賽默飛世爾科技 (TMO) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Life Technologies Corporation third-quarter 2012 earnings conference call.

(Operator Instructions).

As a reminder, this program is being recorded.

I would now like to introduce your host for today's program, Ms. Carol Cox, head of investor relations.

Please go ahead.

Thank you, Jonathan.

Good afternoon, everyone.

Welcome to Life Technologies' third-quarter 2012 earnings conference call.

We issued our press release today a little after 1 p.m.

Pacific time, posted it on our website at LifeTechnologies.com, and we'll be filing it on Form 8-K with the Securities and Exchange Commission.

We've also posted a deck of slides to accompany the webcast today, which may be found on the events and presentations section of our investor relations website, along with our other additional earnings material.

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

Mark Stevenson, our Chief Operating Officer, will also be available during the Q&A portion of the call to answer any questions.

If you've not had a chance to review the earnings release, it can be found on our website at LifeTechnologies.com.

I would like to remind our listeners today that our discussion 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.

Important factors which could cause actual results to differ materially from those in the forward-looking statements are detailed in our filings with the Securities and Exchange Commission.

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 the GAAP -- excuse me, of the non-GAAP measures to GAAP can be found in today's press release or on our website.

And with that, I will hand the call over to Greg.

Thanks, Carol, and thank you to everyone who is joining us today as we provide an overview of our third-quarter results and expectations for the remainder of the year.

At a high level, we continue to gain momentum as we expand into higher-growth markets through partnerships, acquisitions, and internal development.

During the quarter, we entered into strategic business partnerships for companion diagnostics; completed the foundation of our medical sciences business with tuck-in acquisitions of Navigenics, Pinpoint, and Compendia; and acquired distributors in China and Chile to continue to extend our footprint in emerging markets.

We achieved important milestones with several highly anticipated product launches, including the Ion Proton System, a platform whose speed, ease of use, and affordability will democratize genome sequencing; as well as our Pervenio lung test, the first of its kind molecular test to identify early-stage lung cancer patients who are at a high risk of recurrence following surgery.

I'm extremely pleased with the progress of our management team is making across our business platforms and geographies.

We are moving fast in a disciplined way.

Now let me turn to the results.

We finished the quarter ahead of our expectations as continued strength across several of our businesses contributed to results.

Revenue for the quarter came in higher than expected at $911 million and significantly increased sales in our Ion Torrent platform, driven by Ion Proton System sales and continued strong demand for the Ion PGM, as well as growth in forensics and research consumables, drove the 1.4% increase.

Recall that this growth rate includes overcoming headwinds from the decline in sales of our SOLiD 5500 instruments.

Our non-GAAP earnings per share came in at $0.92, ahead of our guidance, due to slightly higher sales, higher-than-forecasted gross and operating margins, and the benefit of a lower share count as we continue to aggressively repurchase shares.

Overall, our end markets remained largely in line with our expectations.

In the US and Europe, we continue to see a cautious but stable environment.

Last quarter, we guided to growth in Europe of low single digits, which is generally what we saw in the third quarter with growth coming in at 2%.

We saw strength in Asia-Pacific and Japan, as well as our emerging markets where we continue to expand our operations.

China continues to be a growth market for us as we continue to invest there on multiple fronts, including expanding our operational capabilities.

We completed the acquisition of Genewindows, Life's distributor covering mainly the Invitrogen brand reagent portfolio in south and west China.

This acquisition complements our go-direct strategy for consumables in mainland China.

We also expanded our footprint with the completion of our state-of-the-art facility in Beijing where we will manufacture advanced DNA testing solutions locally to help forensics labs and law-enforcement agencies solve crimes more cost effectively.

Finally, we entered into a strategic partnership with Sino Biological, a leading Chinese biotechnology company and one of the largest cDNA recombinant protein and antibody product manufacturers and suppliers to biomedical and pharmaceutical research in the world.

