Qiagen NV (QGEN) 2009 Q4 法說會逐字稿

Good morning. My name is Kerry and I will be your conference operator today. At this time I would like to welcome everyone to the Qiagen Fourth Quarter and Year-End 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, Kerry, and hello, everybody. Welcome to Qiagen's fourth quarter and full year 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 fourth quarter ending December 31st, 2009, describing the Company's recent business highlights. And you will find a copy of this announcement, as well as a presentation we will be using during this conference call for download on our investor relations section of our homepage at www.qiagen.com.

This conference call will cover 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 responses to your questions reflect management's view as of today, February 9, 2010.

As you listen to the call, I encourage you to have our press release and presentation in front of you, since our financial results and detailed commentaries are included and will correspond to the discussion that follows. As we share information today to help you better understand our business, it is important to keep in mind that we will make statements and provide responses in the course of this conference call that state our intentions, beliefs, expectations or predictions of the future. These constitute forward-looking statements for the purpose of the Safe Harbor provisions. These forward-looking statements involve certain risks and uncertainties that could cause Qiagen's actual results to differ materially from those projected. Qiagen disclaims any intention or obligation to revise any forward-looking 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 or on our website.

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

Well, thank you, Solveigh. Good afternoon, everyone in Europe, and god morning to those joining from the US, and welcome to our fourth quarter and fiscal year 2009 conference call.

We are very pleased with the progress we made in 2009. This was clearly one of the most successful years in the Company's history. Qiagen is on a strong growth trajectory going into 2010, fueled by a very strong core innovation engine and an excellent strategic position.

In 2009 we achieved many exciting milestones. As part of a decade in which we grew our revenues sevenfold and are earning sixteen-fold, we broke through the $1 billion sales mark in 2009 and are well positioned as a recognized leader targeting strong growth for the periods to come.

Over the next two years we expect an extraordinary rollout of new platforms and new assays, an innovation initiative that will provide significant contributions to the molecular diagnostics industry. Our innovations are also facilitating breakthroughs in life sciences, pharmaceutical research and applied markets. We are shaping the industry in many areas, including key areas such as personalized healthcare.

In terms of financials, Qiagen continued to perform successfully, finishing the fiscal year with an excellent performance, with a fourth quarter where we exceeded revenue guidance once again in 2009 and came in at the top end of our earnings per share guidance. The Company recorded a high organic growth rate, which positions the Company very well for future growth. Equally, our outlook is positive, as Roland will highlight in our guidance section.

Net sales for the full year came in strong, reported at $1.01 billion, thereby breaking through the $1 billion US sales mark for the first time in the Company's history. Organic growth was once again very strong at 13%. Of note, molecular diagnostics grew organically at 19% and organic growth was fueled by products that we launched in the trailing 12 months, thereby providing a testament to our strong underlying innovation engine.

All of our markets are showing good growth and, as I mentioned, in particular our sales to customers in molecular diagnostics. Growth in sales of our personalized healthcare products, including assays such as KRAS and those in profiling, which include influenzas screening, proved to be strong contributors. The organic growth rate does not yet include the TheraScreen personalized healthcare product added to the September 2009 acquisition of DxS. Product in our prevention portfolio, which include HPV screening, also contributed strongly towards the impressive overall growth of our molecular diagnostics products.

Adjusted net income in Q4 increased 32% and propelled us to record $0.93 a share in adjusted EPS for the full year. In general, our markets continue to show robust demand for our product and we expect strong trends into 2010. The period since our last quarterly conference call was a very exciting one for Qiagen, particularly in terms of our strategic developments. We benefited from significant momentum and achieved some key milestones in our customer segments.

They include the DxS acquisition, which has created leadership in companion diagnostics for personalized healthcare. In addition, the acquisition of SABiosciences, which we expect will be very synergistic for us, and allows us to expand our offering of products that bridge pharma and diagnostics. And most recently, the acquisition of ESE, which adds key optical detection technologies so advanced that it can also be applied to battery powered portable devices.

But most importantly, we are driving our leading organic revenue growth by what is core to Qiagen, innovation. This is demonstrated by our track record with 79 new products launched in 2009 and with 5% of our sales coming from products launched in this period.

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

Thank you, Peer, and good afternoon, everyone in Europe, and good morning to those joining from the US.

As Peer mentioned, Qiagen reported another year of strong results, which positions the Company for continued success by executing on our major priorities, including driving organic growth, strategic acquisitions, and key goals for the year. 2009 was also a year where we built on our leadership position in sample and assay technologies and expanded or market presence in key geographic areas.

Overall, we relied on a combination of internal and external initiatives that leveraged our existing skills, adding key technologies and driving our innovation engine. These initiatives yielded results that are positioning the Company well for growth in the years to come.

Let me focus first on our financial performance for 2009. Afterwards, I will briefly address the fourth quarter. And then, at the end of the presentation, I will provide you with our financial guidance for 2010.

We are very pleased with our outcomes in 2009. Reported sales for the fiscal year 2009 were $1.010 billion. Adjusted earnings per share were $0.93 per share. Based on January 31st, 2009 foreign currency exchange rates, sales amounted to $968 million US, coming in at the higher end of our guidance range. Adjusted diluted earnings per share based on January 31st, 2009 foreign currency exchange rates increased to $0.90 per share, these being at the higher end of our guidance range, which we increased in November.

The financial results for 2009 reflect the solid growth we achieved in both consumables and in instruments. Furthermore volume on new product introductions remained key themes throughout the year. For further information on the adjusted figures, please refer to the reconciliation tables in Qiagen's Q4 and fiscal year 2009 earnings release.

