Qiagen NV (QGEN) 2009 Q3 法說會逐字稿

Good morning. My name is Kerri and I will be your conference operator today. At this time, I would like to welcome everyone to the QIAGEN Third 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).

I would now like to turn the conference over to Dr. Solveigh Maehler. Thank you, Dr. Maehler. You may begin your conference.

Thank you very much, Kerri, and hello, everybody. Welcome to QIAGEN's Third 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 third quarter ending September 30th, 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 homepage 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 yourselves to only two questions during the Q&A session. The call will be archived on our website.

Before I turn over to Peer Schatz, please keep in mind that the following discussion and the response to your questions reflect management's view as of today, November 10th, 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 provision. 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 obligations 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 segment. 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 or on our website.

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

Yes. Thank you, Solveigh. Well, good afternoon, everyone in Europe, and good morning to those joining from the US and welcome to our Third Quarter 2009 Conference Call. QIAGEN continued to expand very successfully in the third quarter. The Company recorded a high organic growth rate and exceeded all of the key targets we had guided for. Equally, our outlook is positive, allowing us to increase the midrange of our EPS guidance for 2009.

Net sales exceeded our targets and came in at a reported $260 million, thereby breaking through the mark to achieve an annualized $1 billion sales for the first time in the Company's history. Organic growth came in strong, with 15%. These 15% were once again fueled by 5% of sales contributed from product that we had launched in the trailing 12 months, therefore providing a testament to our strong underlying innovation engine.

All of our markets are showing good growth, in particular our sales to customers in molecular diagnostics showed organic 28% growth, fueled by strong growth in sales of our personalized healthcare product, including assays such as KRAS and profiling, which includes influenza screening. Also, our sales of product in our prevention portfolio, which includes HPV screening, contributed strongly towards the impressive overall growth of our molecular diagnostic products.

Our profitability increased to an adjusted operating margin of 31% and we recorded $0.26 per share in adjusted EPS, at guidance rates $0.25 ahead of the guided range of $0.23 to $0.24 we provided in August. In general, our markets continue to show robust demand for our products and we expect strong trends also for the upcoming quarter and into 2010.

The third quarter was once again a very exciting one for QIAGEN also in terms of our strategic development. We saw a lot of momentum and milestones in all customer segments. The DxS acquisition created leadership in companion diagnostics for personalized healthcare and we expended our partnership with Veterinary Laboratories Agency for veterinary tests. And yesterday, we announced a definitive agreement to buy SABiosciences, which we expect will be a very synergistic acquisition for us.

But most importantly, we are driving our leading organic revenue growth by what is core to this industry, innovation. This is demonstrated by our track record, with 48 new products launched in the calendar 2009 and with 5% of our sales coming from products launched in the last 12 months.

Before we go into more depth on some of the highlights, I will hand the call over to Roland for a discussion on the financials.

Thank you, Peer, and good afternoon, everyone in Europe, and good morning to those joining from the US. We are very pleased with the third quarter. Our numbers are indicative of our strong strategic and operational position. With this superior growth profile and double digit organic growth, we feel we are well on track going into the fourth quarter and on solid footing for attaining our goals for the fiscal year 2009.

Financial results exceeded our expectations for all three key metrics -- performance metrics -- revenues, adjusted operating margin and adjusted EPS underscoring our strong profitability. We reported sales for the first quarter of -- third quarter of $260 million. Based on January 31st, 2009, currency exchange rates, sales amounted to $246 million, thus exceeding our guided range of $235 million to $245 million.

We experienced a strong adjusted operating margin increase in the second quarter to 31%, exceeding the guidance of 29% to 30% we provided in August. The reported adjusted diluted earnings per share for the quarter ended September 30th, 2009 increased to $0.26 per share.

In fact, the adjusted EPS actually excludes $0.02 profit, $0.01 EPS profit related to the transfer of the Olerup SSP business, which was sold in July 2009, and another $0.01 profit related to acquisition related income from Corbett in July 2008. Using January 31st, 2009 currency exchange rates, adjusted EPS also exceeded our given guidance range of $0.23 to $0.24. In fact, on the basis of guidance rates, adjusted EPS would have been $0.25.

Our growth, particularly organic, came in very strong. Organic growth is adjusted for power sequencing, which was acquired in the fourth quarter 2008. Based on the successful first nine moths and our optimistic outlook for the remainder of the year, we are increasing the lower end of our fiscal year 2009 adjusted EPS range. I will provide more details later in the call on our fourth quarter assumptions.

We recorded impressive top line growth in the third quarter. Adjusting for currency impact under constant exchange rates, net sales for the quarter would be approximately $269 million, reflecting a significant 16% growth over the comparable period in 2008. Including the currency impact, we still posted double digit growth in revenues of 13%. Our adjusted operating income of $82 million showed 22% growth in comparison to the third quarter 2008 and, as I already stated, in the third quarter our adjusted operating margin reflect a solid increase to 31%.

As we are now nearing the end of 2009, with increasing revenues as well as increasing operating income each quarter, we are clearly on track with our guided operating margin range of 29% for the fiscal year. I would also like to reiterate that we anticipate about 50 to 100 basis point improvement in our adjusted operating margin year over year. This anticipated increase is largely due to the realization of efficiencies we have in our operating expenses, specifically in the G&A and sales and marketing areas.

