Qiagen NV (QGEN) 2009 Q1 法說會逐字稿

Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the QIAGEN First Quarter 2009 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 conference over to Dr. Solveigh Maehler. You may begin your conference.

Thank you very much, Kimberly, and hello, everybody. Welcome to QIAGEN's First Quarter 2009 Earnings Conference Call. I'm Solveigh Maehler, 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 last night announcing QIAGEN's financial results for the first quarter ending March 31st, 2009, 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 discussion and the responses to your questions reflect management's view as of today, May 5th, 2009. 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 materially from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements.

In addition, certain statements contained in this presentation are based on Company assumptions, including but not limited to revenue allocation based on business activities. 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 to hand over to Peer Schatz. Thank you.

Well, thanks, Solveigh and welcome to our call. We are very pleased to report the results of the first quarter 2009. And we started very well into the New Year. As you saw from the numbers published yesterday, we came in with solid growth as planned and reached $221 million in Q1 and thereby met our guidance, which we had communicated in February.

Our organic growth continues to come in very well. Overall, we recorded about 11% in organic growth with our sales to customers and molecular diagnostics recording growth in the high teens. Within molecular diagnostics, our sales of products related to HPV screening -- they were about half of our sales in molecular diagnostics or a quarter overall -- were strong contributors to that growth. EPS reached the high end with $0.20 for the quarter.

We're particularly pleased with the underlying momentum of QIAGEN. Our innovation engine once again had one of its best quarters ever. And we expect that the pipeline for 2009 will contribute to our great basis for strong growth and competitive differentiation. 5% of sales came from products launched in 2008. That is clearly a very, very strong number for our industry. As shown previously, this number goes to about 20% for the three-year period.

In addition, overall, our organization performed well in the first quarter across all functions and geographies. This is the fifth year in a row with exceptional performance, industry-leading organic growth, and consistent delivery of our financial results and promises. This is a great testament to our teams worldwide. You will see that our Annual Report 2008, which will be published in a few days, is dedicated therefore to our employees around the world. They're making an incredibly important impact on science and healthcare and I'd like to thank them for their contributions.

As the dedication, passion, and highly skilled capabilities of teams continues to increase in importance and the capabilities and talent of workforce is more and more the key competitive advantage of the future, we are also investing more than most companies in attracting and developing the best talents in the industry. We are routinely recognized for these efforts.

I'm particularly pleased that we received one of the most renowned recognitions in this area in the first quarter for our internal development program specifically, which spanned from standard trainings in sciences, languages, and other skills to fully accredited MBA programs run internally in partnership with leading universities around the globe.

A lot happened in this first quarter. You have some bullets here on this slide. But I will address them later in more detail and hand over now to Roland for a review of the financials.

Thank you, Peer. And good afternoon, everyone in Europe, and good morning to those joining from the US. We had a very good start to 2009, very similar to 2008. The first quarter reflected a very solid performance, demonstrating the robustness of our product portfolio while withstanding the challenges presented by the broader economic environment.

Financial results met our expectations in terms of revenues. And they were at the high end for adjusted EPS, underscoring our focus on execution in both new product introduction and volume increase with our existing portfolio. Our growth, particularly organic, which includes all past acquisitions now, except for Corbett and Pyrosequencing, demands to surpass most in our industry. And given the economic situation, we are well positioned and on track to meet our full-year guidance in terms of revenues and earnings.

Based on January 31st, 2009, currency exchange rates, we recorded sales of $220.6 million, coming in line with our guided range of $215 million to $225 million. Adjusted diluted earnings per share for the quarter ended March 31st, 2009, increased to $0.20 per share, this being at the high end of our guidance range of $0.19 to $0.20 per share.

We recorded impressive top line growth amidst a difficult economic environment. Adjusting for currency impact under constant exchange rate, net sales for the quarter would be approximately $240 million, reflecting a significant 16% growth. This is important in that it largely stems from volume and only 2% from price.

In the first quarter, our operating margin was impacted by several factors. Our product mix in the first quarter was more heavily weighted towards insulin sales, affecting the adjusted operating margin, which was 27%. As you may recall, our instrumentation business is conducted out of Switzerland, which has a lower tax rate. And therefore, there is little to no impact here to our net income.

It is also important to mention at this point that we made an additional $6 million under constant exchange rates investment in R&D in the first quarter, which is now 12% of our revenues. We continue to invest in innovation as this is an important and successful growth driver for QIAGEN. As we progress through 2009 with increasing revenues each quarter and more normalizing of our product mix between consumables and instruments, we believe we will be able to achieve an adjusted operating margin of 29% for the fiscal year.

Our adjusted net income showed a strong growth of 9% in comparison to the first quarter 2008 from approximately $37 million to $40 million. A contribution factor to the level of our net income is our commitment to balancing growth with prudent cost control. While we have invested in innovation, we have also maintained a strong discipline to improve our efficiency. In respect to diluted earnings per share, we recorded an increase to $0.20 per share, up from $0.18 for the comparable quarter in 2008 and at the high end of our expectations for the first quarter 2009.

