Qiagen NV (QGEN) 2009 Q2 法說會逐字稿

Good morning. My name is Molly and I will be your conference operator today. At this time, I would like to welcome everyone to the Qiagen Second 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, Molly, and hello, everybody. Welcome to Qiagen's Second Quarter 2009 Earnings Conference Call. I am 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 second quarter ending June 30, 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, August 11, 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 discussions that follow.

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 statement. In addition, certain statements contained in this presentation are based on company assumptions, including, but not limited to, revenue allocations based on business segments. 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. Additionally, we will be discussing GAAP and non-GAAP measures. A full reconciliation of the non-GAAP measures to GAAP can be found in the press release on our website.

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

Yes, thanks, Solveigh, and welcome to our Q2 2009 Conference Call. We are extremely pleased to once again be able to report another quarter of solid operating results. We're now well beyond 25 sequential quarters where we have exceeded or met our guidance. Equally, our outlook is positive, allowing us to today increase the revenue guidance for the full year by about 2% and increase EPS guidance as well.

It has been a great first half of the year and our growth and opportunities are strong, despite the tough macroeconomic conditions we all face today. Net sales came in at $240 million, or $233 million at guidance rates, at the high end of our guidance, which was $225 million to $235 million. What is key is that this revenue number represents an organic growth of 12%, significantly ahead of the industry average.

We saw growth across all customer segments, with strongest growth coming from our sales to customers in molecular diagnostics. For this customer segment, which represents about 48% of our sales, we recorded growth of 21%. This growth was ahead of our expectations and was driven by our broad portfolio, also including screening product, and in that screening segment, primarily by great performance in HPV screening.

We are today also proud to be able to announce for the first time in our company's history an operating margin of 30%. This number is a testament to our operating leverage and the talent and dedication of our teams around the world. While we are delivering this performance, we are at the same time investing in unprecedented sum into growth and innovation, a recipe for significant and sustainable shareholder value.

In sum, we continued to expand the strength of Qiagen in the second quarter and, at the same time, our performance allowed us to notably increase our adjusted earnings per share by 20% to $0.24 over the comparable quarter last year.

Overall, our R&D pipeline is progressing well. We have over 150 R&D projects pushing through the pipelines, including many projects addressing markets that are very substantial in size. In the first quarter alone -- in the first half alone, we launched 39 new products. We had a number of highlights in the second quarter and I'll talk to them in more detail later. Some I wanted to note already here.

We're getting a lot of questions on influenza screening, obviously. This has been an area of substantial success for Qiagen. There's hardly a country in the world that has implemented a screening program that does not include Qiagen's solutions. It is difficult for us to quantify the contributions to sales related to swine flu, as many solutions were purchased through government agencies that are also otherwise customers.

But we assume that we generated several million US dollars in consumable sales, with more in instrumentation as well to come in the second half. In the meantime, we also won many national tenders. These include front to end turnkey sample, Qiagen sample and assay technology consumable and also instrumentation solutions.

Another area where we are extremely active currently is personalized medicine. Qiagen has a unique position and a great pipeline here. As the largest in vitro molecular diagnostics company, the one with a strong pharma arm and by far the largest pharma independent one, we are in the center of this new paradigm and believe we are building a great future for our diagnostic assay portfolio and a great basis for our future overall.

In general, expense remained a key topic for us in the second quarter. We expanded our position in Italy with an acquisition. I'll get to that in a minute. But first, I will hand over here to Roland for a review of our financial performance.

Thanks, Peer, and good afternoon everyone in Europe and good morning to those joining from the US. We are very pleased with the second quarter. While globally some economic challenges remain, our second quarter results reflect a combination of the robustness of the market we serve, the strength of our product portfolio, and our continuing focus on tapping new markets.

Financial results met our expectations in terms of revenues and we exceeded expectations for our adjusted operating margin and adjusted EPS, underscoring our strong profitability. We reported sales for the second quarter of $240 million. Based on January 31st, 2009 foreign exchange rates, sales amounted to $233 million, thus coming in at the high end of our guided range of $225 million to $235 million. We experienced a strong adjusted operating margin increase in the second quarter to 30%, exceeding the guidance of 28% we provided in May.

The reported adjusted diluted earnings per share for the quarter ended June 30th, 2009 increased to $0.24 a share. Using January 31st, 2009 exchange rates, adjusted EPS also exceeded our given guidance range of $0.21 to $0.22. In fact, on the basis of constant currencies, adjusted EPS would have been 26% -- $0.26, reflecting 30% growth over the second quarter 2008. Our growth, particularly organic, which excludes corporate and Pyrosequencing, remains very strong.

Based on the successful first six months and our optimistic outlook for the remainder of the year, we are raising our annual revenue guidance and earnings. I will provide more details later in the call on both our third quarter assumptions and the fiscal year outlook.

We recorded impressive top line growth. Adjusting for currency impact under constant exchange rates, net sales for the quarter would be approximately $258 million, reflecting a significant 19% growth over the comparable period in 2008. Even under consideration of 9% currency impact, we still have double digit growth and revenues of 10%. As I already stated, in the second quarter, our adjusted operating margin reflected a solid increase to 30% in comparison to the second quarter 2008.