Overall, we recorded impressive top line growth for the year. Adjusting for currency impact and constant exchange rates, net sales for 2009 would be approximately $1.039 billion reflecting a significant 16% growth over 2008. Including the currency impact, we posted strong growth and reported revenues of 13%. Our adjustable operating income of $296 million US showed 17% growth in comparison to 2008, and our adjusted operating margin reflected a solid increase to 29% for 2009. This increase was 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 22% in comparison to 2008, from approximately $163 million US to $200 million US for 2009. 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 maintained a strong discipline to improve our efficiencies while extending [capacities] to enable further growth.

In respect to adjusted diluted earnings per share, we recorded an increase to $0.93 per share, up from $0.80 per share in 2008, representing a 16% year-over-year increase. For comparability, as we did an equity capital increase in 2009, it would be a 22% increase based on the same number of shares outstanding. Additionally, the adjusted EPS exclude $0.08 profit related to the transfer of the [Olerup SSP] product line, and the sale of our investment in HandiLab, and other acquisition related income.

Moving on to our net sales distribution for 2009, we continue to show strong growth across our product portfolios. The revenues from consumables and sample and assays technologies grew under constant exchange rates at 30% over the prior year. Particularly, HPV screening assays, genomic DNA sample technologies, and R2s PCR IVDs were contributors to our growth in the consumable group. Overall, consumables accounted for approximately 86% of total revenues.

Qiagen's instrumentation products recorded a growth rate of 42% under constant exchange rates, with products such as QIAsymphony, QIAxtractor, QIAgility, Rotor-Gene Q and [PyroMag] providing significant contribution to this group's overall revenue. Typically, the fourth quarter is a strong quarter for instruments. In addition, we had many keys launches in instrumentation in 2009, such as the Rotor-Gene Q and the QIAgility.

Turning to the geographic background on the -- on slide six, net sales in the Americas represented 49% of our overall business and recorded a growth rate of 12% under constant exchange rates. While European sales, which represent 36% of our total revenues, showed a growth rate of 19% at constant currencies.

Sales in Asia remained strong, with a growth rate of 36% at constant currencies, and now represent 12% of total revenues. The growth in Asia is a testament to the work we achieved during 2009, focused on expanding our market presence in key geographics to sustain further growth. Greater China in particular saw year-on-year growth of 94%. 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 2009. We had compelling 13% organic growth. Our organic growth rate remains to be at the top end of the industry. Growth in new products, coupled with very good growth in terms of volume, led to sales from molecular diagnostics growing organically by approximately 19% in 2009.

The impressive molecular diagnostics growth was largely driven by performance and prevention, profiling, and personal healthcare applications, with flu testing coming in strong in the second half of the year, as well as KRAS and 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 organic growth driven primarily by volume increases in our core products as well as new product introductions.

Moving on, I will spend a minute highlighting the key figures and metrics from our cash flow and balance sheet now. In 2009, our operating cash flow increased to $217 million US, from $173 million US in 2008. This strong operating cash flow results mainly from increased income and working capital management, expressed by a decrease in inventory days from 155 to 145 days, and DSOs from 59 to 58 days. For the year, we had free cash flow of nearly $165 million compared to $134 million in 2008.

In regards to depreciation and amortization, the figure includes acquisition, particular that of Digene, which we closed in 2007. Initiatives that contributed to our CAPEX of $52 million in 2009 include investments of approximately $12 million in building activities, both in R&D and production, for facilities here in Germany and in Germantown, Maryland.

At December 31st, 2009, we had cash on hand of approximately $826 million US, which is notable as we expended approximately $234 million US for acquisitions in 2009. On the other hand, we (inaudible) $623 million US through the offering in September. Ultimately, this puts us in a very strong cash position, almost net debt free, providing us with a strong balance sheet to supplement our strong cash flow, which together can drive continued growth. With an impressive CAGR of more than 30% since 2007, we see our operating cash flow improvements continuing also into the future.

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 60% and the net debt to adjusted EBITDA ratio of 0.4.

Switching now to the fourth quarter of 2009, just a few numbers that I want to draw your attention to. In terms of how we performed compared to guidance, based on January 31st, 2009 currency exchange rates, sales amounted to $268 million US for the fourth quarter, exceeding our guidance range of $250 million to $260 million US. Adjusted diluted earnings per share at guidance range increased to $0.22 per share, hitting the higher end of our guidance range of $0.21 to $0.22.

Reported net sales of $289 million US reflected an increase of 22%, and under constant currencies, a 15% growth over the fourth quarter of 2008. Adjusted operating income grew by 25%, while adjusted net income rose by 32%.

Notable is that we were able to increase our operating margin from 28% to 29%, even though the gross profit margin was lower on an adjusted basis for the quarter. This decline is -- in gross margin was mainly driven by a product mix shift towards instrumentation.

We had charges as indicated in our Q3 call of $6.3 million US related to intellectual property litigation associated with all Digene litigation cases, reported in administration expenses. But offset through other income of $10.5 million US from the sale of our HandiLab investment. Both effects were adjusted in the quarter. With that, I hand back to Peer.

Thanks, Roland. And, as always, starting with slide 11, some highlights in more detail. I'll start with molecular diagnostics, which representing about 47% of our sales and where the momentum is particularly high. Our organic growth rate here was 19%, and 15% overall. This is significantly ahead of the industry average. And considering what we are -- that we are moving to over $500 million in sales in this area, it is quite considerable. At this growth rate, we are incrementally adding sales every year which are higher than the total sales of most other players in this industry.