Our adjusted net income showed strong growth of 26% in comparison to the third quarter 2008 from approximately $42 million to $54 million. A contributing factor to the level of our net income is our commitment to balancing growth with cost alignment. While we have continued to invest heavily in innovation, we also have 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 increase to $0.26 per share, up from $0.21 for the comparable quarter in 2008, reflecting 24% growth.

Moving on to our revenue distribution for the third quarter, we continued to show solid growth across our product portfolios. The growth in consumables and sample assay technologies grew under constant currencies at 16% over the comparable period in the prior year. Particularly our PCR and genomic DNA products, as well as microRNA products were contributors to our growth in the consumable group this past quarter.

Overall, consumables accounted for approximately 86% of total revenues. QIAGEN's instrumentation business recorded a growth rate of 23% under constant currencies, with products such as QIAcube, QIAsymphony and Rotor-Gene Q providing significant contributions to this group overall revenue.

Turning to the geographic breakdown on the right-hand side of slide 6, net sales in the Americas for the quarter represented 51% of our overall business and recorded a growth rate of 15% under constant currencies, while European sales, which represent 35% of our total revenues, showed a growth rate of 24% at constant currencies.

Sales in Asia, especially China, remained strong, with a growth rate of 37% at constant currencies and represents 11% of our total revenues. Throughout the quarter, we saw strong demand in all markets and all geographic regions. Peer will delve more into the outlook on our markets later on the call.

The next slide shows the development of our organic growth rate in the third quarter. We had an impressive 15% organic growth rate this quarter. Our organic growth rate remains to be at the top end of our industry. Growth in new products, coupled with very good growth in terms of volume, led to sales from molecular diagnostics growing organically by approximately 28%. With that, the HPV portfolio remains a strong contributor.

The impressive molecular diagnostics growth was largely driven by performance in profiling, with flu testing coming in strong and our personalized healthcare segment with KRAS and prevention with HPV testing growing well. Going forward, stripping out seasonal effects such as may be the case with flu testing this year, we expect to show steady state double digit organic growth driven primarily by volume increases in our core products as well as new product introductions.

On slide 8, key adjustments that deserve some further elucidations include operating income, of which approximately $28 million is adjusted for factors such as business integration, purchased intangibles amortization, share-based compensation, and shares -- charges related to the DxS acquisition. Also of note is a net income adjustment for the extraordinary gain from the Olerup divestiture and acquisition related income from Corbett in July of 2008. You will find a detailed split-up of these adjustments in our appendices to this presentation and at the end of our earnings press release.

As you recall, in September we completed a public follow-on offering of 31.6 million shares, with net proceeds of $623.5 million, including greenshoe but after offering related expenses. While this financing was used to fund the DxS acquisition, its primary objective was to provide us with the strategic flexibility for expansion, whether in terms of licensing, patents or M&A activities, and serves as an important means to strengthen our balance sheet.

In this discussion, I believe that it would be helpful to give you some of the important metrics we evaluate in respect to potential future acquisitions. If you look back, you will see that most of our acquisitions are accretive within 12 to 18 months. In addition, potential acquisitions must be catalytic and support QIAGEN's internal initiatives.

Our two recent announcements regarding the acquisition of DxS and SABiosciences are good example of this strategy. Both will be accretive within the short term and the DxS acquisition catalyze our initiatives in personalized healthcare and companion diagnostics, while the SABiosciences acquisition serves as a growth engine to our biomarker diagnostic applications with our pharma customers. Peer will talk more about this later on the call.

Moving on, ill spend a minute highlighting the key figures from our cash flow and balance sheet now. In the third quarter 2009, our operating cash flow increased to approximately $77 million from approximately $32 million in the third quarter 2008. This strong operating cash flow result mainly from working capital management and increased income.

In regards to amortization and depreciation, the figure includes components from the Digene acquisition and the 2008 acquisitions from Corbett and Biotage. At September 30, 2009 we had cash on hand of approximately $861 million, which dose not include the proceeds from the greenshoe. I would also like to address a few metrics relating to our liquidity and capital structure. Highlighting our strong liquidity position is our equity ratio of 59% and the net debt to adjusted EBITDA ratio of 0.3.

With that, I hand back to Peer.

Yes. Thanks, Roland. And as always, starting with slide 11, some highlights in more detail. Slide 12 shows the typical overview of our markets. I will start with molecular diagnostics, representing about 50% of our sales, where the momentum is particularly high. Our organic growth rate was 28% here.

In the area of products for prevention, we are rapidly moving towards the initiation of our landmark clinical trials for our next generation screening platform, the QIAensemble and the next generation of HPV screening and genotyping tests that will be running on the QIAensemble. We expect to start the trial in several weeks, certainly before the end of the year. We will have an update on the trial at our Analyst Day in February.

We advanced very well on the QIAensemble Evolution package, which upgrades the existing unmatched performance of the hybrid capture screening assays into a fully automated workflow using the QIAsymphony SP for the sample preparation and adding a de-capping station. We announced first data, which was very good, and the systems are available already in the first countries.