To more clearly show you the currency impact for the first quarter, we have put this slide together, slide six, which details various currencies and their respective impact on our reported results. As you can see, during the first quarter, we had approximately a 9% foreign currency impact on revenue growth using constant exchange rate. As previously stated, we believe that overall we could expect to have approximately a 7% headwind for the fiscal year. Main currency impacts to revenue came from the dollar-euro, US dollar-British pound, and the US dollar of $12 fluctuation. In terms of EPS, our natural hedge is helping us mitigate the currency headwind with a bottom line impact of only $0.01 EPS.

This next slide shows the development of our growth rate for the first quarter 2009. We are still leading our industry peers in terms of organic growth. This past quarter, we had 11% organic growth. Significant drivers of this were 4% increase in volume and importantly, a 5% increase in new product introductions, which highlights QIAGEN's track record of innovation. 5% growth from acquisitions was due to the Corbett and Pyrosequencing acquisition.

Moving on to our revenue distribution for the first quarter, we continue to show solid growth across our product portfolio. The growth in consumables and sample and assay technologies grew under constant currencies at 10% over the prior year. This group accounts for approximately 89% of total revenues.

In the first quarter, sales of our instrumentation products were an impressive driver for us, growing at 93% over year-over-year at constant currencies, largely due to the introduction of new instruments, including the QIAsymphony, QIAgility, and Rotor-Gene Q. And where the QIAsymphony system is not a new system anymore per say, the platform continues to involve. And we believe it's well positioned to address opportunities emerging from the US stimulus bill.

Turning to the geographic breakdown on the right-hand side of slide eight, net sales in the Americas for the full year represented 51% of our overall business and recorded a growth rate of 12% under constant exchange rate, while European sales, which represent 34% of total revenues, showed a growth rate of 13% at constant currencies. Please note that although we posted a minus 6% growth in Europe, this was due to currency impact.

Sales in Asia remained strong with a growth rate of 23% at constant exchange rates and represents 12% of our total revenues. The strong growth rate in the rest of world is largely due to the instrumentation sales, particularly those from the Corbett acquisition.

Throughout the quarter, we saw significant demand from the molecular diagnostics and applied testing segments across all geographic regions. As we noted in our earnings call in February, we expected some softness in pharma, mainly in the discovery arm. Peer will delve more into the outlook on our market segments later on the call.

I think this next slide is a good visual for showing our reported versus adjusted figures, starting with our net sales, the same under both US GAAP and non-US GAAP. Operating income is adjusted for factors such as business integration and purchased intangible amortization and share-based compensation. You will find a detailed split-up in our appendices to this presentation.

I will spend a minute highlighting the key figures from our cash flow and balance sheet now. In the first quarter 2009, our operating cash flow increased to approximately $14 million from approximately $6 million in the first quarter 2008. Our free cash flow for the quarter was approximately $4 million. We had an adverse effect in the first quarter 2009 of $10 million from derivatives, which were noted in the fourth quarter 2008. In regards to amortization and depreciation, the figure includes components from the Digene acquisition and the 2008 acquisitions of Corbett and Pyrosequencing.

So as you can see, our cash flow remains solid. At the end of March 31st, 2009, we had cash on hand of $337 million. That is approximately the same amount on hand as on March 31st, 2008. But note versus is that $152 million we paid for acquisition, we are out of free cash flow since then.

I would also like to address a few metrics relating to our liquidity and capital structure. With only approximately $25 million in near-term debt obligation during the next 12 months, I'm sure you can see we are in a very strong position. Further highlighting our strong liquidity position is our equity ratio of 52% and the net debt-to-adjusted EBITDA ratio of 2.2.

Moving onto the second quarter 2009 expectations, while world economies continue to grapple with uncertainty and volatility, we believe we are uniquely positioned and we have much room for future growth. We are seeing a number of exciting opportunities ranging from increasing market penetration of our existing portfolio to new product introduction, which could translate into accelerated growth in the second half of the year.

Let me now turn to our financial expectations for the second quarter and then provide you with some assumptions. Because of the uncertainties and volatilities of the global economy, we remain cautiously optimistic but believe we will achieve our revenue targets for the year. For the second quarter, we are guiding revenues with strong constant exchange rate growth of 14% to 18%. This translates into a revenue range of $225 million to $235 million at guidance rate and an organic growth rate similar to the first quarter.

While currencies have an impact on our reported revenues, as you can see on slide 11, we have broken this out for you. The impact on earnings are typically significantly reduced. We expect for the second quarter an adjusted operating margin of approximately 28% and adjusted earnings per share to be between $0.21 and $0.22 per share based on January 31st, 2009 exchange rates, which includes the aforementioned currency headwind. Our comprehensive forecasting system and prospective expense planning are key elements to retaining our track record of meeting and/or exceeding our financial targets, even in the face of these uncertain times.

In terms of adjustments to operating income, we expect 123R expenses between $2 million and $3 million for the second quarter, amortization of acquired IP of approximately $17 million, business integration related charges from acquisition of approximately $5 million to $6 million.

This quarter -- on the second quarter, our adjusted tax rate was -- or this quarter, our adjusted tax rate was 28.4%, in line with 2008. And going forward with the second quarter, we believe this to be similarly in line with a range between 27% and 30%. The weighted average number of fully diluted shares outstanding will be around 205 million shares for the second quarter 2009.

