Qiagen NV (QGEN) 2008 Q4 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to the Qiagen Fourth Quarter and Year-End 2008 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the floor over to Dr. Solveigh Maehler, Director, Investor Relations and Public Relations. Please go ahead, Dr. Maehler.

Thank you very much, Cynthia, and hello, everybody. Welcome to Qiagen's Fourth Quarter and Full Year 2008 Earnings Conference Call. I'm Dr. Maehler, Director of Investor Relations at Qiagen. With me on the call today are Qiagen's CEO, Peer Schatz, and Qiagen's CFO, Roland Sackers.

We issued a press release last night announcing Qiagen's financial results for the fourth quarter and year ending December 31st, 2008, 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 30-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 yourself 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 discussions and the responses to your questions reflect management's view as of today, February 10th, 2009. As you listen to the call, I encourage you to have our press release and the 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're going to 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 materially 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 US Securities and Exchange Commission.

With this, I would like over to -- I would like to hand over to Peer Schatz.

Thank you, Solveigh, and welcome to our call. We are very pleased to report the results of our fourth quarter and full year 2008. As you saw from the numbers published yesterday, we exceeded our guidance in terms of revenues and came in with strong growth and achieved $237.2 million in sales in Q4, which was above our guidance range. For the full year, we recorded $893 million, also here ahead of our guidance.

Our organic growth continues to come in very well. Overall, we recorded 13%, with our sales to customers in molecular diagnostics recording even over 20%. Within our molecular diagnostics customer group, our sales of products related to HPV screening, they're about half of our sales in molecular diagnostics, with strong contributors to that growth. EPS reached the high end, with $0.22 for the quarter and $0.80 for the year.

We are particularly pleased with the underlying momentum of Qiagen. Our innovation engine had one of its best quarters and best years ever and continues to give us a great basis for strong growth and competitive differentiation. 5% of our sales came from products launched in 2008. That is clearly a very, very strong number for our industry. As previously shown, this number goes to about 20% for the three-year period.

But also overall, our organization performed very well in the fourth quarter across all functions and geographies. We are taking a lot of strategic momentum into 2009. A lot happened in the fourth quarter. You have some bullets here on this slide. But I'll address them a little bit later in detail and hand over here to Roland for a review of the financials. Roland?

Thank you, Peer, and good afternoon, everyone, in Europe and good morning to those joining from the US. As you can see from our earnings news release, Qiagen reported another year of strong results in 2008. In addition, we positioned the Company for continued success by executing on our major priorities, strategic acquisitions and goals for the year.

Let me turn now to our financial performance overall for 2008. Afterwards, I will also briefly address the fourth quarter and then provide you with our guidance for 2009 at the end of the presentation. We are very pleased with our outcomes in 2008, as we exceeded our financial goals, surpassing the guidance we had provided, which had been increased during the year.

Based on January 31st, 2008 foreign currency exchange rates, we recorded a $909 million, this exceeding our guidance range of $901 million to $906 million. These numbers reflect the solid growth we achieved in both consumables and in instruments. Furthermore, volume and new product introductions remained a key theme throughout the year.

Adjusted diluted earnings per share for the year ended December 31st, 2008 increased to $0.80 per share, this being at the high end of our guidance range and representing a 27% year-over-year increase from $0.63 per share which we reported for fiscal 2007. The 2008 fiscal year adjusted EPS number includes a non-cash charge of $0.01 from the revaluation of acquired businesses -- acquired tax business -- tax position from acquired businesses last year due to the Digene acquisition.

In addition to enhanced comparability and to show underlying performance, we also exclude from these adjusted figures business integration and restructuring related charges as well as amortization of acquired intangibles and equity-based compensation. Of course, we also report our financials, including all such charges and costs as well.

Moving on to our revenue distribution for 2008, we continued to show strong growth in our sample and assay technologies and our instruments. Growth in consumables and sample and assay technologies continued their very robust rate of 34% in constant currencies over the prior year. This group accounts for approximately 88% of total revenue. For 2008, another impressive driver for us was sales of our implementation products, growing at 52% year-over-year at constant exchange rates, largely due to the introduction of new instruments, including the QIAsymphony platform, QIAxcel and Rotor-Gene Q.

Turning to the geographic breakdown on the right-hand side on slide 5, net sales in the Americas for the full year represented 50% of our overall business and recorded an impressive growth rate of 50% under constant exchange rates, while European sales, which represent 37% of total revenues, showed a growth rate of 17% at constant exchange rates. Net sales in Asia remained strong, with a growth rate of 16% at constant currencies, and represents 10% of our total revenues.

Throughout the year, we saw significant demand in molecular diagnostics and applied testing across all three geographic regions. The strong US growth rate was in part due to the success of the HPV demand creation initiative we instituted in the second quarter.