In terms of profiling oriented products, influenza screening, as Roland says, continues to be the most significant driver. With the current concern over H1N1, we are playing a key role in the flu screening effort worldwide and growth is strong here in profiling across the board as well. In the area of personalized healthcare, our growth continues very strong also here, also catalyzed by our acquisition of DxS. But more on this a little later in our call.

We also announced yesterday a very interesting transaction, out intention to acquire SABiosciences. We believe this will be a highly synergistic transaction with our activities in pharma development and also building on a great engine for a molecular diagnostic platform going forward. Also, more here later in the call.

In applied testing, we have some very exciting developments, in particular in the veterinary testing. Most of you know that we have a leading position in molecular veterinary testing and we just announced an expansion of our portfolio in partnership with the VLA. Some of these veterinary tests can actually have revenue potentials which exceed those of human diagnostic tests and they run on the same platforms using the same sample and assay technologies. In academia, we're seeing solid growth with stimulus benefits expected for 2010.

Turning to the next slide, a particularly interesting highlight in Q3 was the acquisition of DxS, at which point we also unveiled what had been our laboratory-based molecular diagnostics strategy for quite some time. We outlined what we internally call the 3P framework, which segments our molecular diagnostics strategy into prevention, profiling and personalized healthcare.

These are the three pillars on which we have built our acquisition and development strategy, which started five years ago. With the acquisition of DxS, we had created market leadership in personalized healthcare molecular diagnostics and, therefore, now that we were able to achieve this leadership in all three segments, we're able to disclose this 3P framework.

As you can see, the pillars are defined by the patient needs and are linked to the appropriate laboratory testing and platform format. With QIAGEN products covering early disease detection based on routine screening and prevention, to diagnostic confirmation with profiling assays, to therapy guidance and personalized healthcare, all key molecular diagnostic areas are linked by our assay technologies and to our instrumentation platforms.

This is a key framework for our molecular diagnostics strategy, with revenues which account for over 50% of our sales. You can see that through either our currently available products or products in the pipeline, we have the foundation needed to create and capitalize on significant new avenues for future growth in molecular diagnostics for many years to come.

Turning to slide 14, the last pillar that we addressed was personalized healthcare, as I just said. We addressed this one last, as it is still developing, but momentum has increased significantly in the last few months. First, here's some definitions, as everyone uses these terms slightly differently.

Personalized healthcare we define as the combined use of companion diagnostics and therapeutics. And companion diagnostics are tests used to guide the use of specific drugs that are typically developed in partnerships with pharmaceutical companies. So, why now? Recent regulatory changes significantly changed how personalized healthcare is being perceived. Previously, personalized healthcare was equivalent to talking about reduced market potentials. Now, personalized healthcare is seen as a way to create improved profiles of drugs.

Turning to slide 15, QIAGEN has been in this market actually for quite some time. Actually, the sales in personalized healthcare at QIAGEN were larger than those of DxS prior to the merger. However, the combination creates a very unique leader as DxS brings a very strong pipeline and a number of very important new tests to QIAGEN. There is a small overlap in products, primarily in KRAS testing, but this simply increases options for pharma partners.

Today, QIAGEN has a very exciting position in this rapidly emerging field as the market and technology leader in companion diagnostics, with the leading portfolio of companion diagnostic tests. We have over 20 personalized healthcare assays in our offering, multiple technology platforms and a very strong pipeline. We have excellent access to the pharmaceutical industry. Combined, we have more than 15 partnerships with pharmaceutical companies around major drugs, more than 10 partnerships in oncology, and we bring independence, i.e. we are not in pharma ourselves and do not want to be so. We thereby ensure that any relationship will be conflict free.

We have a specialized sales force in molecular diagnostics and companion diagnostics, with more than 450 people in sales and marketing in this area. Excellent basis for a future expansion and growth, with leading technologies in research and development, service infrastructure for pharma development, and an installed base of platforms around the world which is one of the leading in our class.

We also have world-class capabilities and an organization to ensure success in the development programs. And we have received excellent and very positive responses from the pharmaceutical industry, as we're now going out and talking to our partners about our enlarged strengths.

Turning to slide 16, the DxS transaction is not only strategically very important, it is also financially quite attractive. It is expected to add $30 million approximately to 2010 sales and to contribute accretion in 2011. The dilution in 2010 comes primarily from significant accelerations in product reformatting to allow a fast migration of TheraScreen assays to our QIAsymphony platform, including the Rotor-Gene Q PCR cycler.

Turning to slide 17, you know we always said that pharma is very important to us. And yes, the growth rates currently in the overall pharma market are not very high. But we sell sample and assay technologies to almost all pharma and biotech companies in the world and we have very strong partnerships in this area across the discovery and development chain.

I believe most of you know this development and regulatory process and its phases very well. It starts with discovery and ends with an improved drug and follow-on studies. On the bottom half of this slide, we illustrate the biomarker companion diagnostics process as well, to show how they match up. QIAGEN has a superb and leading presence in sample and assay technologies from discovery right through to companion diagnostics.

What I would like to highlight on this slide is that the discovery to development process starts with many biomarkers and mostly arrows down the number of such biomarkers used in the development process. Way to the right, our personalized healthcare diagnostics are increasingly used in the later clinical development phases and then in routine companion diagnostics use. To the left, our sample and assay technologies for the life science research markets are used primarily.