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

Yes, thanks, Roland. As always, we picked a few topics to give an update on. And the agenda of these next few minutes is on slide 13. I'd like to turn to slide 14 and thereby to the first highlighted topic. We wanted to take the opportunity to walk you through some of the trends we see in our customer segments.

Sales of QIAGEN products to customers in molecular diagnostics continued to perform very well. We recorded growth of 18% in this segment, which represents about 46% of our total sales. Our end markets, large hospitals, reference labs, specialized testing centers, continue to perform very well. And the segments we sell into also have a very robust outlook.

We saw a lot of excitement around our K-ras testing menu. Also, on the clinical marketing side in HPV screening, which is about a quarter of our sales, our market penetration initiatives are performing very well. And we are seeing record penetration rates and growth. The market for HPV screening in the US is only barely 30% penetrated. And we are moving very aggressively here. We are also very successful in the United States overall and we launched programs in Europe and Asia as well.

In applied testing, about 7% of our sales, we have seen strong growth her as well, also high teens. We are rapidly building out the offering menu. Our new QIAsymphony Investigator package, which is a solution for the processing of even the most challenging case work samples, is creating a lot of demand as well as it was just launched.

Pharma, as Roland said, came in as expected with strong development-related sales -- the whole theme of personalized medicine is in there -- but soft sales to customers performing discovery work. In academia, we are, as most others in this area, somewhat lighter in growth in the first quarter as budgets take some time to flow through the system. But the outlook is now promising. And I'll get to that later as we address the potential impact of the stimulus programs and the long-term outlooks.

Now turning to slide 15, the next topic I wanted to spend some time on are recent publications in the area of HPV screening. As we all know, we are very successfully increasing the adoption of HPV as the best clinical standard in cervical cancer screening. We talked about our initiatives at length this call last quarter. And today, I wanted to highlight two validations, the Kaiser Permanente study and the IARC/India study. Both landmark studies were published during the first quarter alone. And I would like to thank the people who made these publications possible.

It is vital for us that clinicians and scientists lend their support, particularly through the publishing of further data on the importance of HPV screening and the unrivaled superiority of HPV testing solutions. Both of the studies noted here were done with our testing solutions and not funded by QIAGEN.

In the first, Kaiser Permanente released data on an astonishing 800,000 testing events over a five-year period. The data is so amazing because of its sheer size, over 15 times larger than even the largest clinical trials to date. But the real breakthrough is that it completely dispels the fear that HPV testing would lead to many more events in which women tested HPV positive and Pap negative and a doctor would need to spend significant counseling her.

Rather, the number of HPV-positive/Pap-negative women was only 4% in this large-scale study. And this has caused considerable positive resonance in doctors who previously feared that HPV testing would be the cause for overly anxious patients.

The other study is a remarkable demonstration in a population that has never been tested before. The HPV testing is in fact by far more the effective solution and most likely the most economical. This is a significant economic argument for countries considering the merits of adopting HPV screening in the West as well as among the developing world.

Now turning to slide 16, we've gotten tremendous feedback from our partners, customers, and clinical and scientific collaborators, some of who I mentioned before, worldwide on our new QIAGENcares program. Under the umbrella of this corporate social responsibility program, we'll make our cutting-edge technologies available to those most in need.

We announced several programs in this area already -- perhaps just to highlight here, a donation of 1 million HPV tests. This marks one of the largest donations by a diagnostics company to date. We are doing this because it is the right thing to do, but also as we can show governments and regions how simple, effective, and affordable it is to set up the most effective screening technology in the world. I won't go into the details on some of the other aspects of the programs. But there is some further information on this slide and on our website as well.

Turning to slide 17, we are currently getting a lot of questions around swine flu. We clearly hope that this scare will pass quickly. I'm bringing this topic up also to show the breadth we can offer in this area of testing. QIAGEN, as you know, was the first to launch a SARS test, the first with an approved avian flu test, and the global leader in this area as well. What is new here is the breadth of technologies that we can now offer to optimize responses to such testing needs.

First and foremost, we have our incredibly validated influenza screening product based on the artus influenza A screening kit. This test kit is the standard in many countries of the world. It is now serving as the key test kit in many countries of the world for H1N1 surveillance as well.

Next, our QIAplex-based ResPlex II assay gives 18 targets in multiplex detection with sensitivities and workflow benefits unmatched by any other multiplex test. Then, the WHO released a sequencing test based on our proprietary pyrosequencing technology. This is a great technology to monitor mutation drift and recombination shifts.

Further, components are widely used for home brew testing. The recently released CDC testing protocols piece together from several suppliers. By far the largest component in terms of consumable value is the sample preparation from QIAGEN. Several other protocols listed have several other QIAGEN solutions in there as well, in some cases complete QIAGEN workflow listed from end to end. And last but not least, several commercially available and also certain FDA-approved tests are actually based on QIAGEN components. And this was created through the activities of our OM team.

My point is to show with this one example how deep our involvement in the various areas is and how we can address the dynamic needs and molecular diagnostics overall with technology breadth and different testing solutions. Molecular diagnostics is really still not about a handful of mainstream tests but about the breadth of presence in such laboratories. And this is a great example how QIAGEN is playing a key role.

