Qiagen NV (QGEN) 2007 Q2 法說會逐字稿

(Audio starts in progress) right now, in combination with Digene, now also including on a pro forma basis Digene's revenue distribution.

As you see from the left pie chart, our product mix would not really change. The 90% revenue slice coming from Consumables is about the same as we had before, and 10% Instrumentation.

The geographic mix changes somewhat, about 36% of sales coming from Europe now, so less than we had before. And this reflects Digene's very strong presence in the United States, 52% of sales coming from the United States after the transaction, about 9% from Asia.

By customer group, a very interesting pie chart here on the right. About 48% of our sales now come from molecular diagnostics. A very rapidly expanding share of our revenues, growing at very high growth rates, high 20s and 30s quarter by quarter. Applied testing, also here a very rapidly expanding area. Areas such as veterinary testing, bio-defense and forensics continue to grow quite rapidly. Research and the pharmaceutical industry now make up about 40% of our sales.

On the next slide, slide six, you see the breakdown of our growth which, at 19%, was very strong again in this second quarter of 2007. About 4% of that growth came from new products, again, an area we're very proud of, the innovation and also the translation of that innovation into products that our customers are really looking for and are actively creating demand for. This is contributing quite a significant portion of our sales and we expect that to continue.

Our pipeline remains very strong. Product introductions of this year that are a small portion only of this 4% are growing quite dramatically.

Volume contributes about 5% to sales, price about 2%.

Moving to the next slide, I'd like to spend a couple of slides now talking about the Digene transaction, going a little bit more into detail than we had in the previous conference calls or meetings. The Digene transaction clearly is extremely important for Qiagen, but it also adds to a basis which Qiagen had grown quite dramatically over the last few years, and is now in a position of very strong leadership in a very early industry, a very strong leadership position that we want to move forward quite aggressively.

The transaction itself was closed quite quickly. If you recall, in early -- on June 3 of this year, we announced the merger. We originally projected to close the transaction some time in August or September. We were extremely fast in moving towards closing -- ultimately closing the transaction on July 30. In only 57 days from announcement to closing of merger, we were able to complete all hurdles that we had talked about two months ago.

The tender offer expired -- or our EGM on July 20, to start with that, created a vote for the transaction in the amount of 99.96% of Qiagen shareholders voting for the merger. And the tender offer closed a few days later.

94.6% of Digene's shares were tendered. And what is very remarkable, 90% of these Digene shareholders elected Qiagen stock. Remember, we had a cash stock combination and also an election feature built in. 90% elected Qiagen stock in this tender offer.

A very fast process and we're very happy now to move aggressively into integration, which is going very nicely, and I'll talk about that in a minute.

Now, this combination creates true value. We are, with this combination, a market and technology leader in molecular diagnostics, with about $400m of molecular diagnostics revenue on the current run rate, about $800m in total revenues on an annualized current run rate.

And what is even more interesting, we have such a unique technology and product portfolio, we are absolutely leading in breadth and depth in molecular testing, have not only the breadth and the depth in terms of technologies and product, but are also the leader in what is considered the most attractive blockbuster segment, namely HPV testing, going forward, a market with a tremendous market potential.

We have an industry-leading sales channel to realize this technology potential, over 250 professionals in molecular diagnostic sales. This is, by our account, significantly larger than anybody else has on the ground in terms of sales force. And what is extremely important is that this allows us to translate new products very quickly into very significant leadership positions going forward. So we're going to actively link, obviously, our research and development technological capabilities with this very powerful sales channel.

This is an excellent foundation for future expansion and growth. We have a truly global sales and marketing presence. We have market leadership and sales leadership positions in all major regions in the world. We have a leading technological capability and research and development track record. As we've seen quarter after quarter, our research and development capabilities are extremely significant in terms of generating growth.

We have expanded options now as an organization and there are a lot of future growth opportunities, world-class capabilities and an organization to ensure success. It's a very compelling financial profile and value-creation opportunity, enhanced growth profile, not only on the top but also on the bottom line, and increased combined profitability.

Now, the next slide shows how the two companies fit together. It's really a very unique fit. We had a very strong global sales organization. Digene was in the process of rolling out their product on a global basis. We have the leading assay breadth in the industry. We have more tests in molecular testing than any other company in the world, the broadest content portfolio, and are building that quite aggressively.

Digene was looking for further assays to add to their offering, an offering which is extremely unique. HPV, as I said, is considered the blockbuster over the next few years in molecular testing. And this is something that we can add our very broad portfolio to which is, however, a portfolio that has fewer unique content aspects.