As we now progressing through 2009 with increasing revenues each quarter, we feel comfortable with our guided range of 29%. Our adjusted net income showed strong growth of 19% in comparison to the second quarter 2008 from approximately $40 million to $48 million. A contributing factor to the level of our net income is our commitment to balancing growth with cost alignment.

While we have invested in innovation, we have also maintained a strong discipline to improve our efficiencies and extended capacities to enable future growth. In respect to adjusted diluted earnings per share, we recorded an -- recorded an increase to $0.24 a share, up from $0.20 per share for the comparable quarter in 2008, which reflects 20% growth.

We continue to lead our industry peers in terms of organic growth. We have put this shot together on slide six, which depicts over the past 22 quarters our organic growth with other set of the industry average. It is also indicative of how our business is going through incremental steps, a long organic growth progression, where we seek to continually increase market share by adding new product lines, penetrating new market segments and expanding geographically.

This past quarter, we had 12% organic growth, with sales to customers in molecular diagnostics, recording organic growth of approximately 21%. Addressing the untapped potential, especially in molecular diagnostics and applied testing areas, will ensure the sustainability of our future growth.

Moving onto our revenue distribution for the second quarter, we continued to show solid growth across our product portfolios. The growth in consumables and sample and assay technologies grew under constant exchange rates at 12% over the comparable period in the prior year. This group accounts for approximately 86% of total revenues.

In the wake of the new product introduction and Qiagen's implementation business, such as the QIAsymphony, the QIAgility, the EZ1 Advance XL and the Rotor-Gene Q as well as Pyrosequencing. At the beginning of this year, this product area recorded a growth rate of 83% under constant exchange rates.

Turning to the geographic breakdown on the right-hand side of slide seven, net sales in the Americas for the quarter represent 50% of our overall business and recorded a growth rate of 14% under constant exchange rates, while European sales, which represent 35% of all total revenues, showed a growth rate of 14% at constant exchange rates. Please note that although we posted minus 2% in Europe, this was due to currency impact.

Sales in Asia remained very strong, with a growth rate at 43% at constant exchange rates and represents 12% of our total revenues. Throughout the quarter we saw strong demand from all segments and all geographic regions. As we noted on our earnings call in May, we expected some softness in pharma, mainly in the discovery arm. Peer will delve more into the outlook on our market segments later on that call.

On slide eight, key adjustments that deserve some further elucidations include operating income, of which approximately $25 million is adjusted for factors such as business integration, purchase intangibles, amortization and share-based compensation. You will find a detailed split-up in our appendices to this presentation and at the end of our earnings press release.

I believe this next slide is a good means to illustrate the development in our adjusted operating income margin based on trailing four quarters. But I also want to address with this our operational efficiency. Our profitable growth story is based on both. Redirecting the sources to new high value initiatives that bring additional innovation and generating capabilities in the organization that provide continuous improvement in operational efficiency. Working on multiple dimensions of profitability thus enables us to turn strong top line growth into even better bottom line ratios.

I'll spend a minute highlighting the key figures from our cash flow and balance sheet now. In the second quarter 2009, our operating cash flow increased to **approximately $74 million from approximately $47 million in the second quarter 2008. This strong operating cash flow resulted mainly from working capital management and increased income. Our free cash flow for the quarter was approximately $61 million. We do expect a reverse effect -- impact in the third quarter of approximately $8 million to $10 million from our FX hedging activity.

In regards to amortization and depreciation, the figures include components from the Digene acquisition and the 2008 acquisition of Corbett and Biotage. At June 30, 2009, we had cash on hand of approximately $390 million. So as you can see, we are turning our profitability into strong cash flow growth. Our cash flows are steadily improving and therefore provides a means we need for future growth. I would also like to address a few metrics related to our liquidity and capital structure, highlighting our liquidity position is our equity ratio of 52% and the net debt to adjusted EBITDA ratio of 2.0.

Peer?

Yes, thanks, Roland. As always, starting on slide 11, some highlights in more detail. Slide 12 shows the typical overview of our customer segments and I'll walk through those.

In molecular diagnostics, we generated 48% of our sales and recorded 21% growth. Our markets are solid and trends robust. Growth came pretty much across the board, including from our 15 FDA approved or cleared products, from over 100 CE Mark products, and from a loan in China 10 SFDA approved products, in addition from many other approvals or clearances across the world.

Screening, most notably HPV and companion diagnostics, most notably KRAS testing, were highlights. And overall we are increasing global coverage. In applied testing, growth remained strong. However, due to some onetime effects, below the growth that we saw in the first quarter.

Pharma is doing very well in development. As mentioned before, our very unique position as a partner for personalized medicine is creating significant excitement. Growth in pharma development compensates for the slow sales into pharma discovery. Academia had a very solid growth in Q2, with a pickup of funding, in particular solid trends in North America. We had a positive outlook due to the increased visibility of solid funding in most regions. In addition, we look forward to benefiting from the stimulus programs.

We often get asked about our views on US healthcare reform, so on slide 13, here's some general statements. What is important to note is that this is very preliminary and is evolving and being debated heavily still in the US. In general, the objectives of the -- are clear to all. It is cost, quality, coverage, prevention.