On the next slide, slide 18, some data on the stimulus programs. This primarily impacts our sales to customers in academia in the United States, overall about 10% of our sales. Now, a lot has been said about this topic. We are very encouraged about this program. We're spending a lot of time working with dedicated teams to help our customers work through how to access the programs most efficiently.

What I'm almost more encouraged about is the outlook for medium- to long-term funding increases in the United States but also in other countries. Innovation is what we need in these difficult economic times. And this can help stimulate that.

Turning to slide 19, here's just a small excerpt of the list of product introductions we have made. What I wanted to highlight on this slide is the degree of leverage that we can create across customer segments for individual products. Without going into detail here, as you can see, there are some very exciting products on this page.

The sample technology for circulating DNA processing, which is extremely important in oncology and prenatal testing, the PAXgene microRNA product, or the new genotyping multiplexing or epigenetic PCR solutions, these all represent millions of dollars of opportunity and are just a few from a much longer list from this one quarter alone. We are managing a very full pipeline. And I'm very excited about what we will bring to the market, even in the very new future.

On slide 20, here are the launches around CT/GC, HPV, and some others related to our women's health activities. There's clearly a strong integration and leverage across the whole molecular diagnostics and also non-molecular diagnostics activities. The timelines are fully intact. And we feel very comfortable with them. We are working full-steam ahead with teams around the world on this platform program alone.

We announced some great data on our new automation solutions at a recent conference at CVS, which in sum will take our performance-leading current HPV test into full automation, the so-called QIAensemble Evolution package we talked about. The first elements will be launched this year. And the PMA supplement will follow in 2010.

So, turning to slide 21, we are very pleased with our start into 2009. Revenues, growth, and EPS came in strong. We are delivering industry-leading innovation and even in economic environments like we are seeing today, thanks to the structure of end markets and our strong position, strong growth. And we are on track to meet our guidance for the full year.

With that, I would like to hand back to Solveigh. Thank you.

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

(Operator Instructions).

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

Hi, good afternoon or good morning.

Hi, Quintin.

Nice start to the year.

Thanks.

With respect to your comments on academics and the outlook for this year, some people have suggested that in this quarter that just passed, some researchers were working on probably writing the grants as opposed to maybe doing bench work. Did you see any evidence of that? And then, kind of as a follow-up to that, are you seeing any increase in quota activity for some of your instrumentation?

The answer is yes to both of these questions. We are seeing a lot of laboratories working on grant proposals. There's a lot of activity going on there. They're also adding to existing grant proposals potential instrumentation and consumable packages that they would like to include into some of those pre-approved or also pre-developed grant packages that they had. So, they're expanding existing ones. So, there is a lot of, I'd say, administrative activity ongoing.

What's certainly also visible in the first quarter is that some of the federal and state budgets were still not in full-steam mode. So, they didn't have the full approvals going somewhere running on temporary releases. And in some states, we continue to see the states being a little bit choppy in terms of funding into universities.

But in general, in the outlook is now clearing up. And we're seeing that the large government research institutions are projecting strong medium- to long-term growth rates in budgets. And this is very encouraging for the people that we meet in the laboratories and who are putting together also long-term grants.

And then, Peer, with respect to the 2009 guidance, based off of your slide presentation, it looks like that you're putting expectations for like the NIH stimulus package to be more like a 2010 event. So, can we assume that your '09 guidance does not assume much impact from the NIH stimulus?

That is correct. We don't expect a big impact in 2009, as you saw in one of the slides. We do have an estimate in terms of what the stimulus package could mean for us. But to be very frank, this is still very much a guess. And a lot of the institutions are still putting together their mixes between personnel, reagents, and infrastructure and capital equipment.

And as that is still being worked on, we are still pretty much in a guessing game. I think this will clarify going forward. But the numbers are extremely big. And I think most of the estimates that you see out there from companies you could consider conservative. But I definitely see those as 2010 events.

Thank you.

Thanks.

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

Hi, Peer.

Morning, May-Kin.

How are you?

Good. How are you?

Good. I guess it's been a couple of months now since a competitor has the HPV test approved. Can you give us an update on what you're seeing in the marketplace at this point?

Sure. Yes, the competitive situation overall in HPV screening is fully intact in terms of what we had expected. The original idea around the competitive situation that we had when we went into the acquisition of Digene in 2007 was actually significantly more competitive. If we think back in 2007, we had Roche just around the corner with potential approval three months after -- or late 2007. And we had a number of smaller competitors promising the world in terms of performance and also the workflow enhancements in the area of HPV testing.

And as we now are here about two years later, it is pretty visible that, first of all, Roche was delayed and is going to probably come into the market not before 2010 or '11. And some of the promises in terms of performance that were discussed were simply not based on facts. And what we're clearly seeing at the moment is that this is working into the market quite nicely.

It is very evident that our solution package is significantly more robust and reproducible than competitive packages out there. We have much more validation. And also, the emerging automation takes the workflow into one of the best workflows in molecular diagnostics overall. And as we just saw from a few data points that we put forward in the studies that I discussed here in this call with almost 900,000 data points using our test, the data and the clinical performance is just overwhelming.

We have not seen any changes in terms of our ability to penetrate and expand the market. And we are extremely competitive also vis-a-vis customers. However, we're obviously fully aware that you can't always have 100% market share. But that was always part of the plan that there would be entering competition. And our strategic goals of bundling our molecular diagnostics franchise around such a critical and performance-leading assay has been extremely successful, as you see from the top line growth in the molecular diagnostics business.