The next slide shows the development of our organic growth rate for fiscal 2008. Exceeding the target we gave of 12% for fiscal 2008, we in fact reported 13% organic growth for the year. Growth drivers for 2008 were a 6% increase in volume and importantly, a 5% increase in new product introductions, which highlights our track record of innovation. The 22% growth from acquisitions was due to the Digene [each in covered] and Pyrosequencing acquisitions.

Breaking down some of our key financial metrics on slide 7, we continued our track record of strong year-over-year growth, with net sales increasing 37% from $649.8 million in 2007 to $893 million for fiscal 2008. Adjusted operating income grew by an impressive 54% over last year, representing an improvement in operating margin of 300 basis points, mostly driven by the successful integration of Digene and recognizing more cost synergies than we had projected. Moving on to our adjusted net income, this also showed robust growth of 47% in comparison to fiscal 2007. In summary, for 2008 we reported on an adjusted basis a solid 80% after-tax profitability margin.

I will spend a minute highlighting the key figures from our cash flow and balance sheet now. In 2008, our operating cash flow increased to $167.9 million from $84.8 million. This increase primarily reflects strong net income growth. Our free cash flow for the year was $128.5 million. In regards to amortization and depreciation, these figures include components from the Digene acquisition and the 2008 acquisitions of Corbett and Pyrosequencing, as well as currency fluctuations, meaning the euro appreciation is included.

For the category others, the comparative increase from 2007 to 2008 is due primarily to an increase [that include on other] liabilities. This includes certain amounts that we reversed during 2009 related to foreign currency and interest rate hedging activities. The inventory increase for newly launched instruments and an increase in account receivables due to the increased sales volume had reduced operating cash flow by approximately $51 million in 2008 compared to $30 million in 2007. So as you can see, our cash flow remained very strong. At the end of December 31st, 2008, we had cash on hand of $333 million.

I would also like to address a few metrics related to our liquidity and capital structure. With only approximately $25 million in near term debt obligations in the next 12 months, I'm sure you can see we're in a very strong position. Further highlighting our strong liquidity position is our equity ratio of 51% and the net debt to adjusted EBITDA ratio of 2.2.

Switching now to the fourth quarter 2008, just a few numbers that I want to draw your attention to. Our net sales for the quarter reflect a 13% growth over the fourth quarter 2007 and an organic growth rate of 13%. Of note, the currency movement was of similar magnitude to the revenue we recognized from the Pyrosequencing and Corbett acquisitions.

We showed significant improvement in our adjusted income metrics in an after-tax adjusted profitability margin, why from 15% to 18% looking at the comparable quarter in 2007 and 2008. As we previously stated, we expect an accretive effect from the deal with Digene and we ultimately delivered on this. Another note here, our adjusted EPS includes a non-cash tax charge of $0.01 per share from reevaluating of acquired tax position in 2008, so actually a fully adjusted EPS number for the quarter would be $0.23 a share.

Peer?

Thanks, Roland. So, turning to slide 10, we wanted to take the opportunity to walk you through some of the trends we see in our customer segments. On slide 11, I'll start with our sales of sample and assay technologies to customers performing molecular diagnostics. This is about 45% of our sales base and encompasses a broad suite of sample and assay technologies, including 120 different assays.

The market continues to grow at a very high rate and we are outperforming the market. Decentralization is a strong theme. However, MDx has really only performed in larger volumes in about 10% of the 5,000 hospitals with labs and reference labs. The market overall is strong. Some of the smaller hospitals have funding issues, but they are less of a sales volume base for Qiagen.

Our position is very strong. Our brand is strong. We are new, different, innovative, yet very powerful with a substantial infrastructure. We have a broad suite of solutions and are unique in many assay areas. Our HPV franchise is now inseparably integrated into our customer segment, molecular diagnostics. In MDx, we are the largest company outside blood banking and, despite our size, also one of the fastest growing companies overall.

We have great opportunities here. While some hospitals might have currently funding issues, our portfolio includes assays for very critical conditions, or others which are completely integral to healthcare and therefore not optional. Other assays, like HPV screening, our screening solutions addressing is still very underpenetrated market and even if overall market opportunities might deteriorate, which we're not experiencing or do not foresee, the growth opportunities into these segments, which are still underpenetrated, remain vast.

Turning to slide 12, I would like to highlight an interesting project we are leading in Europe. But this could have much broader implications. In recognition of the fact that sample technologies are probably one of the most critical elements for the expansion of diagnostic testing, a project was formed and funded in which 16 companies will define new standards and guidelines for the pre-analytical processes. In other words, what we call sample and -- sample technologies. Qiagen is proud to lead this project and we look forward to reporting results.