Molecular diagnostics have the potential and are increasingly recognized to play a very important role in the solution mix required to reach a new framework. Our screening and early detection solutions have industry leading clinical value and help prevent disease and associated cost at a fraction of the cost which would be required to treat them. With our focus on companion diagnostics, we are also helping health systems manage the cost of therapies. Our solutions utilize the most advanced technologies applied in molecular testing, thereby ensuring best performance in applications such as disease monitoring.

We have probably all heard that diagnostics represent only 2% of healthcare, yet drive over 80% of decisions. This is huge leverage and this is what I guess we all believe is a major almost mega-trend in healthcare. New technologies such as molecular diagnostics now allow a much more significant value opportunity. In general, information provided by diagnostics is value, value that can substantially lower treatment costs. So all in all, while too early to confirm anything, we believe that we are in an attractive position.

The second topic I would like to highlight is our activity in -- our activities in emerging countries, in particular BRIC countries. I think few people know of the strength we actually have there. In fact, we sell at double digit million number of assays in these regions alone. While these assays are sold at lower prices, often up to one-tenth of the price of a comparable assay in the US or Europe, the volumes are significant and give us huge scale.

We manufacture our own line of assays in China. These we can distribute throughout the world. We have over 10 approvals in China, including an in vitro diagnostics and in blood banking. We currently also have a new revised suite of blood banking assays, HIV, HCV and HPV, expected to get approval early in 2010.

While we sell finished assays, other consumables and instruments in many emerging countries, in Brazil we decided to partner with a state owned agency, Bio-Manguinhos, and in partnership developed assays based on a package of Qiagen instruments and consumables. While we normally would not announce transactions like these, this is of a substantial value and the deal structure is quite innovative.

The performance of our solution, in addition to the flexibility we showed in structuring this transaction, were reasons why we were able to win this contract. All in all, Qiagen thinks globally in everything we do, especially as it pertains to emerging and developing countries which are very important to us. This commitment is very important to us and also very significant, as you have seen from numerous announcements over the last years. In sum, it is also a profitable activity.

On slide 15, a short note on an expansion project in Italy. While we have always have been pleased with our life science sales channels in Italy, our molecular diagnostics sales channel delivered only sub-critical mass. We were fortunate to now be able to acquire what is perceived as one of the most outstanding sales channels in personalized medicine and molecular diagnostics in Italy. This transaction more than doubles our footprint in Italy and in addition gives us access to a lot of access in molecular diagnostics and personalized medicine. This transaction is expected to contribute about $5 million in sales in 2010.

Italy is, however, a substantial market in diagnostics, as you can see from the pie chart. It is more than twice the size of the United Kingdom and per capita probably one of the largest in the world. This has to do with their healthcare system. Therefore, this move in Italy is certainly very important.

Lastly, on slide 16, in June we announced that we sold the distribution rights of the so-called Olerup SSP assay portfolio to LinkMed. These SSP assays are used in transplantation testing and our HLA PCR assays of the first generation. While these assays are considered highly sensitive and specific, newer technologies had emerged, including some we had taken on ourselves. Also, we had distribution rights which were economically not too attractive. We will stay in HLA testing with our leading franchise in sample technologies and now our new SBT assays. SBT stands for sequence-based typing.

With this package, we have a unique and very modern portfolio. Some of the HLA assays we will continue to sell into markets outside transplantation. For example, the HLA-B5701 assay, which is used in HIV treatment tolerance testing, a personalized medicine assay. This one assay received FDA approval in the second quarter. While this transaction reduces our revenue base, it was a low margin and low growth portfolio. The sale will therefore not change our EPS outlook.

This divestiture is one more example of Qiagen's commitment to ensuring that our portfolio is state-of-the-art and has a high growth profile. We are very selective. And this has served us well and we believe also it is the right path to create value for our shareholders.

With that, I'm handing back to Roland.

Yes, thanks, Peer. Let me now turn to our financial expectations for the third quarter and then provide you with some assumptions. Despite some lingering uncertainties in the global economy, we remain optimistic and believe we are on solid footing for the rest of the year.

For the third quarter 2009, we are guiding revenues with strong constant currency growth of 15% to 19%. This is based on adjusted Q3 2008 revenues of $227 million, which excludes approximately $2 million related to the Olerup product distribution, which we sold this past quarter. Thus, we expect revenues for the third quarter to be between $235 million and $245 million, at guidance rate and an organic growth rate of approximately 13%.

While currencies have an impact on our reported revenues, the impact on earnings are typically reduced. We expect for the third quarter an adjusted operating margin in the realm of 29% to 30% and adjusted earnings per share to be between $0.23 and $0.24 based on January 31st, 2009 exchange rates.

In terms of adjustment to operating income, we expect 123R expenses between $2 million to $3 million, amortization of acquired IP of approximately $17 million, business integration related charges from acquisitions of $3 million to $4 million. This quarter, our adjusted tax rate was 28%, in line with the first quarter as well with the comparable quarter last year. And going forward with the third quarter, we believe this to be similarly in a range between 27% and 30%. The weighted average number of fully diluted shares outstanding will be around 207 million shares.

Based on the successful first six months and an optimistic outlook for the rest of the year, we are raising our annual revenue guidance by 2% at the midpoint and increasing EPS guidance for the fiscal year 2009 from the previous range of $920 million to $970 million revenues, which included approximately $10 million of revenues related to the Olerup product line which was sold end of June this year. We are now raising our guidance to $930 million to $970 million post-divestment of the Olerup product line for the fiscal year 2009.

