Qiagen N.V. (QGEN) Q3 2007 Earnings Report, Transcript and Summary

Good morning. My name is Alpha and I will be your conference operator today. At this time, I would like to welcome everyone to the QIAGEN Third Quarter 2007 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 period. [Operator Instructions]. Thank you. It is now my pleasure to turn the floor over to Solveigh Mahler, Director of Investor Relations. Ma'am you may begin your conference.

Thank you very much Alpha. And hello everybody. Welcome to QIAGEN's third quarter 2007 earnings conference call. I am Solveigh Mahler, 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 the press release today announcing QIAGEN's financial results for the third quarter and first nine months ended September 30, 2007 and describing the company's recent business highlights. A copy of this announcement as well as the presentation we will be using during this conference call can be downloaded from the Investor Relations section of our home page at www.qiagen.com. This conference call will cover 20 minutes presentation followed by Q&A session. The time of the conference call is set at one hour. We therefore would like to ask you to please limit yourself to only two questions during the Q&A session. The call will be archived on our website. Before I turn over to Peer Schatz, please keep in mind that the following discussion and the responses to your questions reflect management's views as of today, November 6 2007. 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 intention, believes, 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 from those projected. QIAGEN disclaims any intention or obligation to revise any forward-looking statements. For the description of such risks and uncertainties, please refer to the discussions and reports that QIAGEN has filed with the U.S. Securities and Exchange Commission. With this, I would like to hand over to Peer Schatz.