Over the coming periods we are expecting an unprecedented rollout of platforms and assays, including our QIAensemble platform for prevention assays, which include HPV, CTGC and several others, which is due to launch in 2010 in Europe and in 2012 in the United States. In addition, our QIAsymphony platform, covering sample to result processing in random access continuous load formats, will be launching into QIAsymphony RGQ format with an exceptional breadth of assays, including HIV, HPV, HCVC, MBVZV, EVP, influenza and several others in Europe in 2010, and in 2011 in the United States.

The fully integrated version of this QIAsymphony will be available with upgrade packages for the existing modular users. And the QIAsymphony RGQ platform will also run our groundbreaking companion diagnostic products, of which several will go to the FDA for submission in the second half of 2010. So, overall, we expect strong continued growth and a lot of news flow in this area.

Turning to page 12, in personalized healthcare we are extremely active. The portfolio of partnerships around our existing and future PCR, real-time PCR and pyrosequencing assays is growing rapidly, and we expect many key milestones in 2010. We are very pleased to have recently announced a further significant partnership to develop a companion diagnostic with a major pharmaceutical company. In our new partnership with Pfizer, we will develop a companion diagnostic for use on the QIAsymphony platform to guide the use of a novel immunotherapy vaccine against glioblastoma multiforme.

The drug is very innovative, and stems from a partnership between Pfizer and Celdex. It has a target which is exposed to mutations which occur in 25% to 40% of cases. We have developed a very interesting RNA-based assay to detect such mutations and are looking forward to working with Pfizer to bring this personalized healthcare solution to fruition.

In addition, we yesterday announced an exclusive license to create certain assays targeting the PI3K gene, which is seen as a very important companion diagnostic candidate and associated with a number of cancers. We already have a [RUO assay] and have received significant interest to partner to provide assays targeting this gene. As such, we expect to be taking this assay forward to PMA and CE stages as well.

Turning to slide 13, we recently announced our intent to take assays that we develop for other platforms, such as for our prevention platform QIAensemble, and import them to a point of need platform. The key requirement in point of need are fast turnaround times. While the standard in turnaround time for point of need testing is still two hours or less, we believe that novel technologies such as those we have announced in the last few weeks allow detections in under 15 minutes.

Using the same assay technologies we apply on other platforms, we have created an interesting package that we intend to roll out starting this year. The target markets are molecular diagnostics and applied markets. We do not intend to have a broad offering in the United States, as the United States has a very efficient laboratory infrastructure. Therefore, the menu offering in the US is intended to be limited to acute care and HAI. And Europe and Asia will be broader, and we also see great opportunities in developing countries.

Turning to slide 14, what is helping us power this capability in point of need is, on the one side, ultra-fast assay technologies that we developed for our prevention screening systems, and on the other side, unique detection modules. Some of these applications that we are using apply novel, very advanced detection technologies that can be miniaturized, reducing cost and consuming very little power, basically in the form of battery power. These features allow a price per instrument also of under $2,000.

The current system has wireless and networking communications and multiple modular upgrades to expand processing options. We were very intrigued by the power of this technology and the team, and acquired the company, ESE, in January. While the point of need platform might steal the spotlight, the optical detection technology and expertise was actually of core interest. We believe it will find utility in many of our laboratory-based instruments as well.

The modules and the point of need systems are already available today. Hundreds have been placed, and the number of assays have already been formatted for it by third parties, and now also by Qiagen. The acquisition should contribute about $6 million in revenues in 2010 and be neutral to earnings.

Now, moving away from diagnostics and to applied testing, on slide 15. Our sales to customers in applied testing continued strongly. We recorded about 6% of net sales and good growth. In 2009 we significantly expanded our assay portfolio and intend to expand this portfolio further in 2010.

While this customer segment is still small, this is a dynamic area and highly synergistic with our activities in the life sciences and molecular diagnostics. Our key focus segments are genetic ID or forensics and veterinary testing. We have complete platforms, in particular, sample to result processing on QIAsymphony and others and now also on our point of need platform.

Turning to pharma, on slide 16, pharma development continued strong as well. This is about half of our sales into this pharma segment, which represents 21% of sales. In pharma discovery, we expect softness to continue due to mergers and recently announced restructurings. But discovery is an increasingly minor part of our sales into pharma.

By supplying disease and pathway focused panels for biomedical and pharma activities in discovery and preclinical, we believe that Qiagen can contribute to the discovery and validation engines of biomedical and pharma companies. This can lead to further growth and development and potentially also to companion diagnostics. This is at the core of our strategy in pharma.

As such, the recently closed acquisition of SABiosciences will be highly synergistic with our strategy in pharma and diagnostics as well. It can be seen as a significant contribution to our engine to expand our content portfolio and thereby our diagnostic offering.

If you turn to slide 17, we have listed some comments on the academic markets. We are actually growing quite look nicely here. We did see first stimulus funding come in, but it has not been significant. However, we are very well positioned to benefit from these funds when they do arrive, which will probably be more significant in 2010, and even more in 2011. Even though US academia is only 10% of our sales, the overall contribution from stimulus could be as high as $20 million US through 2012.

Our strategy in academia is not to be a one-stop shop, but to lead with technology excellence in our core area of expertise, sample and assay technologies. This is further augmented by our leading positions in translational research, microRNA and epigenetic research, just some of the fastest growing areas of academic research today. Now let me hand back to Roland now.

Thanks. Our financial expectations overall for 2010 are outlined here on slide 19. While the outlook for the global economy remains uncertain in many areas, we see stable economics in our core markets and growth opportunities in untapped markets. Both position us well for this year.