The breadth of our platform technology, I think, is very well known. We are not only a direct supplier to the industry, but also supply a lot of other companies in this molecular diagnostics base with our technology platforms. And this serves very well to Digene's platform expansion strategy that we believe we can greatly accelerate.

We are a truly global operation versus Digene's focus on the United States. What I think is so unique about HPV, it's really more than just a test or an area of testing; it is a link between virology, which is today's majority of molecular testing, into oncology, which is clearly the next generation of molecular value generation. We believe very significantly in that opportunity going forward and have now created a very nice link to put our technologies into some of these fast-growing areas of the future.

Now, we closed a few days ago, but the PMI process or the post-merger integration process has already been going on for quite some time, as you see on the next slide, slide 11. The integrations don't start when the deal is announced or when the deal is closed. We actually started the integration process months ahead of closing, about two months prior to the announcement of the transaction, actually, where we started dedicated teams to plan the integration process.

We always do that. This is a very typical chart for us. This is also one of the reasons why we have been quite successful in the past. In the 15 acquisitions we did in the last few years, we typically were quite successful in integrating them quite rapidly.

You see there's a preplanning phase, a pre-closing phase. The closing was on July 30 and we very rapidly moved into the integration process between those dates and are now already implementing quite significantly, rolling out the organizations as we speak.

We expect this to be about a 12-month process following the announcement, so some time mid of next year the integration should be complete, or the last of the projects should be handed over to the line functions.

We want to provide certainly a lot more details on this and also some information on the events and milestones in the analyst and R&D days planned in 2008, but also in the regular quarterly conference call.

On the next slide, you see what has already started here, some of the key bullets around this transaction. We see this as a lot more than really just an HPV testing franchise. This is the creation of the largest molecular diagnostics franchise in the industry, outside blood bank and viral load. So a huge opportunity going forward.

We triggered over 30 R&D programs. It's one of the largest R&D initiatives ever created at the Company, or the largest. I think I can say that. There are HPV-related products within those R&D programs, but a lot of other franchise-related projects as well. And we think it's going to be quite an exciting analysts' meeting in February 2008, when we can then also announce further updates or give more insight into what we're actually building here.

The synergy targets are -- certainly on the revenue side we've talked about quite a few of those. Those will certainly accelerate after 2009, as we are now moving product through the pipeline and also expanding geographically.

On the expense side, we have projected about US$35m to US$45m in cost synergies. And we believe now, a few weeks into the actual integration process, that these targets are very realistic. We're leveraging the fact that we are neighbors. We're already working very closely together and already focusing very heavily on the growth path that we plan going forward.

The integration is a fast integration. We want to move as quickly as possible. And certain areas of the joint Company are now already almost working business as usual.

The MDx business and the molecular diagnostic businesses will be fully integrated. We have a laboratory sales force of now over 150 professionals who sell the complete offering, so all molecular diagnostic assays that we have. There's a physician sales force going to the physicians, educating them about women's health related molecular diagnostic assays. And this is a sales force of over 100 professionals that are creating a lot of demand for next-generation assays as well.

Qiagen is the corporate name and our core brand. And this is what we will be using going forward. Corporate claim is sample and assay technologies for the whole organization.

So the integration is well underway. We have defined very, very clear and measurable targets on that path. And we believe that the targets that we set out for synergies but also for growth going forward are well achievable.

Now, Digene is obviously a phenomenal franchise. It has a regulatory and a technology leadership that is second to none, really, almost in the molecular diagnostic space, and it is moving very rapidly. The combination with Qiagen is creating vast new opportunities that we are leveraging very quickly with an industry-leading R&D capability. And we are looking forward to putting even more products around this franchise now going forward.

Now, there are certain litigations that we inherited, and I just want to touch those very quickly on slide 13. This is more a slide for your information that we inherited and that we'll continue to pursue going forward. Now, intellectual property, and Digene owns a vast amount of intellectual property around HPV but also around other technologies that are used to -- around the tests that they are marketing.

This was a significant element in Qiagen's due diligence. We are very much willing to defend this going forward. There are a number of actions going on that we are obviously going to continue to invest in, and it's certainly an important area. But we are very focused on growth going forward, and this is something that we will certainly see quite a bit of from this franchise.

Now, the Company is really firing on all cylinders. And we had so many new product announcements and introductions in the second quarter 2007 that I'm quite excited about. And it's tough to pick out one or the other. I'll show you one on slide 14 which is quite interesting how we went about this.