Thank you. And then, on the influenza testing, how much of your revenues are derived from that at this point?

It's one of our bigger tests. It's clearly one that as it is a screening test that is more rarely used, it is more stockpiled and used if outbreaks are feared. We had a few of those over the last few years actually, where smaller regions did some testing. And it is very actively also used in its applied testing version in veterinary testing, where we're by far the largest player worldwide. We also I think have the only approved test still in this space for veterinary testing and export control.

So, it is a single-digit million dollar business for us. But clearly, if we would go into screening programs like are currently being discussed, the numbers could go up considerably. The hope is clearly that this will not happen. But if you look at the cost of the tests today, to take the CDC test, for instance, cost of the sample preparation is in the range of $3.50. The cost of the enzyme is about $1.50. And so, we're talking about $5.00. And you multiply that times the number of tests that we think could be performed if we have a larger outbreak. And that immediately brings into larger numbers, which we all hope does not happen.

And then just lastly, on the mix of consumables and instruments, this quarter was high for instruments. But you thought that the operating margin was normalized for growth. So, should we be seeing less instrument sales going forward? What happened this quarter?

We were quite surprised with the instrumentation growth in the first quarter. It was -- it did extremely well in many areas. And I think one of the reasons was that the sales force got a tremendous new lineup of instrumentation. The real-time cycle came on board, which was long awaited, the QIAgility as the assay setup system, and also the pyrosequencing platform in addition to the add-ons to the QIAsymphony. So, there was such a tremendous lineup that a lot of focus was spent on that.

This will balance out we believe over the course of the year. I think it will continue to be a very strong automation year this year. But we're looking forward to see it more balanced, especially as we get more consumables pull through from the instruments that were so successfully placed now for two years in a row.

Great. Thank you very much.

Thanks, May-Kin.

Your next question comes from the line of Daniel Wendorff of Commerzbank.

Good afternoon, gentlemen. Thanks for taking my question.

Hey, Daniel.

And three questions, if I may -- firstly, regarding your consumable sales from plus 10% local currencies year-on-year and in Q1. And am I assuming right that this is due to a sort of sluggish demand from the pharma side? And also relating to that, you said that pharma demand from the discovery side was quite soft. I wonder if you could attach a number to the pharma -- to growth coming from your pharma customers overall.

Secondly, regarding your gross margin development, that has been quite stable at -- showed about 66% in Q3. Is that a number which we can assume going forward, given the more important meaning of the instrumentation franchise? And lastly, regarding your artus influenza and AB assay and also Res-Plex test, am I right that the output or sort of the result you get from these two tests is that the patient is either influenza A and B positive and not directly positive for the swine flu for the H1N1 variant which is currently out there?

Okay. I think I'll take the first two and the last. And Roland, if you could then prepare for the gross margin question. The first on the consumables growth, this was I think a good number for this first quarter. As I said, in molecular diagnostics, we're charging ahead very aggressively. In the non-HPV part of the molecular diagnostics business, which is about half of the molecular diagnostics pie, the instrumentation part was a larger proportion.

In HPV screening, the instrumentation -- or the consumables part was the larger portion. The consumables are growing very nicely in HPV screening. And there was a higher focus on instrumentation placements in the real-time PCR and multiplex PCR molecular diagnostics applications. This had to do with the fact that we simply had new platform capabilities now. And a lot of customers were waiting for us to have these. And that part of the business is doing very nicely.

The growth rate in pharma was in development, continued at high single digit, low double digits. I have to get that number. There's some assumptions that go into that. But in discovery, we clearly saw a counterbalancing effect basically leading to flatter, very low growth in pharma overall. And it's about 20% of our sales.

I'd say the development business -- the development activities using our products will continue to grow over the very long run with a very nice growth rate as these whole themes, personalized medicine, and molecular profiling of diseases and patients is really just starting. The discovery side, I would say we'd probably continue to see a soft market in that space.

And in academia, as we said before, as a lot of budgets primarily in the United States were not fully approved and set free and we saw some delays due to the confusion around the stimulus programs, the academic growth was lower in the first quarter. But it was still in the mid-single digits. So, that was about the breakdown around the consumables, pretty comparable to the overall growth with the exception of the molecular diagnostics-related instrumentation.

The last question, the artus influenza assay, that's a screening assay that picks up influenza strains by detecting multiple regions, including very conserved regions that are shared by several virus subtypes. So yes, you're right. The way you do this is basically have a screening assay as a first-line assay. And the positives would reflect into a specific assay, which we by the way also have solutions for. For instance, the pyrosequencing assay, which is also on the WHO website, or also a specific assay that the CDC has on their website, which actually even can detect Tamiflu-resistant strains, which would also be an important feature.

That last paper by the way is interesting because it's one of those few papers where basically everything in the paper is a QIAGEN component or an instrument or a workflow suggestion. So, it's an interesting paper from that perspective as well.

By the way, I forgot before when we talked about prices, when the CDC assays obviously using research market components for the enzymes, so not a prefab kit, a typical influenza assay can retail anywhere between $25 and $15. Multiplex assay can be twice that or more. So, it really depends on what type of assay a region is instituting to calculate the demand and also the potentials.

