expectations for the first quarter 2007.

I think this next slide is a good indicator of showing our reported versus adjusted figures. First, our net sales -- the same under U.S. and non-U.S. GAAP. Operating income is adjusted for factors such as acquisitions we closed in 2006 and other acquisitions of late expenses as well as FAS 123R expenses. We have a $0.01 difference in EPS between GAAP and non-U.S. GAAP, ultimately still an adjusted 80% after-tax profitability.

You will find the details split up in our appendices to this presentation.

Turning to our cash flow statement, our operating cash flow of U.S.$21.2 million in the first quarter versus that of the same period in 2006 where we had U.S.$22.3 million was mainly driven by increases in net income, depreciation on amortization, and acute liability offset by increases in inventories prepaid and other expenses and accounts receivable as a result of our acquisitions and expansion of operations.

The investment on our logistics center in Europe as well as in our Asian operations to increase efficiency obviously had an impact on our free cash flow, which is down from U.S.$17.8 million to U.S.$14.4 million for the comparable periods 2006 to 2007.

We have listed a number of assumptions here to frame some items more precisely. Organic growth, as I already mentioned, we continue to look for approximately 10% here. In terms of adjustments to operating income, we continue to look for approximately similar percentage margins as in the first quarter here. To note our also stock option -- the effective stock unit grants, which will have a noncash impact of about $750,000 to U.S.$1.25 million for the second quarter.

Amortization of acquired intangible assets, approximately U.S.$2.7 million for the second quarter and restructuring and related integration cost for acquisitions from the prior year, approximately U.S.$750,000. Due to acquisitions to come in for all aspects on top in terms of revenues, profits, but also on one-time charges and expenses. We anticipate revenue growth for the second quarter to be between U.S.$127 million and U.S.$130 million.

As I mentioned at year-end, we really picked up the pace of our investments. This is also true on a continuing basis for 2007. We are well on our way to investing clinical trials for a number of molecular diagnostic products as well as investing in sales and marketing in this area. We would expect, therefore, the second quarter adjusted EPS to be comparable or to be slightly higher than the first quarter number.

Finally, a word on our tax rate -- to give you some background, we adopted a new accounting standard called FIN 48 at the beginning of the year. FIN 48, as you may have heard, is called accounting for uncertainty income taxes is itself an implementation of a prior rule called FAS 109. Adopting FIN 48 affects how we disclose information about uncertain tax positions, and also requires us to reevaluate the measure our uncertain tax position using a different analytical approach.

For us, the net result of this process is set to reduce our intent to earnings balance at the beginning of the year by U.S.$7 million, essentially reflecting increased tax results.

FIN 48 has an impact only on the timing of recognition of tax benefits. We expect it to result in a higher volatility in our effective tax rate. For the current year, we expect a positive impact and a reduction in our effective tax rate, but it would be too early to give a more precise number. Most likely, we could do so in the second or third quarter.

We would use additional profit out of the potential decrease in tax rate to boost our resource spending and channel activities without any impact to our guided EPS number.

So, with that, I had back to Peer.

Yes, thanks, Roland. So, overall, a very strong first quarter. We are very pleased with the results to beat our forecasts that we had for this quarter. It's a good start into 2007 -- revenues up 18%, organic growth continues to be industry-leading, and a very strong growth in instrumentation.

The strategic momentum, however, is very strong as well. It's an exciting market environment as we all know, especially in the molecular diagnostics space. We are playing a key role, and it's such a dynamic and very exciting industry.

We expanded our position through the acquisition of eGene that we hope can close in the second quarter, and the integration of acquired businesses is on track. We have demonstrated, now, we've put out a few of these report cards now on various larger acquisitions, and you clearly see that we've been able to deliver, integrate rapidly, and also have a meaningful impact on our overall growth rate, going forward.

The guidance for the full year 2007 continues to remain very strong. Revenues of 5.18 to 5.35, an operating margin of about 27% and EPS of $0.60 to $0.63 are the targets that we've put out in February. Should we close eGene, that would be reflected also in that guidance. Revenues would go up slightly, and there would be one-time charges.

In general, we are very well on track based on this first quarter 2007, and we look forward to reporting on future quarters.

With that, I'll hand back to Solveigh.

Thank you very much, Peer, we are now looking forward to discussing your questions. For this I would like to hand over to our operator, Coretta?

(Operator Instructions) Brian White, Deutsche Bank.

I wondered if that historically you've given us some indication of utilization rates with respect to capacity that you have -- manufacturing capacity. I wonder if you have more up-to-date numbers for us to look at?