Yes thank you Solveigh and thanks for joining QIAGEN's third quarter 2007 conference call. We had a very strong performance in this third quarter 2007. Revenues came in at a $176.6 million, EPS on adjusted basis at $0.17. Net income on an adjusted basis grew 42% and the strong performance in this third quarter 2007 allows us to increase full year 2007 EPS adjusted guidance. Overall revenue growth, as I said was every strong. We grew 50%, significantly advancing our leadership positions almost all across the board. Strong organic growth rate, underlying the overall growth rate has been very strong again, continuing a very strong performance in our sample and assay technology core areas. We believe we increased market leadership and share in all markets we serve. At the core of this success is and continues to be QIAGEN's success in innovating. Once again, 4% of sales come from products we launched within the trailing 12 months. This continues to be a record for our industry and we're actually facing one of the strongest pipelines ever looking into 2008. The Digene integration is running very well. It is fully on track, all major projects have been started; some have actually already been completed, I have more details on that in a slide a little bit later. So many good things happened in this third quarter 2007, on top of that and what certainly captured a lot of headlines were landmark studies which were published demonstrating the value of HPV testing, including such value as a primary screen, and this is clearly very important as we are rolling out this product into many markets that do not have established testing regimes yet. So overall, both operationally, financially, but also strategically a very strong performance in this third quarter, we exceeded our targets and we are looking very confidently into 2008. Turning to slide number 4, the typical distribution of our revenues, as we shown in previous conference calls, didn't really change materially. 90% of our sales continued to come from consumables, and about 10% from instrumentation. We saw a very strong growth across the board in our consumable space, or sample and assay technologies consumables 45% growth rate on a constant exchange rate basis. Clearly, this includes acquired revenues and I will get through the breakdown in a minute. But in instrumentation, which also was about the same share of the legacy Digene business which is now consolidated, continue to show a very strong growth rate and we are very satisfied with that business area as well. As we all know these two products, instrumentation and consumables go hand in hand and are used very often as a package which operate together. If we look at the geographic regions on the right hand side, we see continued very growth in Europe, North America slightly under that growth, but also a good performance and Asia continues to grow very rapidly. But it is important to say here while the overall growth rate in Asia is under that of the second quarter the growth rate in Asia continues to be very strong, there many countries are continuing to grow at very high growth rates. Japan is in there which is growing in the single-digits but the most important factor was the second quarter included acquired revenues which increased that growth rate, so we continue to see on an organic basis a very strong performance in the Asian countries and we are very excited about our leadership position which we actually have in many markets and which we are actually expanding every day. On slide number 5, you see the typical breakdown of revenues that we always show and shows you that we continue to show a very solid and very strong organic growth rate of about 10% and this organic growth rate comes from a 2% price increase, 4% volume increase and 4% increase from new product i.e. innovation. This is a very comparable number to what we have seen in previous quarters and continues to demonstrate the strength of our innovation and of our operating franchise. On top of that 35% of our revenues came from acquisitions; exchange rates added another 5%... to an overall 50%, overall revenue growth rate. Turning to slide number 6, I just wanted to give you a small glimpse into our integration process. Now what is important to note here is that our molecular diagnostics business pre-merger was about the same size as the Digene business pre-merger. The two are coming together. The majority of our revenues, our... the pre-merger revenues are actually hardly involved with disintegration process. It is more of the administrative and the directly associated marketing and sales activities, directly associated with the molecular diagnostics business. I will give you an example in a minute. The disintegration is going very well. Its especially going very fast more than 80 integration projects were defined and they were defined in record time early September. We actually rolled out the organization at that time as well and all employees have received their project descriptions or their job descriptions at that point in time. Approximately 525 high level project milestones were identified and we actually completed already our 25% of those as of today. We clearly went into an in-depth review of the synergy targets that we had estimated when we came out and announced the acquisition early June, and we can hereby confirm that we feel very confident with the synergy targets. Most importantly the revenue synergy targets coming from collapsing the sales forces and also... and especially new product which is an extremely exciting area for us that we see accelerating significantly, especially in 2009 as we're finalizing these developments over the course of 2008. On top of that, the cost synergies that we estimated at $35 million to $45 million in 2008, we can hereby reaffirm, we feel very comfortable with that number. Out of these $35 million to $45 million in cost savings about 10% to 15% of those are coming from the cost of sales areas, the manufacturing areas that are leveraging manufacturing capacities that are also sharing infrastructures and overhead. And this is clearly one area that will continue to... place continued emphasis ongoing forward. The cost energies and the R&D area are a little bit misleading. We are actually expanding our R&D efforts and the pipeline is extremely promising and very full in the area of women's health, but also overall for our company. What we are seeing here is cost synergies are primarily the sharing of resources and infrastructures and also overhead. At the same time what we are also seeing here is that we're able to collapse a number of QIAGEN related products, pre-merger QIAGEN related product into projects that pre-merger Digene was about to address. And this is leading to significant cost synergies. And also here we will give some... shed some light on this pipeline in our analyst day in February. It is an extremely exciting pipeline around the area of women's health but also overall in the company. And we much look forward to sharing that with you. In the sales and marketing area, we see significant synergies as we're collapsing our molecular diagnostic sales force as I have some details on that in a minute. And especially as the legacy Digene business case had an expansion of the sales force we can generate a lot of synergies there. In the G&A area the cost synergies are primarily in the area of corporate infrastructure and also IT and therefore the largest area of... in terms of dollars largest area of synergies. The integration is fully on track. We feel it is very well managed and we are very much looking forward to building on this going forward. Just one example how, because we are getting this question from time to time, how we are going about our sales force or integrating our sales forces. On slide number 7, you see how the legacy QIAGEN business actually sold. We had in the legacy QIAGEN business one of the largest sales forces in the world if not the largest molecular diagnostics about a 150 professionals globally selling over 500 different products directly through laboratories. These are the same customers that are also