Under constant exchange rate ratios consideration, revenue expectations for 2009 would show growth rates between 11% and 16% when compared to 2008. We also feel confident about increasing our expectations for adjusted diluted earnings per share from the previous range of $0.88 to $0.94 per share to now a range of $0.90 to $0.94. As always, the revenue and EPS guidance is based on foreign currency exchange rates as of January 31st, 2009.

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

Yes, thanks, Roland. In sum, I'm very pleased with our performance in the second quarter and I'd like to thank our customers, employees and partners for their contributions to this industry leading performance. The Company is growing at 19% on a constant exchange basis. About two-thirds of that organic, one-third acquired.

This has been our formula for quite some time now, with the exception of the large acquisition of Digene in 2007. Our acquisitions have nicely contributed growth and accretion. The position we have today, coupled with our innovation leadership and the ability to execute on this information profitably, is a great basis for a strong outlook.

And with that, I'll hand back to Solveigh.

Thank you very much, Peer. We are now looking forward to discussing your questions. I would like to open the Q&A session by handing over to Molly. Molly?

(Operator Instructions).

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

Hi. Good morning and congratulations on a strong quarter.

Hey. Good morning, Quintin.

With respect to the guidance and kind of outlook with -- for the ARRA NIH, your previous guidance did not assume too much contribution in the fourth quarter. I assume that the guidance that you gave now also takes that stance. And what's your outlook right now?

Roland, do you want to take that?

Yes, hi, Quintin, and thanks. I think you're right. We do expect most impact from the stimulus package for Qiagen clearly in 2010. If something comes earlier in the fourth quarter, happy to take that. But right now, and we do believe that we see probably a significant impact in 2010. For us, the reason why we increased our guidance is that we actually have seen in the second quarter worldwide in all regions and actually also in all segments a quite significant demand for our products. So, it's not based by any expectation around NIH.

And just looking a little bit with respect to the really strong instrument quarter that you had here, could you give us a little color on kind of where those placements, what type of instruments you're selling? And then, with respect to your gross margins, it was a pretty impressive gross margin considering the real strong instrument placement.

Sure, I'll take the first part. And Roland, if you could take the second.

Exactly.

The instrument placements went primarily into the diagnostic sector and, to a certain degree, in pharma and applied testing. We have seen a strong uptake there. The growth of instrumentation in academia remains robust. But clearly, the area where we see a significant improvement or significant value for customers are in the more commercial areas such as diagnostics.

The success of QIAsymphony is continuing. We are selling these products very rapidly, expanding the portfolio of assays on the QIAsymphony as we speak. And we have additional modules being added to it and more assays coming onto that portfolio for quite some time. So, that outlook is very promising for our customers.

The interesting growth also in the area of Pyrosequencing, which is growing very rapidly, and we're showing some great successes integrating that product into our portfolio. It has become a very strong seller, particularly in pharma and in personalized medicine. And what we've also been doing quite nicely and much better in the second quarter was the Rotor-Gene Q sales, as we started ramping up sales of these new products, of these new real-time cyclers in our portfolio.

In the second quarter have been doing -- been doing very well and have become an integral part of our front end solution offering. For instance, in swine flu testing, we're seeing now increasingly people now integrating our cyclers, our enzymes, our front end sample solutions because we have a front end solution that is also very validated.

Roland?

Yes. Quintin, in terms of gross margin development, I think you're right in terms of we had a very successful instrumentation quarter. But in addition to that, we also had a very strong molecular diagnostics quarter. And as you know, our molecular diagnostics product, especially also around HPV, are coming with a very high gross margin and having here 21% organic growth rate, was somewhat offsetting the impact from a strong instrumentation quarter.

In addition to that, we also are doing quite well in progressing and improving our efficiency in terms of utilization around production area. So, we see now with even higher volume going throughout the year an improvement quarter-over-quarter.

Great. Thank you.

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

Hello. Let me --

Hi, Cornelia.

-- add my congratulations to your very good quarter there.

Thanks, Cornelia.

I just got a question on the influenza test to begin with. So, as far as I understand, that added at least to the growth in Q2. Now, over the past few weeks we've seen, for example, in the UK that they're actually not diagnosing people with swine flu anymore. Instead use a call-ahead hotline and they tell you -- somebody at a computer sort of asks these questions and then says, well, yes, swine flu or no swine flu, without any consumables or any testing involved.

And I've also heard that in Germany this is not reimbursed anymore. So, just wondering what -- how do you see this progressing? Do you see if there's a proper -- well, if the pandemic sort of progresses as it has so far, do you think several more countries might do the same, have the same approach? And what sort of impact do you think is that going to have on Qiagen in 2009?

Yes, good question, Cornelia. There never was broad-based testing for swine flu, as the tests really didn't exist and they just started coming into the laboratories over the second quarter really. The testing is not not being done. It's only being done on subpopulations that are of higher risk. And these include children or pregnant women or older people or people who have some kind of other -- are immune compromised in some way.

So, this is actually quite a significant subset. And for those, testing is reimbursed. The private sector is continuing -- private insurances are continuing to reimburse also PCR testing in countries such as Germany and others, including also in other European countries. So, we will continue to see testing of subsets going forward.