Now, turning to slide 13, a few words on applied testing. This customer segment generates about 8% of our sales, but is growing very rapidly. It is primarily forensics and veterinary testing. In veterinary testing, we are the overall market leader. In forensics, we focus on and lead in sample technologies. We are seeing great interest in livestock testing and launched a range of assays in this area last year. Growth has been very strong and we expect strong growth in 2009 as well. We have not seen any impact from recessions on this customer segment and according to our customers' feedback, they foresee little or no impact for 2009.

On slide 14, we summarize some aspects of our customer segment pharma, about 20% of our 2008 sales. We are seeing a lot of activity here. This segment changed quite a bit over the last few years. Five years ago, this was primarily sales into early stage research/discovery. In the meantime, it is almost half into development, where molecular methods are becoming more and more prevalent.

In particular, the personalized medicine wave is one in which we are playing a very strong role. While discovery is currently a challenging market to sell into, development is doing very well. What is helping us here is that our solutions can bridge academia with early stage pharma with development and ultimately with diagnostics. This is a truly unique value proposition. So, on this customer segment, we also expect growth, where one sub-segment should compensate for slower growth in the other.

Turning to slide 15, the academic markets are not really much different compared to where they were some time ago. The US continues to be overall softer, Europe stronger. We're growing in the mid, high single digits overall. This is a very important market for Qiagen. We can capture trends early and standardize them. Last year, there were 14,000 publications citing Qiagen on Medline and the number is increasing with an increasing growth rate.

This is of huge value to us. We all know about the stimulus package and its potential impact. We have not planned any contributions from this, but the injection of funding in the amounts discussed could have major positive implications for growth in this area.

Now, on slide 16, just a few words on the launch program. We had one of the most significant launch programs ever for the Company this January. Among six instruments were launched, four of them coming from acquisitions and made ready to be members of the Qiagen product portfolio in record time. I won't go into them in detail on this call, but show you only some examples of their importance.

On slide 17, on top, you see a lineup which is quite revolutionary, a completely automated molecular biology testing solution from sample to result, starting out as low as $60,000. And there are a number of modules to choose from. EZ1 is a record selling instrument, here now in a stretch version allowing to -- allowing the processing of 14 samples versus six in the standard version.

The instrument in the middle is QIAgility, which has the potential to be quite a blockbuster. It is a highly versatile, easy to program solution, which automates the steps needed to prepare an assay. And to the right, Rotor-Gene Q, which, as QIAgility, comes from our acquisition of Corbett, runs to the world's highest performance real-time PCR detection sample to result with industry leading performance.

In the middle, the newest addition to QIAsymphony, the second module assay setup is now fully integrated into QIAsymphony. What is unique is that this module takes in more in the span width of QIAsymphony, random access, continuous load, any type of sample, et cetera, into the next step, the assay setup. The next step is integration of a real-time PCR detection unit, making QIAsymphony the first such integrated unit on the market.

The third system on this slide is Pyromark from our acquisition of the Pyrosequencing business from Biotage. Early interest has greatly exceeded our expectations and we look forward to rolling out more tests. We will have some interesting data for this system at our analysts meeting as well.

And that brings me to the next slide, slide 18. These additions I just talked about were highly strategic. With them, we can offer complete solutions from sample to result. This gives us great opportunities in areas such as applied testing and molecular diagnostics. As you see on slide 18, we now have a full suite of molecular detection systems, opening up a broad array of options for testing. And as you see on slide 19, these solutions are or will soon be available on a range of throughputs which is unmatched in the industry.

With that, I'd like to hand back to Roland to describe how these new capabilities translate into our guidance.

Thank you, Peer. Moving on to 2009 financial expectations, while the US economy is experiencing unprecedented times and [affects they are founding] worldwide, we are uniquely positioned to retain the strong underlying fundamental momentum in the majority of our core businesses.

We see a number of exciting opportunities in 2009, ranging from increasing market penetration of our existing portfolio to new product introductions, which may translate into accelerated growth in the second half of the year. We believe that the position of strength from which we are starting this year gives us significant comfort and confidence that Qiagen will be able to leverage significant opportunities.

Let me start, then, with our expectations for 20089 and then provide you with some assumptions around the first quarter. The cause of uncertainties and volatilities of the global economy, we are [poorly] reflecting this in our outlook for 2009 in the form of a widened guidance range. This range is somewhat wider than we had -- historically had. This measure as well as a more comprehensive forecasting system and prospective expense planning are key elements we are instituting to retain our track record of meeting and/or exceeding our financial targets, even in the face of this uncertain times.