The area of stabilization, or sample stabilization, and storage and sample management is such a rapidly expanding area. You might remember we talked about it when we acquired Gentra about a little bit over a year ago. This was one of the main markets that they were selling into, and we started rolling out a number of different initiatives around sample management.

And in the second quarter we significantly expanded that. We had a number of internal developments. But what is very important in sample storage or sample management is that the customers have to be independent of the sample types. They have to have solutions for all kinds of different processing steps that they want to go through subsequent or afterwards with their -- with the samples that they stored. So the technological challenges around sample management is vast.

And sample management is used in many different areas, in diagnostics, in the pharmaceutical industry, and it's one of the fastest-growing segments in the life science research and pharmaceutical research area.

The announcements that we did in the second quarter around the Biomatrica SampleMatrix technology and also the Whatman FTA and FTA-based kit technology add to that portfolio. And we today have quite a broad portfolio. And here are just three examples how these technologies fit together.

We have quite a broad portfolio of technologies that address almost any need, be it tissue, be it purified analytes, such as DNA or RNA or proteins, be it sampling some kind of raw format. We have different versions of sample stabilization and storage technologies that our customers are leveraging quite a bit for areas such as clinical research, biomedical research and molecular diagnostics.

With that, I'll hand over to Roland for a discussion on the financials.

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

Just as a reminder, although we announced the agreement with Digene in the second quarter, we have in fact just closed on July 30, as many will have seen from the recent press release. Therefore our second quarter results do not reflect nor incorporate any aspect of Digene nor eGene's performance in that timeframe. I will, however, address our assumption for the third quarter and provide you with an adjustment -- adjusted guidance for the full year 2007, with a view of the effects and impacts of both the Digene and eGene acquisitions.

On several fronts, the quarter proved to be a very successful one. We delivered solid growth, both in Consumables and in Instruments. Volume and new product introductions this quarter were driving elements behind our strong organic growth. Especially the QIAcube, one of our newest instruments, has received a tremendous welcome by our customers.

On the Consumables side, PCR reagents continued to be an important factor in our higher sales numbers. The steady contribution to growth that is derived through our acquisition is also important to note as a significant component to our overall growth.

Geographically, as Peer showed in his breakdown slide already, China remains a key focal point of our expanding geographic strategy. The Asian region as a whole contributed significant in revenue growth, 53% under constant exchange rates.

So, taking a closer look now at our second quarter results, here on slide 15. We are pleased with this outcome, as they are better than expected compared to the business outlook we provided at the time we gave you our yearly guidance on February 12. We exceeded both revenues and adjusted EPS expectations.

We reported revenues in the second quarter of US$135m, which are up by 19% over the same period last year. Using our guidance rate from January 31, 2007, the revenues came in in US$132.4m which is a strong 17% growth rate.

We achieved an adjusted operating income margin of 27%, which we feel is quite solid and demonstrates great continuity for our growth this year and our profitability this year as well. Net income was US$25.8m for the quarter, demonstrating growth of 30% over the second quarter 2006.

Our second quarter adjusted EPS of $0.16 per share lies above what we expected. We exclude from these adjusted figures any acquisition, integration and relocation-related charges, as well as amortization of acquired IP and equity-based compensation.

Turning to a breakdown by product line for the second quarter 2007. As I already highlighted, we continued to see impressive performance in our Instruments business. This quarter we delivered 29% growth on a constant exchange rate basis.

The reasons for this are mainly twofold. Firstly, strong organic growth in Instruments. Our Instruments business, which serves the whole spectrum, from low to high throughput, continues to show very strong demand, particularly the QIAcube. Secondly, we continue to see a significant level of sales coming from instrumentation products acquired in the Gentra transaction. We are leveraging our improved sales and management, particularly for newly introduced instruments.

In terms of consumables, growth in sample technology was very solid in all market segments and across all product lines. We believe that the expanded portfolio agreement we entered into with Whatman for their FTA and FTA-based kits, and Biomatrica for the SampleMatrix technology, will also subsequently add to our addressable market in this area. For assay technologies, or PRC reagents and tests, demonstrated significant growth rates far above average.

In terms of the category others, the numbers are the factor immaterial, but we show them for the sake of completeness here.

Overall, the second quarter numbers break down as follows. We once again report a strong top line growth. Our net sales of US$135m this quarter compared to US$113.2m for the same period in 2006 reflects a solid growth rate of 19%.

