Qiagen NV (QGEN) 2007 Q3 法說會逐字稿

Good morning. My name is Elsa and I'll be your conference operator today. At this time, I would like to welcome everyone to the Qiagen 3rd Quarter 2007 Results Conference Call.

[OPERATOR INSTRUCTIONS]

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

Thank you very much, Elsa, and hello, everybody. Welcome to Qiagen's third quarter 2007 earnings conference call. I'm Solveigh Mahler, Director of Investor Relations at Qiagen. With me on the call are Qiagen's CEO, Peer Schatz, and Qiagen's CFO, Roland Sackers.

We issued a press release today announcing Qiagen's financial results for the third quarter and first nine months ended September 13, 2007 and describing the Company's recent business highlights. A copy of this announcement as well as the presentation we will be using during this conference call can be downloaded from the investor relations section of our home page at www.qiagen.com. This conference call will cover a 20-minute presentation followed by a Q&A session. The time of the conference call is set at one hour. We therefore would like to ask you to please limit yourselves to only two questions during the Q&A session. The call will be archived on our website.

Before I turn over to Peer Schatz, please keep in mind that the following discussion and the responses to your questions reflect management's views as of today, November 6, 2007. As you listen to the call, I encourage you to have our press release and presentation in front of you since our financial results and detailed commentaries are included and will correspond to the discussion that follows.

As we share information today to help you better understand our business, it is important to keep in mind that we will make statements and provide responses in the course of this conference call that state our intentions, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the Safe Harbor provisions.

These forward-looking statements involve certain risks and uncertainties that could cause Qiagen's actual results to differ from those projected. Qiagen disclaims any intention or obligation to revise any forward-looking statements. For the description of such risks and uncertainties, please refer to the discussions and reports that Qiagen has filed with the U.S. Securities and Exchange Commission. With this, I would like to hand over to Peer Schatz.

Yes, thank you, Solveigh. And thanks for joining Qiagen's third quarter 2007 conference call. We had a very strong performance in this third quarter 2007. Revenues came in at $176.6 million, EPS, on adjusted basis, at $0.17. Net income, on an adjusted basis, grew 42%. And the strong performance in this third quarter 2007 allows us to increase full year 2007 EPS adjusted guidance.

Overall revenue growth, as I said, was very strong. We grew 50%, significantly advancing our leadership positions almost all across the board. Strong organic growth rate underlying the overall growth rate has been very strong again, continuing a very strong performance in our sample and assay technology core areas.

We believe we increased market leadership and share in all markets we serve. At the core of this success is and continues to be Qiagen's success in innovating. Once again, 4% of sales come from products we launch within the trailing 12 months. This continues to be a record for our industry and we're actually facing one of the strongest pipelines ever, looking into 2008.

The Digene integration is running very well. It is fully on track. All major projects have been started. Some have actually already been completed. I have more details on that in a slide a little bit later. So many good things happened in this third quarter 2007. On top of that and what certainly captured a lot of headlines were landmark studies which were published, demonstrating the value of HPV testing, including such value as a primary screen.

And this is clearly very important as we're rolling out these products into many markets that do not have established testing regimes yet. So, overall, both operationally, financially, but also strategically, a very strong performance in this third quarter. We exceeded our targets and we're looking very confidently into 2008.

Turning to slide number four, the typical distribution of our revenues, as we've shown in previous conference calls, didn't really change materially. 90% of our sales continued to come from consumables and about 10% from instrumentation. We saw very strong growth across the board in our consumable space, our sample and assay technologies consumables at 45% growth rate on a constant exchange rate basis. Clearly, this includes acquired revenues and I'll get to the breakdown in a minute.

But also instrumentation, which also was about the same share of the legacy Digene business, which is now consolidated, continued to show very strong growth rate. And we're very satisfied with that business area as well. As we all know, these two products -- instrumentation and consumables -- go hand in hand and are used very often as a package which operate together.

If we look at the geographic regions on the right-hand side, we see continued very strong growth in Europe. North America slightly under that growth, but also a good performance. And Asia continues to grow very rapidly. What is important to say here, while the overall growth rate in Asia is under that of the second quarter, the growth rate in Asia continues to be very strong. Very many countries are continuing to grow at very high growth rates.

Japan is in there, which is growing in the single digits. But the most important factor was the second quarter included acquired revenues, which increased that growth rate. So, we continue to see, on an organic basis, a very strong performance in the Asian countries and we're very excited about our leadership position, which we actually have in many markets and which we're actually expanding every day.

On slide number five, you see the typical breakdown of revenues that we always show. It shows you that we continue to show a very solid and very strong organic growth rate of about 10%. And this organic growth rate comes from a 2% price increase, a 4% volume increase and 4% increase from new product, i.e. innovation. This is a very comparable number to what we've seen in previous quarters and continues to demonstrate the strength of our innovation and of our operating franchise. On top of that, 35% of our revenues came from acquisitions. Exchange rates added another 5% to an overall 50% overall revenue growth rate.