For 2010 we are guiding revenues between $1.120 billion and $1.170 billion US based on January 31st, 2010 exchange rates. This represents an 11% to 16% growth over 2009.

Here I would briefly like to draw your attention to currency weight volatility and their impacts on revenue estimates. The past three months have seen a change between 2% to 3%, a net effect on estimated revenues that represents a headwind of about $35 million US. We have a graphical representation of this in the appendix on slide 38 of our presentation.

For the 2010 adjusted earnings per share, we expect between $0.90 and $0.96 per share based on January 31st, 2010 exchange rates. Note this is using the weighted average number of fully diluted shares outstanding of 242 million [inaudible - highly accented language] including those from the equity offering. Adjusted for the net impact from the equity offering, the growth in adjusted EPS would be between 8% and 16%.

This next slide addresses some of the questions you may have in terms of the development of our operating margin given some of the investments we are making in the business. Over the last few years and also going forward we have been able to gain efficiencies by leveraging SG&A. In 2010 we are using the leverage from SG&A to fund our R&D efforts.

Specifically, this investment will go towards clinical trials for our next generation platform QIAensemble, and about five related assays, including HPV screening and genotyping, as well as integration of the DxS products onto the Qiagen platforms. The latter will be accounted for in the first half of 2010.

We believe that we can continue to maintain a strong operating margin of around 29% in 2010 and still be on track for improvements going forward. What is interesting to note is that the operating margin targets for 2010 are at or above [inaudible - highly accented language] estimates. Where we are being conservative is in estimates of surplus cash, where we're expecting a total return of only 40 basis points.

So, as you can see on slide 21, in terms of the interest rate on our cash balance, we estimate approximately 40 basis points and interest expense of approximately $30 million US Please note that our functional currency is the US dollar, and therefore our interest benchmark is the US dollar interest rate. We recognize that analysts use the European companies euro interest rates, which are at about 120 basis points. We said we would have achieved approximately $7 million US higher interest income.

About two-third of our debt is fixed rate or swap into fix, hence we do not see any negative impact from potentially rising interest rates. Our cash balances and marketable securities are invested at floating rates. Therefore, as the floating cash position exceeds the floating debt position, any rise in interest rates will improve our net interest expense.

In 2010 we can also continue to expect organic growth at the same levels as 2009, in the mid to high teens. In terms of adjusted operating income, we expect pretax 123R expenses between $13 million to $14 million US. Approximately require -- amortization of acquired IP of approximately $84 million US, integration and acquisition related charges of $19 million to $23 million US.

For 2010 we expect our non-GAAP effective tax rate to be between 27% and 30%. The weighted average number of fully diluted shares outstanding will be around 242 million.

Before I hand back to Peer, let me just briefly outline our guidance and assumptions for the first quarter. We are guiding for revenues to be between $255 million and $265 million US, and adjusted earnings per share to be between $0.18 to $0.19 using January 31st, 2010 foreign currency rates. We expect an adjusted EBIT margin between 26% and 27% for the first quarter.

For 123R expenses, we expect approximately $3 million US, amortization of acquired IP to be approximately $21 million US, and business integration and related charges of $7 million US. With that, I would like to hand back to Peer.

Yes, thanks, Roland. We are very pleased to be able to report another year in which we met or exceeded our targets in every quarter and for the full year. Underlying trends are strong, and the Company's performing well. Our organic growth rate of 13% for the year and our operating margin of 29% are industry leading.

At the same time, our strategic momentum is as strong as it ever has been. In particular, we are pleased to be able to announce that we expect to significantly expand our company in 2010 as well, from $1.01 billion US to up to $1.17 billion in net sales. We have a lot in our pipeline and we are prepared to give an exciting overview for Analysts Day on Thursday in New York City and look forward to seeing you there to share with you the developments and growth outlooks of Qiagen. And with that, I will hand back to Solveigh.

Yes, thank you very much, Peer. We are now looking forward to discussing your questions. Kerry?

(Operator Instructions). And your first question comes from Quintin Lai with Robert W. Baird.

Good afternoon. Congratulations on --

Good morning.

Peer, could you give us a little bit more color on the strength that you saw in molecular diagnostics, comparing kind of US versus Europe?

Well, we saw, I'd say, a strong growth on the prevention side in the States, clearly, with the HPV, CTGC and other products in that portfolio. And we saw very strong growth in the profiling portfolio, primarily in the United States. The differences were not too big, however. So I think the whole suite of products, personalized healthcare is still only about 10% of the portfolio. We're running about $50 million revenue volume on personalized healthcare products currently. The two big ones in the molecular diagnostics portfolio are profiling and prevention and they showed slight differences geographically but not dramatic.

And kind of as a follow-up to that, there's a lot of macroeconomic news with respect to sovereign debt in Europe. Your outlook in 2010, I guess, do you anticipate any kind of ramifications of macroeconomic issues on your businesses on either the molecular side -- or the diagnostics side or the tools side?

You know, it's tough to say. If you look at the countries that are currently exposed, like Greece, Portugal and Spain, Greece and Portugal clearly represent very small markets. Spain is a little bit larger. The growth has been good in Spain over the last few years. But again, it's a much smaller market than, for instance, the UK, Germany, Italy or France. So from that perspective, an individual country, even the sum of all of these discussed countries, would not be a huge exposure.

If you would look at how it -- a potential default could taint the euro zone, there are clearly implications for that. But also here, I think this is something that can be covered in the scenario that we're currently guiding for. There is a very strong underlying growth that we are basically getting because we are penetrating markets and replacing other technologies. So we're not asking for new money, but basically doing things more efficiently for our customers. And, therefore, I don't necessarily see a big change in diagnostics. In research, Spain was -- even Spain was a much smaller market than Germany and France --

Thank you very much.