purchasing the HPD related products and others in the area of women's health. If we now move to the next slide, slide 8 we have a description of the pre-merger Digene business. For laboratory sales force which you see on the bottom on slide 8 was actually substantially smaller than the QIAGEN laboratory sales force. So, the legacy Digene only had 20 sales people going into laboratories and actually focused on selling and creating solution packages over the laboratory themselves. The majority of those sales force was in the area of so called clinician sales force about 80 people and on top of that the quite innovative marketing program the direct to consumer advertising. If we move to slide 9, you see how we are going to collapse this. It's actually quite simple. We will continue and actually expand the direct to consumer advertising programs. We're also rolling these out internationally, into countries that are open to this type of advertising. On top of that we're keeping and actually expanding going forward the clinical sales force that is focusing on educating physicians about HPD and how to take samples and how to send them on to laboratories. This is an area that is extremely important as we're still seeing low penetration rates. Even in the United States the education of physicians is absolutely critical. On top of that our laboratory sales force just got even larger, at 170 professionals we are clearly a very formidable force globally, working with laboratories on complete solution packages creating an opportunity for laboratories to also interact with professionals who really understand molecular diagnostics and have an unrivaled breadth in product and solutions in this space. This is a very important area for us and we're going to continue to focus on that going forward as well So a very strong sales channel and one that we will also replicate in similar formats and actually did so in many instances already in other countries around the world. On slide 10 just one word on our franchise, very often it's a... I see various efforts to try to put us into one or the other bucket as there are a number of sub-segments of the molecular diagnostics space. What's actually so exciting about QIAGEN is that we are present in almost every sub-segment of molecular diagnostics. We have two, our open platform technologies at present which starts in very early adopter segments as they're using our open platforms and developing tests for these, for noble targets we are present in an extremely exciting way allowing us to be one of the most often cited companies in journals such as Journal of Molecular Diagnostics and others. On top of that we have a closed assay portfolio which is one of the broadest in the world. We have today about a 120 tests that we sell throughout the world in various countries in different formats that address very many different sub-segments of molecular diagnostics. These certainly include the areas of viral and non-viral infectious diseases. There are also genetic diseases in pharmacogenetics and in oncology we have a very fascinating pipeline around HPV but also one that we are significantly focused on to expand going forward. In blood screening, we are typically working through partners and in many countries of the world we actually have a direct sale of closed assays into blood screening but predominantly in Asia. So, a very leading player at the same time a very broad footprint in this early market allowing us to address a lot of opportunities going forward. And this leads me to slide 11, also here platform strategies are often being discussed and very often around a specific type of platform. Well we think a customer thinks beyond that. He is not interested in buying of oxygen, he is interested in buying a solution. And we today have an extremely broad platform of strategy that is around very high throughput technologies that are for instance the Rapid Capture System but also others. We sell into open real time PCR platforms that are today almost ubiquitous standards in almost any molecular diagnostic laboratories so most of our assays are actually regulated for use on multiple different sites for us in many countries of the world and here again we have a leading portfolio of tests. We also have these novel multiplex technologies that we're detecting on Luminex system that are also very strong standard in the market and also added now the Genetic Analyzer the eGene system that we will formally be rolling out in 2008. That gives us a really exciting product for many sub-segments of molecular diagnostic as well, and I can tell you that this area will increase going forward. It's an area of heavy focus above and it's certainly not the same... you will not have the same chart in a few years. The assay offering continues to be very broad and is expanding actually every day. We are using clearly this breadth to give solutions to our customers across many different types of targets that potentially... there are hardly any other solutions for. We are there to provide these and clearly this is now also boosted by the blockbuster franchises around HPV, and in HPV we have significant expansion of the product offering that we will shed light on in February 2008. We did already say that HPV genotyping went on fast track as well the CF assay and respiratory and hospital-acquired infections should come out in 2008 as well. All on these novel multiplex technologies that we are getting fantastic results on, first products have been launched into the research use only market. Now, just a few words on these HPV studies. There have been a number of studies that came out over the last few years, and what is really very exciting is that they are using our product, our technologies here to demonstrate the value of HPV testing. HPV testing is an area... it's actually easy to detect an HPV virus. It's a very difficult, so the analytical sensitivity of a test is very easy to achieve. The clinical sensitivity is very difficult to achieve. And this is like... these broad studies are extremely important and the study that came out and was established in the New England Journal of Medicine a few weeks ago was just extremely positive for us and clearly we'll pick up with Frontline News, our news in USA Today and many other newspapers and journals throughout the world continues to show the importance of what we do. On slide 14, just some key findings of these, HPV consistently is more sensitive and psychology. HPV DNA detect lesions earlier than psychology. It's a better predictor of risk for older women. Follow-up of HPV positive side of normal women with genotyping, psychology improves specificity. And LBC does not detect more high-grades squamous intraepithelial lesions and will not be recommended. This is a study performed in Italy that concluded that. HPV testing is safe and likely cost effective and there are studies that drill deeper into the significant cost effectiveness of HPV even as the primary screen and the extended interval is a benefit for women on lower cost for the health care system overall. Self sampling is one area that is increasingly also looked at. So HPV as a frontline primary screen is really the next logical step and these studies come at a very important time and the decision periods in which many countries are in terms of cervical cancer screening programs. Just to close my part of the presentation on slide 15, we get some questions on our geographic presence as well. We have three main sites, the site in Maryland is now significantly expanded the two sites are being merged. And we actually have teams moving back and forth between these sites. This is the fantastic opportunity to accelerate integration and also to combine and concentrate our efforts in certain functional areas. Our site in Germany is also expanding and also our site in China is expanding, and we actually received a very important and very rare still medical device manufacturing enterprise license from the FFTA [ph], making us one of very few diagnostic manufacturers who have received this seal of approval from that authority. With that, I'll hand over to Roland.