We expect total revenues during January 31st, 2009 rates to fall between $920 million and $970 million. Under 2008 constant exchange rates, our reported revenues for 2008 of $893 million compares directly to our expectations for 2009 of $990 million to $1.04 billion, this demonstrating an impressive increase of 11% and 16% over 2008 and reflecting adjusted diluted EPS of $0.92 and $0.98 per share respectively.

In order to help you compare our future results directly with our expectations, we also provide guidance on this slide [with a static] exchange rate of -- as of January 31st, 2009. Under this, we expect revenues between $920 million and $970 million in 2009 and adjusted diluted EPS between $0.88 and $0.94 per share. This metric will allow you directly compare our results against our expectations without currency impact.

While currencies have an impact on our reported revenues, the impact on earnings and cash flow are typically significantly reduced because of our natural hedging. These two guidance numbers demonstrate effect in negative 7% and impact on revenues translate into a negative 4% impact on net income. Finally, one other note is that our revenue guidance assumes further streamlining of certain acquired businesses which accounted for approximately $5 million to $10 million of revenues in 2008.

As we have previously communicated to you over the past year, we expect adjusted operating margin to improve to approximately 29% in 2009. For 2009, adjusted diluted EPS we expect $0.88 to $0.94 per share based on January 31st, 2009 exchange rates. We expect the adjusted tax rate to be in the range between 27% and 30%, which compares to 29%, respectively 28% for 2008 when eliminating a non-cash tax charge from the revaluation of acquired tax positions in 2008. On a constant exchange rate basis, we expect to report diluted adjusted EPS of $0.92 to $0.98 per share.

On this slide, I would like to take a moment to explain how currency developments over the past few months have valuably changed the dynamics of our naturally hedge. Prior to November 2008, we had a positive revenue impact from a broad range of currencies in the face of a weakening dollar along with offsetting cost impact from the euro. In aggregate, this resulted in a near zero effect to our bottom line. As of November 2008, the US dollar has increased against most other currencies. We still have a positive cost impact from the euro.

However, we have -- we are having a negative revenue impact from a broad range of currencies in which we do not have significant offsetting cost basis. In aggregate, therefore, a negative 7% currency has been in revenue would not be completely hedged and instead would be reduced to a 4% hedge fund to our bottom line. The takeaway here is that our natural hedge is still at work, however, not to the same degree as previously. To more clearly show you the currency headwind we anticipate to face in 2009, we have put this slide together, slide 22, which details various currencies and how our natural hedge mitigates their respective fluctuation to our bottom line.

This next slide frames our assumption for 2009. Of note, we expect organic growth up to 14%. In terms of adjustment to operating income, we expect 123R expenses between $10 million and $12 million, amortization of IP of approximately $68 million, business integration and related charges from acquisitions of $11 million to $14 million. As mentioned already, the tax range to be between 27% and 30%. The weighted average number of fully diluted shares outstanding will be around 205 million for the fiscal 2009.

Moving on to the first quarter expectations and assumptions, based on January 31st, 2009 rates, we expect revenues of $215 million to $225 million and diluted adjusted earnings per share of $0.19 to $0.20 per share. In terms of adjustment to operating income, we expect 123R expenses of approximately $3 million, amortization of acquired IP of approximately $17 million, business integration and related charges of approximately $5 million.

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

Yes, thanks, Roland. In sum, we were very pleased with the performance in 2008. Our financial performance was very strong and it was one of the -- one more year in which we made very significant expansions of our strategic footprint and capabilities. I'm particularly pleased with the record success with new, innovative solutions. For 2009, we see a continuation of this trend. We are in a very fortunate position and have great opportunities in front of us.

With this, I would like to hand back to Solveigh. Solveigh?

Thank you very much, Peer. We are now looking forward to taking your questions. Cynthia?

(Operator Instructions).

Your first question comes from the line of Quintin Lai with Robert W. Baird.

Hi. Good afternoon.

Hi, Quintin.

Thank you very much for all that color, especially on the FX. I found that very helpful. With respect to the trends that you're seeing on the molecular diagnostics, sounds like that adoption rates were strong through the end of the year, despite kind of the worldwide recessionary environment. I guess as you're looking into '09 and part of the '09 guidance, what are you seeing and how much visibility do you think that you have right now in terms of increased penetration?

Yes, Quintin, if you look at our molecular diagnostics franchise, about half of it is related to assays that are an integral and absolutely key part of healthcare. So, I don't think we'll change guidelines on people coming out of chemotherapy or transplantation or HIV patients in terms of infection disease monitoring, which is a big part of our business, or I don't believe that other certain predictive tests will be wound down in such times. So in general, in the, let's say, the integral parts of healthcare part of our business, we definitely see a very solid position and also increased adoption going forward.

