賽默飛世爾科技 (TMO) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our Q4 2010 Life Technologies Corporation earnings conference call.

At this time, all participants will be in a listen-only mode but later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder, today's conference is being recorded.

And I would like to introduce your host for today, Eileen Pattinson.

Thank you, operator, and good afternoon, everyone.

Welcome to Life Technologies' fourth-quarter and full-year 2010 earnings conference call.

Joining me on the call today are Greg Lucier, our Chairman and CEO, and David Hoffmeister, Chief Financial Officer.

In addition, Mark Stevenson, President and Chief Operating Officer, will be available during the Q&A portion of the call.

If you haven't received a copy of today's press release you may obtain one from our website at LifeTechnologies.com.

I want to remind our listeners that our discussion today will include forward-looking statements including but not limited to statements about future expectations, plans and prospects for the Company.

We believe these statements are based on reasonable assumptions but actual results may differ materially from those indicated.

It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

Additionally, we will be discussing GAAP and non-GAAP measures.

A full reconciliation of these non-GAAP measures to GAAP can be found in today's press release or on our website.

I will now hand the call over to Greg Lucier.

Thank you, Eileen, and thank you all for joining us.

I hope you have had a chance to review the press release we put out this afternoon.

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I will spend a little time highlighting what we've done in each of these areas over the course of the last year.

In 2010, we launched a multitude of new innovative products that are designed to accelerate the pace of discovery by making research simpler, faster and more accurate.

The successes of our BioProduction business throughout the year is a notable example of how new products are driving topline growth.

In 2010, this business grew more than 20% driven in large part by the success of several newly launched products including biological detection for the rapid identification of common contaminants and biomanufacturing and optimized animal origin free media for CHO cells, the most commonly used cell industrial production of proteins-based therapeutics.

Key product launches in other areas such as Sample Prep, Real-Time PCR, benchtop devices and sequencing to name a few solidify our leadership position in these areas as we continue to provide our customers with the best products available.

The Instrument business which makes up approximately 20% of our revenues grew over 8% in 2010, 14% excluding the impact of H1N1 and the Japanese police order.

This performance was driven in part by the strong demand for the VS7PCR system, the 3500 CE Sequencer and the solid next-generation systems expanding our footprint in the labs and locking in highly profitable, consumable revenue stream, benefiting us for the years to come.

The consumables business which makes up the remaining 80% of revenues grew 7% in 2010 and 8% excluding the impact of H1N1 and the Japanese police order.

Researchers in every field of science use our consumable products each and every day to perform the fundamental research that advances scientific discovery.

Growth in this business continues to be very stable, due to the essential nature of these products and the high volume of small orders that we process every day.

Continued investments in R&D and small tuck-in technology acquisitions have allowed us to continually refresh our portfolio and offer cutting-edge technologies across the entire spectrum of biological research.

Taking a closer look at some of our larger franchises, you can see where these investments in innovation are paying off.

Since 2009, we made a number of investments in our Real-Time PCR business including the acquisition of Stokes Bio in 2010.

The Stokes platform is a transformational technology that speed, scalability and high-performance will not only drive growth in our traditional PCR applications but also expand our addressable market by taking share from the $1.2 billion micro array market.

With our Taqman assays this platform will allow customers to analyze up to 50,000 data points in one hour to get the industry's best quality and most reliable results.

The Stokes platform is cost-competitive of micro arrays on a per sample basis, performs better than micro array platforms in terms of throughput and is significantly better in terms of the data quality.

Early access to the Stokes Bio platform will be available this year with a full launch expected in early 2012.

Internal investments in R&D resulted in the 2010 launch of the VS7 platform, a truly innovative product that takes out 60% of the steps in a PCR run, greatly increasing productivity in the lab.

This product, along with a variety of new assays, has accelerated growth and increased our market share in the Real-Time PCR business.

Excluding the impact of H1N1 pandemic, growth in this business has accelerated from 9% in 2009 to 12% in 2010.

Sequencing is another area where we're making tremendous progress.

One year ago, Jonathan Rothberg introduced the Ion Torrent technology to the world at the Advances in Genome Biology and Technology Conference.

Since that time the array technological advancement has been unprecedented with throughput consistently increasing 10 times every six months during the systems development.

Today, the 314 chip delivers 10 MB of throughput and the 316 chips, available in the second quarter, will deliver 10 [megabases] of data.