Thank you, Peer and good afternoon everyone in Europe and good morning to those joining from the U.S. I believe our numbers this quarter are a testament to the strong strategic and operational highlights that Peer just outlined for you already. Our leadership in molecular diagnostics is boosted by a deep pipeline of technology opportunities and allows cost and sales synergies. This is superior growth profile and double-digit organic growth. We feel we are well on track going into the first quarter and on a solid footing for attaining our goals for the fiscal year 2007, therefore the increase in our fiscal year 2007 guidance. So taking a closer look now at our third quarter results on slide 17. We are pleased with this outcome as we exceeded our financial goals. We reported revenues of $176.6 million U.S., which are up by 50% over the same period last year. Our sales of HPV testing product are recorded in our sales to customers transforming molecular diagnostics. These sales continue to gain momentum, exceeding our expectations and further reinforcing our position as a market leader. They exceeded our targets for such HPV related sales in the third quarter and remain confident in our ability to grow our HPV testing business between $58 million to $60 million U.S. in the first quarter and further accelerating this business to $260 million to $270 million U.S. for calendar 2008, as we have guided before. As you may know, it is our policy not to break out individual products or business from past acquisition and our approach is to show consolidated figures which incorporate the revenue from Digene and to HPV tests. This policy is also reflective of how we conduct our business, where HPV is a part of an integrated molecular diagnostics strategy. We saw a 3% foreign currency impact on revenues comparing the actual results for the guidance spread from January 31st 2007. Perceived adjusted operating income of $43.7 million U.S., an increase of 43% over the same period of 2006 is margin of 25%. Although this is still to quite solid we are not yet fully yet leveraged cost synergies. So we expect further operating margin level improvement in 2008 on this basis. To increase comparability and to show underlying performance, we exclude from these adjusted figures any acquisition integration and relocation related charges, as well as the amortization of acquired IP and equity based compensation. Of course, we also report our financials including all such charges and costs as well. Adjusted net income was $31.1 million U.S. for the quarter, demonstrating growth of 42% over the third quarter 2006. Our third quarter adjusted EPS of $0.17, as share lies above what we expected. Included in this is a tax benefit of $0.02 which resulted from prior year tax credit as well as a positive impact relating to FIN 48. Turning to a breakdown by product line for the third quarter 2007. Just for some additional clarification ahead of this on how we have allocated the various newly acquired products. The consumable line includes sales from all molecular diagnostic assays including HPV tests and under instruments, we include all instruments related to molecular diagnostics, including instruments related to HPV testing. We had strong growth both in consumables and instruments this quarter. We delivered 45% growth on a currency exchange rate basis in consumables and 39% growth in instruments. I think these numbers are a signal that we are leveraging not only our improved sales management, particularly well in instruments, but it is also true for our consumables in terms of integration progress. Also in both sample and assay technology was solid in all market segments and across all product lines. We had an innovation rate of approximately 4% based on revenues coming from products and sample and assay technologies in areas including the gene expression, microRNA, proteomics and molecular diagnostics launched in the last 12 months. In terms of the category others, the numbers are effectively immaterial, but we show them here for the sake of completeness. On the next slide we show our reported versus adjusted figures. As a reminder we provide non-GAAP figure financial measures because we believe it provides useful information to both management and investors by excluding certain expenses that may not be indicative of our core results and provide for consistency and financial reporting. First, our net sales were same under both GAAP and non-U.S.GAAP. I like to break down operating income a bit more for you. This was adjusted mainly for in-process R&D amounting to $25.9 million, comprised of $25 million from Digene, 900,000 from eGene. Acquisition and integration related costs amounted to $5.9 billion. Also included in these adjustments are acquisition-related intangible amortization of $11.4 million and FAS 123R expenses of $2.2 million. To put this in another perspective, excluding these integration expenses, we showed significant profitability on operating income, net income and EPS. There is an adjusted 18% after tax profitability. You will find the details split out in our Appendices to this presentation of these figures. Of all the third quarter numbers breakdown as follows. We once again reported strong top line growth. Our net sales of $176.6 million, this was compared to $117.9 million for the same period in 2006, reflects a growth rate of 50%. Looking at our numbers on an adjusted basis, our gross margin was 71% for the third quarter. To give you a bit more detail on these numbers, first of all Digene was consolidated only for two months, not for three months. For next quarter, we would see a slight increase here. Secondly, the legacy Digene typically included licenses outside of cost of sales, the operational expenses whereas at QIAGEN we typically include this in the cost of sales. Finally, there were also other reclassifications between operational expenses and cost of sales. So overall, on a standalone basis, the gross profit is slightly lower than Digene reported before, nevertheless, we expect for the fourth quarter an improvement in gross margin. Our adjusted operating income demonstrated approximately 43% growth over the third quarter 2006. Our adjusted net income showed a strong growth rate of 42%, however, our tax rate is also lower rather for third quarter 2006, including the tax benefit as mentioned before. Our normalized tax rate was around 30%. Additional factors that continue to contribute to a lower tax rate are also the revenue share in Asia as well as Switzerland as it pertains to our instrument business and favorable tax benefit from the recent $500 million credit facility. In respect of adjusted diluted earnings per share we had an increase of 21% to $0.17 per share up from $0.14 for this comparable quarter in 2006. And that's also our expectation for the third quarter 2007. I will not go into any great detail on our nine months numbers at this point. You will find the detailed breakdown on slide 33 in our appendices of these. I would like to highlight however that our first nine months revenues for 2007 were $439 million using guidance rate that would be $432 million and with an adjusted EPS of $0.48 which is up 20% over the first nine months in 2006. Based on our strong performance in the third quarter, we are increasing our full year guidance for adjusted diluted EPS by $0.03 from the previously announced $0.55 to $0.59 to $0.61 to $0.62. For fiscal year 2007, we continue to forecast revenues to be in the range $614 million to $635 million using the guidance rate. We believe that both eGene and Digene expected contribution to this remains well on track as previously stated. From our HPV testing business for instance that is $58 million to $60 million. For adjusted EPS for the fourth quarter, we expect $0.13 to $0.14. Just to point out to you some of the effect of contributing EPS estimate also having made significant progress on the integration front we still have some way to go on achieving operational leverage and the necessary efficiencies. In addition, direct advertising and regulatory costs also have an impact. On the next slide we've listed a number of assumptions to frame some of the items more precisely for the fourth quarter and fiscal 2007. First of all our organic growth, we continue to look for approximately 10% here. Digene and eGene are not organic of course. On adjustment, operating income for the fourth quarter, including the Digene and eGene acquisition, you should expect the following. FAS 123R expenses between $4 million and $4.5 million driven mainly by the legacy Digene equity-based compensation plan. Amortization of acquired IP of approximately $15 million which will not all be seen in the operating line, was approximately 78% in the cost of goods sold line. Integration and acquisition-related charges of approximately $3.5 million to $4 million. The overall pro forma tax rate for the fourth quarter is expected to be between 26% and 30% and the weighted average number of fully diluted shares outstanding will be around 205 million shares for the fourth quarter and around 175 million to 180 million shares for the full year 2007. Before I hand back to Peer, I would like to go ahead and give you some assumptions for 2008. In terms of adjustment, operating income for 2008, you should expect 123R expenses between $15 million and $17 million. This is including the legacy Digene equity-based compensation plan. Amortization of acquired IP of approximately $60 million and again here this will not all be seen in the operating line, was approximately 78% of this in the cost of goods sold line. Integration and acquisition related charges of approximately $12 million to $50 million. This will be spread over all four quarters next year by tapering off as the end of Q4. As most of you know we have significant operating activities in Europe, primarily in Germany. Due to a tax reform in Germany we expect a significant positive decrease of our corporate tax rate down to 26% to 30% for the year 2008. We would use additional profit out of a decrease in tax rate to boost our research spending and sales channel activities without any impact on our EPS number. The weighted average number of fully diluted shares outstanding will be around 210 million shares. For a detailed breakdown of amortization please refer to slide 31. With that I would like to hand over to Peer.