If we're really thinking about what the WHO is calling for a third of the population being infected over the course of some time, then obviously not everybody can be tested. We should restrict testing to certain subpopulations. But these numbers are still so big that I think any system would have a difficult time handling that subset even. And -- but again, we all hope this does not happen and I think it's very difficult to predict anything at the current status that we are.

Okay, thanks. And then, one question on applied testing. During the presentation, you said that the growth in applied testing was lower than in Q1 due to some onetime effects. Could you just specify what these onetime effects were?

These were some shifts in customer stocking. So, these are -- at 7% of sales, these are rather small numbers. And while we still showed very good growth, it was slightly below what we saw in the first quarter, which was very high growth. So, there's a little bit more a, let's say a volatile development in this -- in the smaller customer segments, most notably applied testing. This is a market that we are continuing to invest in quite significantly.

You probably saw we launched the bluetongue testing product, which for those of you who are in Europe know this is an extremely important test that we're now bringing online. And I've already seen some very interesting national tenders move in our direction. So, this is applied testing remains a high growth sector for many, many years to come. But it -- as it is smaller, will be a little bit more volatile.

All right, thank you very much.

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

Peer, I wonder if you could just talk through the emerging market growth, what the competitive environment is like and your strategy on the diagnostic side there?

Sure. Thanks, Peter. It is a very important part of our business strategy to have a global approach to everything we do. What we typically do is we mirror the manufacturing into offshore manufacturing sites. In our case now, quite a substantial Chinese manufacturing site. The competition we have are typically local small players.

So, we are market leader in China, but there's a number two there. It's a local player. And number three and four, I guess, are local players as well. So, the Western players are not really too present. It's very tough to compete in there with a Western product. And therefore, we have a mix of Western and locally manufactured products, which has been very successful for us.

The interesting thing is that as we have to compete with local manufacturers in China for $3.50 on a HCV assay, this allows us to also expand into other emerging countries and also developing countries with similar packages. Now, Brazil is clearly at a very different level, so this was economically much more attractive pricing. But if you can get high volumes, these prices are actually -- can be given even at a very high profitability.

And then, the diagnostics business is across the board, so in China we -- in the emerging countries, this is the only region where we're in blood banking directly. So, we have quite a substantial business in a number of countries, most notably China in blood screening. But it is not a market that we've been addressing yet in Europe and the US directly. As some of you know, we do sell some of our products through Roche and other sales channels into blood screening.

And could you walk through the approvals you're talking about for the blood banking business?

Yes, the -- we have at any given time something in the range of 20 or 30 projects in the pipeline with a regulated endpoint, including a number of products that will also have arms for Chinese approvals. These include an updated version of our blood banking panel that -- where we'll phase out the older assays and add the newer assays to the portfolio and this should hopefully kick in sometime the early 2010, first half of 2010.

This is in China, at least, an important product for us. There are also a number of other assays. We have a new TB assay that is just being submitted right now. So, it's a different panel that we have in Asia, clearly, to what we have in developed world.

When are those blood-based tests going to come over to the US? Or is it kind of restricted for emerging markets?

Well, we do have -- we launched last year what in the meantime has been published as a very highly performing blood-borne virus panel, which includes HIV and HCV. And as the patents have fallen on HCV in a number of countries in 2009 and are falling in 2010, we have been selectively launching into the various countries this package of HIV and HCV for use on the QIAsymphony and Rotor-Gene Q. And the -- that is a different product. I don't think we would take a product that we manufactured for the Chinese market and take it into the western hemisphere. These have slightly different configurations.

Okay. Thank you so much, Peer.

Thanks.

Your next question comes from the line of Philippa Gardner with Jefferies.

Oh, hi there. I have a question on HPV testing in the US and I was wondering if you could maybe provide some visibility on what you'll see in terms of volume growth there and what you're seeing in terms of impact from competitor? And I -- just kind of related to that, given the economic pressures, we're hearing that visits to a gynecologist are decreasing in the US. And so, I was wondering if there's any impact on testing volumes over there?

Sure. Well, volumes -- I have to go check. I think they actually increased in the second quarter over the first quarter. We look at it more in a year-over-year basis and we've seen very strong growth in volume. We are very successful in expanding the market. We're investing significantly in actually educating the physicians and educating the health systems and also the patients in the value of HPV screening. And we still remain the only party really doing that right now and I think it just shows our dedication to doing what is valuable for patients.

So, the market is continuing to expand. We are only at 30% penetration, i.e. only one out of -- less than one out of three women is actually complying with the recommended screening guidelines. And this is something that we see as the big growth opportunity going forward. As the market is underpenetrated, we want to continue penetration. We've successfully done that. I think we passed through the 30% mark sometime in the second quarter probably with a very high growth rate.

So, our focus is on market expansion. We have not really seen a significant pickup from competition. I think it was -- it's in the meantime recognized that what had been touted as interesting new products have now been unveiled as actually showing performances that are inferior and in some cases significantly inferior to our solutions.

At the same time, we are showing customers glimpses of our new packages that are now moving through the pipeline very rapidly and successfully. And we're getting tremendous responses. So, the feedback has been very positive on the customer side. You can't always have 95% share of a market. But we are extremely competitive and I think the -- this is very visible in the market.