In the six weeks since PGM was launched, demand has continued to accelerate and a growing user community is rapidly developing applications for the system.

You will hear more about this on Friday when at this year's conference, five of the industry's leading researchers will present data generated with Ion Torrent technology.

As the system continues to scale up, its speed and simplicity have generated a significant level of interest in the scientific community.

We're seeing an increasing number of innovative vendors developing technologies that streamline workflows, both up and downstream of the PGM system, making the technology even more attractive to scientists who don't have the resources to invest in higher cost, more complex, next-generation sequencing technology.

Continued advancements and lower cost sequencing solutions such as Ion Torrent directly address the technical needs and the financial hurdles facing the research community, opening up the market to labs of all sizes.

As more government and private funding bodies around the world dedicate a higher percentage of their resources to genetic research, the trend towards using sequencing to solve a wide range of biological questions accelerates.

Life Technologies is in a unique position to benefit from this increase in demand.

Sales of our solid instruments and consumables has grown 50% year over year and we're very pleased with the level of interest in the solid 5500 which will begin shipping later in the first quarter.

But just as importantly, we offer products that simplify and streamline the upfront sample prep and library creation, as well as products that enable virtually every step of the data analysis and the downstream research that takes place after the sequence is completed.

And because discoveries ultimately lead to more questions, the cycle of demand for our products continues.

The unparalleled breadth of our product offering, coupled with world-class distribution, service and support infrastructure, ensures that there is no company better positioned to capitalize on this opportunity than Life Technologies.

In order to support the growing demand for our products, we have made specific investments over the last year which will allow us to better service our customers in emerging markets around the world.

Our sales in emerging markets are growing at a compounded annual rate of 30% and now make up approximately 10% of the Company's revenues.

We continue to build out our infrastructure to ensure and that we're well positioned in these fast-growing areas.

In 2010, we took a number of actions to further this goal, including the expansion of our distribution networks in Singapore and China, as well as the acquisition of LabIndia, a long-time distributor of Applied Biosystems products in that country.

With operations throughout the country, our customers in India will now better access to a robust line of both instruments and consumable products, as well as greater sales, customer and technical service support.

The acquisition of LabIndia, along with other investments in Asia-Pacific and Latin America, will allow us to capture the full opportunity in these fast-growing regions.

Before I hand it over to David to walk you through the numbers, I will talk about another major milestone for the Company that we delivered in 2010.

In the fourth quarter we put actions in place that will deliver another $20 million in synergies associated with the Applied Biosystems integration.

Through focused execution on the integration plan, we were able to deliver on our promise of $175 million in annualized synergies one full year ahead of schedule.

We ended 2010 with industry-leading operating margins of 28.7%, an expansion of 210 basis points from the prior-year.

Over the next few years, we will continue to refine our operations and generate savings through increased manufacturing productivity, supply chain efficiencies and fixed cost leverage, which will expand operating margins to over 31% by the end of 2013.

To further our goal, we have created a dedicated team that will lead this effort over the next several years.

We have a number of specific projects that we're kicking off in 2011, including optimization of our manufacturing and distribution networks, streamlining of our marketing programs, and enhancements to our website.

Over the course of 2011, we will share details with you on some of our projects and provide quarterly updates on specific actions that are being put in place to generate savings in the business in the time to come.

And with that, I will now hand it over to David.

Thanks, Greg.

This quarter revenue grew 7% to $934 million.

Currency had no impact on reported revenue growth, while acquisitions contributed an additional 2 points.

Excluding the impact from currency, acquisitions and divested shares, revenue grew 5% and it grew 9% also excluding the impact of H1N1 and the Japanese police deal.

Organic growth by region in the quarter was as follows.

The Americas grew 7%, Europe 3%, Asia-Pacific 12%, Japan declined 4%.

Excluding the impact of H1N1 and the Japanese police order, the Americas grew 10%, Europe 5%, Asia Pacific 17% and Japan grew 10%.

Similar to prior quarters, stimulus-weighted revenues for the fourth quarter were approximately $10 million.

Genetic Systems had revenues of $246 million, representing 11% organic growth.

Overall sales of CE instruments and consumables grew 4% for the quarter, driven by mid-teens growth in consumables and accelerating demand for our 3500 genetic analyzer.

Growth in this business particularly instruments was negatively impacted by a difficult year-over-year comparison, resulting from last year's Japanese police order.

Excluding the impact of this order, overall sales of CE instruments and consumables grew 10% for the quarter and 8% for the full year.