Roland, do you want to address the gross margin?

Yes, sure. Hi, Daniel. No, I think your assumptions for the fiscal year 2009 in terms of gross margin are correct. We do expect that the gross margin -- I think you were looking at the reported rate and looking more on the adjusted rate. But the development will be actually the same.

We'll improve within the year probably by 100 basis points driven by different mix between consumables and instrumentation, but also in terms of getting better procedures within our instrumentation production. As you know, demand is increasing significantly. So, we're also increasing production capabilities here, which is also helping us transfer the cost of instruments.

A move more to 67% is feasible then during the course of the year?

Yes, I think we are adjusted for 72%, reportable 66%, so I think at least 100 basis points.

Thank you.

You're welcome.

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

Hi, Peer. Hi, Roland.

Hi, Peter.

I wonder if you could just give us an update on HPV timelines for instrumentations and new tests.

Sure. I can refer to slide number 20 for that. As you see here, there are two -- or there are multiple different I'd say buckets I'd see in terms of product that will be coming out. I'd like to focus first on the second to the bottom, the next-gen Evolution package. This marries an automated sample container processing device commonly known as a decapper but has a lot more features. It marries that with the QIAsymphony and the rapid-capture system. And this creates a fully hands-off platform suite for the HC2 product.

The first feedback that we've gotten from customers has been extremely positive. This product is going to be -- or we actually show data on the QIAsymphony protocol at CVS with a performance which I think was very exciting. The CE mark product is coming later in the year. And we are submitting to the FDA -- that's always at the arrow, where you see the start point of the arrow, that's the submission. And so, we're submitting sometime in the first half of '010, potentially even the first quarter. So, that is the Evolution package, will be complete. But again, for self validation or in Europe, we will have a solution already in the next few weeks.

The genotyping products are available now in Europe. And we're getting them CE marked in the third quarter. That's the third bucket from the top, third row from the top. And we are launching the ASR, the 16/18/45 reagents in the United States in summer in the third quarter.

And also here, the importance of type 45 very high because also you've seen probably a lot of the activities from the vaccine companies emphasizing the importance of 45 and the efficacy of their vaccines against that target as it is one that causes adenocarcinomas that are very difficult to detect. So, you can be HPV positive but not 16/18 and still have an extremely dangerous infection in terms of -- not only in terms of disease causing but also in terms of being very difficult to detect with a Pap smear.

The QIAensemble Revolution packages, as we call them, the two first lines, there has been no change to the timelines as we have disclosed. And we feel increasingly comfortable with them. There are actually some opportunities to move up to two of these modules. We had some discussions if we should change that for this slide. But we just feel very comfortable with the timelines as they are here now today. We've had further validation of the products at certain sites. And it's just a totally new dimension and has been up to the expectations from everybody here.

Okay. Are any of your customers making any comparisons of the sensitivity and specificity between the rival HPV tests out there?

It's really interesting to see. I think customers who really understand this application area are -- very clearly see that there is a significant difference. If you just look at the confidence intervals and the various specifications, if you look at the way a discussion is put around workflow and with obvious pieces missing. And I think customers who dive into it very quickly see that there is a clear superiority of our solution package.

This is not to say that there will be competition. And there should be competition going forward. And we can't have all -- win all customers. And we are -- as part of our business plan, we had actually projected a few years ago that there would be a certain portion of the market which would already have converted by today, which was not the case.

And we've also seen that competition has been marketing since a year. I'd say most of the customers who are willing to switch would be the ones who are also willing to cut a few corners and use an ASR. And this has not really been a very significant impact over the last few months. And going forward, we will certainly see a few more now with an FDA approval. But we think it is very well manageable by us.

Thank you. And then just finally, Roland, I wonder if you could make some commentary about the 28% operating margins. What's going to get you up there off of that low base in Q1?

Clearly, the driver for the operating margin in the first quarter was our greater instrumentation business. Clearly, gross margins were therefore lower than what you are used to in the last quarters. Nevertheless, I think it's important to stress here on a net income side, it really doesn't make a different for QIAGEN because in terms of tax rate, in Switzerland, we get a significant benefit here from the net income side.

It really doesn't matter for me for selling consumables or instrumentation. Actually, instruments clearly have the benefit on generating future consumable sales. Nevertheless, we do expect a different mix in terms of consumables and instruments, therefore a relatively positive impact on margins for next quarter.

Is there a cost-cutting program in place?

We don't have a cost-cutting program in place. It's actually the way around. We heavily invest into R&D. We are hiring people. But of course, we do this in a very prudent way. We try to streamline our processes, to invest in our processes. For example, we are in the middle of rolling out also more SAP integration into our EIP systems into countries like Malaysia or Singapore, which will help us gain even more benefits going forward.

Okay. Thank you so much.

Your next question --

Thanks, Peter.

-- comes from the line of Bill Quirk of Piper Jaffray.

Good afternoon and good morning, everybody. This is actually Dave Clair for Bill. How are you guys doing?

Hi. How are you?

Good. Just a quick question on European HPV screening guidelines -- have we seen any kind of movement there?