-- in 2009.

Thank you.

Your next question comes from Davis Bu with Goldman Sachs.

Thank you for taking the question. I guess I'd like to build off that last question a little bit. Looking at your -- well, first, looking at your growth rates US versus internationally, not surprisingly and historically you've had higher growth rates ex-US And looking at some of the products, like the point of need testing, sounds like there are greater opportunities outside the United States. So I guess the first question is, over the coming years, would it be reasonable to expect a greater proportion of your sales ex-US?

And then secondly, given the volatility around exchange rates and I guess in this quarter and maybe in 2010, given what's going on in Europe, maybe even more volatility with increasing international exposure, would you consider financial hedging? Or how do you think about currency effects?

Okay, I'll take the first question and, Roland, the second. Thank you. It's, I think, an important fact to lead into the answers is that we have a geographical distribution which pretty much represents the global market. So we have never really seen ourselves more skewed to one or the other markets. And I think going forward, the United States will continue to be an extremely strong market.

And if any market potentially takes share on a global basis, it will more come from Asia, which is still quite small but growing rapidly. So, in general, the weighting of the business, I'd say, over the next three to four years, I would expect Europe and the United States are pretty much the same percentage as they do now, relatively, and Asia increasing in share.

The products are very often quite different. In the United States, which are more centralized laboratory infrastructure, the diagnostics market is different to the market than what you see in Europe, where you have a more fragmented laboratory infrastructure and, again, very different to what you have in Asia. So the products might be slightly different as well.

But the way we segment it, the pillars in molecular diagnostics, so asymptomatic screening, symptomatic patient diagnosis or a personalized healthcare, I don't necessarily see those being different in the United States and in Europe.

Roland, do you want to answer on the currency side?

Absolutely. Yes, first of all, I think it's important to mention that in general we do have a very good natural hedge situation, meaning that our costs and revenues are aligned in the currencies where they occur. And it even improved in 2009. With acquisition of DxS, we now have also a larger cost base in the UK, where in the past we only had a sales force there. And of course significant numbers of revenues.

In terms of overall and going forward exposure, as Peer said, in Asia it's right now mainly China is growing in a very significant way. As I said, 90% -- or more than 90% in 2009. And this currency is clearly, at least right now, tied to the US dollar. And within Europe, I think we do have still this very good natural hedge situation. So the only thing we're going to do going forward out of view from today is cash flow hedging. And I think that puts us in a strong position.

Okay, thank you.

Your next question comes from Dan Leonard with First Analysis.

Thank you. Peer and Roland, do you expect your organic growth rate of any of your large product lines will decelerate in 2010, besides flu?

Dan, well, there are always -- there's a mix of different growth rates within the portfolio. And if you look back at the history over the past few years, five, six years, about half of our portfolio was actually reintroduced and replaces older product lines, or adds growth to our product portfolio. And, therefore, compensates for older products that are probably not growing as fast. So there's always a mix there.

The interesting thing is that most of our products don't really decelerate or decline. They kind of, like, stay at a certain level, even if you pull marketing from them. We have 15-year-old products that basically just continue to grow without -- with very little investments. And even if we have a replacement product, they still continue to grow. So it's an interesting market that we're in, with a very, very high degree of stability over a long period of time. It's not like in pharma where you suddenly have radical changes in revenues. It's much more predictable.

I don't expect any of our basic customer segments to change dramatically in growth rates. The academic market is in the mid single digits, in pharma as well, applied testing a little bit higher, and diagnostics, again, a very strong quarter. But we had always guided for 15% organic going forward and now we're at 19%. So you'll see these slight changes. But it is, I think, an -- overall quite a dynamic portfolio where within the portfolios you will see different types of dynamics.

Okay. And the R&D expense at 12% of revenue, is that the new number you'll manage the business towards, even beyond 2010, or would you expect to manage that number downwards?

I --

-- we are right -- sorry, Roland. Do you want to take that?

Sure. I think in general, as I've said also at the beginning, we feel quite comfortable with the R&D investments we're doing to maintain this very high innovational edge which we have in this 5% of growth coming from new products. We clearly have an increase in clinical trial costs from 2009 to 2010. But, of course, having then the basis of 2010 going forward, I think number of 12% sounds quite reasonable for me.

Okay. Thank you both.

Dan, if I just may add to that, I think one thing that is very often underestimated is that we are pushing forward a platform initiative which I think the industry has not seen before. We are coming forward with a high throughput screening solution which is launching in Europe in 2010. We are coming -- and I call that the server, the high throughput screening system.

We're pushing forward in 2010, as we speak, with the broadest menu in molecular diagnostics in Europe, a random access continuous load platform, the QIAsymphony RGQ. That platform is also going to be launched in the States and we're already in clinical trials for a number of the assays that will be put on that platform. And the point of need platform will have a couple of assays coming forward, in 2010 Europe, in 2011 the States.

So we're on all three pillars pushing something forward and are doing that and still increasing the operating margins going forward. So I think it's something we've actually been managing over the last few years, the preparation of this. But we'll start seeing this come out now and, therefore, 2010 and 2011 are immensely exciting years for us in our diagnostics franchise.

Your next question comes from Cornelia Thomas with WestLB.

Yes, hi. Thanks for taking my question. I was just wondering in terms of the introductions of your new instrument ranges. If you could give us a bit more of a feel for when about in 2010 you're planning to launch these, because I would imagine that has quite a huge impact on instrument sales in that particular quarter and the following quarter -- following quarters, rather.