In addition, the next-generation sequencing business demonstrated strong double-digit growth in the quarter.

For the full year, our solid instruments and consumables continued to gain share, growing 50% year over year.

Sales of the recently launched Personal Genome Machine are off to a good start; and we anticipate that Ion Torrent-related revenue will be a significant contributor to growth in the second half of 2011.

Molecular Biology Systems had revenues of $445 million in the quarter, representing a decline of 1% in organic growth.

However, excluding H1N1-related revenue, organic growth was approximately 4% for the quarter and 6% for the full year.

As Greg mentioned earlier, acceleration in demand of real-time PCR consumables in the instruments as well as strong demand for genomic assays contributed to this growth.

Also royalty revenue for this division grew 14% for the year, as a result of the concerted efforts of our licensing team, which was able to more than offset the decline in PCR patents.

For the total Company, royalty revenue grew 7% for 2010.

Cell Systems had revenues of $238 million for the quarter, representing 11% organic growth for the quarter and 12% growth for the year.

Growth in this division was driven by strong demand across the portfolio.

For the full year, the BioProduction, Dynel Beads, and stem cell businesses all delivered double-digit growth.

Moving onto other items, fourth-quarter non-GAAP gross margin was 64.6%, 40 basis points lower than the same period last year.

Increased productivity in the quarter was offset by the negative impact of mix, primarily higher sales of instruments and BioProduction.

On a sequential basis gross margin declined as expected by 220 basis points, due to the impact of lower realized price mix and higher manufacturing expenses as we produced less and drew down inventory at year end.

Fourth-quarter non-GAAP operating expenses increased 4% over prior year's levels to $357 million.

The increase was primarily the result of acquisition-related expenses.

Sequentially, operating expenses increased 9%, the result of acquisition-related expenses and investments in R&D.

Non-GAAP operating income was $245 million, an increase of 9% over prior year.

Fourth-quarter operating margins were 26.3%, representing 50 basis points of improvement year over year.

The increase in operating margins was the result of synergy savings partially offset by slightly lower gross margins.

For the full year, operating income increased 17% to just over $1 billion.

Operating margins were 28.7%, an increase of 210 basis points.

Operating margin expansion was the result of improved gross margins and operating expense synergies, partially offset by acquisition-related costs.

In terms of other income line items for the quarter, we had $1 million of interest income and no material impact from currency gains and losses.

Interest expense for the quarter was $28 million, other income for the full year included $4 million of interest income and no material impact from currency gains and losses.

Interest expense for the full year was $113 million.

Our non-GAAP tax rate for Q4 was 21%, down from 20.5% for the first nine months.

The extension of the R&D tax credit contributed three percentage points of the approximately 7% decline.

Other legislative changes regarding treatment of non-US income that were also enacted in Q4, retroactive to the beginning of the year, contributed another 2.5 percentage points.

The remaining 2 percentage points is from a combination of items including greater income earned in lower tax rate jurisdictions and one-time benefits from the integration of acquired subsidiaries.

For the full year, the non-GAAP tax rate was 26.7%.

Our diluted share count for the quarter was 191.2 million shares and [190.6] million for the full year.

In the fourth quarter we repurchased all the shares associated with the Ion Torrent acquisition and completed the full $350 million share repurchase authorization by the end of the first week in January.

The total amount of shares repurchased was 9.4 million.

Approximately 5 million of the repurchased shares did not impact the weighted average share calculation for 2010 because they were purchased late in the fourth quarter.

The full impact of the share repurchase will be realized in 2011 but will be partially offset by dilution related to our convertible debt and share-based compensation programs.

GAAP diluted earnings per share were $0.37 for the fourth quarter which includes $0.40 per share of acquisition-related amortization expense, $0.03 per share of non-cash interest expense associated with the adoption of APB14-1 and $0.10 per share of business integration costs and other items.

On a non-GAAP basis, which excludes these items, diluted earnings per share were $0.90.

For the full-year GAAP diluted earnings per share were $1.99 which includes $1.05 per share of acquisition-related amortization expense, $0.13 per share of non-cash interest expense associated with the adoption of APB14-1 and $0.38 per share of business integration costs and other items.

On a non-GAAP basis, which excludes these items, full-year diluted earnings per share were $3.55.

Moving onto the balance sheet and cash flow, our ending cash and short-term investments were $855 million.

This compares to last quarter's balance of $537 million.