And now moving to slide 18, this is exactly where the acquisition of SABiosciences fits in. While QIAGEN has an offering to sell its sample and assay technologies in formats that allow customers to address any molecular biomarker, we wanted to expand our offering to offer formats that include complete panels that cover the whole molecular pathway or cover a whole disease.

On the left you can see, for instance, the EGFR pathway. That is the basis of several of our personalized healthcare assays, such as some of the assays that we acquired with the acquisition of DxS. Customers can basically now buy panels that are formatted to cover all the genes along this pathway, including, for instance, KRAS, and run their samples against them to find patterns that might highlight specific biomarkers or combinations thereof to profile their discovery assumptions or validate those in pre-clinical or even clinical settings. And those biomarkers could be of diagnostic value as well.

By supplying disease and pathway focused panels for biomedical and pharma activities and discovery in pre-clinical, QIAGEN can therefore contribute to the discovery and validation engines of biomedical and pharma companies. This can lead to collaborations around creating fast tracks to new diagnostic content for prevention in profiling diagnostics as spin-offs of pharma or personalized healthcare diagnostics as their primary targets. As such, the pending acquisition of SABiosciences will be highly synergistic with our diagnostic strategy and can be seen as a significant contribution of our engine to expand our content portfolio, our diagnostic menu.

If you turn to slide 19, you see this rationale in a different format. On the left, you see a high level menu screen shot from the SABiosciences website. There are dozens of pre-formatted panels of PCR-based assays that cover disease areas or pathways. SABiosciences' expertise and value therefore lies in the creation of panels incorporating the newest biomedical knowledge for diseases and pathways and for making these -- this knowledge available as PCR-based assay panels. Their panels cover genetic expression, microRNA and epigenetic assays.

Turning to slide 20, this heavy focus on cutting edge biomedical knowledge is also one of the reasons why almost half of the employees hold PhDs. As you can see on slide 20, SABiosciences is, by the way, located very close to our headquarters in Germantown and Gaithersburg, Maryland, which we expect will facilitate the integration quite a bit.

On the left side, you see what the first step is in the process. It is the bioinformatics and assay panel selection tool on the top, which is a key value of the company. The product is actually a tube or a plate containing QIAGEN sample and assay technologies which are combined with the designed assay components from SABiosciences. The customers can run these products on QIAGEN instruments or others, if they so choose.

We expect this transaction to contribute about $24 million in 2010 sales and to contribute to sales growth. And after 2011 to adjusted earnings growth. So, while this transaction is somewhat more complex in its rationale than DxS, I hope these slides contributed to helping you to see why we are so excited about this transaction as well.

With this, I will hand over to Roland again for the financial outlook.

Our financial expectations overall for the fourth quarter are outlined here on slide 21. Despite some lingering uncertainties in the global economy, we believe we are on solid footing for the rest of the year. For the fourth quarter 2009, we are guiding revenues between $250 million and $260 million at guidance rate, which translates to $265 million to $275 million using actual currency rates. We expect growth for the fourth quarter to continue to be driven by strong performance in molecular diagnostics.

We expect for the fourth quarter an adjusted operating margin in the realm of 30% and adjusted earnings per share to be between $0.21 and $0.22 based on January 31st, 2009 exchange rates. Note this is using the weighted average number of fully diluted shares outstanding of 241 million shares, thus including those from the equity offering.

In terms of adjustment to operating income, we expect pretax 123R expenses between $2 million and $3 million, amortization of acquired IP of approximately $18 million, business integration related charges from acquisitions, including Corbett, SABiosciences and DxS, of $9 million to $10 million. In addition, in Q4 we expect an after-tax net gain of approximately $5 million to $7 million due to profit from the sale of a minority holding in [Handilab] to Becton Dickinson & Company, offset by various charges, including intellectual property litigation.

This quarter, our adjusted tax rate was 29%, in line with the second quarter as well as the comparable quarter last year. And going forward with the first quarter, we believe this to be similarly in the range between 27% and 30%. The weighted average number of fully diluted shares outstanding will be around 241 million shares.

This next slide merely is a good visual to demonstrate our pre and post equity offering net income EPS development on a quarterly basis more graphically. For fiscal 2009, we expect to come in well above $1 billion in revenues under constant exchange rates. We are also listing the lower end of the EPS range by $0.02.

Taking under consideration a higher average share count now of 240 million shares outstanding for fiscal 2009, our previous guidance would be equated to a range of $0.86 to $0.90. However, we feel, given our strong profitability for the nine months to date, we are able to lift the lower end of this range to $0.88 to $0.90.

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

Thanks, Roland. We're very pleased to be able to report one more quarter in which we exceeded our guidance. Underlying trends are strong and the Company is performing well. Organic growth rate of 15% and our operating margin of 31% are industry leading. At the same time, the strategic momentum at QIAGEN is very strong. Effectively, we increased the midrange of our EPS guidance and are very excited about the opportunities in front of us.

And with that, I will 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 the operator. Kerri?

(Operator Instructions).

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

Hi. Congratulations on the very nice quarter.