Now, turning to slide number six, I just wanted to give you a small glimpse into our integration process. Now, what is important to note here is that our molecular business, pre-merger, was about the same size as the Digene business, pre merger. The two are coming together. The majority of our revenues are -- the pre merger revenues -- are actually hardly involved with this integration process. This is more the administrative and the directly associated marketing and sales activities directly associated with the molecular diagnostics business. And I'll give you an example in a minute.

But this integration is going very well. It's especially going very fast. More than 80 integration projects were defined. They were defined in record time, already early September. We actually rolled out the organization at that time as well and all employees have received their project descriptions or their job descriptions at that point in time.

Approximately 525 high-level project milestones were identified and we actually completed already our 25% of those as of today. We clearly went into an in-depth review of the synergy targets that we had estimated when we came out and announced the acquisition early June and we can hereby confirm that we feel very confident with these synergy targets. Most importantly, the revenue synergy targets coming from collapsing the sales forces and also, and especially, new products, which is an extremely exciting area for us, that we see accelerating significantly, especially in 2009, as we're finalizing these developments over the course of 2008.

On top of that, the cost synergies that we estimated at $35 million to $45 million in 2008, we can hereby reaffirm. We feel very comfortable with that number. Out of these $35 million to $45 million in cost savings, about 10% to 15% of those are coming from the cost of sales areas -- the manufacturing areas that are leveraging manufacturing capacities that are also sharing infrastructures and overhead. And this is clearly one area that we'll continue to place continued emphasis on going forward.

The cost synergies in the R&D area are a little bit misleading. We're actually expanding our R&D efforts and the pipeline is extremely promising and very full in the area of women's health, but also overall for our company. What we're seeing here as cost synergies are primarily the sharing of resources and infrastructures and also overhead. At the same time, what we're also seeing here is that we're able to collapse a number of Qiagen-related products, pre merger Qiagen-related products, into projects that pre merger Digene was about to address.

And this is leading to significant cost synergies. And also here we will give some -- shed some light on this pipeline in our analyst day in February. It is an extremely exciting pipeline around the area of women's health, but also over in the company and we very much look forward to sharing that with you. In the sales and marketing area, we see significant synergies as we're collapsing our molecular diagnostics sales forces. I have some details on that in a minute. And especially as the legacy Digene business case had an expansion of this sales force, we can generate a lot of synergies there.

In the G&A area, the cost synergies are primarily in the area of corporate infrastructure and also IT and therefore the largest area of, in terms of dollars, largest area of synergies. The integration is fully on track. We feel it is very well managed and we are very much looking forward to building on this going forward. Now, just one example how -- because we're getting this question from time to time -- how we're going about our sales force -- or integrating our sales forces. On slide number seven, you see how the legacy Qiagen business actually sold. We had, in the legacy Qiagen business, one of the largest sales forces in the world, if not the largest in the area of molecular diagnostics, about 150 professional globally selling over 500 different products directly to laboratories. These are the same customers that are also purchasing the HPV-related products and others in the area of women's health.

If we now move to the next slide, slide eight, we have a description of the pre merger Digene business. The laboratory sales force, which you see on the bottom on slide eight, was actually substantially smaller than the Qiagen laboratory sales force. So, legacy Digene only had 20 salespeople going into laboratories and actually focused on selling and creating solution packages for the laboratories themselves. The majority of their sales force was in the area of what is the so-called clinician sales force, about 80 people. And on top of that, the quite innovative marketing programs, the direct to consumer advertising.

If we move to slide nine, you see how we are going to collapse this. It's actually quite simple. The -- we will continue and actually expand the direct to consumer advertising programs. We are also rolling these out internationally into countries that are open to this type of advertising. On top of that, we are keeping and actually expanding going forward the clinical sales force that is focusing on educating physicians about HPV and how to take samples and how to send them onto laboratories. This is an area that is extremely important as we're still seeing low penetration rates even in the United States. The education of physicians is absolutely critical.

On top of that, our laboratory sales force just got even larger. At 170 professionals, we are clearly a very formidable force globally, working with laboratories on complete solution packages, creating an opportunity for laboratories to also interact with professionals who really understand molecular diagnostics and have an unrivaled breadth in product and solutions in this place.

This is a very important area for us and we're going to continue to focus on that going forward as well. So, a very strong sales channel and one that we will also replicate in similar formats and actually did so in many instances already in other countries around the world.

On slide ten, just one word on our franchise. Very often it's -- I see various efforts to try to put us into one or the other bucket as there are a number of subsegments of them, like the diagnostics based. What is actually so exciting about Qiagen is that we're present in almost every subsegment of molecular diagnostics. We have, through our open platform technologies, a presence which starts in very early adopter segments as they're using our open platforms and developing tests for the -- for novel targets.