Cash from operating activities was $225 million, capital expenditures were $42 million and free cash flow was $183 million.

Full-year free cash flow was $614 million including $94 million of integration-related costs.

In December we issued $800 million in senior notes.

Our ending debt as of December 31 was approximately $3.1 billion.

This balance consists of our convertible debt of $800 million and senior notes of $2.3 billion.

Return on invested capital decreased 10 basis points to 9.1%?

However we remain on track to achieve our goal of 10% return on invested capital by 2012.

I will now move onto our outlook for 2011.

We expect revenues to grow organically in mid-single digits.

Revenue from acquisitions will add and another approximately 1 percentage point to revenue growth.

As we have discussed previously, we have currency hedges in place that will impact the first seven months of the year.

Because of the size and timing of the impact of these hedges, I will give you some more color on what to expect throughout the year.

As of December 31 month and rates, currency for the first half of the year is expected to have no impact on revenue and a negative 160 basis point impact on gross margins in each of the first two quarters.

Earnings per share will be negatively impacted by $0.08 in the first quarter and $0.05 in the second quarter.

In the second half of the year, currency is expected to have no material impact on revenue, gross margins or earnings per share.

As a result, the full-year impact of currency is expected to have no material impact on revenue, a negative 50 basis points impact on gross margin and a negative $0.13 impact on earnings per share.

For the full year, gross margin will be flat to slightly down from prior year.

Operating margin expansion is expected to be 75 plus basis points for the full year but negative in the first half due to the impact of currency.

As Greg mentioned earlier, we're on track to achieve 31% operating margins by the end of 2013.

Non-GAAP earnings per share is expected to be in the range of $3.80 to $3.95.

For modeling purposes you should keep in mind that due to the impact of currency and the ramp up of revenue from acquisitions completed in 2010, earnings per share will be slightly weighted towards the back half of the year.

To help you better account for these factors on a quarterly basis, I will give you a little more color on what to expect throughout the year.

Due to exceptionally strong performance in the first quarter of last year, organic revenue growth in the first quarter of 2011 is expected to be in the low single digits.

As a reminder, organic growth in the first quarter 2010 was 10%, the result of US and Japanese stimulus programs and the last installment of the Japanese police order.

Due to lower revenue growth and the impact of currency, earnings growth is expected to be flat to down 5% in the first quarter of the year.

However, excluding the impact of currency, earnings per share is expected to grow in the mid- to high single digits.

Looking beyond the first quarter you should expect both revenue and earnings growth to accelerate throughout the year.

Revenue growth will increase as sales from Ion Torrent ramp up and benefits from productivity initiatives started earlier in the year will also accelerate earnings growth.

We expect free cash flow to be in the range of $675 million to $700 million for 2011.

Capital expenditures are expected to be in the range of $125 million to $150 million including approximately $20 million of restructuring-related capital.

Our free cash flow forecast also includes approximately $80 million of one-time expenses related to restructuring.

It is important to note that as in the past our free cash flow will be higher in the second half of the year, due to normal working capital fluctuations and the payout of annual bonuses in the first quarter.

A few other items related to our expectations in the coming year include the following.

Royalty revenue is still projected to decline by $20 million in 2011, the result of a decline in the PCR royalties as patents expire throughout the year.

The pro forma tax rate will be approximately 28% and that is down from the 29.5% that we guided to at the beginning of 2010.

Interest income will fluctuate depending on our cash balance.

On average interest rate -- our average interest rate on investments is approximately 25 to 35 basis points.

Interest expense is expected to be approximately $135 million.

Assuming an average share price of $55, we would expect the weighted average diluted share count for 2011 to range from 185 million to 187 million shares.

Share count will depend on the amount and timing of share repurchases throughout the year and dilution related to our convertible debt and share-based compensation programs.

For the first quarter, a good estimate of the share count would be 188 million shares.

And finally here are a couple of other variables that may help in modeling the business.

First, you can assume that every point of organic growth contributes about $0.09 to earnings per share.

Second, every $10 million in operating expenses equals about $0.4 per share.

And third, if all currencies moved against the dollar by 5%, our mix of foreign currency stayed the same, the impact on earnings per-share would be about $0.15.

And with that I will hand the call back over to Eileen so we can answer any questions you may have.

Thank you, David.

John, we're now ready for the Q&A portion of the call.

(Operator Instructions).

Quinton Lai.

First question, the last quarter you talked about ERP installation in Asia.