Looking at our numbers on an adjusted basis, our operating income demonstrated approximately 24% growth over the second quarter 2006. Our adjusted net income showed a strong growth of 30%. However, our tax rate is also lower versus the second quarter 2006. The tax rate in the second quarter this year was 30.5% versus 36% for the same period in 2006 on a pro forma basis.

Amongst the factors that contributed to this was a larger revenue share in Asia, where the tax rate is lower than many -- than in many of our other markets. We believe Asia to be a significant building block of our geographical expansion, and so we continue to put in place the appropriate measures to expand our business group here.

We recently announced a new Hong Kong subsidiary that is set to become our regional logistics hub. We believe this will strengthen our service capabilities to address new customer demands even more efficiently in that region.

Switzerland remains an important factor to the lower tax rate as well, especially as it pertains to Instruments, as this is where our Instruments business is conducted.

In respect of diluted earnings per share, we had an increase of 23% to $0.16 a share, up from $0.13 for the comparable quarter in 2006 and above our expectations for the second quarter 2007.

On the next slide we show our reported versus adjusted figures. First, our net sales, the same under both GAAP and non-U.S. GAAP. Operating income is adjusted for factors such as acquisitions we closed and other acquisition-related expenses, as well as 123R expenses. We have a $0.02 difference in EPS between GAAP and non-U.S. GAAP, ultimately still an adjusted 19% after-tax profitability.

You will find a detailed split out in our appendices to this presentation. We are also happy to report that we have completed on the Gentra acquisition. Therefore, there's slightly higher integration costs than expected.

Based on our strong performance for the first two quarters, we are increasing our full-year guidance for adjusted diluted EPS from the previously announced $0.60 to $0.63, to $0.62 to $0.64, this being on a pre-acquisition basis, pre-Digene and pre-eGene.

Taking into consideration the acquisition impact for the second half of 2007, we are forecasting revenues to increase for fiscal 2007 from our February guided revenue target of US$518m to US$535m to US$614m to US$635m, using the identical currency rate as in February.

We believe that eGene over Q3 and Q4 will contribute approximately US$1m in each quarter. We are estimating Digene to contribute between US$36m to US$38m in the third quarter, and US$58m to US$60m in the fourth quarter.

We would further expect full-year adjusted diluted EPS to be in the range of $0.50 (sic - see presentation) to $0.59. This is calculated using a fully -- full-year weighted average number of fully diluted shares outstanding of approximately 180m shares. Also this takes into account dilutive effects of eGene for the second half of 2007, at $0.01 per share, and Digene for $0.01 to $0.02 in the third quarter and $0.03 to $0.04 in the fourth quarter. So this is not any different to the figures we announced at the time of the deal press release.

On the next slide, we have listed a number of assumptions to frame some items more precisely for the third quarter. First of all, our organic growth; we continue to look for approximately 10% here. Digene is not organic, of course. For our third quarter revenues, including Digene, eGene, we expect US$166m to US$174m.

In terms of operating income derived from Digene activities for the third quarter, this has not been included to date. As we moved so quickly and successfully in closing this acquisition, it is clearly not possible to have the same speed in assessing all the different accounting impacts of such a large transaction.

I am able to provide some insight on what we expect to incur in the charges for the third quarter due to both the Digene and eGene acquisitions. For the more detailed operating income figures, I would like to defer to the time of our third quarter conference call on November 5, once we have a significant clearer indication.

For adjustments to operating income for the third quarter, excluding the Digene and eGene acquisition, you should expect 123R expenses between US$750,000 and US$1.25m, amortization of acquired intangible assets of approximately US$2.8m, and restructuring and integration costs of approximately US$300,000.

Adjustments due to the acquisition of eGene and Digene for the third quarter, we expect approximately US$40m to US$45m on a pre-tax basis. These charges mainly include one-time in-process R&D charges as well as amortization of acquired IP, restructuring and integration costs, and 123R expenses and others.

Please keep in mind that the in-process R&D charge does not carry with it a tax benefit. Currently the after-tax impact would be in the range of US$35m to US$40m for the third quarter.

The overall pro forma tax rate for the third quarter is expected to be between 30% and 33%. And the weighted average number of fully diluted shares outstanding will be around US$185m -- will be around 185m shares for the third quarter, and around 200m to 210m shares for the fourth quarter because of the prorating of the additional Digene shares into the dilution.

Again, for a more detailed breakdown of our adjustments and one-time expenses, I defer to our third quarter call, as I mentioned previously.