We are present in an extremely exciting way, allowing us to be one of the most often sited companies in journals such as The Journal of Molecular Diagnostics and others. On top of that, we have a closed assay portfolio, which is one of the broadest in the world. We have today about 120 tests that we sell throughout the world in various countries in different formats that address very many different subsegments of molecular diagnostics.

These certainly include the areas of viral and non-viral infectious diseases, but also genetic diseases in pharmacogenetics and in oncology we have a very fascinating pipeline around HPV, but also one that we are significantly focused on to expand going forward. In blood screening, we're typically working through partners and, in many countries of the world, we actually have a direct sale of closed assays into blood screening, predominantly in Asia. So, a very leading player. At the same time, a very broad footprint in this early market, allowing us to address a lot of opportunities going forward.

And this leads me to slide 11. Also here platform strategies are often being discussed and very often around a specific type of platform. Well, we think a customer thinks beyond that. He's not interested in buying a box. He's interested in buying a solution. And we today have an extremely broad platform strategy that is around very high throughput technologies that are, for instance, the rapid capture systems, but also others. We sell into open real-time PCR platforms that are today almost ubiquitous standards in almost any molecular diagnostic laboratories. So, most of our assays are actually regulated for use on multiple different cyclers in many countries of the world. And here again we have a leading portfolio of tests.

We also have these novel multiplex technologies that we're detecting on Luminex systems that are also a very strong standard in the market. And also added now the genetic analyzer, the eGene system, that we will formally be rolling out in 2008, that gives us a really exciting product for many subsegments of molecular diagnostics as well. And I can tell you that this area will increase going forward. It's an area of heavy focus of us and it's certainly not the same -- you will not have the same chart in a few years.

The assay offering continues to be very broad and is expanding, actually, every day. We are using, clearly, this breadth to give solutions to our customers across many different types of targets that potentially there are hardly any other solutions for. We are there to provide these and clearly this is now also boosted by the blockbuster franchises around HPV. And in HPV we have a significant expansion of the product offering that we will shed light on in February 2008. We did already say that HPV genotyping went on fast track as well as the CF assay and respiratory and hospital-acquired infections should come out in 2008 as well, all on this novel multiplex technologies that we're getting fantastic results on. First products have already been launched into the research use only markets.

Now, just a few words on these HPV studies. There have been a number of studies that came out over the last few years and what is really very exciting is that they're using our products, our technologies here, to demonstrate the value of HPV testing. HPV testing is an area -- it's actually easy to detect an HPV virus. It's very difficult -- so, the analytical sensitivity of a test is very easy to achieve. The clinical sensitivity is very difficult to achieve. And this is why these broad studies are extremely important. And the study that came out and was published in the New England Journal of Medicine a few weeks ago was just extremely positive for us. And clearly, the pickup with Frontline News and USA Today and many other newspapers and journals throughout the world continues to show the importance of what we do.

On slide 14, just some key findings of these. HPV consistently is more sensitive than cytology. HPV DNA detects legions earlier than cytology. It's a better predictor of risk for older women. Follow up of HPV positive/cyto normal women with genotyping or cytology improves specificity. And LBC does not detect more high-grade squamous intraepithelial lesions and will not be recommended. This is a study performed in Italy that concluded that. HPV testing is safe and likely cost effective and there are studies that dwell deeper into the significant cost effectiveness of HPV, even as a primary screen.

And the extended intervals benefit for women and lower costs for the healthcare system overall. And self sampling is one area that is increasingly also looked at. So, HPV, as a front-line primary screen is really the next logical step. And these studies come at a very important time in the decision periods in which many countries are in terms of cervical cancer screening programs.

Just to close my part of the presentation, on slide 15, we get some questions on our geographic presence as well. We have three main sites. The site in Maryland is now significantly expanded. The two sites are being merged. We actually have teams moving back and forth between these sites. This is a fantastic opportunity to accelerate the integration and also to combine and concentrate our efforts in certain functional areas. Our site in Germany is also expanding and also our site in China is expanding. And we actually received a very important and very rare still medical device manufacturing enterprise license from the SFDA, making us one of very few diagnostic manufacturers who have received this seal of approval from that authority. 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. I believe our numbers this quarter are a testament to the strong strategic and operational highlights that Peer just outlined for you already. Our leadership of molecular diagnostics is boosted by a deep pipeline of technology opportunities and allows cost and sales synergies. With this superior growth profile and double-digit organic growth, we feel we are well on track going into the fourth quarter on a solid footing for attaining our goals for the fiscal year 2007. Therefore, the increase in our fiscal year 2007 guidance.