Secondly, just in terms of instrumentation, there's two strong quarters that we've had with QIAcube in its initial launch phase. Should we see Q1 as a new base level for instrumentation, going forward? Thank you.

Good questions, Brian. Forty percent growth for the instrumentation business on a long-term basis -- that would be great. I think the current growth rate that we're seeing right now is certainly reflecting investments that we have done in the instrumentation space or automation portfolio is very strong, and the first quarter does not even include the QIAcube yet, and the QIAcube is not the end of the pipeline. There's a deep automation pipeline as well.

So we clearly anticipate that as automation becomes more important for key customer segments that we will see automation be a successful part of our business, going forward. I would not see it go to 15% or so in the very near future or even higher. It is probably going to remain pretty much within the guidance that we gave for the full year, which shows quite impressive growth but a little bit below what we saw in the first quarter. Also included, obviously, the 40% included the automation systems from Gentra.

Now, in terms of the capacity utilization, there are various areas or functional areas within our manufacturing. We have areas such as biological manufacturing, where we manufacture enzymes and other biological products. We have chemical manufacturing. In some of these areas, there is a certain minimum and efficient size that is required and, very often, we do not reach that minimum efficient size, but for proprietary information reasons, we want to keep these capacities in-house.

So in some areas such as biologics and chemistry, which is used, for instance, to manufacture buffers and similar, the capacity utilization is significantly below where it is, let's say, in assembly, which is a more variable and modular expandable capacity, where the minimum efficient size is very quickly reached, and you typically then adjust modules, going forward.

In the logistics center, which we built, this is focused on assembly; it is focused on the logistics of internal use, goods, and wares, and is also focused on the logistics of products that are going out of the company. It is fully automated, fully integrated and allows us to have a much more modular capacity expansion, going forward, with a very similar use of human labor.

And there, in the assembly areas, or in the logistics areas, we are typically running at higher capacities very typical to what you would see 80%, 90%, depending on the various units.

Dan Leonard, First Analysis.

A question on the margin expansion -- your operating margin did not expand in the first quarter versus the first quarter of last year. Do you still think you could do your target of a minimum 100 basis points expansion in 2007 now that you've got a larger mix of instruments sales in your sales?

We believe that we are very well on track, also on the margins. We are better in Q1 than we expected in forecasts for ourselves. So our guidance was 27% of operating margin, I think it's something what we believe is well achievable, and even the current mix probably makes it a little bit harder, but I think we should clearly go there, as we ought to see quite a significant momentum on the revenue side.

Okay, and, Roland, your assumptions for the second quarter -- when I add up the pieces, you've got 10% organic growth, currency at -- current exchange rates, probably at least a cultural percent, and then you still have a quarter of Gentra, I believe, which is still considered acquisition. So why wouldn't the lower end of that revenue range be higher?

Thanks for reminding me. Of course, the number I gave was based on the guidance not on exchange rates.

Okay, great, and final question -- the EPS solution you expect from eGene, a penny in the back half of the year -- does that include the one-time charges or exclude the one-time charges?

This is excluding the one-time charges. We expect the one-time charge of $0.01 probably in the third quarter and in addition to that, we probably will see an impact in adjusted EPS of another $0.01.

Philippa Gardner, Lehman Brothers.

My first question is actually a repeat, because I missed this right at the start of the call. The U.S. sales growth -- can you just explain or give us a bit more detail on why that was relatively weak this quarter? And then my second question is just on R&D spend -- I know full-year results, he talked pursuing regulatory approval of molecular diagnostic tests, but we have already seen an impact on the R&D as yet in the first quarter. So should we expect that to be ramping up over the rest of this year?

The first question, on the U.S. sales, as I said in the call, the sales in the first quarter of 2007 were impacted by a few things -- multiple different reasons, and none of them really standing out. So we remain very positive on the North American sales and also sales growth for the remainder of the year.

The major impacts were that we had some very significant orders from the pharmaceutical industry in the first quarter of 2006, which we did not see in the first quarter of 2007. These were seven-digit orders as well, and we had more shipments, and we had some quite sizable, also, revenues that were shifted a little bit in Q4 and Q1, so there are timing effects in there. It's a year-over-year comparison, which those two factors are primarily focused on the pharma industry.

Academia, we planned very soft growth for the full-year 2007 in the United States. As we all know, the academic sector is not very -- showing very strong growth at the moment in the U.S. and that's also what we planned for, so that was fully expected.