And it looks like things rebounded growth wise there.

Any update on that and other initiatives that you have planned for that region for growth in 2011?

That's right.

So our Asia-Pacific business overall rebounded nicely as we predicted it would, once we got past this ERP implementation.

In terms of further investments we've made in that region, there have been several.

First, as we noted in the script we acquired LabIndia which gives us significant warehousing, technical support, sales force capability on the Applied Biosystems side of the business.

We also completed the development of a very large logistics center in Singapore to house tens of thousands of products to serve the region and we also started on building several warehouses across China in the coastal cities to further expand the footprint we already had.

We had outgrown the infrastructure we have put in place a few years earlier.

So those are seeing notable achievements across the Asia-Pacific region.

And, Greg, as you look out to 2011 and with the guidance, are you expecting a continuation of the end markets that you have now or especially -- we're getting a lot of questions on what are your thoughts on the academic side and potentially NIH funding.

Any color would be helpful.

Thanks.

You bet.

In our estimate we have presumed a fairly stable funding environment.

We continue to see good strength in the biotech pharma sector across the world.

We think academic funding will be basically flattish versus last year, and we're not counting on any improvement in the NIH in our forecast.

We see continued robust demand in the Asia-Pacific region and Latin America and the Middle East and so those factors are what drive our overall forecast for revenue in 2011.

Thanks.

Congrats on the year.

Thank you.

Thank you.

Doug Schenkel.

Thanks for taking the questions.

One clarifying question on Q4.

Maybe folks just didn't have it modeled right, but if I remember correctly I think you guys guided operating margin expectations to a 150 basis point year-over-year increase in Q4.

If I'm remembering correctly you clearly came up a bit short of this which seems attributable to weaker-than-expected gross margin, at least given relative to where consensus was.

Did you come up short here?

And if so can you talk through some of the reasons why the pricing [is a] currency mix royalty?

What happened to gross margin line?

And then I will come back with the second question.

We had a couple of things impacting in the quarter; nothing unusual.

We have a higher mix of BioProduction than we expected in the quarter and that brings the margins down slightly.

We also had as expected sequential reduction in pricing which is typical in the fourth quarter of every year.

And we had sequential reduction, I believe, in royalties as well which would have also brought down margins.

Okay.

But to answer your question, Doug, I think it was in line with what we expected.

It wasn't anything unusual and similar to what we've experienced in prior years.

So that gross margin, again, you guided gross margin I think to a decline sequentially which, clearly, it did although I don't think people were modeling that it would be down quite this much.

If that was in line with the expectation then I think the operating line was a little bit lower.

Is that not correct?

We did make some investments in R&D in the quarter, as well in things like Attune, Ion Torrent, and we also invested in BioProduction which Greg had mentioned earlier.

In terms of the guidance, mid-single digit growth is not a surprise especially given you've talked about that before.

That being said, how should folks view this?

First off, what does mid-single digit mean?

Is that 4% to 6% and given you guys did 9% organic growth in 2010, excluding H1N1, should folks be -- would you be surprised if people are disappointed by this, given it does imply moderation which seems a bit surprising, given your ability to get price predictable volume and growth in emerging markets?

I think it is a good question.

I think mid-single digits is -- you know, you pick your number but I would say it's somewhere 4% to 6%, and we said we would expect something around a percent or so from acquisitions over the course of the year.

And I think that is actually in line with what we experienced this year.

Remember, you have to adjust for comps as well.

So there are a couple of things in our growth rate this year that make comparisons for next year slightly more challenging.

We talked about the first quarter where we had exceptional growth last year and we're expecting lower growth in the first quarter this year as a result.

Second, BioProduction business grew at 20 plus percent; that is phenomenal performance for that business this year.

And we think that that business is going to continue to perform as it has over any two- or three-year period in the high single digits.

But obviously were not counting on a growing 20 plus percent this year, so that is a factor.

And then the third thing is royalty revenue.

Royalty revenue, we're projecting, will fall by another $20 million next year.

Now this year, we've been successful with our licensing group in completely offsetting the drop in -- expected drop in royalties.

But at this point in the year we're not counting on that for next year.

Okay.

Thank you for taking the questions.

Tycho Peterson.

Thanks for taking the question.

Given that a lot of us are [down at] (inaudible), I'm just wondering stepping back as we think about your sequencing business.

In the past you've provided some thoughts on your overall level of spend.

Are you willing to talk about the overall level of spend?