In the screening area, a number of screening assays that -- and clearly, HPV is the largest such screening assay, we are seeing an increased adoption rate. We've actually seen significant increases in the momentum that we're able to generate now post integration, which was completed in summer. And with the new capabilities we talked about, particularly in the Q2 and Q3 conference calls, we're performing very, very well in this area. It's an extraordinarily strong sales and marketing engine that we have here and they're performing very well also in increasing adoption rates in screening assays that currently have low penetration, like HPV.

So, I expect this trend to continue. We're working very closely with our partners, with physicians, laboratories and with the public and doing everything to increase adoption rates. We will be seeing more targeted campaigns also in Europe and Asia going forward, where we see a lot of opportunities. And that will certainly be something we look forward to reporting on in '09. So, as of -- in the position we are today, we have not seen any changes to the model that we expect going forward.

Thank you for that. And then, a follow-up and I'll go back into the queue. We talked to some researchers who are very optimistic, I guess, as the stimulus package here in the US continues to get closer and closer to passage. I know you haven't put any expectations for that stimulus bill. But kind of -- how have your conversations been for, first, the US NIH stimulus proposed package and are you seeing any other worldwide stimuli packages that could also enhance R&D efforts?

Yes, Quintin, excellent question. It's definitely one of these things that everybody's talking about currently in the academic sectors in the US, but also abroad. So, the second part of the question first, yes, we are seeing similar stimulus packages, albeit probably not in that size, in many other countries of the world, either being discussed or being implemented.

This includes Asia, it includes Europe and other regions of the world as well, but primarily those two. And the impact on Qiagen is certainly a positive one. It is important to note that we have not planned any impact from the stimulus packages into the guidance. So, this would -- we would only put something like that into guidance if it has been approved.

What is interesting to note is that these funds will have to be allocated very quickly for them to really qualify as stimuluses -- stimuli. And if you -- just to give you an important or just rough quantification of the impact, we're doing somewhere in the range of $150 million in academic sales in the States, give or take. And we're coming out of a scenario where the academic markets basically got zero funding for the past five years and -- or actually even slightly negative on a real basis.

And now, we are looking at increases which amount to somewhere like 25% to 30% growth, if they really come through. So, these numbers are huge. And I think everybody's trying to understand exactly how much will now come through and what the modalities are and how it should be prepared and planned for. But the impact could be considerable.

Thank you.

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

Hi, Peer.

Morning, May-Kin.

Hi. Can you just talk a little bit about the hospital market? You mentioned a little bit about the potential impact from the economy. And also, in the molecular diagnostic market, who do you consider your major competitor? And for a hospital that's buying competing machines, why are they making those decisions?

Okay, great question. The first one, on the hospitals, there are several thousand hospitals in the United States. Molecular testing is really only performed in a small fraction of them, 10%, maybe a little bit more, little less. In high volumes, even in far less labs. So, while some assays are being rolled out into some of these hospitals that have previously not been performing molecular diagnostic testing, those potentially might be facing certain headwinds.

But the laboratories that we sell into in the hospital market are typically the larger, well funded hospitals that have a history of doing molecular diagnostics, already have infrastructure in place, and also have a sample flow that they have to manage. And that's where I would differentiate. The -- let's say the newcomers or the new adopters, they potentially are facing more hurdles to get infrastructure and routines in place in some of the more established laboratories that are typically well funded.

The other part of [business] work that we do with the reference labs, this is clearly a different situation. These are businesses and samples continue to come in in increasing volumes. They are managing for more efficient management of these samples and ultimately revenue generation.

The question on the competition, it is in the meantime I think quite clear the one company that stands out is clearly Roche Diagnostics, which is a formidable company and extremely well managed and has great infrastructure and resources and great people and we have a lot of respect for them. It is not a player that we necessarily compete with head-to-head.

But we -- they have assays in certain areas, we have assays in other areas, but it is one that there is a little bit of overlap with. Primarily, however, the home group market, the laboratory developed tests that we therefore much more proactively also try to supply components into. So, those would be the two competitors. One is the home group market, the other one is clearly a very well established company with Roche that however does not really sell very much into the markets that we sell into. It's more a parallel market.

Yes. And with the currency situation, are you planning to do more hedging?

Roland?

Yes, one thing what we clearly are looking into right now is that we going to improve our -- on the one hand side, our natural hedge but also certain cash flow hedging activities. So, I would expect that we should be able to improve a little bit on the natural hedge ratio over the year. Nevertheless, it's very hard to predict where the currencies are going.

So right now, we keep the numbers as we put on our guidance and I think that it's a way to look forward to that, that the -- if you want to compare our performance in 2009, best way is to exclude currency movements in 2009. Nevertheless, of course, we are trying to get here a better result out.

Thank you.

Of course, it's something what we can't control.

Right. I understand. Thank you.