I think, before I hand back to Peer, I would like to just highlight some key aspects of the financing of the Digene deal and what our future financing plans on this point look like.

The structure of the Digene acquisition comprises both equity and debt instruments to address these specifics as well as some cost-limiting aims. The debt component was financed on very favorable terms with Deutsche Bank. Under the loan we have drawn US$600m, of which US$100m will be redeemed shortly by using Digene's cash. The remaining US$500m has a five-year term and currently via interest at 6.1%.

The loan includes a further US$150m revolving credit facility, which gives us flexibility going forward. We may decide to opportunistically refinance the longer-term instruments, depending on financing rates which the markets present [themselves to us].

Shareholders' equity remains unchanged at 46% before and after the deal, and therefore the balance sheet structure continues to be strong.

With that, I would like to hand over to Peer.

Yes. This was a very strong second quarter. The Company's very well on track. The revenues were up 19%. Strong organic growth of 11% fueled that.

It was a strong first half of fiscal 2007 as well. Growth in net income in the first half of the year was 24%. We reached $0.31 earnings per share in the first six months of the year. Now, comparing that to the guidance for the full year, you see that the Company's well on track.

But, most importantly, a very strong strategic momentum. This was a very exciting time for the Company and we believe that will continue going forward. The market environment for the whole industry is very exciting. And in that, all of that dynamic development, we are actually leaders in the key molecular diagnostics segment.

We are expanding that day by day. The second quarter saw the acquisitions of Digene and eGene, again, also all on the basis or on the fundament of a very strong organic growth rate. And integration of the acquired businesses is well on track.

The guidance for the full year 2007, as Roland just described, was therefore lifted to revenues of $614m to $635m for the full year 2007, operating margin about 27%, and earnings per share about $0.55 to $0.59 for the full year.

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

Thank you very much, Peer. We are now prepared to take your questions. To open the Q&A session, I would like to hand over to the operator. Pam?

(OPERATOR INSTRUCTIONS). Thank you. Your first question is coming from Brian White with Deutsche Bank.

Good afternoon. A couple of questions, if I may. Just quickly on the guidance on operating margins. Roland, you've previously give us a guidance of about 100 basis points improvement in the operating margin for Qiagen as a standalone company. I wonder if you could update us on that.

Yes. Hi. It's Roland. Yes, I think this is also clearly one of the aims we have going forward. Also, after closing the acquisition of Digene and eGene, we even more believe that we should be able to improve margin year on year by at least 100 basis points.

Okay. And then, just secondly, on the very strong instrumentation result in the second quarter. If I understand what you're saying, you're suggesting that's a trend that we can continue to expect to -- throughout the rest of the year and beyond. Does that mean an improvement in the tax rate on a longer-term basis?

On the tax rate for the third quarter, I gave you a precise number also in the assumption. I think on the mid term, we still believe that the outlook we gave last quarter, between 33% and 35%, is probably something what we would assume as of today. Third quarter on a pro forma basis, slightly better.

Okay. Thanks, Roland.

You're welcome.

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

Hi. Roland, I have two questions on the financials. One is can you explain a little bit about the share count on third and fourth quarter, how that's increasing as you describe?

Sure. If you recall, we all took clearly -- used shares for the acquisition of Digene, and the third quarter we only have two or three months included there. So if you look on a pro rata basis, there are around 185m shares for the third quarter on a pro rata basis. On the fourth quarter, with not only the shares coming in but also certain equity-based compensation dilution, we are probably around 200m to 210m shares for the fourth quarter, which gives an average for the full year 2007 of around 180m, meaning 156m for the first -- second quarter, 185m for the third, and whatever, 200m to 210m for the fourth quarter.

So the equity-based compensation is quite significant. Do you see that also increasing in 2008?

This is clearly something what we got from the Digene acquisition, I think, going forward. And if you see these compared to the Digene -- to the Qiagen numbers historically, I think this will probably be more in the historical Qiagen side.

And you are guiding, for third quarter, the Digene revenues to be $36m to $38m, which is lower than second quarter. How should we think about this seasonality, if any? Hello?

Hi, Maykin. This is Peer. Yes. There is a quite -- almost a linear growth within the year for both of the businesses. So we have slight seasonality, as we always had, and it's more a -- it depends on larger shipments that we have to certain customers under certain contracts, or if we have surges in sales in certain areas. That is not something that we see, I'd say, on a very regular and predictable seasonal path. It's a pretty steady growth, though, within the year.