And as we think about Ion Torrent talk a little bit more maybe about go-to-market strategy.

It sounds like maybe you're shifting some of your resources from SOLiD over to Ion Torrent.

If you could talk a little bit about integration and anything [on installment] plans that would be helpful.

Sure, Tycho.

The overall spend is about the same just maybe slightly elevated and as you stated there has been a shift in our resources as the 5500 SOLiD machine is now basically being launched.

We have a very large development team that has been able to augment the Ion Torrent team and really accelerate now that development.

So I think that is the way you can consider our investment and how we have shifted it.

And then, as we think about the capillary business could you talk your expectations?

I mean you've obviously had more resilience there than I think people originally anticipated doing next-gen.

Can you just talk to how sustainable some of those underlying trends are?

Yeah.

I think the best way to describe the CE business is to bifurcate the end markets for it.

So on the applied market side forensics, food testing and the like, that is a very sticky business.

It is a very well-received product early now in the lifecycle and so we anticipate very good demand for CE Instruments on the applied market side for some time to come.

On the research side, where I think everybody has been pleasantly surprised, that product has continued to have an uptake.

I think it is primarily due that it is the gold standard in sequencing.

So as more and more sequencing gets done, more validation has to get done, more confirmatory analysis gets done and it is being done on CE because it is, as I say, the gold standard.

And this product is a dynamite product.

It is very well-received and I think that is why we are seeing continued demand for what everyone else thought would have perhaps been obsolete by now.

And just one last one.

You mentioned BioProduction in your comments a few times.

You know, talk to some of the trends there, is that largely shipped over to biodisposables and what is your visibility on that market for 2011?

Thank you.

Right.

As David said, that is a business that cycles through every couple of years, these very high-demand years as a product that gets approved by the FDA and then perhaps modulates as other products are not approved in the subsequent year.

But overall it is a trend line that is in the high single digits sometimes low double digits.

We benefited in 2010 by the approval of a couple of products, by increased demand of therapeutics of customers that we had, and by further penetration of new customers based on a strategy we put in place several years ago to link our research business with the BioProduction business and follow these molecules from the very earliest stage.

So 2011 as David said, it's going to be a good year for that business, it's just not going to grow at 20% again.

And I think it is very normal to see that type of cycle.

Thank you very much.

Derik De Bruin.

So just following up a little bit on Tycho's, I mean -- you've launched Ion Torrent.

Could you give us a taste on how you see the development progressing, particularly in respect to the sample prep or is that something you're going to highlight at AGBT this week?

I think that is something we're going to highlight more at AGBT, but a couple points I would make on Ion Torrent.

One is that we have tried to indicate the scalability of the machine itself.

And so, we fundamentally believe we're now moving into a post light era for sequencing and so we'll be able to articulate that more in quarters to come.

On the sample prep question, it's a question we get often asked.

You will hear more at AGBT on what we're doing around the PGM instrument, but suffice it to say there is work underway.

And we feel very pleased about the overall total solution that will surround the Ion Torrent technology and we'll have more to communicate that, on that as time goes on.

Great.

One other question.

So, the goal for reaching a 31% operating margin in 2013 is pretty impressive, given how strong the margins are right now.

Could you just kind of break it down in terms of what the moving parts to kind of get it to that level?

Yes.

In the presentation we shared a particular chart on how we think about this but let me take you through the various buckets of where the synergy will come from to get the operating leverage.

The first thing is that, for example in purchasing, we are shifting more of the resources to Asia Pacific.

Ironically, we do very little sourcing in that fast-growing region today, so we anticipate very nice savings coming from that.

We continue to consolidate our sites.

We don't publicly announce which ones are affected, but as we have stated in other presentations, we have lots of choices and we continue to consolidate the footprint.

The other thing that we're doing is just becoming ever more efficient at how we move products at the right moment in time to our very sophisticated logistics centers around the world.

Now today everything is flying basically in a FedEx airplanes and things like that very expensively.

We have key strategies in place on how to move this by land and sea, in a much more efficient economical way, over the next three years.

And then lastly, one of our key tenets when we merged the two companies was to do no harm; and a good example of that was we took each companies IT system and basically just put a link between the two and ran the company and we did quite effectively with that.

Now over the next three years we're going to actually shut down the entire IT system of one half of the Company, merge it into the other, do it very methodically and we can save tens of millions of dollars as we do that over the next three years.

So those are some of the examples.

Thanks.

Ross Muken.