So, taking a closer look now at our third quarter results here on slide 17. We are pleased with this outcome as we exceeded our financial goals. We reported revenues of US$176.6 million which are up by 50% over the same period last year. Our sales of HPV testing products are recorded in our sales to customers performing molecular diagnostics. These sales continue to gain momentum, exceeding our expectations and further reinforcing our position as a market leader.

We exceeded our targets for such (inaudible) sales in the third quarter and remain confident in our ability to grow our HPV testing business between $58 million to $60 million in the fourth quarter and further accelerating this business to $260 million to $270 million for calendar 2008, as we have guided before. As you may know, it is our policy not to break out individual products or business from past acquisitions and our part is to show congregated figures which incorporate the revenues from Digene and the HPV test. This policy is also reflective of how we conduct our business where HPV is a part of an integrated molecular diagnostics strategy.

We saw a 3% foreign currency impact on revenues comparing actual results to the guidance [read] from January 31, 2007. We achieved adjusted operating income of $43.7 million, an increase of 43% over the same period in 2006 with a margin of 25%. Although this is still quite solid, we have not yet fully leveraged cost synergies, so we expect further operating margin level improvements in 2008 on this basis. To increase comparability and to show underlying performance, we exclude from these adjusted figures any acquisition, integration and relocation related charges as well as amortization of acquired IP and equity-based compensation. Of course, we also report our financials including all such charges and costs as well.

Adjusted net income was $31.1 million for the quarter, demonstrating growth of 42% over the third quarter 2006. Our third quarter adjusted EPS of $0.17 a share lies above what we expected. Included in this is a tax benefit of $0.02, which resulted from prior year tax credits as well as a positive impact relating to FIN 48.

Turning to a breakdown by product lines for the third quarter 2007. Just for some additional clarification ahead of this on how we have allocated the various newly acquired products, the consumable line includes sales from all molecular diagnostic assays including HPV tests. And under instruments we include all instruments related to molecular diagnostics, including instruments related to HPV testing. We had strong growth both in consumables and in instruments this quarter. We delivered 45% growth on a constant exchange rate basis in consumables and 39% growth in instruments. I think these numbers are a signal that we are leveraging not only our improved sales and management, particularly well in instruments, but it is also true for our consumables in terms of integration progress.

Growth in both sample and assay technology was solid in all market segments and across all product lines. We had an innovation rate of approximately 4% based on revenues coming from products in sample and assay technologies in areas including gene expression, microRNA, proteomics and molecular diagnostics launched in the last 12 months. In terms of the category others, the numbers are de facto immaterial. But we show them here for the sake of completeness.

On the next slide, we show our reported further adjusted figures. As a reminder, we provide non-GAAP financial measures because we believe it provides useful information to both management and investors by excluding certain expenses that may not be indicative of our core results and provide for consistency in financial reporting. First, our net sales, the same under both GAAP and non-U.S. GAAP. I'd like to break down operating income a bit more for you.

This was adjusted mainly for [in course] R&D, amounting to $25.9 million, comprised of $25 million from Digene, $900,000 from eGene. Acquisition and integration-related costs amounts to $5.9 million. Also included in this adjustment are acquisition-related intangible amortization of $11.4 million and FAS 123R expenses of $2.2 million. To put this is in another perspective, excluding these integration expenses, we showed significant profitability on operating income, net income and EPS with an adjusted 18% after tax profitability. You will find a detailed split up in our appendices to this presentation of these figures.

Overall, the third quarter numbers break down as follows. We once again reported strong top-line growth. Our net sales of $176.6 million this quarter compared to $117.9 million for the same period in 2006 reflects a growth rate of 50%. Looking at our numbers on an adjusted basis, our gross margin was 71% for the third quarter. To give you a bit more detail on this number, first of all, Digene was consolidated only for two months, not for three months. So, next quarter you would see a slight increase here.

Secondly, the legacy Digene typically included licenses outside of cost of sales in operational expenses, whereas at Qiagen, we typically include these in the cost of sales. Finally, there were also other reclassifications between operational expenses and cost of sales. So, overall, on a standalone basis, the gross profit is slightly lower than Digene reported before. Nevertheless, we expect, for the fourth quarter, an improvement in gross margin.

Our adjusted operating income demonstrated approximately 43% growth over the third quarter 2006. Our adjusted net income showed a strong growth rate of 42%. However, our tax rate is also lower versus the third quarter 2006, including the tax benefit as mentioned before. Our normalized tax rate was around 30%. Additional factors that continued to contribute to a lower tax rate are also the revenue share in Asia as well as Switzerland, where it pertains to our instrument business and favorable tax benefits from the recent $500 million credit facility.