Thanks Roland. So overall here on slide 24 is summary, as very strong third quarter, well on track, revenues up 50%, organic growth of 10% and a strong first nine months. But very important here is strong strategic momentum. We are seeing a very exciting market environment across the board. In our molecular diagnostic business HPV testing is getting more and more accepted also even outside the United States and we are very well positioned to take also the instrument [ph] business going forward. As integration of our acquired businesses is very well on track and we look forward to moving on this project very actively now over the next three months. The guidance for the full year 2007 as given by Roland before $614 million to $635 million on the top line and $0.61 to $0.62 which represents an increase of about $0.03 compared to the previous guidance. So overall a very strong performance and we are looking at very positively into 2008. And last but not least on slide 25, I would like to introduce you to somebody here in new on our QIAGEN team. I know a lot of you know how Al Leury very well. Al has been with Digene for seven years in Investor Relations and other related functions. He brings to... he will be joining our Investor Relations team and this is a great addition to our team. And he has such a strong academic background in both science and finance, a BS in biology and a bachelor's degree in economics and also he's a graduate from Warton with an MBA. His contact information is here on the slide, and he will be the contact before all... investors are increased in the United States if you like to move to this channel. And we look forward also to introducing him and to you in person going forward for those who have not yet met him. With that, I would like to hand back to Solveigh.