Yes, where I think we're seeing momentum in the Netherlands. And it somehow seems to be visible now that we'll see announcements sometime in the second or third quarter. That's at least what people are telling us. We're close to the government there.

But there was a postponement last year on this due to internal political reasons. Only the vaccine part got approved. And the second part from pure administrative reasons had to be pushed out. But everything is pointing now to sometime this summer. And this is obviously very important. Italy, the same thing. Germany we saw last year. We're starting to see more and more private insurances jump onto the reimbursement. And we saw also an increase in reimbursement in the first quarter for the HPV virus test.

So, a lot of things are happening here. But it's still a very country-by-country effort. And that's why we are very much looking forward to see the first fruits of our European HPV penetration initiative, which we started in the first quarter of this year. And this is focusing more on advocacy and education.

Okay. Great. And then, can you give us any color on the low-risk/high-risk mix in your HPV testing and then any update you can give us on pricing as well there, given the new competition in HPV?

Yes. Okay. Well, the percentage of low-risk/high-risk, this would get into significant detail. But clearly, high-risk testing is by far the majority. But at the same time, you're pointing out something interesting. Low-risk is a very attractive economical proposition for some laboratories for genital wart analysis. And the reimbursement rates can be very different. So, they would like to have an FDA-approved product. And we're the only ones that have that on the same platform as the high-risk test as well. So, that continues to be a very important aspect.

In terms of the developments in the market, we've seen year to date very good developments on the average selling prices. They're stable. We're moving those exactly along the lines that we had projected. We are seeing also increases in demand quite considerably also in the first quarter, very successful further market penetration and also the increases in testing volumes at the laboratory partners that we work together with. So overall, I think what is more important in this time is just market penetration. And this has been very successful and completely, I'd say, significantly larger than any potential effect even from competition.

Okay. Great. Thanks for taking some questions.

Thank you.

Your next question comes from the line of Rodolphe Besserve of Societe Generale.

Hey, Rodolphe. Hello? I think we lost him.

Hello? Hello?

Yes, there you are, Rodolphe.

Yes, sorry. Good morning. Good afternoon. Could you please make an update on the main contracts you have with US larger clinical labs on HPV tests? And are there any of them set to expire or at least to be renegotiated with in the near future?

The majority of these collaborations are built to be long-term collaborations. And there are always contracts behind them. And they have certain periods around them and those can be multi-year periods. And that's what we continue to do going forward. We also have updated a few in the past. I know these were always announced. We are now just upgrading them and prolonging them as we go. And I've been doing that very actively. There's not a big portion that expires, let's say, within 12 months or so. These are typically discussions that you'd have in advance of that.

Okay. Also on HPV, sorry, but may we have an idea of underlying growth for HPV testing, too? And I know you don't want to communicate on those figures. But may we have at least an idea of the growth profile?

Sure. Well, I said from our molecular diagnostics business is growing about 18%. And HPV screening was a strong contributor to that. And so, I think that is quite clear what that could mean. And it continues to be a star within the portfolio.

Okay. Thank you.

Thank you, Rodolphe.

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

Yes, hello. Good afternoon or good morning. Thanks for taking my questions. Just quickly again on HPV testing -- sorry to go on about this -- but sort of what are your assumptions on when Hologic will have proper instruments to run its test on? And how do you think -- when's that going to happen? And how do you think is that going to impact on your sales?

And then, the second question I have -- and you may not be able to give me that sort of detail -- but the impressive growth in instruments you've seen in this quarter, how much of that was actually due to the addition of Corbett Instruments you now have that you didn't have in Q1 2008? And what of that was organic?

Okay. I'll take the former and Roland can take the second. In terms of automation solutions available on competitor platforms, we already expected those to be available today. And frankly, competition has already been marketing since about a year. The interesting thing is that somehow the instrumentation partner keeps on changing. And I think we have still to see what the ultimate solution is.

What we're seeing being marketed right now are instruments that would cost about $0.25 million to achieve half of the throughput of our systems. And so for many labs, it's just simply far from being economical and are not fully automating the package either. There's a manual centrifugation step that you have to include in the process. So, it still remains very cumbersome.

So, I don't think there would be a big change in that. And I would expect -- I always tend to believe it is best to expect that these things come in earlier rather than later. So, I think the official guidance is somehow in the first half of next year. It could actually be even sometime this year. And I don't think there will be a huge difference compared to what we're seeing today in terms of how discussions are being made in front of customers by competitors.

Okay.

Again, to give an example, we have much more formidable competitors in Europe with Roche coming out with the COBAS 4800. We have like Abbott out there actively marketing a test which is by the way under license from us and a lot of other solutions as well. And we are very successfully holding and in some cases now, also increasing now with the new efforts that have initiated our market share north of 70%. So, there's -- I'd say that type of automation that we're seeing from some of these companies is very formidable competition. And we're dealing very well with that as well.

And on your question to answer growth of instruments, our instrumentation group (inaudible) was 93% for the quarter. And I don't record the precise number. But it was more than one-third of this is organically.

Okay. And then if I may, just another question -- if I look at the numbers in sort of a bit more detail, then it seems to me like your general and administrative costs were relatively high compared to what we see in 2008 as a percentage of sales. A, why was that? And B, should we expect that to continue over the next few quarters?