It really has to do with the progression of the business.

I see. Oh, because of the two months versus three?

Exactly.

Yes. And, Peer, maybe you can comment a little bit, I know it's early days, so far, any (technical difficulty)? I'm sorry. Peer, can you talk a little bit about the integration? Any surprises so far?

No, Maykin. I think we're having some audio problems here. But no, the integration is going quite well. There are no negative surprises. What we have actually seen in the first phase in July, where we had all-hands meetings and the companies coming together to really do some deep dives into the opportunities, we're actually seeing a lot more opportunities than we originally saw. So we are increasingly excited about that. And there's a lot to do going forward, and we're trying to tackle as much as we can.

That's good. Thank you very much.

Thanks, Maykin.

Thank you. Your next question is coming from Dan Leonard with First Analysis. Please go ahead.

Hi. Good afternoon.

Hi, Dan.

Roland, you walked through the balance sheet on one of your slides. I think I might have missed part of it. What is your current cash and debt balance as opposed to the payment of the Digene shareholders?

Yes. What we have put in here is of course also the balance sheet which we used for our filing with the SEC. So it was abolished, the balance sheet, or the combined balance sheet as of March 31. So it's not a dual balance sheet. It's a merged balance sheet. So we're currently working, of course, combining both entities going forward, so this balance sheet really should give you a first indication.

On the financing side, I think what was important for Qiagen going forward is -- and also one of the reasons next to others why we, of course, also used shares within the acquisition, is we want to keep our financial flexibility as thorough as possible. So not that we used shares into the acquisition, but we clearly also added more financing flexibility to our balance sheet potentially, because of adding another revolving credit facility to the Company. And even more important, given our current cash flow and assumed cash flow going forward, on the combined entity we should be on a similar cash position as of the beginning of the year, probably by end of the year.

Okay. Thank you. And on your Instruments growth, you mentioned it was 29% constant currency. What would -- if you back out the acquisition, and I guess it would just be Gentra, what would that number have looked like?

I think what I can say is that the organic growth was significant higher than the Instruments and acquired growth, probably two-thirds to one-third [around that].

Okay. And then my final question. Peer, you mentioned you have -- you initiated over 30 R&D projects post the Digene closure. Could you speak to maybe how many you might have already had in the pipeline before the deal was even consummated, and also if, in automated, going on to the rapid capture might have been part of that?

Yes. There are -- I think there are two ways to look at that. Number one is there are directly HPV-linked products, or projects. And we don't think it's a very winning proposition to simply come out to the market with an HPV test alone, but there is more around it that really creates a lot of value. So there are directly HPV-related projects, one that you've just described. We know one or the other thing about DNA purification, and so that's clearly a project that we think we can -- or we clearly see on high priority, and also have the fundamentals to get tackled.

But the majority are actually around this franchise. So the molecular offering around the -- as I described before, if you put in a platform into a customer, it does have an HPV angle to it, which is clearly like an engine of growth or the first demand generator. But that platform can leverage a lot more than just HPV and so this is how we're thinking about it. It's a lot about having new breadth as well.

Okay. Thank you very much.

Thanks, Dan.

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

Hello, everybody. I have two questions. One question is regarding your role as an OEM manufacturer for other diagnostic companies. Have you already any indications of an impact that you are now, for example, a competitor for Roche's HPV product portfolio as an -- or -- and you are (inaudible) are an OEM supplier? Any indications on the negative impact and maybe on the long term?

And the second question is the $0.04 to $0.05 of costs in H2 '07 that are not related to acquisition costs and amortization, integration costs and so on, a word on that. What is that? Is it implementation of additional sales force? Are you strengthening the European arm by putting in a Europe -- or a stronger European gynecology sales force, or so? These are the two questions. Thank you.

Yes, sure. Well, the first question related to OEM. Really a good question. The OEM businesses now obviously fall into a very small fraction of our molecular diagnostics sales, but we -- it's still a very sizeable business. It's double-digit millions. And what we see here is that the value of us as a provider has actually increased, and we have not seen any reduction of demand for our core capabilities.

Now, these are -- some of these technologies are tremendously powerful. And it's quite usual in this industry to cross-license and to share technologies, and this is something that we've also -- that we also adhere to. We have an absolute loyalty towards our existing relationships in an active, ongoing OEM program, and actually have some new additions. So (multiple speakers).

So you have some new additions or --?