It's actually Mike here for Ross.

A lot of my questions have been addressed, but just kind of talking a bit more about the Ion Torrent Personal Genome Machine.

I was curious how you see the market developing on a near-term basis.

You've obviously talked about some early success that you have had.

Could you talk about some of the early customers that you have had, kind of where they have come from and over the next six to 12 and 18 months, how you see the market developing in terms of who are going to be the early and then kind of later adopters?

I think it is important to note how sequencing, next-generation sequencing has actually developed just over the last couple of years has primarily happened in the heavy users, the genome centers.

And so when we think about the technology now moving out over the next few years, we want to put it into as many labs as possible and essentially follow the very successful strategy that we had with QPCR.

So this Personal Genome Machine has been sold to customers that A, can buy more than one; B, that can collaborate with us on the usage of it, the sample preparation of it, the data analysis of it and quickly iterate with us on improvements so that we can get them back out to the user community.

Now that is phase 1 of the customer base.

I would tell you we're actually holding back orders right now because we want to make sure that that iteration happens a few more times before we take the next, if you will, level or concentric circle of growth that we see with this PGM instrument.

But the PGM instrument we ultimately believe and further refinements of it can mimic very much like a QPCR machine in terms of its penetration in virtually every lab in the world.

Now, how that fits in with our strategy is, as you can understand, Life Technologies has a very broad distribution network.

We're in virtually every country that does science and so a product like this very much plays to our sales and service and technical support strength.

And so that is how we're thinking about it.

Thanks.

That was definitely helpful.

Marshall Urist.

So first question just for David on the margin and expense picture for next year.

It would be helpful just first on gross margin -- I know you gave us some detail there but where would you think you would exit the year on, I guess in the back half of the year, where would you think you would be as we start to think about momentum off of the currency dilution into 2011 and then just also plans on R&D and SG&A next year?

And how much leverage are you looking for on those lines as well?

That would be helpful.

What we've said -- first on gross margin what we said was that gross margin for the year would be roughly flat to down 50 basis points.

So we've provided it would be down 160 basis points year over year in the first half of the year.

So that gives you some idea of what the increase is or the deceleration in the second half of the year on the gross margin line.

And then on (multiple speakers) yes, sorry -- R&D and SG&A.

In terms of R&D, as we said before, target roughly 10% of sales and SG&A and our other expenses, that is going to be an area where we're focusing on -- as Greg mentioned -- some of the programs we have underway whether it be in marketing, plant overhead, whatever to drive some of our 75 plus basis points of operating margin improvement.

Thanks.

And just one other one, if you could just talk about 2011.

I know you talked about the high-level organic growth but from a segment perspective from Molecular Biology, Genetic Systems and Cell Systems as we think about since there's a little bit different comp base in each one of those going into '011, can you talk about how you're thinking about those three different segments in 2011?

That would be helpful.

Let me give you some color on what we expect for organic growth by region -- or by division.

For Molecular Biology Systems we anticipate that to be mid-single digits.

For Genetic Systems, we expect that to be high single digits and Cell Systems mid- to high single digits in terms of organic growth.

Great.

Thanks for taking the questions.

John Groberg.

Thanks for taking the questions.

First question, Greg, can you maybe -- a lot of focus obviously gets placed on the AB bus-- the old legacy AB businesses.

Can you maybe talk about how some of the legacy Invitrogen businesses are doing and I guess particularly in the not so much in the BioProduction business which you talked about but in the Molecular Biology division?

Yes, you bet.

The Molecular Biology business has been doing okay.

I would say it has been the lower end of mid-single digit growth over the last 1.5 years or so.

The Cell Biology business, the old molecular probes and pieces of Dynel, as Eileen said earlier, is growing very nicely still.

And when you then combine it overall with the media business, the BioProduction business, it has continued to perform in the mid-single digits higher end of that range overall.

So the old Invitrogen has continued to chug along as it always has.

Okay, thanks.

And if I can, just one more.

David mentioned kind of the importance potentially of Ion Torrent in the second half of the year starting to contribute some revenues.

Obviously a competitor introduced the -- at [least announced] a potential product.

Can you talk about whether or not some of your order book they have had any success installing the market and kind of what you've seen internally?

And then also do you have any constraints from the manufacturing standpoint?

Could you maybe just talk about your manufacturing capabilities to scale up as that product scales?

Thanks.

So I think the good news is we have a product that we're selling and shipping right now.