Good question, Cornelia. I think the answer is that in instrumentation sales, you do always have a certain lead time. And you follow up with certain clinical data that can be supplied by the company and by third parties. So there's kind of like a ramp-up phase where the early adopters dive in quickly and then you can follow up into the broader markets.

We intend to launch the QIAsymphony RGQ in the second quarter this year, in about the May period. And on that platform, as I said before, there's an impressive lineup of assays, which is, we think, the largest actually for a platform in Europe. And a lot of them are the same assays that have a huge amount of documentation and validation in their original formats running on the EZ1 and (inaudible), so now in the integrated version in the second quarter of this year.

The QIAensemble is launching in a CE Mark version sometime in the third quarter of this year. And the platform there is HPV screening and genotyping and shortly thereafter Chlamydia. We are launching that platform, the HC 400 version, which is a very versatile, very compact instrument that has a throughput which is still many times faster than the fastest instruments available today. So a very versatile, yet -- and very cost effective, yet extremely powerful platform.

So that's going to be introduced and obviously with a new version of our assay. We have the first data has already been published on our next generation HPV assay. And as the data clearly indicates, this is a totally new dimension, which in terms of specificity beats anything on the market and still could improve on the sensitivity of how we capture, too. So quite an amazing feat and, therefore, we think there will be a faster ramp-up of the QIAensemble but it still needs a few months for it to roll into a broader market.

Okay, thanks. And then my second question is regarding applied testing. Unless I'm totally mistaken, the percentage of that within your total sales keeps on going back. So indicating that that apparently isn't growing as strongly as some of the other areas. Could you give us the reason for that, please?

It always jumps around between 6% and 7%. And what is important is there is a certain cyclicality in, for instance, diagnostics and applied testing compared to some of the other markets. They have to do with the test and routine testing volumes typically being a little bit lower in Q4 than in Q3. So there are some comparisons between these two markets and Q4 is typically a little bit lower. But it was always between 6% and 7% for the year. And if you look at the underlying growth rates, you'll see that it's the second highest growth market that we are in.

Okay. Thank you very much.

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

Just wondered if you could talk through the dynamics that you're seeing in the HPV marketplace at the moment.

Sure. Good morning, Peter. Well, the dynamics continue comparable to what we saw in Q3. The United States mode is continued penetration. We've been very successful there. We have continued to expand the market. The revenue growth was good in 2009 and we also see good outlook for 2010 as well. We are now moving towards the 40% penetration. When we acquired Digene it was substantially lower, was around 25%. So there are some -- we are moving quite aggressively in this market and I expect that to continue for some time going forward, constantly changing the marketing mix and making sure that we put the right focuses in the right places.

The name of the game in the United States is market expansion and continued penetration of the non-screening population, which is still the majority of the market. In Europe it remains a very regional game, where we are actually very active now. We won some very large tenders now recently in a number of countries in Europe, in southern Europe, but also in Scandinavia.

We're working on a number of large programs also in emerging countries and even in developing countries. So the underlying momentum is also in Europe and outside -- in Asia very good, also Latin America. Our program in Mexico is moving very nicely and in the meantime covered a substantial population.

What --

It's -- yes?

Sorry. What --

After you.

-- your appetite for M&A and the kind of businesses that you're looking for.

Sure. Well, I think one of the key things that we wanted to do over the past year is if you really take an 8, 10-mile view of what we actually did, in diagnostics what we did is we tried to acquire a flagship assay portfolio. In the case of screening it was HPV. In the case of profiling it was the [Artis] portfolio. In the case of personalized healthcare it was the DxS portfolio.

Then we tried to create the right platform for these assays. In the case of screening it was the QIAensemble. In the case of profiling and personalized healthcare it was the QIAsymphony. And then once we have created that, we try to expand menu. So in the case of the QIAensemble we have five assays moving forward. In the case of the QIAsymphony you saw that the menu is actually very broad. And that's what's happening.

So the focus of M&A is clearly to expand the menu offering on that real estate that we've now spent so much in building and are rolling out over the next few years. The PI3K deal that you saw on Monday is actually very important for us and a nice example of what we want to do more of.

But I don't see a [big flank] in the Company that would need a major acquisition. The Company has a very strong growth trajectory in front of it. Looking back over the past few years, we've made or beat every single year. And going forward I expect very strong growth rates at a company five times the size we were a few years ago. And that is primarily going to be based, as in the past few years, on organic growth.

Thank you so much.

Your next question comes from Bill Quirk with Piper Jaffray.

Thanks. Good afternoon.

Good morning, Bill.

First question. Roland, based on your response to the R&D question, it sounded to me like we should not expect that the clinical trial expenses for 2010 will fall off in 2011. Said another way, it sounds like you essentially are looking to replace that spending with some additional R&D projects beyond 2010.

I think what I tried to say is that of course we have now such a strong focus on molecular diagnostics, and of course especially with our strong one right now on the QIAensemble platform with all the additional assays we're going to launch, we clearly have a very busy year 2010. Nevertheless, it also gives us a good basis in terms of R&D expenses for going forward to clearly have here some opportunities to even restart other things.

I think the other thing you have to have in mind is, of course, that all pharma partnerships we're having, and as we announced in the past, is clearly helping us in terms of leverage and also R&D expenses that because most of the partnerships we do have here in personalized healthcare are clearly structured in a way that our pharma partners are paying our R&D efforts here, which clearly gives us significant leverage into the organization.