In respect of adjusted diluted earnings per share, we had an increase of 21% to $0.17 a share, up from $0.14 for the comparable quarter in 2006 and above our expectations for the third quarter 2007. I will not go into any more detail on our nine months numbers at this point. You will find a detailed breakdown on slide 33 in our appendices of these. I would like to highlight, however, that our first nine month revenues for 2007 were $439 million, using [guided weights], that would be $432 million and there is an adjusted EPS of $0.48, which is up 20% over the first nine months in 2006.

Based on our strong performance in the third quarter, we are increasing our full year guidance for adjusted diluted EPS by $0.03 from the previously announced $0.55 to $0.59 to $0.61 to $0.62. For fiscal year 2007, we continue to forecast revenues to be in the range of $614 million to $635 million, using the guidance weight. We believe that both eGene and Digene expected contributions to this remains well on track as previously stated. From our HPV testing business, for instance, that is $58 million to $60 million.

For adjusted EPS for the fourth quarter, we expect $0.13 to $0.14. Just to point out to you, some of the factors contributing to this EPS estimate, although having made significant progress on the integration front, we still has someway to go on achieving operational leverage and the necessary efficiencies. In addition, direct advertising and regulatory costs also have an impact.

On the next slide, we have listed a number of assumptions to frame some items more precisely for the fourth quarter and fiscal 2007. First of all, our organic growth. We continue to look for approximately 10% here. Digene and eGene are not organic, of course. On adjustment operating income for the fourth quarter, including the Digene and eGene acquisitions, you should expect the following. FAS 123R expenses between $4 million and $4.5 million, driven mainly by the legacy Digene equity-based compensation plan.

Amortization of acquired IP of approximately $50 million, which will not be -- which not all be seen in the operating line, rather approximately 78% in the cost of goods sold line. Integration and acquisition related charges of approximately $3.5 million to $4 million. The overall pro forma tax rate for the fourth quarter is expected to be between 26% and 30% and the rated average number of fully diluted shares outstanding will be around 205 million shares for the fourth quarter and around 175 to 180 million shares for the full year 2007.

Before I hand back to Peer, I would like to go ahead and give you some assumptions for 2008. In terms of adjustment to operating income for 2008, you should expect 123R expenses between $15 million and $17 million. This is including the legacy Digene equity-based compensation plan. Amortization of acquired IP of approximately $60 million and again here this will not all be seen in the operating line, rather approximately 78% of this in the cost of goods sold line. Integration and acquisition-related charges of approximately $12 million to $15 million. This will be spread over all four quarters next year, but tapering off by the end of Q4.

As most of you know, we have significant operating activities in Europe, primarily in Germany. Due to a tax reform in Germany, we expect a significant positive decrease of our corporate tax rate down to 26% to 30% for the year 2008. We would use the additional profit of our decrease in tax rate to boost our research spending and sales channel activities without any impact to our EPS number. The weighted average number of fully diluted shares outstanding will be around 210 million shares. For a detailed breakdown of the amortization, please refer to slide 31. With that, I would like to hand over to Peer.

Yes, thanks, Roland. So, overall here on slide 24, a summary, it's a very strong third quarter, well on track. Revenues up 50%, organic growth of 10%, and a strong first nine months. But very important here -- a strong strategic momentum. We're seeing a very exciting market environment across the board. In our molecular diagnostics business, HPV testing is getting more and more accepted also outside the United States and we're very well positioned to take also this into our business going forward. The integration of our acquired businesses is very well on track and we look forward to moving on these projects very actively now over the next few months.

The guidance for the full year 2007 was given by Roland before, $614 million to $635 million on the top line and $0.61 to $0.62, which represents an increase of about $0.03 compared to the previous guidance. So, overall, a very strong performance and we're looking very positively into 2008. And last, but not least, on slide 25, I would like to introduce you to somebody here new on our Qiagen team. I know a lot of you know Al Fleury very well. Al has been a -- with Qiagen for seven years in investor relations and other related functions.

He brings to -- he will be joining our investor relations team. This is a great addition to our team and he has such a strong academic background in both science and finance, a B.S. in biology and bachelor's degree in economics and also soon to graduate from Wharton with an M.B.A. His contact information is here on this slide and he will be the contact for all investors or inquiries in the United States if you'd like to move through this channel. And we look forward, also, to introducing him to you in person going forward for those who have not yet met him.

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

Thank you very much, Peer. We are now looking forward to taking your questions. To open the Q&A session, I would like to hand over to the operator. Elsa?

Thank you. (OPERATOR INSTRUCTIONS) Our first question is coming from Bill Quirk with Piper Jaffray. Please go ahead.

Thank you and good morning or good afternoon. I suppose it depends on your perspective. First question here, I know you don't like to break out the Digene contribution by geography, but it looks like the European business actually continues to grow in excess of the U.S. Is our math correct here?