We, too, had some one-time costs. But we had some costs in the first quarter especially around legal expenses which will not recur now going forward in the second and third quarters and so on. So, I think that is clearly something that was driving and especially costs in the first quarter on sales and marketing costs, I think there's just effect of revenues and here go drive efficiency also going forward between them.

Okay. Thank you very much.

Your next question comes from the line of Dan Leonard of First Analysis.

Hi. Good afternoon.

Hey, Dan. Hi.

Peer, a lot of people are obviously trying to quantify the potential benefit of the swine flu. Would it be fair to use SARS as a proxy? And if so, could you remind us how meaningful SARS was back when that was a scare for you guys?

Right. I think the big difference between SARS and swine flu is its contagiousness. The contagiousness of -- the ability to spread of the influenza virus is at least five times higher than SARS. And that makes it -- it's not considered a dangerous virus I think today by most people. But it is considered extremely effective in spreading, which SARS was less so. And so, with SARS, it was a more contained screening program that we had. We still, for instance, by the way still sell by far the most SARS tests. It is still being tested for routinely.

But that pandemic back then, I would quantify it about $2 million to $3 million of sales. But that was really very localized. And we did a lot of donations at that point in time back in China. And that helped us considerably after that to get the routine screening business. But the actual sales were $2 million to $3 million. We were primarily looking at screening in Asia at that point in time. And it was never really rolled out into the Western hemisphere, a full-scale SARS screening. It was more anecdotal around, let's say, airports associated -- we're talking about a different animal.

And also, avian influenza was less human testing initiative but more also veterinary. Here, we're probably seeing many times more of that. But it's significantly -- it's very, very difficult to quantify. Unless we go into large-scale screening programs, I think I would quantify it in the single-digit millions and not more. And we hope it stays there, frankly.

Okay.

But there are negative impacts. And we clearly also have business in Mexico and in other countries and everything. So, I think it's to the benefit of us overall that we'd rather have it stay there.

Okay. And then my second question, could you generically tell me on your HPV growth assumptions whether you're expecting the growth to accelerate, remain consistent with, or decelerate from 2008 levels?

Well, we saw a significant increase in growth in the second half of the year and went into the high teens and into the 20s. And it's hovering very nicely. And we're seeing record penetration right now at these very high levels. And at the initiative, the partnership programs, we're working so closely with our partners and rallying around this common theme of just increasing penetration and adoption of these tests that I think we can continue to expect growth rates comparable to what we saw in the second half of 2008 and now in the first quarter of this year.

Okay. So, that would represent an acceleration from the entire year 2008 number?

Yes.

Okay. Thank you.

Thanks.

Your final question comes from the line of Un Kwon of Wedbush.

Hi, good morning.

Hi, Un. How are you?

I'm doing well. I was wondering, could you remind us where you are with development of your CT/GC screening test? When I look on your slide presentation, it looks like you're expecting FDA approval around the time of your HPV assay and was wondering how that would complement what you're currently doing with HPV?

Good catch. It's definitely -- and we discussed this before -- it is a 510(k) approval. So, the timelines for the clinical trials are much shorter. We here on this slide simply showed that the two would be launched, the two assay -- there are actually more than that. There will be CT/GC. And we're looking at a few others as well to put on to the platform. So, this is going to be a really meaningful utilization of real estate at customer sites.

The assay is going into lockdown in the third quarter. And from that perspective, third or fourth quarter -- I think it's September or October -- it's one of these in that timeframe. And the initial data that we have right now on the preliminary assay is very, very promising. And so in the meantime, it's well known we're using a very fast isothermal amplification technology which is extremely sensitive. And we have been able to achieve some quite exciting performance.

Great. And do you plan on doing beta testing with certain sites ahead of your formal FDA trial?

There will be -- good question. We're thinking about doing exactly that. The demand is very significant for a new generation of tests in this area and also new platforms. And because of the timelines in terms of platform development, you note that from the slide that the first CE marked system will be out in early 2011, late 2010 for the screening platforms. You see that as the CE line down late 2010.

And that in theory also contains the isothermal amplification module. So, if there's a shorter clinical timeline, we're thinking about how to deal with that. Right now, the resources are clearly focused on the HPV development. But once that now leaves the station in terms of the clinical trials during the second half of this year, this is going to be something that we can allocate resources to.

Okay. And just one quick question on the swine flu impact -- when you had quantified single-digit impact, does that just include your assays specific for testing for influenza? Or are you also quantifying the impact from selling just other general sample prep kits?

I think this would be the overall package, assuming that we wouldn't have a large-scale screening program. It could be pandemic 6, but still contained to screening only certain areas. So, that would be a mix of all of the solutions together because it's -- I forgot who it was asked before. You will have to reflex into specific tests in some cases where you have influenza A positivity.

We do also have the multiplex test that immediately gives you the H1N1 distinguishment. But the influenza A assay is just so validated that people like using that. And so, it's going to be a mix of components, home-brew solutions, instrumentation, and finished kits.

Okay. Thanks very much.

Thanks.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I would now like to turn the conference back over to Dr. Maehler.

Thank you very much, Kimberly. With this, I would like to close the conference call by thanking you all for participating. We hope to welcome you again to our second quarter results conference call on Tuesday, August 10th, 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. You may now disconnect.