Very good. And then secondly, Peer, just thinking about the timing of a lot of the product launches, both from an instrumentation side as well as some of the assays, it sounds like we're going to have a big push essentially starting in the middle part of 2010. And, presumably, this should help with the overall organic growth rate or the growth profile for the Company once we kind of get beyond 2010, so we should be thinking 2011, 2012 potentially seeing an acceleration here off the base.

Good question, Dan. And the way I see this is we've been building machines, literally, actually, but we've been building machines that can now start generating [horsepowers] by the fact that if we place them at a customer's labs, we can start generating consumable revenues. And with much more powerful, higher bandwidth machines with more assays running on them, this is clearly the goal.

So going forward, we expect that the work that we've been putting in over the last few years to put everything into the position we have today should start generating a very good organic engine. I wouldn't go out and say we expect significant increases in organic growth rate going forward. But I think what I can say is it's going to be a very interesting year 2010 and 2011. And we'll, over the course of those two years, have many, many new milestones and news flow that could make it interesting for everybody to get more visibility on the growth rate than in the years thereafter.

Very good. Thank you.

Your next question comes from Daniel Wendorff with Commerce Bank.

Good afternoon. Thanks for taking my questions. I actually have three, if I may. I'm starting with a product question. The QIA HPV test, could you remind me there about the timeframe when you expect this to be launched, where, and particularly if it's possible in the medium term horizon the test could contribute to your top line?

Secondly, regarding you mentioned a lot of projects which should come to the market in 2010 and 2011. Is it fair to assume that the annual growth contribution from your product introduction is going above the 4% to 5% threshold there?

And lastly, a financial one. The operating cash flow and free cash flow generation has been quite impressive over the last few years. And you have quite a substantial cash and equivalents position in your balance sheet. What can we expect you to do with the money? I mean, obviously you are still looking for nice acquisitions which could add interesting technology or even could pave the way into an interesting market. But would it be a dividend payment on a medium term horizon be an option if your operating cash flow development continues as it is? Thank you.

Great, good questions. Well, the first is the [carriage PV] product which is our point of need molecular test for HPV that we co-developed with [Path] and the Gates Foundation. That product is done. We completed the clinical trials. We have data points on 10,000 women and the product is fantastic. We met or exceeded our sensitivity and specificity milestones and expect to have the product as an IVD available in end of March, early April. The first programs are lined up.

And as you do, I see a big market opportunity for this product. At the same time, we're going to start as cautiously with a few pilot programs to make sure that it's used in the right way so that we get the right momentum. We already did five or six studies, including Rwanda, Ghana, Nicaragua and China and India and a few others. And they all went extremely well. And we're going to do one or two demo projects in 2010 before we go into full scale commercialization.

That was the first question. The second question is on organic growth going forward. I think I would like to just also refer to what Dan answered before -- asked before. The -- we have a lot of things that we prepared that should be organic growth rate drivers going forward. We will get additional visibility over the course of 2010. And I think that will give a good view on the capabilities for us to drive organic growth rate over the course of maybe even the next five years.

There are some massive markets that we're targeting. These are multi-billion dollar markets that we're now opening up to and where we actually have, in terms of technology and capabilities, now a leading position. So this will make it very exciting.

And to 16% is a starting point one can say then? (inaudible - microphone inaccessible).

Well, we guided for 11% to 16% in 2010 and going forward we'll have to see where -- how the products' acceptances are. But the numbers are big. And any number I'd put out would be -- I'd prefer it to deliver the number and make it visible that we can achieve them and then follow up with actual performance that validates that. So, therefore, I think the 2010 guidance is -- reflects a certain degree of conservatism.

And it should be understood against -- even though it is above the consensus, both in terms of the revenues and also in terms of the operating margins, there were some discussions around currency, but if you factor that out, it's above the consensus. So against that backdrop of all of this, we're actually putting out a massive initiative next year which will give you visibility on organic growth rate.

Roland, do you want to --

Last but not least --

-- take the last?

-- dividend, sure. I think, Daniel, you are right. Of course we had a significant improvement over the last couple of years in terms of operating cash flow. Last year it improved 25% to $217 million US But on the other hand, of course we also do see still quite a significant number of very attractive small to mid size M&A possibilities here, which clearly give us quite accretive [events for the] next probably two years. So I think, we should see what we can do here in 2010, might be even early 2011.

And, yes, but you are right. I think in the mid terms we have to review that as well of course cash flow is going to increase over the times. But right now we see still an active (inaudible) going on in the industry and Qiagen wants to play an active role as well.

But you don't see a reason why operating cash flow should decline?

Not at all.

No.

Good. Thank you.

Thank you.

Your next question comes from Doug Schenkel with Cowen & Co.

(inaudible - microphone inaccessible) solid 2009 in a tough environment. However, I just want to try to cut through the numbers and make sure I'm understanding one thing correctly. Because when I take the full year percentage of sales figures you presented by geography and product class and back into the Q4 numbers, it suggests that worldwide molecular diagnostics and overall US sales growth may have moderated in the quarter. It's entirely possible my numbers are off, but would you be willing to talk about Q4 performance again in the US and then worldwide molecular diagnostics?

Doug, I think there must be a currency impact that we're happy to work with you on that is leading to this conclusion. We're continuing to seeing strong growth in molecular diagnostics and all geographic regions that we supply into, a little bit faster in profiling in Europe, a little bit faster in prevention in the States. But the overall growth rate of 19% is coming basically from all regions, a little bit faster in Asia but still a small percent of sales.

And the 19%, by the way, is currency adjusted organic growth rate. And if you do look at the third quarter, due to year-over-year comparisons, there was a higher growth rate on molecular diagnostic, but that was substantially higher than what we had in the second quarter. And I think we're even above the second quarter now in the fourth quarter, which is kind of unusual as a growth rate. So there is always a certain seasonality in there, but the 19%, we're definitely very strong and across all regions.