The other product you mentioned is simply on a piece of paper.

And so we're moving forward taking orders as I said before and doing well.

And the product has enormous runway ahead of it.

So the good news is when people by the PGN they know they're actually buying a platform that has, perhaps, even more throughput than that product you mentioned in terms of its specifications.

Finally, the last part.

You talked about the ability to fulfill the orders.

We have relationships, we have a very solid supply chain that we've worked out with Ion Torrent and the suppliers.

And we feel very good in our ability to deliver.

Just to add on that.

The chips are from foundry that has massive capacity, relative to what our current needs are.

And the housing electronics are manufactured by the same company that manufactures the Xbox.

So there is plenty of capacity out there to meet our current needs.

Thanks.

Amit Bhalla.

Good afternoon.

Two questions, first in Europe it looks like Europe has been holding in pretty resilient with the 5% organic growth extra (inaudible) H1N1 obviously.

Can you talk about just Eastern Europe versus Western Europe and some of the trends that you're seeing there?

Certainly.

So, Eastern Europe, Middle East, Turkey especially, Israel, in particular Africa are where we see the real growth happening in that region we call EMEA, that most companies do.

And so as we move into 2011 more resources are being shifted from Western Europe into those geographic centers.

The good news is, we already had the infrastructure in place.

We had started this when we merged the two companies and so now we're just adding on more resources to get the growth there versus Western Europe.

Can you put any numbers round it, if you have 5% organic in total Europe, what is the difference between the two?

And the second question I had, my follow-up was on that pricing.

Can you give us a ballpark of what kind of impact pricing was?

I think just on growth in Europe, I think what we said before is we're growing at low to mid-single digits in most of the large major markets.

There's some more uncertainty in some of our smaller markets in Southern Europe like Greece and Portugal.

And then in Eastern Europe and some of the smaller areas, as Greg mentioned, they tend to grow at the higher end of the range on high single digits.

And then you had a second question.

On pricing.

On pricing, as we have traditionally said, we've gotten roughly 1.5% in terms of price this year, and we're targeting another 1% to 2% next year.

I was actually just asking about the hit on pricing for the quarter.

Oh the hit, the [down] on pricing for the quarter?

That's just a case of what we typically experience as the year goes on.

There is more discounting and [degradation] of our list pricing and we also tend to have larger orders placed at the end of the year.

And the net result is our net realized price is slightly lower in the quarter than it is in the other quarters.

Okay, thanks.

So, John, I think we have time for one more question.

Jon Wood.

Greg, I think you mentioned RCPCR growing 12% adjusted in 2010.

Is it unreasonable to think that business can grow double digits again in 2011 or are there comp issues that you foresee in 2011?

I think that business overall has very good fundamentals for a variety of reasons as we have talked before.

And we think it will continue to gain share due to the launch of Stokes technology and some other technology we will be announcing.

But we're not prepared to give an estimate for 2011 for the instrument business other than it is going to do, we think, pretty darn good this year.

We don't see anything changing in the underlying industry fundamentals.

Okay, great.

And then, last one for David.

On the cash flow, $80 million of one-time restructuring in '11, is that still related to AB?

It is related to, as Greg mentioned, site consolidations whether they be sales office consolidations, back-office consolidations, or plant closures.

But it also includes other restructuring or productivity improvement initiatives we have underway.

So Greg mentioned we're looking at the marketing organization, how we can do that more effectively, and we expect there will be some costs associated with those changes.

Understood.

So is that a number we should expect to continue as kind of beyond 2011 just at a lower level?

Like, will you have these kind of restructuring expenses every year or will they completely go away?

We will continue to drive productivity improvement all through the business.

So I would expect there would be some costs on an ongoing basis, but they should definitely come down over time.

(multiple speakers).

As they have.

Exactly.

Okay.

Thanks a lot.

Okay, great.

So there's one question I wanted to clarify before we ended the call.

I think Doug asked earlier why our operating margin differed from the guidance we gave in Q3 and I just wanted to clarify that as we saw benefits on the tax line coming through throughout the quarter, we decided at that point it would be a good opportunity for us to make investments back into the business.

So that would be the reason why our operating margin guidance differed from our actual results in the quarter.

Okay, so this includes our fourth-quarter and full-year earnings conference call.

This webcast will be available via a replay on our website for three weeks.

Thank you all for joining us today.

Ladies and gentlemen, this does conclude your conference.

You may now disconnect and have a great day.