Well, it certainly is coming from a much smaller number. And clearly, we're seeing effects of these tests rolling out in certain countries, leveraging our sales infrastructure. Maybe first overall, we gave certain number targets for the third quarter and we came well within those or actually exceeded those targets for the HPV-related business. The international mix is one that I wouldn't want to break out at this point in time. I would say, however, our molecular diagnostics business in Europe had a very strong quarter in the third quarter.

Excellent. Thank you. Second question actually has to do with the pipeline and, in particularly, the hospital-acquired infections launch. Good to hear that this is teed up for 2008, but I was hoping, Peer, I know you don't want to give too many details away out of the analyst day, but perhaps you could help us think a little bit about the launch timing. Is this the beginning of '08, kind of end of '08 and should we assume that this is going to include more than an MRSA assay? That we're looking at more of a panel approach?

Well, first to the latter question, the profile of the assay. Our QIAplex technology allows us to put a lot of real estate onto a panel. So, with very high sensitivity, we can hit many targets within a given sample. And this is a benefit that we want to bring to our customers. So, we're not thinking about an MRSA assay and then -- here and then a VRE assay there or -- and then the third assay there. We're thinking of creating panels that, in one shot and in a very powerful way, can give a very high resolution of the various targets and also a sub-typing of them as well. This is the benefit of the QIAplex technology and also one of the advantages of a first preliminary version we launched for researchers only in Q2.

Now, in terms of the launch outline, we did put some of the women's health-related assays on fast track and the hospital-acquired infections panel will be more, in the regulated format, will be more in the second half of 2008 than the first.

Thank you very much.

Thanks.

Thank you. Our next question is coming from Jason Weiss with Robert W. Baird. Please go ahead.

Hi. Thanks for taking my call. I'm wondering if you could talk a little bit about perhaps some HPV contract wins that you've seen either within or outside the U.S.

Sure. Well, we continue to expand our business and there were some major contracts signed in the second and third quarter. One that was announced was certainly the extension of our contract with Quest. And we continue to see that our customers are extremely favorable to the tremendous body of data that we can bring to the table that shows the value of these tests. And we are winning contracts almost every day or every week.

So, as this expands geographically, I wouldn't want to comment on individual contracts unless they're really material, but we're seeing a very strong competitive advantage for the technology and the competitive advantages of our product.

Great. Thank you for that. Then, with regard to gross margin, you gave some good insight as to some of the moving pieces there. I'm wondering if you could provide any additional detail on the gross margin of the core Qiagen business during Q3.

Yes, also on the core Qiagen, hi, Jason. I think we have a good -- we have seen, I think, a good quarter. We have, clearly, have had a strong instrument quarter as well, which, as you know, clearly has an impact on gross margin, but, as I said before, really doesn't have any impact on operational income and on EPS as we benefit then on the tax side. So, overall, I would say a slight improvement on the -- call it legacy Qiagen gross margin, but I think a bigger impact was really that we, for accounting purposes, really had some reclassification between legacy Qiagen and now Qiagen accounting policies. And therefore, you will see a -- you have seen a slight impact in the third quarter. But of course, as I said, you will see even an improvement already going into the fourth quarter. Because having three months of Digene ithin our consolidation, certainly has an impact as well.

Great. Thank you, Roland.

Thank you. Our next question is coming from May-Kin Ho with Goldman Sachs. Please go ahead.

Hi. I don't know whether I've missed this. I think in the past you've broken down your business based on research, molecular diagnostics, et cetera. So, what is the breakdown for this quarter?

Yes, thanks, May-Kin. Well, the breakdown is a little bit difficult and misleading because we didn't have a full quarter. On an apples -- of the Digene business being consolidated here, I would take as the best basis the numbers that we put out in the second quarter in which the molecular diagnostics business, about 48% of our sales, and you should consider that also as a target number for this quarter. But again, we only consolidated two quarters of Digene and that's why this percentage number, we thought of it, but it would have been a little bit misleading if we put it in. So, no major changes. Use the second quarter number as the guidance for what we have in the third quarter, if that's okay.

Sure. If I do a quick calculation here, there's about $85 million. And when I go diagnostics, granted, there's only about two months of Digene, but if you do the calculation in the second quarter, molecular diagnostics is $65 million. For instance, $20 million for the two months. Is that the right way to think about that?

Roland?

Yes, I think if you do it on an apple-on-apple basis, you would probably see that, for the third quarter -- to put it differently, in the fourth quarter, you will probably will see that molecular diagnostics will be around 48% of total revenues. For the third quarter, it was around 42% because of a two-month Digene consolidation.

So, if the math is correct, then the two months is only $20 million.

No, then there's something wrong with your math.

Maybe I didn't correct --

We have guided for numbers around $40 million in the HPV-related business. And, as I said before, we were well in or exceeded that number.

Okay. Thank you.

Thank you. Our next question is coming from Dan Leonard of First Analysis. Please go ahead.