So that 19%, was that the full year number or was that for the quarter?

We -- sorry? That was for the quarter.

Okay. All right, that is helpful. And then you guys are clearly moving aggressively into some promising areas that are even higher growth than the historical norm for you guys, both on the companion diagnostics and applied markets side. To some degree, it does seem like you've made a decision to trade off near term operating leverage and earnings for long term growth prospects associated with these areas.

So, when we look beyond 2010, and I guess this is kind of going back to Bill's question a little bit earlier in terms of just talking about R&D spend in the context of operating leverage, I guess one thing I think a lot of us would be interested in hearing about is what do you think about -- what do you think the peak margin may be for the Company over the next few years? I mean, can this be a 30% operating margin company over the next two to three years or is it unlikely that you guys would let it trickle through to that level given some of the opportunities that exist?

Yes, well, I think the best way to answer that is if you look at what we're doing in 2010, we're literally talking about an operating margin which is pretty much comparable to what we saw in 2009. I think it moves up even [inaudible] or so. And so we even see an improvement in 2010 over 2009, despite one massive number of clinical trials and also big launch programs being planned for 2010. So going forward, I don't necessarily expect this to significantly increase then for 2011.

And with that, we -- typically, we were in 0.5% in additional operating margin trend every year. And this is something that we should, if the economy of scale equation is the same as it was in the last 15 years, it should also continue to kick in. We are definitely seeing an unprecedented rollout in 2010. And therefore, the expenditures in R&D went up compared to what we're spending -- what we were spending in 2009. But I wouldn't see this as a continuous now as a proportion of sales increase.

The HPV trial that we're starting is actually going to be probably the biggest and the most extensive clinical trial ever done in molecular diagnostics and we are -- we're launching -- we're submitting, in the second half of 2011 is the date, mid 2011, and with the launch date in 2012. So that's about -- the other assays that are coming onto that are primarily 510k assays with a fraction of the expense.

So that's why I wouldn't necessarily assume that we decided to make a tradeoff on margin to support R&D expense. But this is really something where we're trying to manage something and are actually keeping the operating margin flat despite a significant increase in clinical activity.

Okay. Thanks for taking the questions.

Thanks, Doug.

Your next question comes from Isaac Ro with Leerink Swann.

Good morning. Thank you for taking the question. Just to take that last question and maybe in a slightly different direction, I'm interested in maybe talking a little bit about your point of need opportunity and how you think about your go-to-market strategy there specifically for emerging markets. And what I mean by that is do you think you need maybe an incremental investment there in distribution for the long run? And as you get to scale in that business, do you see an opportunity to have that be a sort of margin accretive part of your franchise or would it be more in line with the corporate average?

That's excellent question. The point of need market is evolving and there are two ways to play in it, either play in it selectively and find partners for other parts of the market that we don't want to build sales channels around, or do a broad-based initiative which would require more activity and also more investment but could be highly profitable.

We're right now -- the model that we're working on right now is a very selective approach and we are opening up the platform to third parties that are -- of which several already have developed assays for this system. And we are encouraging that going forward. So you could think of it something like an app store that we've created where other parties can also develop assays for the system.

And there are a number of different parties that are already commercializing this system, or various variants of it. As I said, a few hundred have already been placed. We are taking a selective strategy right now. This is what I would plan for and also project for the foreseeable future. But we do have strategic options to go into a broader mode in this area. But this is currently not part of the plan.

Great. Thank you. And then maybe secondly just a big picture question on the companion diagnostics market opportunity, at least in the US. How do you look at maybe developing that channel over time? There's obviously a number of constituencies who will have an interest here, whether they're drug companies, labs and PBMs. So do you see a standard model developing for you guys to play in that market or do you think it'll be very dependent on the specific drug and indication that we're talking about?

Excellent question. I think there are four strategies in general people can take. The first is you can take the science and if you see that science says that a diagnostic would work well with a drug, you can develop a diagnostic for it. And there are a few models. There are typically [base models] where hundreds of millions were spent to validate these types of assays. And the businesses can be attractive, but at huge upfront investments.

The second model is to take, like, a Medco strategy. We saw them recently move here where a payer basically decides on doing this. The third is there are certain complexities, regionalization. It's not a global strategy. And interesting for the payers, but not interesting for us. The third strategy is that you could basically go out and, as a pharma company, start building your own diagnostic channel. But not everybody can be a Roche, who do an excellent job in this area and for their own drugs.

And the third option is the one we're taking where we have a very substantial instrumentation and placement base out there, where we have sales channels into pathology and to hematology and to all the other segments where these types of assays are performed and where we are then porting that content in partnership with pharma onto these platforms. And basically everybody has a certain element of strength that is contributed to the equation. And this is working very nicely.

And I'm enthusiastic about our partners and how we're working together. And it's a great deal of fun and it will be very, very exciting over the next two years. We're going to submit the first true companion diagnostics to the FDA, hopefully in the second half of this year. And this is going to be a watershed event, not only for molecular diagnostics but the whole healthcare industry. And we're quite proud to be associated with that.

Thanks so much.

Thank you.

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

Yes, thank you very much, Kerry. With this, I would like to close the conference call by thanking you all for participating. We hope to welcome you again to our first quarter earnings conference call on Tuesday, May 3rd, 2010.

As always, if you have any additional questions, please do not hesitate to contact us. Again, thank you very much and have a nice day. Bye.

Thank you.

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