Your next question comes from the line of Peter Lawson with Thomas Weisel.

Good day, Roland. Wonder if you can kind of talk through the potential gross margin benefits from [real time PC auger] and also its patent?

Good question. This is something what we expect to start sometime in 2010 and then we'll phase in over the years into -- up to 2014. So, it's not a kind of a onetime impact. It will be a step-by-step. Right now, we do expect it will be clearly an important number for us, important thing for us. Having given detailed guidance, of course, expect also on what kind of revenue increase we will see into the year 2010 into 2014 in the area of PCR sales. Nevertheless, it will be probably at least a high seven-digit number and might be an eight-digit number.

Thank you. So then, Peer, I wonder if you could just walk through some of the moving parts in your guidance with respect to your expectations for pharma and the instrumentation side, if you're going to get any push back on that?

Sure. Pharma's about 20% of our sales. We have a targeted sales force into this area and this [technique] includes CROs and pharma, I'll say, suppliers that ultimately service to our development and discovery. We see it is primarily large pharma, includes a smaller portion of biotech, but primarily large pharma, which clearly invests a lot more.

If you look at the R&D expense at a pharmaceutical company, about 25% of the R&D expense is pre-clinical research and 75% is clinical. The 25% pre-clinical research typically expands and contracts more with economic developments. In good times, people will invest more in early stage research. When times get tough, you'll try to save a little bit more in this area.

The development area is one that has a lot more protected budgets because it typically surrounds products that are moving through clinical trials and potentially ones to be launched, or actually should be moving towards launch and therefore are cash flow generation [azac]. So, those areas typically are lower, much lower on the list in terms of targets for cost cutting.

This is important for your question. If you look at the capital expenditures in early stage discovery, especially in areas where we have M&A, there you have uncertainty, you have potential cost cutting measures and these types of things, all coming together, the market is tough.

And also, the capital equipment but also the amount of work, which means also the consumables, is clearly a softer growth. And in the discovery area, which typically is much closer to cash flow generation, or at least with a visible internal rate of return for the investment there. And so, on the overall pharma side, we continue to see growth but it is different. We see growth in both sub-segments but one much higher than the other.

And over the last few years, we have focused much more on the higher growth development area because, a, it is a faster growth area. But b, we think we can play our continuum from research through development into diagnostics extremely well. And we have quite a few relationships ongoing. We're developing companion diagnostics or at least patient profile and patient selection solutions together with our pharma partners.

Thank you. Thank you for the color. And then, just commenting upon HPV, are you seeing any impact from new entrants in Europe?

No, we've actually seen a lot of positive impact from our own efforts here to structure the landscape now following the merger using the infrastructure and the resources that we had. We had -- we consolidated the distribution networks, document a number of distributors. We had to move over the product into our own channels over time. And our sales forces have been trained and this is starting to roll out a lot more effectively. And we got some great developments in Europe also in place with all the other infrastructure that we have.

For instance, the reimbursement for [apex] testing went from about $26 to $40 here in Germany where I currently am, and it is just the market at a very early stage where we have to manage the market competition is less of a primary concern for us right now. It is really management of the market, the market infrastructure, so the reimbursement, the adoption rates, the -- all the politics around this and the key opinion leaders and these types of things.

Okay, thank you so much.

Your next question comes from the line of Cornelia Thomas with WestLB.

Yes, hi. Thanks for taking my question. Can we just follow up on that HPV question? I was just wondering if you could give us a bit more color on the development of the HPV testing program in Europe. Are there any more guidelines that are including it now? You just mentioned reimbursement in Germany. Is there -- are there any reimbursement rates in other countries, any such things?

Yes, there are a number of -- Europe is a very fragmented market for these types of things. It's not a very homogeneous market. And so, we are working more or less country by country with dedicated teams and substantial effort to create markets and to educate physicians, patients and the administrators and the public.

But it's an ongoing effort. There are moves in a lot of countries all the time. These are smaller moves. And what we clearly see as quite interesting is that some countries, like for instance Mexico, are now going into screening or primary screening campaigns that is having an interesting effect on some of the developments in Europe.

So, I'm quite hopeful that we're going to see some interesting things in Europe this year. Everybody was hoping to see the Netherlands come in this year. It was postponed for a few reasons, but it is clearly part of the agenda, probably more than ever actually due to some recent developments. And so, we're quite hopeful to see at least some countries come through very nicely this year.

Okay, thanks. And then, my second question is I've read that some of the larger US private universities have cut their research budgets quite substantially and I was wondering if you have seen any effect of that or if you are expecting to see any of that and if anything has been included in your model?