Thank you very much Peer. We are now looking forward to taking your questions. To open the Q&A session I would like to hand over to the operator, Alpha. Question And Answer

Thank you. The floor is now open for questions. [Operator Instructions]. Our first question is coming from Bill Quirk with Piper Jaffray. Please go ahead.

Thank you and good morning or good afternoon. I suppose in terms of your perspective. First question here I know you don't like to break out the Digene contribution by geography but it looks like the European business actually continues to grow in excess of the U.S, is our math correct here?

Well it certainly is coming from a much smaller number and clearly we are seeing effects of these tests rolling out in certain countries leveraging our sales infrastructure. So maybe first overall we gave certain number targets for the third quarter and we came well within those or actually exceeded those targets for the HPV related business. The international mix is one that I wouldn't want to break out at this point in time. I would say however molecular diagnostics business in Europe had a very strong quarter in the third quarter.

Excellent, thank you. Second question actually has to do with the pipeline and in particularly the hospital-acquired infection launched, good to hear that this is tied up for 2008. But I was hoping Peer I know you don't want to give too many details away until the analyst day but perhaps you could help us think a little bit about the launch timing, is this beginning of '08, kind of end of '08 and should we assume that this is going to include more than an MRSA assay that we are looking at more of a panel approach?

Well first to the latter question, the profile of the assay, our QIAplex technology allows us to put a lot of real estate onto a panel, so with very high sensitivity we can hit many targets within a given sample and this is a benefit that we want to bring to our customers. So we're re not thinking about an MRSA assay and then here and then VRE assay there or then the third assay there, we are thinking of creating panels that in one shot and in very powerful way can give a very high resolution of the various targets and also a sub-typing of them as well. This is the benefit of the QIAplex technology and also one of the advantages of first preliminary version we launched for researchers only in Q2. Now in terms of the launch outline, we did put some of the women's health related assays on fast track and the hospital acquired infections panel will be more in a regulated format, will be more in the second half of 2008 than the first.

Thank you very much.

Thanks.

Thank you. Our next question is coming from Jason Weiss from Robert W. Baird, please go ahead.

Hi thanks for taking my call. I am wondering if you could talk little bit about perhaps some HPV contract wins that you have seen either within or outside the U.S.?

Sure, while we continue to expand our business and there were some major contracts signed in the second and the third quarter, one that was announced was certainly the expansion of our contract with Quest and we continue to see that our customers are extremely favorable to this tremendous body of data that we can bring to the table, that shows the value of these tests. And we are winning contracts almost every day or every week. So as this expands geographically, I wouldn't want to comment on individual contract, unless they're really material, but we are seeing a very strong competitive advantage for the technology and the competitive advantages of our product.

Great, thank you for that. Then with regard to gross margin, you gave some good insight as to some of the moving pieces there. I am wondering if you could provide any additional detail on the gross margin of the core QIAGEN business during Q3.

On our core QIAGEN... hi Jason, I think we have a growth... we have seen I think good quarter. We have clearly had a strong instrument quarter as well which as you know clearly has an impact on gross margin, but as I said before, it doesn't have any impact on operational income and on EPS as we benefit some on the tax side. So overall I would say a slight improvement on the call it legacy QIAGEN gross margin, but I think a big impact was really that we... for accounting purposes where we had some reclassification between legacy QIAGEN and QIAGEN accounting policies. And therefore you will see a... you have seen a slight impact in the third quarter, but of course as I said, you will see an improvement already going into the fourth quarter, of course having three months of QIAGEN within our consolidation, certainly has impacted growth.

Great, thank you. Roland.

Thank you. Our next question is coming from Maykin Ho with Goldman Sachs. Please go ahead.

Hi. I don't know whether I missed this. I think in the past you've broken down your business based on research, molecular diagnostics etcetera. So what is the breakdown for this quarter?

Yes thanks Maykin. Well the breakdown is a little bit difficult and misleading, because we didn't have a full quarter. On an apples of the Digene business being consolidated here, I would take as the best basis the numbers that we put out in the second quarter in which the molecular diagnostic business about 48% of our sales and you should consider that also as the target number for this quarter. But again we only consolidated two quarters of Digene and that's why this percentage number we thought of it, but it would have been little bit misleading if we put in. So no major changes, use the second quarter number the guidance for what we have in the third quarter, if that's okay.

Sure. If I do a quick calculation here that's about $85 million in molecular diagnostics, granted this is only about two months of Digene. But if you do the calculation in second quarter molecular diagnostics is $65 million, for instance $20 million for the two months, is that the right way to think about that?

Roland.

Yes, I think if you do that on an apple-on-apple basis, you would probably see that for the third quarter... put it differently in the fourth quarter you will probably see that molecular diagnostics will be around 48% of total revenues, for the third quarter was around 42% because of the two months Digene consolidation.

So if the math is correct then the two months is only $20 million?

No, that is something wrong with your math.

Maybe incorrect?

We guided for numbers around $40 million in HPV related business and as I said before, we were well in or exceeded that number.

Okay, thank you.

Thank you. Our next question is coming from Dan Leonard of First Analysis, please go ahead.