Good afternoon. A pair on the hospital-acquired infection panel -- could you give me some insight into how a multi-target panel like that might be reimbursed?

Yes. We have some very interesting ideas in this space. If -- that's an excellent question, Dan, and one which is very important. If I may, I would like to keep that a little bit under lid and try to give you a little bit more detail on that in February. But we see this as actually an extremely important opportunity because it could also significantly lead to a cost reduction in the system. And as we're seeing the need for broader based analytical -- broader based testing.

Okay. Thank you. And then, my second question. Can you give me an update on the progress of your HPV patent litigation?

Yes, sure. Well, we really don't comment on ongoing litigations. And I know a lot of other people have been doing that and the information has all been a little bit misleading. I would maybe, for instance, say that Qiagen has the most extensively HPV intellectual property position in the world and we remain extremely committed to enforcing this position. But in terms of specifics, we do not, as a policy, comment on any pending litigation or ongoing litigation.

And this IP portfolio is only one of very many significant barriers to entry in the HPV testing market. And again, I see a lot of data around HPV testing, where analytical performances are being looked at. What is important is the clinical performance and this is where probably the most significant barrier kicks in. And we have a, however, a very clear position that we will defend our IP positions very activity going forward and nothing has changed on that. We're looking forward -- our strategy is very straightforward and we are moving full steam on it.

Okay. Thank you.

Thanks.

Thank you. Our next question is coming from [Eric Kriskulio] with Thomas Weisel. Please go ahead.

Hi. Thank you for taking my question. Filling in for Peter Lawson here. I was just wondering, can you comment on what the organic growth for your instruments were this quarter?

Roland, do you want to take that?

Absolutely. I think the organic growth overall was around 10% and I think on -- there was not such significant difference, just looking on the details here, between consumables and instruments. Suppose around approximately 10%.

Okay. 10%. Great. Thanks. And also, as far as the sales force integration is going, can you maybe comment on what maybe your biggest concern is regarding the integration on maybe what you could possibly see as a hurdle that you have to overcome for that to go smoothly?

Well, I think, as with every integration, the most important thing is the people behind the companies and the organizations that are coming together and now working as one. And we're placing a significant emphasis on integrating the cultures and also the people. And this has been very successful, especially now in the last -- about the last six weeks since we were able to announce the organizations and the roles and responsibilities. This is something that we're putting very high emphasis on.

In terms of the integration of the sales forces, we're actually getting fantastic feedback from the sales teams. First of all, the sales teams have a broad portfolio they can now talk about and also create very interesting discussions with their customers across a number of different products. And at the same time, our legacy sales force has a product line which is extremely important for so many laboratories that they talk to. So, that integration on the sales side will be completed by the end of this year and we expect to operate under the new structures we showed here starting in January.

And it is different country by country. And that's really the challenge to balance the right mix between physician and laboratory sales force and then leverage everything with advocacy and DTC marketing, which -- this mix is almost in every country very different. And finding that optimal mix is one thing that we're working very intensely on.

Okay. Great. Thank you very much.

Thanks.

Thank you. Our next question is coming from Patrick Fuchs with DZ Bank. Please go ahead.

Hello. I have a question regarding HPV testing in China as there the cytology infrastructure is not so well developed than in Western countries. So, are you still -- are you already seeing there a picking up sales? What are you activities there and will it be more obvious in the -- let's say, in the HPV growth rate in 2008? Thank you.

Excellent question, Patrick. China is, as we know, a very important market for Qiagen. We're a market leader in molecular testing in China. And this is a market that is very open to HPV testing and especially to the solutions we have to offer. We have already been offering HPV tests in the legacy Qiagen business, previously, on a real time PCR basis. But the legacy Digene technologies are simply far superior in terms of the clinical validation and also the performance of the product. So, we're getting great feedback on this. And the integration of our businesses in China is actually one which is a very high priority.

What is very interesting in China is we have -- there was -- were announcements previously from the legacy Digene organization that they had a product in the pipeline that had been co-financed by the Bill and Melinda Gates Foundation that allows HPV testing to go into their rule of setting. And this is certainly a product area that you'll hear more from going forward as we talk about rolling out HPV testing into developing countries, linking HPV testing around the developed world versions with disseminatable solutions that we can use in rural settings is very important politically and something that we look forward to leveraging going forward.

Thank you.

Thanks.

Thank you. Our next question is coming from Matthew Scalo with Canaccord Adams. Please go ahead.

Hi, guys. I just wanted a little bit of clarification here. Peer, you mentioned HPV -- $40 million was the expectation for the quarter. I've got in my notes $36 million to $38 million. I know I'm splitting hairs here, but you said you exceeded $40 million.