And just in terms of the visits to physicians, is that having any impact?

Oh, excuse me. Yes, very good question. Well with this low penetration rate that we have, we haven't really seen that and could very well be that we are not yet -- or that some of the markets that we have in the meantime penetrated are the ones that are less vulnerable to these economic swings.

But the impact of the economy is at best inconclusive with our physician customer base and some are seeing absolutely no impact, some are seeing a slight impact. But it is not one that is in any way material at the moment. And so, we continue to also get positive feedback from our physicians and their ability to continue to convert.

That's great. Thank you very much.

Thank you.

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

Hi. Good morning.

Good morning.

My first question, I guess, Roland, is for you. Why do you think your organic growth will accelerate in the third quarter from first half levels?

A couple of reasons. First of all, just looking at the second quarter, again, we have seen also an acceleration within the second quarter month-over-month. So, I think there's clearly a trend indication we have seen already to happen in the second quarter. Second, what we also have seen is that just in the number of orders we got in all of different areas, as Peer mentioned, we had some impact already we expect on instrumentation in the third quarter on instrumentations for swine flu testing. Clearly in addition to that what we have seen before.

And third is especially Asia is very strong right now. We have seen a very strong growth rate here in the second quarter and we believe that it's going to continue. So, as we said in the call before, it's a couple of different impacts. It's not one big driver. It's all over the place, different segments and different regions.

Okay, thank you. And Peer, I appreciate all that color on your blood screening strategy. How large a market opportunity do you think that is for you when just looking at the countries such as Brazil and China, which are not, I guess, prohibited from entering right now because of intellectual property?

Yes, the market is quite substantial in the emerging world. I think the United States and Europe are served quite well by basically two players that are today doing a good job in this market. Going forward in the Western world, we would more sell through the existing channels that we have chosen as partners. There are some select pockets where we have direct access to the market.

But this is really not in vitro diagnostics. This is more a quality control of a medical product. So, blood screening per se is not necessarily very symbiotic with some of the other more high growth and promising markets that we're looking at in in vitro diagnostics.

Looking --

It is an important -- it's an important integral part of an offering in some of the emerging countries, but in the Western world we're looking at high growth markets such as personalized testing and asymptomatic patient screening.

But could you size their Brazilian opportunity, for example?

Well, if you look at it at 5 million blood banks and you look at the numbers that you basically have in terms of opportunity for the three assays that they would be forming, in this case two assays they're performing on it, and you see it as certainly a double digit million dollar potential. And we're sharing some of that profit with -- or revenue with Bio-Manguinhos and it's a five-year agreement. So, it is substantial in size for us. But it is one of many countries that we're currently looking at.

Okay, thank you.

Thank you.

Your next question comes from the line of Davis Bu with Goldman Sachs.

Hi. Thank you for taking the call. I'm sorry if I missed this earlier, but so -- talking about all the opportunities in the emerging markets, I was wondering if you could provide an update or let us know where your fast HPV test stands and what sort of opportunity that that might represent?

Yes, it's a great question. And we do have a number of products that we also sell into developing countries, and -- such as the -- we call it Care HPV now. We created a Care line which includes a number of different assays that we're selling into developing countries. And to, for instance, understand how we're moving forward, and we will be able to talk about some concrete programs soon, is that we create standardized screening systems in more centralized cities and have in the decentralized regions then systems like Care HPV that are more near patient testing.

The performance of Care HPV is spectacular. We have upgraded the product and to make it also extremely easy to use. And I have to say the team did a fantastic job and was internally one of the innovation award winners here at our company just based on, I think, the ingenuity that went into this product. That product is moving quite quickly now in the clinical trials and we hope to have a submission in China sometime over the next, let's say, six months, first half of next year. In China, it's always a little bit insecure, depending on the submission window that you can get, and we could see a market tomorrow.

And we have a number of projects that are currently working on an RUO basis that might want to flip more quickly to a CE Marked IVD product quite quickly. So, all of these things are in the works and this is an extremely important product for us and we think it will create a huge value for a lot of developing countries.

Thank you. And the second question I had is, I don't know, Roland, if you can provide a little bit more color around your operating margin expansion and how much -- how much headroom do you see left in the operating margin?

Yes. Clearly, the second quarter was record value for Qiagen, was a 30% adjusted EBIT margin. And also, clearly a EBIT above what we expected. This year, we call our guidance for year 29% and so therefore we feel quite well on track for that. And the reason for that is I think I would also like to refer to our first quarter conference call.

We had some one-off expenses in the third quarter, especially around administration, which clearly didn't recur in the second quarter. So, it's a good basis going forward, the cost basis we have in the second quarter. We invested especially in 2008 quite significantly into sales and marketing activities. And now, we see the leverage coming through exactly as we guided for.

In terms of R&D, as Peer said on the call, we -- in absolute dollars now with going into some even a little bit earlier than expected into the clinical trials, the mark in absolute increase in dollars I guess relative to percentage of revenues on the expenses might be in same area as we now might be a little bit higher.

Thank you very much.

Okay, thank you. Solveigh, do we have --

Your next question comes from the line of --

Okay. There we go.

-- [Rodolphe Besserve].