Hey, Quintin. Thanks.

Let's first talk a little bit about the end markets. The commentary you made about academia and pharma, it sounds like the pharma continues to get sequential improvement. And could you talk a little bit about that? And then with academia, what are the -- now that you've got -- starting to see some of the NIH stimulus, what's your outlook for 2010 and 2011 globally for how those funds are expected to flow to you?

Great. If I may, I'll start with the second part of the question first. With hindsight, I think we made the right choice a few months ago to be very conservative on our outlook on stimulus inflow. We intend to keep that policy until we actually see money hit the market. As we all know, this has hardly happened -- or is hardly expected to happen this year. We'll -- there might be some inflow in Q4 but the expectation is if it comes, it will be more meaningful in 2010.

The numbers that we guided for are conservative, with low double digit million dollar number. But it is again something that we want to be very conservative about because to date, I think very few people have actually seen money in their bank accounts. And until that happens, we'd prefer to remain somewhat conservative. There might be a trickle into 2011.

It could actually be bigger, depending on how quickly the processing works and the grants continue to be reissued. But again, also here I think it -- we're well advised to be conservative on this. The academic markets in the United States are about 12% of our sales, 12%, 13% of our sales, in that range, half of our academic sales, which are about 24%.

The first part of the question in the pharmaceutical industry, we're definitely seeing a continued soft market in discovery but it did improve over the last few quarters sequentially. And the development market, however, is doing very well and is growing at double digit growth rates. On average, the pharma market is in the mid to higher single digit growth rates, but is really a very mixed bag of different types of activities.

Then, one question with respect to kind of your acquisition strategy, the 3P. A lot of focus on genetics-based type of testing, epigenetics, genotyping expression, microRNA. With you increasing biomarker discovery and then clinical applications, where do proteins fit in that for you? And could you talk a little bit about your capabilities on that side?

Sure, Quintin. A good question. We could imagine going forward that there are diagnostic opportunities that will require both a molecular and a protein angle. To date, the pure molecular market is still vast and has huge opportunities for a pure molecular approach. We have, however, prepared for potential combination assays in that most of our platforms, actually all of them have a protein analysis and preparation capability.

So, the QIAsymphony also has a multiple protein processing protocols and the QIAensemble system, for instance, can also do very high throughput protein detection, immunoassay detection. And the same is also true with protocols on real-time cyclers for protein detection. So, there is that capability right now. It just simply has not -- there's not really a marker area where the combination has been very forcefully pursued. This could change going forward as we would get more knowledge about interactions between various biomolecules including proteins as well.

Thank you. Congratulations again.

Thanks, Quintin.

Your next question comes from Peter Lawson with Thomas Weisel.

Hi, Peer. Just wondering if you could talk through some of the dynamics you're seeing in the HPV market, share gains or losses and pricing, and whether you saw quarter-over-quarter growth?

Well, yes, growth has been very good in our prevention portfolio, also in our HPV screening product lines. We've seen very robust and in some cases even accelerating growth rates in the space. I think it is very clear, we have been very open and clear about our performance profile of our assay and our capabilities, also what we intend to bring forward.

We talked about this in the last call and the market has recognized that just now the evidence that we came out with the Evolution package, which I kind of like buried in one of the slides here today, but we actually have now the complete automation for the hybrid capture product out there. And that is going now through a regulatory process, as we talked about previously. In certain countries, it's already available now. And it is spectacular. You've probably -- some of you have seen data at very recent event and we'll show more data at AMP in a few days.

So, the fact that we're just -- we're very open and honest about a superior performance and actively also delivering on our R&D pipeline has actually put us in a very strong position. And we think that this is also very well recognized by customers.

Then, just a question for Roland. You've done a phenomenal job with operating margins over the last six years. Where can they head?

Yes, thanks. As I said during the call, I still see a lot of areas where we can even do better going forward. So, a margin improvement somewhere between 50 and 100 basis points year-over-year for the next couple of years, let's say three, four years. I think this is very feasible for us. There's no reason why we shouldn't gain even more efficiencies out of the investments we made, especially over the last 12 and 18 months, in sales and marketing activities and sales and marketing headcounts. And we are just seeing here the first leverage coming through. So, I'm quite optimistic on that as well.

And just a follow-up on sort of the visibility into 2010. Should we think about sort of the typical 10% to 13% organic growth continuing?

Yes, we are definitely seeing strong momentum in organic growth. If you look at the past 12 -- four, eight or 12 quarters, you've actually seen remarkably stable organic growth rate hovering from 10% to 15%. And there might be smaller quarter-over-quarter changes, but we expect a very strong continuing trend also into 2010.

Okay. Thank you so much. Congratulations on the quarter.

Your next question comes from Doug Schenkel with Cowen.

Hi. Good morning and thanks for taking the questions.

Hi, Doug.

Sales in Europe really picked up this quarter in what is typically not a seasonally strong quarter. Any chance you could just talk a little bit about what's been driving that performance across different end markets and/or product classes?

Sure. We actually had a very strong performance in the molecular diagnostics profiling area. Did quite well also in prevention but particularly in profiling. And the uptake of the QIAsymphony platforms now, with the money that has been CE Marked for that system and the expanded portfolio of options customers now have, has been doing very well.