Molecular diagnostics and applied testing, we continue to grow very rapidly. So these are multiple effects that came together, and I would not attribute too much value to any one of them individually, but in some they just led to a slightly slower growth.

Okay, and on the R&D?

Oh, R&D, before Roland takes that question, just to note that these trials, they typically start very slow in terms of spending, and then they ramp up. And we're not talking like with the pharmaceutical product. Huge costs of these trials, these are typically trials that cost a few hundred thousand dollars. In the case of multiplex products, it might go a little bit higher.

But if you spread that over a certain period and look at our overall R&D budget, I wouldn't attribute too much to numbers going up and down a little bit on the overall expenses and associate that with certain individual projects in this area especially in the regulatory space.

Roland, do you want to put more color to that?

I think you covered it all. I think the only thing that I probably should [pat] is we shouldn't expect a strong ramp-up over the year, probably a slight ramp-up. And the other thing, of course, more the relative number, we do shorten this, of course, approval work into North America through the new currency impact on that and, therefore, on the relative side, it's not as much as we would do in Europe.

Maykin Ho, Goldman Sachs.

Sorry, I'm on a cell phone, I hope you can hear me. I don't know whether somebody asked this question before, but what do you think about the potential acquisition of [Biosite]? I know that it's not exactly in the same area of diagnostics you are in, but what's the implication for the industry?

Well, I think this industry is clearly seen as very critical to a lot of different players in this space. You see this is not only shown on evaluations of some of these assets. You know, the growth rate and the expansion opportunities of some of these assets, the prices are paid for them. I'm not referring to buy side here now -- are quite, quite interesting to look at, you know, comparing the J2Rs.

But we clearly see that the diagnostic space is getting a lot of interest from a number of different players, and, in this case, we have parties that are closer to the space and other areas we have new parties entering into the space and into the diagnostic space. And at the core of all of this is the most critical element for the long-term growth of the diagnostic space is the molecular piece, and we just hold such critical keys to that molecular diagnostics space, going forward, that puts us into an exciting role, and it just reinforces our vision that we talked about now for quite some time; that this is going to be a very important space, and it's now clearly also shown by other companies in terms of their interests and, going forward, I think this will continue to see accelerating momentum.

That's interesting, and another question is -- it feels that your tax rate continues to be pretty high. What is the strategy to reduce the taxes, going forward?

Roland, do you want to --?

Yes, absolutely. Hi, Maykin. I think on the tax side, we probably will see a slight decrease over this year but also over next year. Clearly, it's driven by several factors. One factor is clearly having a stronger share of revenues in Asia, where the average tax rate is significantly lower than, for example, New York or in the U.S.

Another big driver could be, clearly, we're just not decided yet to German tax reform, which probably will start -- be effective as of January 1, 2008, which could have a larger impact on our tax rate.

So, going forward, I think the tax rate will go down and should contribute quite significant cash to the company.

In 2008, 2009, could we expect a tax rate of 100 to 200 basis points lower?

Yes. I think our midterm growth, winning politicians is hard over in Germany. But if all the things I just mentioned are going to happen, I would expect a tax rate on the midterm between 33% and 25%.

Martin Wales, UBS.

Good afternoon. Roland, you commented on instruments -- each instrument being a continuing revenue stream for consumables, which is, of course, true. I'm just trying to get a sense of how important the revenue stream for consumables and (indiscernible) today some sense of where that can go to in the near term?

I'd probably start with it, and probably Peer can add something to it. Furthermore, we have to clearly to say that 90% of our customers are using manual products. So I think that it's one of the largest possibilities we do have, going forward, in converting even more manual customers in customer using automated products and, of course, generating throughput. So the starting point is very good.

On the average, what we do see, and it's really depending on the kind of product calls, but also depending on the kind of instrument the customer is wanting is that typically kind of rule-of-thumb to see that the customer is using something between 20% to probably 70% of the purchase price of an instrument on consumables on a yearly basis.

So let's assume an instrument costs U.S.$100,000, we should probably see consumables going to this instrument somewhere between U.S.$20,000 and up to U.S.$30,000. While the overall sales of consumables versus instruments is 90/10, the percentage of consumables that are run on automation platforms is significantly higher. So we try to track that internally based on CRM data or customer relationship management data, and some of their products are uniquely on position to run on automation systems.

The percentage of revenues associated with automation is quite a bit higher than the 10%. We run internal P&Ls, actually, showing the automation customer group as a customer group and their growth dynamics, and the growth rate is quite high in that automated use area, because the customers are typically in the molecular diagnostic space or in the applied testing space or in the pharma space, and these are areas that are growing quite rapidly.