Hi. Good afternoon. First question on organic growth. May we have a pretty good idea of the organic growth for both consumer growth and instruments and also could you indicate what was [virtual] impact of H1N1 in Q2? So, one question on QIA ensemble. Could you please remind us approximately the total number of patients you need to recruit for the validation of the different PCs and assays on QIA ensemble and which also timeframe and total time that you should allocate to this? Thanks.

Okay. Hi, Rodolphe. I will probably take the first question, Peer. And in terms of organic growth is that overall 12% for the Company in the second quarter [consumable] as it is 86% of everything was also on 12%. And instrumentation organic growth was somewhere, I think, call it somewhere between 25% and 30%. And others was negative but others also now in the meantime below 1% of all revenues. So, in total this gives us the 12%.

Yes, and to the second two questions, again, as I said, it's very difficult to quantify because some of these government institutions are longstanding customers and they were buying components and generic reagents in addition to instrumentation. We assume it was several million in consumable sales in this -- in this second quarter.

We have a big pipeline of instrumentation also related to some national tenders that were actually already now closed and we're looking forward to also shipping over the next periods. The --- I'd say that the first stocking was really minimal and what we expect is to see a continued demand from swine flu, even to cover basic needs currently over the next few months.

On top of that, on QIA ensemble, I'd like to maybe refer to a -- when we start the clinical trials, which we expect in a few weeks, this will be quite an interesting event. We have been progressing extremely well with QIA ensemble. Some of you might have noticed recent papers coming out in the performance of the assay and also the performance of the instrument and they are setting a completely new paradigm in high throughput screening for a number of different targets.

We also announced the first data on the performance of the assay, which I think is also here a totally new standard. The size of the clinical trial and all these things I'd like to maybe highlight at a later point in time when we can talk about it concretely. But we're moving very quickly and we will do a gold standard clinical trial in this space. We're -- we owe that to our franchise and we will not cut corners, as we have partially seen in the past. This is an important event for us and we'll talk about it at an upcoming event.

Okay, thank you. And just maybe a final question. Do you still expect the clinical launch of ResPlex II assay in Europe this quarter?

The ResPlex II has been CE Marked, yes. ResPlex II has been CE Marked in Europe and this is available. And we have a number of ResPlex add-ons that we have in the pipeline, which include also H1N1 sub-typing. We've gotten demand from a number of agencies, including also in the US, to get the regulatory submissions for that. And we're debating that right now. But it's quite an interesting product, especially now in the wake of respiratory diseases such as swine flu.

Excellent. Thank you.

Thank you.

Your next question comes from the line of Un Kwon-Casado with Wedbush Morgan.

Hi. Good morning.

Good morning.

How are you?

Good. I was wondering would you be able to give us an update on your development plans for interim HPV automation solutions? And are you on track to launch the personal processor by the end of the year?

Sure, good question, Un. We didn't address that adequately. I think the -- what we call the QIA Ensemble Evolution package, which includes the upfront de-capping sample extraction and linking that to the HC2 product, this is moving very, very nicely. You probably saw some original posters, the performance of the chemistries and the automation are superb. And we have published that at recent events, has created a lot of excitement.

We expect a big demand for these products. We are moving into a PMA supplement. We hope to be able to start that late this year, everything as we originally planned. And this is a much shorter process obviously than a full-fledged PMA. We hope to have a product out late in 2010. This is something we're racing towards and in Europe the product will be available obviously earlier.

The combination of the de-capping, the sample extraction and the current rapid capture system, all on the HC2 system, is now, based on everything we see in the market, superior both in terms of workflow automation and also, certainly in terms of clinical performance, superior to anything I've seen even on the horizon in HPV screening. And on top of that, in the very near future we're going to come out with a QIA ensemble. So, we feel very good about our competitive position near term and also long term.

Great. And just secondly, would you be able to give us your level of HLA typing revenue and what is your share in this market?

Sure. Well, the Olerup product portfolio that we had been selling since 2002, we acquired that with the acquisition of GenoVision. And we decided to keep that on because there was synergies with other products. But we obviously were never happy with the profitability as we had a very low distribution margin. Professor Olerup is a very well known transplantation scientist.

This portfolio, however, was widely used throughout the world really. We also pushed it through an FDA approval earlier this year and generated in sum about $20 million in sales. We discontinued the sales of the SSP product portfolio. Those $20 million in sales were now discontinued. And we're taking forward the sample preparation and the new sequence-based typing assays that give a very high resolution with full sequence analysis.

This -- there's certain benefits in doing that and therefore those have been growing a lot faster. SSP testing has been pretty low growth. And the overall market for HLA testing is probably in the range of $250 million to $300 million. I've just checked the last numbers, as a very substantial market leader with an overall package and a number of smaller players. And the high resolution PCR-based area, we were one of the largest player, if not even the largest player.

And while this was an interesting market position to have, it just didn't give the growth because there were newer technologies that emerged. And we're pretty confident that we can move to very high growth and very substantial revenue base using our new SBT assays.

Great. Thanks very much.

Thanks, Un.

Your next question comes from the line of Spencer Nam with SummerStreet Research.

Hi. Thanks for taking my questions. Most of them have been answered, but I just have one question on the HPV. I was just curious if you see any competitive products in the marketplace and how they are competing against current DNA Pap and any thoughts on sort of how you guys are planning to address competitive pressures as you go forward?