Yes. The increased capabilities and the increased infrastructure, and also the increased manufacturing capabilities that we have, this has just added to the attractiveness of the business.

Okay.

And Patrick, on your second question, yes, unfortunately integration doesn't go overnight, even if we strongly believe that we can do the whole integration within 12 months. It is clearly a ramp-up and it will clearly take us a couple of months now, especially in 2007, to get here significant efforts done.

And so what we will see in 2006 is of course, on the one hand side, we will have additional financing costs, meaning we pay interest, we have less interest income, but on the other hand we don't -- do not gain the full cost synergies in 2007. And the gap between these numbers is really the difference, so the additional load for 2007 we have to carry. But this will phase out over time, and you see this already then happening, quarter over quarter.

Okay. Thank you.

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

Hi. I've got three questions. They're all financial. Firstly, just returning to Maykin's point on the guidance for the Digene business in the third and fourth quarters, I understand there's only two months of sales this quarter, but it still looks as though the -- given there was 8% quarter-on-quarter growth for Digene in 2Q, it looks as though you are assuming either a slowdown. Or otherwise, I wondered if it reflected elimination of inter-company sales, or perhaps the Digene stock, the pipeline for the end of the second quarter. I'm just wondering if you can give us a bit of an insight into that.

Secondly then, on the tax rate, I know Roland reiterated the fact he expected the mid-term tax rate to stay the same. I just wanted to ask, given Digene's largely U.S. profits at the moment, how that could impact the tax rate, given the U.S. rate is obviously above your average.

And thirdly, just on molecular diagnostics, can you possibly give us the percentage this quarter of Qiagen's sales that were in molecular diagnostics? I know you said 27% or about $35m for the first quarter of this year. Can you give us that number for the second quarter, just so we can see where it's going? Thank you.

Okay. Peter, I'll take questions one and three. The first, as I tried to outline to Maykin, there is a fluctuation within any given quarter based on the timing of large shipments to the larger customers. And as the closing was on July 30, and so what we simply did is sat down and looked at the timing of some of these orders over the next eight weeks, and made that assessment. So the Company continues to grow quite rapidly, and there's also a very strong underlying growth assumed now in this third quarter. Again, Digene grew, and we noted that in the press release, over 30% in the second quarter, year over year, and this is a trend.

The last question was on the molecular diagnostics share. Again, we always approximate that, based on our internal customer split that we have. The business is doing extremely well, and we actually had one of the highest growth rates we've ever had in this business in many regions in the second quarter of 2007. And the percentage of sales is approximately 30% in this third quarter -- in the second quarter.

Peter, and to your second question on the tax rate, I clearly would see that the tax rate also in the mid-term of 33% and 35% I just mentioned should also include the Digene acquisition. You are absolutely right that Qiagen at the moment is doing by far the majority of this revenue in North America, and the tax rate in North America is probably closer around 39% to 40%, including state taxes. But given that we clearly also see a strong expansion into Asia, into Europe, of the Digene business, plus that we do have some hopefully improvement in other regions of this world in taxes, that the combined tax rate should be in this area mentioned before.

Thank you very much.

Thank you.

Thank you. Your next question is coming from Quintin Lai with Robert W. Baird.

Good afternoon. This is actually Matt in for Quintin. Congratulations on the quarter, guys.

Thanks, [Dan].

Yes. I just have a couple of questions, the first being, when the Digene deal was originally announced, I think you guys were saying something in the range of $0.02 to $0.04 of accretion for 2008. And I just wanted to check - is that unchanged? And if I could get some color on what that's based on now.

Yes. Correct, Dan, a good point. We could have reiterated that. That is still our current belief, and we have increased confidence in the synergy range now that we have had some time to go in deeper into the business, and so therefore this projection still stands.

Okay. And that's based on the $0.55 to $0.59 base in 2007, or is that based on what we were seeing at the time the deal was closed?

Hi. It's clearly based on comparable to the, call it, standalone Qiagen business before the deal.

Okay. Awesome. And then next, just more of a strategic question. Just for future acquisitions, I was just wondering if there any other focal points that you would be looking towards, for instance, maybe extending the links between virology and oncology, or something to that effect.

Excellent question and this is something we are aggressively looking at, at the moment. And a lot of these content engines are not really in the, let's say, incorporated or commercial space. They are mostly academic and, much more importantly, pharma. And if you look at what the diagnostics industry spends in content development, it's a few hundred million dollars a year. And if you look at what the pharma industry spends in this space, it's in the billions.