Now, with the QIAcube, we clearly have a product that will go into every laboratory -- that's our vision for that. There is no laboratory that is not a potential QIAcube customer, and that will have a baseline growth rate, but, overall, it is a very -- it is addressing areas of high overall growth in specific customer segments.

Could you maybe, then, just follow-up by giving me a little bit more color about how QIAcube is launched. I believe you made some reference to it in your press release.

We announced the launch in Q1, and started ramping out -- started demo-ing the product to certain customers and announced that we would be starting shipments in April. We are receiving overwhelming, very exciting demand for the product. In case you were at one of the industry conferences, we just rolled it out at CBS about a week ago, at the Clinical Biology Society, and we had not really anticipated that it would receive such exciting uptake in the diagnostic space just yet, but it was one of the hottest products at CBS, and we had to expand the meeting rooms and got a lot of interest for this product.

It just shows that the standard -- it's not about the metal, it's not about the software, it's about the tens of thousands of customers that use our chemistry. They are now thinking about the same chemistry and going onto an instrument. So it's not buying a new instrument and new consumable and new chemistry and having to revalidate the whole thing. It is a seamless migration. It cannot get easier moving from manual to automated, and that kind of opened the floodgates for a lot of customer segments.

We expect to ramp up -- or start shipments -- we started shipments in April, but we are focusing on -- or most of the instruments that we ship, they went into the demo group and so we have a lot of instruments in the field that we're showing to customers and to distributors, and we're starting to sell the first instruments now to end-users and ramping that up, as well, over the course of the second quarter.

So we're very pleased with the demand, and we can potentially give more color to it later in the year, but I expect this to be a very strong product.

(Operator Instructions) Alastair McKay, GARP Research and Securities.

Oh, hi, good afternoon. I had another question about instrumentation. Can you talk a little bit about the division in instrumentation sales between individual end users and the OEM market?

Excellent question and, as you know, there are a number of interesting next-generation diagnostic products that are coming to market that we'll also be employing our automation in combination with our consumables and through third party or OEM relationships.

But, by far, the majority of our sales are actually direct. We have today one of the largest sales forces in the life science or molecular biology industry, in general. We have the top two or three sales force in molecular diagnostics. I think this is something that very often is overlooked just in terms of the number of people we have on the ground, we are second to almost no one. And the position that we have there is clearly very exciting for the automation products as well.

So the majority of our instruments are going through direct sales channels. We have some very valued and also very long-term OEM relationships with customers that are in the molecular diagnostics field, and we're working very well with them together as well.

When you compare the growth rates of those two sides of instrumentation, are they roughly comparable?

Internal is growing faster, so the growth that you see here is almost all coming from internal. The numbers on the OEM automation sales is too small to have an overall meaningful impact.

And then, lastly, do you have any thoughts of expanding the technologies that your instruments will use? You make many more technologies such as vacuum aspiration, magnetic filtration, than your own instruments actually employ.

We do have a complete series of magnetic particle technology systems. We are today the leader in this space as well, by far. The EZ1 system and the M48 system, they process magnetic particle technologies. Some people want to work with magnetic particles. They have advantages in certain areas.

Other people want to work with the membrane-based technologies, and there we have the systems such as the BioRobot Universal, which is the pharma -- every application membrane product automation system, and we have the MDX BioRobot MTX, which is a product that you'll see in a clinical lab or a molecular diagnostics lab. It also has received certain regulatory approvals already for those applications.

And the QIAcube is for membrane-based spin columns, or orderly spin column-based processing.

So we try to, today, when we develop a product, it's no secret -- the primary target for each development project is potential diagnostic cues. So we develop it under -- with the clear quality requirements and the documentation requirements that are required for a diagnostic product.

We also, as a secondary requirement, we also look for an automation angle to every product we put out, particularly in the sample technology space. So most of the products, the epigenetics products or the micro RNA product that you see here, they will be running on the QIAcube for instance, and that is part of the original design specification sheet that was created when the development was started a few years ago.

Your final question is coming from Patrick Fuchs, DZ Bank.

I have a question regarding the G&A costs that rose 18% in Q1. The figure that we saw there, is that to be the absolute run rate for the rest of the year? And then a question on the U.S. again -- is it, that in the U.S., then, your sales mix by customer is quite different to what you see in Europe or as the average of the companies, I assume, pharma and academia than any U.S. part of that phase be lower, and, if not, can it be compensated by molecular diagnostics then? So just a question on that end.

Okay, I'll take the second. Roland, do you want to take the first?