Well, I think we're very accustomed to competition and we're very successful in dealing with that. We have 30 competitors in Europe and are holding a 70%, probably even more, share. And our competitors in Europe include almost every diagnostic company in the world. And this shows the superiority of our solution package and the way we market this product and the way we're working with our customers to expand the market.

In the US, there will be several competitors. The current competitive situation is actually, for us, much better than we had originally planned. Remember the original business plan back in 2007 when we acquired Digene, called for at least two competitors to be in the market by today. And we barely have one. So, it's certainly something that we're dealing with. And to date, I think the competition -- the competitive situation has clearly been around the superiority of our product and the solution package that we offer today and have in the pipeline. And this makes us feel quite comfortable for the future.

Thanks very much.

Thank you.

Your next question comes from the line of Christian Packebusch with HSBC.

Yes, hello, gentlemen. Christian --

Hi, Christian.

-- Packebusch with HSBC. I have only one question left; actually, it's also an update on HPV test in Europe. Is there anything you can update us on the reimbursement? I mean, you have recently said in the last conference call, I guess, was it on the Netherlands, as an example, that may -- a country that may start a reimbursement very soon. Is there anything else you can say on that?

Yes, there was supposed to be a session in the second quarter in Parliament. This has now been moved to the third quarter. So, they hope to make a decision on this sometime this year. I'd say it's more a timing issue now. And so, that's certainly one country, which is quite interesting, which is going to primary screening on HPV only.

We are, however, very active in a number of other countries as well, which include also Germany, Italy and other countries as well. We have been able to receive reimbursement from a number of private insurances also in Germany. And are just moving one at a time. It is a very complex market in Europe compared to what you have in the United States. And we are basically looking at the most attractive opportunities and going for those first.

So, it's really one step at a time here, one country at a time. But the near term one, as everybody says, the Netherlands. We have some large screening programs that we won in Italy and Spain and a number of other countries as well and we'll continue to work on those. Those were all won in the second quarter, by the way, with full competition against all competitive solutions in the market, even with some that had not yet been introduced. And we took the lead very handsomely there. And that's something that we're seeing ongoing right now.

Mexico we already talked about. We announced that last year. Also here a big screening program ongoing with our product. So, a lot of things happening right now. But it's really country, in some cases even region by region.

Okay, thank you.

Thank you.

Your next question comes from the line of Romain Zana with Exane BNP Paribas.

Yes, good morning, gentlemen and congratulations for the strong quarter. First question --

Thank you.

-- on personalized medicine. Just could you give us more details on the influx of the recommendation that we have from the health authority on the companion diagnostics and maybe how many products are concerned by these recommendations. Just can we assume all the Pyrosequencing products, for example? And the second question on swine flu. Do you see still a significant impact on the coming quarters from swine flu testing or in the case of [autonomy] do you think that the necessity of this testing would be no longer relevant?

Okay. The first question on personalized medicine, we today have about 15 tests. I think I showed a chart in the last conference call on our personalized medicine portfolio, which is really just an excerpt. We today have quite a substantial portfolio of also regulated assays for personalized testing and it's something that we're expanding continually.

The recent recommendations on some major blockbuster drugs but also on some smaller ones have really created something like a breakthrough. And what we're seeing now is that there is tremendous level of activity in pharma that we're working on here. And we're very excited about the pipeline and are spending a lot of time in this space. It is extremely important for us. We expect these potential companion diagnostic programs to turn into companion diagnostics and to real revenue generators then over time.

So, we're building a long term sustainable assay pipeline in collaboration with partners, which is really perfect. And it's a substantial value generator also for healthcare systems. So, I expect healthcare systems to continue to support this and to push also industry into this direction, as they're doing already. There's also a substantial profit opportunity for pharma companies as well here in this space. And it's really almost a win-win for everybody.

In terms of swine flu testing, yes, we do -- what we've seen right now in the second quarter is really anecdotal. This has been very low volume testing. And so, would it increase? Yes. I'm pretty sure it will increase. I don't think everybody with the flu will get tested and shouldn't get tested. I think it would totally overwhelm our healthcare system. But we will see -- should the pandemic continue to expand, we will see a step up in testing as well.

And just coming back on the first question, who is your biggest customer in that field? I mean, if it's just pharma in order to fine-tune their clinical trials?

Well, we have a business of somewhere in the range of over $150 million going into pharma accounts per year. And this is very much increasingly so in the overlap between development and discovery. So, we're working increasingly also on development programs. This is -- so these will be the partners and they include almost -- we sell to almost any pharma company in the world. There are several that we have closer relationships with. In the past, we've never announced those and we don't want to change that now.

But what -- our customers would be laboratories that would be purchasing our products for routine testing and we, for instance, in KRAS have set up a number of laboratories in Europe where customers purchased our solutions and brought this assay online and started selling it as commercial laboratories. And this would be, then, the customer for us.

Thank you very much.

Thank you.

At this time, we have reached the end of the Q&A session. I would now like to turn the call back over to Dr. Solveigh Maehler.

Thank you very much, Molly. With this, I would like to close the conference call by thanking you all for participating. We hope to welcome you again to our third quarter results conference call on Tuesday, November 10, 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.

Thank you. This does conclude today's conference call. You may now disconnect.