So the fact that we actually have a very substantial business, supplying biomedical research and clinical development, and this business really came from nowhere into almost 20 -- or about 20% of our sales now, this is a tremendous feeder into potential next-generation content, and we're trying to utilize that even better going forward. I'm not sure that this is really going to be more acquisition -- built on acquisitions. I think it will be -- a lot of it will be organic and partnership related.

Great. Thanks again, and congratulations.

Thanks, Dan.

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

Yes. Good afternoon. Three questions, if I may. And one, sorry to be insisting on that issue, but regarding the guidance you gave for revenues coming from Digene in the third and fourth quarter, is there already elimination of inter-company sales? Did I get that right? If not, my question would be, I understand your point regarding the third quarter, but if I look at the fourth quarter and if I turn back the last six quarters for Digene, I saw at least a 6% quarter-on-quarter growth rate, so at least the fourth quarter guidance looks quite conservative to me.

Second question. I didn't quite catch what you said regarding the one-off and -- yes, the one-off charges for the third quarter. Coming from the Digene acquisition, I think, Roland, you said something in the range of $40m to $45m, if I got that right. So if you could elaborate a bit on that.

And then the last question, regarding the number of shares for the fourth quarter. You said something between 200m and 210m, so that's quite a difference between this number. Can you a bit elaborate on what factors this difference might depend? Thank you.

Sure. Let me take all three questions. First question, yes, clearly it includes also the offsetting impact from the now inter-company sales to Digene -- for the former sales of Qiagen Instruments to Digene. This was true for the guidance which we gave this announcement of the call to the third and fourth quarter as well as for 2008, so this includes also -- it's a net number we just mentioned to you for the third quarter and for the fourth quarter.

On the one-off, yes, what we said is we are very fast in the process, if you recall. We closed this deal within 57 days. Unfortunately, accounting is not always so fast, even if we try hard to do the whole valuation with independent appraisal persons and so on. So we still have to wait for final results. But I think what we can say so far is that we overall expect a charge of about US$40m to US$45m pre-tax, and about US$35m to US$40m after tax. This is mainly a very large in-process R&D charge, one-time charge in the third quarter.

Again, I would love to give more details, but I think everything I would add to that at the moment would just not be precise enough, and I wouldn't like to give something to you which I don't feel comfortable with. I think it will be in this range. That gives you a first indication. And I clearly refer you to our third quarter conference call, where I do give you the whole outline on allocation of -- to intangibles to goodwill, and what you should expect on expenses also going forward (inaudible) for the next 12 months.

On your third question, on the share count, it's also not an easy to answer question. There's easy parts to it, which is clearly the shares coming out of the acquisition, or there's a conversion from the shareholders itself, easy to calculate that number and also the number we announced. The number which is more difficult to calculate at the moment is of course there were certain stock options as well as the share-based compensation outstanding at Digene.

We do not have any history or really internal expectation on how many of the shareholders are now going to convert into Qiagen shares right now, or keep it going forward. So it's unfortunately only a broad range I can give you, but probably a little bit more around 200m shares for the fourth quarter, and so therefore for the full year 2007 around 180m shares. It's a little hard for us to get.

Okay. Perfect. Thank you.

You're welcome.

Thank you. Your next question is coming from Ian Wainwright with SG.

Hi. I just wondered whether you could give us a bit of flavor with regard to the market development for RNA analysis, given that's an important gene expression and an increasing area of research as opposed to DNA analysis, and whether that's a new market that could develop for you, and if you could quantify it in some way. Thank you.

Yes. Excellent question, Ian. I think a lot of people have been waiting for that, and we actually saw quite a dramatic breakthrough in this last few weeks. And the announcement by Johnson & Johnson on their breast cancer diagnostic -- molecular diagnostic product I think is phenomenal and it really opens the gate to a lot more.

Now, for those who have ever purchased that product, you might note a small logo on one of their boxes. That's what I can refer to here. But there are a number of other products in the pipeline that are using similar techniques, and we're trying to help where we can and there is quite some promise in it. We're still some -- the choice of the right analytical techniques is still one that a lot of people are faced with. But if you can limit the number of genes, and if you can thereby make it easier to use, there are some substantial market opportunities.

Okay. That's very helpful. Thanks.

Thanks.

I would like to close this conference call now by thanking you all for participating. We hope to welcome you again to our Q3 results conference call on Tuesday, November 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.

Thank you. And this concludes today's Qiagen second quarter 2007 results conference call. You may now disconnect your lines, and have a pleasant day.