Good afternoon. Peer on the hospital acquired infection panel, could you give me some insight into how a multi-target panel like that may be reimbursed?

Yes we have some interesting ideas in this space. I'd say it's a excellent question Dan and that one which is very important. If I may, I would like to keep that little bit under lid and try to give you little bit detail on that in February. But we see this is actually an extremely important opportunity because it could also significantly lead to a cost reduction in the system and as we're seeing the need for broader based analytical, broad based testing.

Okay thanks. And then my second question, can you give me an update on the progress of your HPV patent litigation?

Yes, sure. Well we really don't comment on ongoing litigations, and I know lot of other people who have been doing that and the information has all been a little bit misleading. Maybe for instance say that QIAGEN has the most extensive HPV intellectual property positioning in the world, and we remain extremely committed to enforcing this position. But in terms of specifics, we do not as a policy comment on any pending litigation and ongoing litigation. And this IP portfolio is only one of very many significant barriers to entry in the HPV testing market. And again, I see a lot of data around HPV testing where analytical performances are being looked at. What is important is the clinical performance and this is where, probably the most significant barrier kicks in. And we have a, however, a very clear position that we will defend our IP positions very actively going forward and nothing has changed on that. We are looking forward. Our strategy is very straightforward and we are moving full steam on it.

Okay. Thank you.

Thanks.

Thank you. Our next question is coming from Eric Criscuolo [ph] with Thomas Weisel Partners, please go ahead.

Hi thank you for taking my questions filling in for Peter Lawson here. I was just wondering, can you comment on what the organic growth for your instruments were at this quarter?

Well Ronald, do want to take that?

Absolutely, I think the organic growth was around 10% and I think there was not such significant difference, maybe just looking on the details here between consumables and instruments, so both are around approximately 10%.

Okay, 10% great thanks. And also as far as the sales force integration is going, can you maybe comment on what maybe your biggest concern is, regarding the integration on maybe what you could possibly see as a hurdle that you have to overcome for that to go smoothly?

Well I think whichever integration, the most important thing is the people behind the companies and the organizations that are coming together and are working as one. And we are placing a significant emphasis on integrating the cultures and also the people. And this has been very successful especially on the last... about the last six weeks since we were able to announce the organizations and the roles and responsibilities. This is something that we are putting a very high emphasis on. In terms of the integration of the sales forces, we are actually getting a fantastic feedback from the sales teams. First of all the sales teams have a broad portfolio they can now talk about and also create very interesting discussions with the customers across the number of different products and at the same time our legacy sales force has a product at line which is extremely important for so many laboratories that they talk to. So that integration on the sales side will be completed by the end of this year, and we expect to operate under the new, under the new structures we saw it here starting in January. And it is different country by country, and that's really the challenge to balance the right mix between physician and laboratory sales force and then leverage everything with advocacy and DTC marketing which... this mix is almost in every country very different and finding that off to more mix is one thing that we're working very intensely on.

Okay great. Thank you very much.

Thanks.

Thank you. Our next question is coming from Patrick Fuchs with DZ Bank, please go.

Hello, I have a question regarding HPV testing in China as their cytology infrastructure is not so well developed than in western countries. So I still see... are you already seeing there picking up phase or what are your activities there? And will it be more obvious in let's say an HPV growth rate in 2008? Thank you.

Excellent question Patrick. China is as we know very important market for QIAGEN, we are market leader in molecular testing in China. And this is a market that is very open to HPV testing and especially to the solutions we have to offer. We have already been offering HPV tests, the legacy QIGEN business previously on a real time PCR basis but the legacy Digene technology is simply far superior in terms of the clinical validation and also the performance of the product. So we're getting great feedback on this, and the integration of our businesses in China is actually one which is at very high priority. What is very interesting in China is we have... there were announcements previously from the legacy Digene organization that they had a product in the pipeline that had been co-financed by the Bill & Melinda Gates Foundation that allows HPV testing to go into very rural settings. And this is certainly a product area that you'll hear more from going forward as we talk about rolling out HPV testing into developing countries linking HPV testing around the developed world versions with disseminatable solutions that we can use in rural setting. It's very important politically and something that we look forward to leveraging going forward.

Thank you.

Thanks.

Thank you. Our next question is coming from Matthew Scalo with Canaccord Adams, please go ahead.

Hi guys I just wanted a little bit of clarification here. Peer you mentioned, HPV $40 million was the expectation for the quarter. I have got in my note $36 million to $38 million I know I am splitting hairs here but you said you exceeded $40 million?