Yes, definitely a good question. We talked briefly about it, I think in the third quarter conference call, but we clearly have more data on this now. As we all read from the news, some universities clearly got cut up with their endowments, [fairly] significant decreases in value. And there were certain measures that were talked about and -- of the public and in the press. Yes, there were some impacts on the academic research side, but the privately funded universities are not a huge portion of the academic spending in the United States and are really dwarfed by the spending on the public side.

And therefore, while there were implications in certain universities that did not really impact the overall market in a very meaningful way, we actually had a very good performance in the academic market in the fourth quarter in the United States, so even despite continuous resolution and all these things happening.

So, I put this a little bit into perspective. While some of these endowments might have lost 20% to 30%, they made 20% to 30% per year in some cases over the last three years, or at least in the teens. So, they -- while it is a dramatic loss in value, it's not -- it doesn't put us back five years or 10 years; it puts us back a few years in terms of the value of their endowments. So, I think everything is coming a little bit into perspective and we'll see how this develops going forward. But even in a worst case scenario, private universities are not the major contributor to research in the United States.

Okay, thanks very much. I'll just jump back in the queue.

Thanks.

Your next question comes from the line of Un Kwon with Pacific Growth Equities.

Roland, I was wondering on your R&D expense line, it sequentially increased by about $4 million. Was there any sort of onetime items in there or was this driven by sort of stepping up your next generation HPV test?

The increase we have seen from the third to the fourth quarter is, I would say, driven by two impacts. One impact is clearly acquisition of Corbett and in Pyrosequencing; both came actually with quite significant R&D efforts. So, that is by far the majority of that. And second, we also in recognizing that we were on our way for the fourth quarter, we also accelerated certain projects, but this is a smaller amount of it. So overall, I think we were very comfortable also going into 2009 the investment rate of 11% to 12% of revenues for R&D.

Okay, thank you. And my second question for Peer, so within your organic revenue guidance of up to 14%, if molecular diagnostics is almost half of your revenue and that's growing 25% plus and applied testing you'd indicated is growing 15%, can you help me understand why your guidance is still relatively conservative?

Well, on its high end, it's about 14% organic growth for the full year 2009. And if we have the molecular diagnostics and applied testing areas, let's say, be half the sales growing at 20% and the academic and pharma markets growing in the mid, high single digits, then we would get to those 14%.

So, we are assuming quite aggressive growth rates on an absolute level. We think they reflect a continuing trend at our company that are comparable to what we've been doing over '08. And the -- but in general, our guidance, clearly we want to make [a big] guidance and I think it's a good set to guide for in these times. And the -- if you look at the sub-segments and go through each of the product areas or geographies, I think it is a good start.

Okay, thank you.

Thanks.

Your next question comes from the line of [Tim Cruise] with [MM Warburg].

Hi, everybody, from Hamburg. Peer, just a short question on the HPV business. You said you would have expected maybe Holland to start a reimbursement program. Would that be additional growth to your HPV business if that would come through in 2009?

Yes, that is -- thanks for the question, Tim. Yes, I should clarify that. The -- any primary or any large national screening program, we're working on quite a few at the moment, they are very tough to put in because you have all the -- into the guidance because you have all the governmental hurdles that you have to go through and timing is often very difficult. So, we wouldn't want to risk -- put risk into our guidance for these types of factors. And it would definitely represent an upside.

Now, if you look at a country like the Netherlands with about 8 million people, you clearly have -- you have a significant population there, even if you do interval screening would be quite a meaningful double digit million dollar number.

Okay, thanks a lot. And a short question to Roland. Just to get my calculations right, sales contributions from Corbett and Pyrosequencing you gave in 2008, were those based on January 31st, 2008 exchange rates or on the date of when you gave the guidance?

They were based on date of guidance, but actually -- yes.

Okay, thanks.

Your next question comes from the line of Derik de Bruin with UBS.

Hey, good morning.

Hey, Derik. Good morning.

Good morning.

Just a lot of the stuff I've wanted to ask has been answered, but I'll just a couple of peripheral questions. So, what are you seeing for free cash flow growth in CapEx in '09?

Roland?

Actually, I've seen [the amount] is quite significant cash flow growth in the fourth quarter was quite sustainable. I think that as we've seen [ $120 million] cash flow growth for the year -- or free cash flow for the year 2008 was about $125 million. Going now into 2009, I think it should increase at least by revenue growth rate. I -- actually something what we have to include here as well, we're going to start some long-term investments. Therefore, we have to adjust debt. It will not to be a significant impact for 2009, might be more in 2010 as we going to increase the [amount of these facilities] and so on.

Okay.

Nevertheless, I would expect increase in free cash flow as well as [unbridled] cash flow.

Great. And I know you're going to talk a lot about it at your analyst meeting on Thursday, but could you give us a little bit of color on particularly the Biotage, and I'm particularly curious on some of the pathogen genotyping assays. Are you developing HIV, HCV for this platform? And I guess what's your type of regulatory outlook for taking the sequencing into these areas?