Absolutely, I'll have a go at it, Patrick. On the G&A side, if you're looking on the last five quarters, you see G&A was always somewhere between 10% and 11% of revenues. So out in the first quarter was 11%. It was more the upper side in the first quarter. We had certain expenses in the third quarter, which we probably won't have in the second and third quarter.

It shouldn't compare, really, to the fourth quarter. Of course, with significant lower -- so I think somewhere in between is the value to look forward. So probably using a percentage of revenue somewhere between 10 and 11% is a good value to take.

Patrick, on the latter question, the North American sales clearly have a stronger emphasis on pharma sales. While there are a lot of pharmaceutical customers, obviously, in Asia and in Europe, they very often have their research facilities in the United States, and so it represents a larger portion of the overall sales mix than we have on an overall basis. Twenty-four percent is the overall revenue contribution from pharma, and the United States is a little bit higher.

It was particularly -- there were two larger clinical trials last year that had meaningful impacts and that actually got approval, and we're very excited and happy for our customers that got approval for those products. Some of them were quite intensively in the press last year, and these timings are just, as we are now in the pharma space, very often looking at clinical work and not only discovery work. In the clinical area, some of these individual orders are significantly larger, and so there are timing differences when they restart their trials, and that one customer, for instance, is now going on international trials, and the other one, I think, as well. So we'll see that pick up again. So I see this more as a timing and then just a customer segment specific change now in this first quarter that led to softer growth.

What is interesting to see is that the European sales continue to grow very nicely, and Asia, of course, due to the overall economy there but, in Europe, we are very well underway and have, again, been able to meet and exceed our targets in Q1 and with a very high growth rate.

Okay, maybe just a follow-on on your remark on the clinical trials for some pharma company that you finally go approved products in -- can one assume that from this clinical trial you would be also in a position to develop diagnostic tests for that, or was this simply part of a pharmacogenomic analysis of the clinical trials?

Well, let's take an example -- this is now unrelated to what I was talking about before, but one example is [Gardasil]. I can talk about that because Merck has been talking about that. We were the prime supplier of the assay of the sample technologies to Merck for those trials, and these are quite significant, as tens of thousands of assays are performed to monitor these patients and, yes, there is potentially a diagnostic angle to it at some point in time, and that's clearly something that is of tremendous value to our customers; that they know that we not only can ship GNP manufactured product and have the quality, the homogeneous lot manufacturing, the tracking systems, the ability to control individual loss for our customers. These things are so important, they're standard in the diagnostic space, so we do them.

But it's very rare that the companies that supply the clinical monitoring space also can hold the customers' hands into a diagnostic world, and that's exactly what people are looking for right now. So these investments that we have in molecular diagnostics, they're paying off also in the pharma space.

Christian Peter, Sal Oppenheim.

Hi, and thanks for taking my question. Looking at the gross margin developments, one can see that you actually manage to keep gross margin constant despite the increased share of instrument sales.

Now, is it correct to assume that you actually manage to a significantly increased gross margin for consumables? And, if yes, can you give an indication what your approximate size of impact is there?

The other question also refers to your instruments. As you mentioned, these sales are a kind of catalyst for consumable sales. Now, my question is what kind of instruments did you sell most in Q1? Are these high or low throughput instruments or, in other words, what should we expect in terms of gross margins and consumables in the future?

On your question regarding gross margin, I think we typically don't break out the different cost margin, but I think what we can say and I think you clearly probably towards a wide assumption is that our consumables clearly have a higher gross margin than our instruments, in general, and our gross margin clearly had a very nice development now up to 70% over the last two quarters.

Given that we had strong instrument growth rate, you clearly can do the math and see that consumables' growth rate and gross margins are significantly up, but, going forward, I wouldn't really look at assume that you should focus in all numbers, and having a gross margin of 70% and sticking to our goal on operating income margin upon the business points, year-over-year, I think this is a fair conclusion.

On the instrument side and the split of our different sales, I just would like to comment that, as I mentioned during the call, that we really have seen a demand on all kind of instruments from low to high (indiscernible) not one instrument which was clearly leading or another instrument which was not selling as good. It was all over the place.

Retailer was clearly driven by Asia and Europe and, on a customer side, clearly, it was a strong demand from applied testing as well from molecular diagnostics.

I'll now turn the floor over, back to Qiagen management for any closing remarks.

Okay, thank you very much, Coretta. I would like to close this conference call by thanking you all for participating. We hope to welcome you again to our Q2 earnings conference call on Tuesday, August 6, 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 conference call. You may now disconnect and have a wonderful day.