Okay. I was... sorry for the confusion here. We had given guidance for the third quarter of 36 to 38 and I said, we... I didn't give us... I said our guidance has been around 40 and we met or exceeded the guidance. So and so it's... the business is performing very well.

Okay. Thanks for that and then as far as Digene's DTC campaign in the U.S. can you comment a little bit about third quarter fourth quarter spend, possibly talk about do you anticipate continuing that in 2008 and then possibly do you anticipate doing a DTC campaign in Europe to kind of jumpstart back road there?

Sure good question. We had, we're currently analyzing our 2008 plan for DTC activity. So we continue to see this as an important factor and one that we want to use going forward as well. And the market is changing, there is increasingly awareness around HPV in general, the vaccines did their share, we can do our thing as a... we might be large as a diagnostic company but we are no match to the vaccine companies with their hundreds of millions of dollars of HPV awareness activity. And this is certainly something that we want to synchronize and leverage that more going forward. So we are looking at the 2008 plan but it will certainly be a very heavy emphasis also going forward. In Europe we have been using... we have been test driving DTC in various regions with some good success in some regions and it really depends on the local infrastructure on the reimbursement and these types of things. So also here this is part of an very important effort where we've put our very strong European infrastructure to work at optimizing the rollout of these products in 2008.

Okay, thank you guys.

Thank you.

Thank you. Our next question is coming from Alastair Mackay with GARP Research. Please go ahead.

Hi good afternoon.

Hi Alastair.

Digene has had previously disclosed that they were working on the genotyping assay which they have mentioned is HC4, can you give any insight as to whether you are pursuing the genotyping assay in HPV and whether or not we could use the Hybrid Capture Technology or perhaps whether you would migrate that assay over to another QIAGEN technology?

Sure Alastair, I think I wouldn't want to say yes or no now to your answer. Let me just tell you what we have said so far. We have a very exciting HPV genotyping product that we have on fast track and that will actually be launchable in the foreseeable future now. And this is a very powerful product that we'll be leveraging multiplexing technologies which we have some under the QIAplex technology name. These are PCR multiplexing technologies that can be detected on numerous different systems such as Luminex or others. At the same time, our innovation engine is put behind women's health in a broad way and also in the sub-segment of HPV testing in a very broad way. And we see that the market we will need many different solutions and we are committed to bring to our customers a number of different solutions in this space. And as the market leader and the technology leader we are taking this very seriously and we are going to be extremely innovative over the next few years, and also here I would like to defer some of your latter question regarding hybrid capture based genotyping to our analyst day in February.

Very good thank you. And then for Roland, I had an arithmetic question. Roland if you could say how many shares in total QIAGEN issued in the third quarter for both eGene and Digene and any other similar activities?

For Digene was around 39 million shares and eGene was around a million share. Nothing else.

Okay, thank you.

Thank you. [Operator Instructions]. Our next question is coming from Peter Welford with Lehman Brothers. Please go ahead.

Hi thanks for taking my question, as there is two actually firstly on the $500 million credit facility that Roland mentioned. I am just wondering whether you can give the outline the financial terms of that and whether how long that's in place for. Second question that is just on the tax and I appreciate that it will be very difficult to outline. But just the benefits you are clearly seeing in the midst, how should we think about this going forward beyond '08? And can I just also ask for a point of clarification which is just on the 4Q EPS guidance you gave? I just tried to do the math from your full year guidance and the number of shares you've got, I think you won't stand too low in the range because I... could you expand [ph] on, just to check back, that will great? Thank you.

Hi Peter, thanks for your question. On the credit facility, the debt component for Digene acquisition was financed, as I would see it as a very favorable terms at Deutsche Bank. [indiscernible] is the five year term at total interest rate of somewhere between 575, 6% and then we have additional $150 million on revolving credit facility, which gives us some flexibility going forward. On the tax, I think going forward I think especially in 2008 as of January 1st 2008, the German tax reform will come into power and as you know that we have significant or do significant step-up of our production and value generation in Germany where there is effective tax rate as small as coming down from 38% to 30%, which means overall we probably should have an effective tax rate for QIAGEN group somewhere between 26% and 30%. And I also think there is something which will be... we feel very confident in 2008 and beyond. And on EPS I think guidance is $0.61 to $0.62 and we had shifted $0.48 within the first nine months.

Okay, thank you.

You are welcome.

Thank you. At this time I would like to turn the floor back over to Mr. Peer Schatz.

Solveigh. Do you want to...

Yes okay, thank you very much. I would like to close this conference call by thanking you all for participating. We hope to welcome you again to our full year 2008 results conference call in February 2008. If you have any additional questions please do not hesitate to contact us. Again thank you very much and have a nice day. Thank you very much, bye.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.