Excellent question, Derik. It's definitely one that we have quite a considerable group working on right now. When we acquired the Pyrosequencing business, we acquired it primarily because we were interested in methylation analyses where Pyrosequencing, the Pyromark systems are really the only platform that can do quantitative methylation analysis. And we think that will be a very important area going forward for the research but also diagnostics.

It then came up that our customers just told us how excited they were about pathogen and genetic testing and, in pathogen testing, primarily in genotyping. And it turns out that we actually have a portfolio, a number of pathogen genotyping assays. There's even an HPV genotyping assay on Pyro and a number of other pathogens as well and also a number of genetic assays. And we'll talk about some of these genetic assays in our analyst day meeting.

The regulatory hurdles are still a little bit unclear. You could sell these as, depending on the area as -- potentially even launch them as RUOs and potentially even launch them as ASRs. So, those both options exist. They don't necessarily exist for real-time PCR assays, but the configuration of the Pyrosequencing assays is so modular, that even in ASR could be feasible. But we're preferring currently the regulatory route for a number of assays. We will be launching a whole suite of CE Mark versions here in Europe very shortly, but -- as we did with the KRS assay, but in the US we're currently in discussions.

I guess when you kind of look at the development of molecular methodologies within the diagnostics market, do you ultimately see sequencing as replacing or being much more competitive with the real-time PCR? I guess how do you think about those two markets evolving, as you've obviously made investments in both platforms?

I think they both -- they both will be working side-by-side. Real-time PCR has the beauty of being a tremendously sensitive and quantitative technology. Sequencing is a gold standard in terms of information that you get. You can't get anything better than sequence information ultimately. And with the Pyro technology, you have a certain quantification as well, relative quantification, which is extremely interesting.

And what I'm -- as I said a few times, I don't -- I think that the very large scale sequencing platforms, they have a lot of opportunity in some assay areas. But in a lot of assay areas, people are only looking at 20, 30 base pairs because the clinical validation is so complex, even between single genes and diseases, that we're still -- we have to do a lot of things to the regulatory process and others to really make some of these more complex information patterns lead to everyday clinical use.

So, while we are a believer in it, over the long term, I think that the 20 to 100 base pair area is extremely interesting over the next five to 10 years. And there, you need diagnostic accuracy and that's why we love this Pyro platform because it basically gets you diagnostic accuracy in exactly that sweet spot and it gives you the key information that people want to get.

Great. And then, just one final question. Do you still expect to get about 2% pricing in 2009?

Yes. That is what most vendors currently are looking for in the market. Some are actually going a little bit higher.

Thank you very much.

Thanks.

Your next question comes from the line of Ravi Mehrotra with Credit Suisse.

Thanks for taking my question. Peer, can you give -- or Roland, can you give us any color, more color on the Digene revenue growth, specifically for the Digene and HPV [big test]? Secondly, are you seeing any benefit, any critical mass benefit, for want of a better word, in your molecular diagnostics offering now you got to a certain size? Obviously, with Roche ahead of you but a lot of very much smaller competitors behind you and how can you leverage that going forward? Thank you.

Sure. Well, to the latter, the infrastructure definitely makes a big difference in terms of in vitro diagnostic sales. With over $400 million, we are quite substantial. Most -- some of the other companies you mentioned, they have a big blood banking business which is a totally separate distribution channel. So, in the in vitro diagnostics area we have, especially in the segment that we sell into, we have an extremely strong sales and marketing channel.

The sales and marketing channel is selling the complete portfolio and therefore, we don't really separate out individual products. There is no Digene sales force or Digene business unit or anything. It's completely integrated. They have Qiagen business cards through Qiagen portfolio of the products are marked Qiagen and so on and so on.

What I referred to before is HPV screening products and overall molecular diagnostics business, molecular diagnostics we're at about a little over 20% and HPV contributed significantly to that growth, about the same. So, you see a significant growth rate even on a business which is at the size where it currently is. And the -- we don't necessarily expect that to change going forward.

If you look at the historical developments over the year, we retooled in the first half of the year and this was fully expected. In the second half year, third quarter, you saw the numbers increase. Fourth quarter, I can tell you the numbers were even significantly higher than in the third quarter. And then, we have a strong outlook for 2009 as well.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for the question-and-answer session. I would now like to turn the call back over to Dr. Maehler for closing remarks.

Thank you very much, Cynthia. I would like to close this conference call by thanking you all for participating. We hope to welcome you again to our Q1 Results Conference Call on Tuesday, May 4th, 2009. If you have any additional questions, please do not hesitate to contact us. Again, thank you very much and have a nice day. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.