Okay. I was -- sorry for the confusion here. We had given guidance for the third quarter of $36 million to $38 million and I had said we -- I didn't give -- I said our guidance had been around $40 million and we met or exceeded the guidance. And so, the business is performing very well.

Okay. Thanks for that. And then, as far as Digene's DTC campaign in the U.S., can you comment a little bit about third quarter, fourth quarter spend, possibly talk about do you anticipated continuing that in 2008? And then, possibly, do you anticipate doing a DTC campaign in Europe to kind of jumpstart that growth there?

Sure. Good question. We had -- we're currently analyzing our 2008 plan for DTC activities. We continue to see this as an important factor and one that we want to use going forward as well. And the market is changing. There is increasingly awareness around HPV. In general, the vaccines did their share. If -- we can do our thing as a -- we might be large as a diagnostic company, but we're no match to the vaccine companies, which there are hundreds of millions of dollars of HPV awareness activity. And so, that is certainly, is something that we want to synchronize and leverage more going forward. So, we are looking at the 2008 plan, but it will certainly be a very heavy emphasis also going forward.

In Europe, we have been using -- we have been test driving DTC in various regions with some good success in some regions and it really depends on the local infrastructure, on the reimbursement and these types of things. So, also here, this is part of a very important effort where we have put our very strong European infrastructure to work at optimizing the rollouts of these products in 2008.

Okay. Thank you, guys.

Thank you.

Thank you. Our next question is coming from Alastair Mackay with GARP Research. Please go ahead.

Hi. Good afternoon.

Hey, Alastair.

Digene had previously disclosed that they were working on a genotyping assay which they had mentioned as HC-4. Can you give any insight as to whether you're pursuing a genotyping assay in HPV and whether or not it would use the hybrid capture technology or perhaps whether you would migrate that assay over to another Qiagen technology?

Sure, Alastair. I think I would -- I wouldn't want to say yes or no now to your answer. Let me just tell you what we have said so far. We have a very exciting HPV genotyping product that we have on fast track and that will actually be launchable in the foreseeable future now. And this is a very powerful product that will be leveraging multiplexing technologies, which we sub some under the QIAplex technology name.

These are PCR multiplexing technologies that can be detected on numerous different systems such as Luminex or others. At the same time, our innovation engine is put behind women's health in a broad way and also, in the subsegment of HPV testing in a very broad way. And we see that the market will need many different solutions and we're committed to bringing to our customers a number of different solutions in this space.

And as the market leader and technology leader, we're taking this very seriously and we are going to be extremely innovative over the next few years. And also here I would like to defer some of your latter question regarding hybrid capture base genotyping to our analyst day in February.

Oh, very good. Thank you. And then, for Roland, I had an arithmetic question. Roland, if you could say how many shares in total Qiagen issued in the third quarter for both eGene and Digene and any other similar activities.

For Digene, was around 39 million shares and eGene was 100 million shares. Nothing else.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is coming from Peter Welford with Lehman Brothers. Please go ahead.

Hi. Thanks for taking my question. There's two, actually. Firstly, on the $500 million credit facility that Roland mentioned, I'm just wondering if you can outline the financial terms of that and whether how long that's in place for? Second question then is just on the tax. And I appreciate this has been very difficult to outline. But just the benefits you're clearly seeing in the near term. How should we think about this going forward beyond '08?

And could I just also ask for a point of clarification, which is just on the 4Q EPS guidance you give? I just tried to do the math from your full year guidance and with the number of shares you've got, I think you're $0.01 too low in the range for those two. Could you ask someone just to check that? That would be great. Thank you.

Hi, Peter. Thanks for your question. On the credit facility, the debt component for the Digene acquisition was financed, as I would see it, as a very -- with very favorable terms with Deutsche Bank. There was $500 million with a five-year term and currently be an interest rate somewhere between 5.75% and 6%. And then we have additional US$150 million revolving credit facility, which gives us some flexibility going forward.

On the tax, I think, going forward, especially in 2008 or as of January 1, 2008, the German tax reform will come into power and that means, as you know, that we have significant -- or dual significant steps of our production and value generation in Germany where then the effective tax rate is more or less coming down from 38% to 30%, which means, overall, we probably should have an effective tax rate for the Qiagen group somewhere between 26% and 30%. And I also think that is something which will be -- where we feel very confident in 2008 and beyond. And on the EPS, I think guidance is $0.61 to $0.62 and we achieved $0.48 within the first nine months.

Okay. Thank you.

You're welcome.

Thank you. At this time, I'd like to turn the floor back over to Mr. Peer Schatz.

Solveigh, do you want to ...

Yes. Okay. Thank you very much, Elsa. I would like to close this conference call by thanking you all for participating. We hope to welcome you again to our full year 2008 results conference call in February 2008. If you have any additional questions, please do not hesitate to contact us. Again, thank you very much and have a nice day. Thank you very much. Bye.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.