As you noticed, we also CE Marked some of the Pyrosequencing-based products, most notably the KRAS test a few months ago and Europe is clearly ahead of the curve in being able to access these products because of a much more streamlined and simplified regulatory process. So, I think this is -- could be indicative of what an enlarged menu can mean. And as you know, we're clearly working towards that also in the United States.

Okay. That's helpful. And then, regarding the recent acquisitions, SABiosciences and DxS, how should investors evaluate the success of these fields over, say, the next six, 12 and 18 months, beyond just the financial goals that you outlined when you completed these deals?

Sure, excellent question. I think one of the ways -- if you look at the past acquisitions, they very often, because they merge with an internal initiative, that in the case of the DxS is almost comparable in size, what we always want to achieve is certain catalytic events where our internal initiatives are boosted by an outside acquisition and create enlarged mass, but also enlarged game capabilities.

So going forward, how I would measure that is the ability for QIAGEN to develop within personalized healthcare and companion diagnostics, you can measure that on the string of submissions that we do to the FDA. There are a number planned, as you know.

You can look at novel partnerships, of which we have quite a few that we're -- that are in the pipeline that we're working on. And the -- also the -- in the case of SABiosciences, basically the way that we can start feeding validation of content into our diagnostic pipelines, that is a more difficult one to measure on the short term because it -- here we're talking about a more medium term strategy to use our pharma and academic customers to help us validate biological content by the fact that we're giving them whole panels that they can blast against their samples to see what starts creating an interesting noise.

This is a more long term approach, but on the personalized healthcare acquisition of DxS, I think this is more near term and more visible. Obviously, we will have the financial accretion is now on the table that we put forward. We've made the expectations for that and that will also be financially measurable in the year 2011 in both transactions.

Okay. Thanks a lot for taking the questions.

Thanks, Doug.

Your next question comes from Holger Blum with Deutsche Bank.

Yes, hi. Holger Blum, Deutsche Bank. Just one question on the segment organic growth. If you running at 28% in molecular diagnostics and with your pharma customers in the mid to high single digit, that implies that for your other two divisions, you have no growth or maybe even declines organically. Could you maybe comment there on organic growth and how that have evolved over the course of this year? Thank you.

Hi, Holger. Thanks for the question. I think that there must be some kind of a switch in the numbers there. Roland, do you want to run through that?

Yes, sure. No, as we said also in the press release -- hi, Holger -- we did have roughly 28% for molecular. As Peer said, pharma was in the mid to single digit area for overall pharma. Applied testing and academia were also in the mid to single -- mid to higher single digit area. So, overall there we didn't -- we actually quite pleased with all different customer segments and different customer end markets. And we also do believe going now into the end of the year that there'll be no significant change. Clearly, molecular diagnostics was a strong driver and that's not going to change.

And as Peer also said on the call, for 2010, even if we didn't give you so far too optimistic outlook, but we do believe that there will be additional funds coming into the academic environment, clearly going to boost here on stimulus packages. Is actually, by the way, which is not only going to happen in the US. We see also stimulus package in other countries as well, as you know.

Okay, but then -- shouldn't then be organic growth for the group be more than 15%? Shouldn't be --

Yes, it's nicely rounded actually down. So, if you do the math, you will actually see it's even -- to be precise, above 15%.

If you run the math, you'll see that there's a rounding. Take academic and pharma at mid single digits and applied testing can be double digit, it's a smaller percent, it's only 7% of sales, you see that the rounding still works to 15%.

Okay, thanks.

Okay.

Your next question comes from Isaac Ro with Leerink Swann.

Hi. This is actually [Jody Dye] in for Isaac. Thank you for taking our questions. First of all, one question regarding the acquisition of SABiosciences. Can you comment on the gross margins at this company and what opportunities you see both immediate and long term to improve the profitability of this business thanks to your scale and [tano] reach? Separately, what geographic and end market mix does this company have?

Very good questions. Roland, do you want to take the gross margin question?

Yes, sure. No, gross margin for them is actually quite similar to our overall company gross margin. So, I don't expect that we will have a significant change to our overall gross margin. And but of course, coming from a -- they're coming with a totally different growth rate here. As we said, they're going to $24 million in revenues next year and then a significant increase even above that. So, in absolute numbers of course it's driving, but relatively comparable to the QIAGEN group.

Yes --

During the -- sorry.

Would you also provide some color on the geographic breakdown --

Yes. The revenue mix was -- is about 15/85, so 15% outside the States and 85% inside the States. And here, you can clearly see there's a huge opportunity to take this to our pharma and personalized medicine partners very quickly.

Okay. And secondly on HPV specifically and molecular biology -- I'm sorry, diagnostic in general, what's your sales and marketing strategy in various European countries as a result of either local regulations or customer specific demands? We're just curious about how that informs your competitive advantages over new entrants. Thank you.

Yes, Europe continues to be a very mixed bag of different dynamics. All of -- very dynamic. In most countries we actually won quite a few very significant tenders over the course of the last three months that were larger government organized screening programs and so the whole reason why people are doing that right now is they're making last stage assessments of the feasibility of actually conducting large scale screening. In some cases, as we know, it's primary screening.

So, things are moving ahead quite quickly. And we are continuing to work on the reimbursement front quite actively to see if we can get reimbursement at least in the private areas to accelerate. So this is always a long process, but we're taking this one country at a time with a specific task for us.

Great. Thank you.

Thank you.

Your next question comes from Daniel Wendorff with Commerzbank.

Good afternoon, everybody. And a few questions, if I may, starting with a more general one regarding your growth contributions from new products. It was still rather quite high at 5% in the third quarter. I was wondering if that rate is sustainable with your current rate of acquisitions to stay this way or can you give us a bit more color on that one?

And then, also a follow-up question on the HPV testing business. If I recall that right, when you did the Digene acquisition you also had in mind that with the HPV DNA test you get a better positioning with clinical laboratories also in order to sell the remaining portfolio of your products. Has this strategy worked out?

And maybe lastly on the margin side. You already mentioned 50 to 100 basis points improvement per year over the next four years would be possible. And is that due to shift in product mix or is it that you believe you can save more money on the G&A or would you say it's the marketing side? Thank you.

Yes, sure. Let's start with the last question and, Peer, you take the first two one. In terms of profitability, as we promised over the last two years and I think also delivered over the last two years is that we do believe there's a significant opportunity for QIAGEN in leveraging especially operational expenses. There's also mainly the driver going forward. We heavily invested into sales and marketing. We are also investing in R&D.

But we also have a great outcome out of that. You just mentioned [Biosciences], we have clearly industry leading output on growth coming from new products. And as we also do believe that is also the case going forward. But more important is clearly a potential leverage in SG&A. It's clearly a key driver for us.

Small additional profitability is clearly -- or additional profitability is also coming of course from the gross margin side. We do believe that the product mix going forward is a stronger share in molecular going forward, also price increases as in the past year-over-year. We do also see here a certain contribution. But so overall, this is something where we think we do have a very defined execution plan and we're going to work on that for the next three years.

Daniel, the first two questions, number one is acquisitions shouldn't really distort our focus on innovation. This is always the first and foremost focus that we have. The 4% number goes back now almost four years every quarter and over the last few quarters actually went to 5%. Is it sustainable? The pipeline is very full and we have some blockbuster products coming out next year.

Just make one example where next year we're going to be able to launch late next year certain elements already of our next generation HPV screening program product in Europe. And some of these products alone are good for quite significant portions of these 5% that we want to achieve. So, there's a big pipeline for next year as well. And the acquisitions have actually helped us accelerate that in the past and not really impacted negatively. So, it has been a big focus of ours and it paid off, as we see from the numbers.

And number two is the QIAensemble Evolution package, i.e. the upgrading of the current hybrid capture 2 HPV screening product by adding automation to it. We all had discussed a year ago or two years ago problems with sample preparation. Well, happy to announce that we have fantastic solutions for that now. They're available subject to regulatory approval in certain countries already today. And we're going through the various processes required also in the US.

They completely automate the process and put it into a level of automation which I haven't seen in anything right now, even on the horizon, at quite a good throughput. Now, these systems can also run real-time PCR, as we are basically hotwiring the QIAsymphony franchise with the prevention franchise of today, the rapid capture system.

And we are seeing customers saying that we're going to use these now for two years and then go over to the next gen systems as they come on line and then we'll use the QIAsymphony for the real time PCR portfolio, which is rapidly emerging in those laboratories, or some of them are actually doing both tests on one -- on one QIAsymphony. So, this is definitely working that we're being able -- we have a position to broaden our position in laboratories based on these multipurpose instruments.

Thank you very much.

Your next question comes from Cornelia Thomas with WestLB.

Good afternoon. I've got one follow-up question on the HPV testing in Europe. I was just wondering, you said that you have one -- some tenders in various countries in Europe. Could you specific which countries these are and sort of give a more general idea on where things are in which country in terms of usage of the HPV tests and reimbursement and probably also guidelines for testing, HPV testing.

And the second question is just a pure calculation question actually. If I look at your adjusted EPS guidance for Q4, that's $0.21 to $0.22, and add that to what you've achieved in the first nine months, $0.69, then I end up with full year 2009 adjusted EPS of $0.90 to $0.91 whereas you're guiding for $0.88 to $0.90. Could you just clarify where that discrepancy comes from? Thank you.

Roland, do you want to take the second part and I'll take the first?

If you take the first one first, I'll find to the second.

Okay, good. Well, in principal we haven't really had a policy up to now to really announce individual tenders. I can say we're closing well into the hundreds of contracts constantly also this year, winning tenders left and right, and have many successes in this space. We haven't really seen meaningful competition and while we're heavily competing against other companies in Europe, for instance, our platform clearly is seen as the superior platform and we're taking the wins.

At the same time, it's very difficult to go country by country. I'd say we had some wins in almost every country, but they're very different. And every country is so individual. If you talk about the intricacies of France versus the UK versus Italy, for instance, will be very, very different. And what we're seeing is we're seeing three clusters.

The primary screening clusters, which are -- we talked about the Netherlands but also a few other countries, we see the co-screening clusters that have guidelines in place but reimbursement is not yet up and running. Germany is such an example. Also Scandinavia. And we have a group of countries that are still only doing ascus reflex screening like the UK.

So, there are different types of countries and all of them have their own dynamics. I think it would go beyond -- it would need quite some time to go through every one of them. I could try to see if this is something for the Analyst Day, maybe, that we could go into. It is very exciting but it --

I'm just trying to get a handle on what your progress is in Europe because it doesn't seem like there seems there's not much movement. But I guess -- I mean a lot of this we are actually not seeing. There's a lot under the radar screen that's happening.

Well, we showed 28% growth in molecular diagnostics --

Yes.

-- that HPV is doing very well. So I'd say that -- I'd say it's a little bit more than no movement. I think we are definitely seeing a lot of steps very successfully being completed, but this is not something that is digital that happens overnight. And therefore I'd be happy to show you what we're doing in each country. We have advocacy teams, reimbursement teams, we have marketing teams, we have people working on the lobbying side to help people understand the value of what we're doing.

So, all of these things are in motion and they're just happening. And you see it on the numbers, that are actually growing very nicely, that something is happening. But I'd have to go country by country and show you what we actually achieved to make you be able to measure that.

Okay. Thank you very much.

And your last question, Cornelia, one of the US GAAP things, of course with a capital contribution, the average number for the fiscal year 2009 is 240 million shares. We are so far for the nine months of course we could still use the 205 million shares. So, there's a difference so you really have in a fiscal year divided by a net income divided by 240 million shares. So, that makes the impact also for certain numbers of the first nine months.

Okay, thank you.

Your next question comes from Peter Welford with Jefferies.

Hi, two rather boring questions for Roland, I'm afraid. Firstly, I was hoping you could go through the Becton Dickinson point again you made and sort of a bit more details on what happened there and what we should -- and was that $5 million to $7 million net of the numbers he was assuming for the guidance for 4Q?

And then secondly, probably for Roland, is on the use of the proceeds, you have a fairly onerous debt obligation outstanding. I don't know whether or not you're going to disclose any plans to down pay that, but can you perhaps give us some view on your thoughts as to what you can see potentially doing with the cash with regards to the credit facility over the coming months? Thank you.

Yes, sure. And let me start with the last question and then turn to the first one. And probably Peer is going to add on that as well. Next year, we have to adjust a regular pay-down by $15 million. This is one pay-down we also going to do.

We are not planning so far to do even accelerated pay-downs on our existing debt structure of [knowing tools] credit facility amounts right now to $475 million because we -- as you know, we have a very attractive financing in place. We pay something like LIBOR plus 50 basis points, around that. So wouldn't be a wise decision to pay out that earlier, especially given the pipeline on M&A possibilities that we see right now on accretive transactions also for execution in 2010.

On your first question, yes, we did have a minority share in Handilab. And this was sold from our Dutch entity, is also tax-free again for us. So therefore, we clearly think there's an opportunity for us also in the fourth quarter to have some extraordinary gain. We actually going to adjust for that, so it is not part of our adjusted EPS guidance, by the way.

So, we're going to exclude that. On the other hand, we also have some potential, as you know, litigation charges coming up and so -- but after all, we still believe it will be a quite significant positive impact for us in the fourth quarter, somewhere between $5 million to $7 million after tax.

Great. Thank you.

Your last question comes from May-Kin Ho from Goldman Sachs.

Hi, Peer. A question about your --

-- May-Kin.

Hello? Can you hear me?

Yes. Great.

Oh, sorry. I have a question about your Asian business. I notice in the last couple of quarters it's been growing very fast. Granted, it's a small slice of the pie at this point. But if we look at the growth rate, maybe in the next few years it could be a quarter of the business. Is that too optimistic a view and why is it growing so fast in the last six months or so?

Well, in Asia we have a complete portfolio now of life science and molecular diagnostics products and are active on a number of fronts there to expand the use of these products. The growth rate was 37% on a constant exchange rate. In the third quarter it's 11% of our sales.

Question, could this grow to a quarter? Well, we all know that the market in Asia and particular China will be one of the largest healthcare markets over the next decade. And this is some thing that we feel prepared for to capture as we continue to grow our base there. But if you take the numbers, the 37% a few years into the future, it definitely becomes a larger slice.

It's tough to project. It jumps a little bit because we have some screening programs that we're working on in some countries that would immediately be larger components. But they -- a 20% number would be a good target over the next three, four, five years.

Having just come back form China, I think certainly it's a very exciting time there.

Yes, and thank you for your visit there. It's definitely it's an extremely exciting and dynamic environment with a very strong recognition of prevention, disease prevention. We're very active in that space with our HPV screening in Chlamydia but also HIV and HCV and blood screening and other products there. But also very active in the disease surveillance, for instance, of H1N1 where we have a very active role and are the prime supplier to the Chinese CDC.

Yes, great. Thank you.

Thank you.

We have reached our allotted time for questions. I will now turn the conference back to Dr. Maehler.

Thank you very much, Kerri. With this I would like to close this conference call by thanking you all for participating. We hope to welcome you again to our third quarter and full year 2009 results conference call on Tuesday, February 9, 2010. 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.

This concludes today's conference. You may now disconnect.