They have developed the capability to produce over 1,000 new recombinant protein bolts per year in house and have commercialized more than 10,000 products.

Through this partnership, we will distribute Sino Biological's broad portfolio of products and jointly develop new proteomic products for additional applications.

During the quarter, we continued to execute on our development pipeline with product launches across several of our businesses, including the Ion Proton System, the PI chip, and the Pervenio lung cancer test I mentioned earlier.

In addition to these launches in our genetic analysis and medical sciences businesses, we also launched GlobalFiler and GlobalFiler Express in our forensics business.

These two new DNA kits are revolutionizing how crime labs perform forensic testing around the world, making it faster, easier, and cheaper to process DNA samples.

By increasing the number of genetic markers by over 30%, GlobalFiler delivers the ability to recover significantly more information from forensic samples and increases discrimination power, resulting in faster and more powerful comparisons of forensic data to resolve crimes.

To date, 44 countries have now implemented criminal offender DNA database programs with a combined offender sample pool of 40 million and growing.

On our last quarterly call, Ronnie Andrews joined us to talk about his vision for our medical sciences business.

Since that time, we've continued to make progress.

Earlier in October, we announced our acquisition of Compendia Bioscience, which will enable deeper engagement with an established customer base of leading pharmaceutical companies and will position Life as a partner of choice for drug and companion diagnostic development.

Coupled with Navigenics and Pinpoint Genomics, tuck-in acquisitions in July, Compendia completes the foundation of our oncology strategy and positions Life to drive personalized medicine.

In combining these assets, we are now able to extend the full range of clinical capabilities by developing high-value proprietary content design and validation through the CLIA lab, delivering interpretation through informatics and ultimately impacting clinical insights through our physician portal.

Compendia's oncology workflow can also be incorporated with the Ion Reporter software to enable our Ion customers with robust bioinformatics solutions for early-phase clinical research.

In addition to acquisitions, we entered into two partnerships that will help us build diagnostic content.

We entered into our second agreement with Bristol-Myers Squibb for current and future companion diagnostic projects, covering an initial project for oncology and providing a long-term partnership across a potentially broad range of Life instrument platforms in a wide range of therapeutic areas.

The pharmaceutical industry is increasingly turning its focus to discovering and delivering targeted personalized medications.

As more and more targeted drugs come onto the market in the next decade, there will be growing need for diagnostics that can help predict which patients will benefit from which drugs.

For oncology alone, hundreds of agents are currently in clinical trials, and we can see an extremely strong market opportunity for the development of companion diagnostics.

We're also working to bring next-generation sequencing into the clinical market, and recently signed a nonexclusive license and supply agreement with VelaDx to develop clinical diagnostic tests on Ion PGM for oncology and virology.

VelaDx is a privately funded company led by management team with extensive experience in the pharmaceutical and diagnostic arenas.

Under the terms of the agreement, VelaDx will utilize the PGM platform with their Ben Sentosa workflow and their menu of molecular diagnostic tests.

They will pursue FDA approval for their systems and kits, which are already in conformance with CE IVD regulations.

The success of the clinical PGM platform, as is the case for most diagnostic platforms, will rely in part on the existence of a menu of tests that have high value in the market.

We continue to seek out partners who are interested in helping us ensure that such a menu exists in multiple areas of clinical importance.

Progress across our Ion semiconductor sequencing platform accelerated significantly during the quarter.

We made improvements to the PGM and AmpliSeq pipelines, including the launch of a 400 base pair sequencing kit and Torrent software; launched our new Ion proton system; and introduced several new additions to the technology roadmap, including Avalanche, an emulsion-free template preparation chemistry that will work on all Ion platforms and also allows us to bring a third chip to the proton series, which we are now calling the PIII chip.

We believe the proton system is a real game changer as it truly opens up the market to affordable clinical exomes and genomes.

The PIII chip brings with it new low cost and will make routine genome testing ordinary.

In mid-September, we hosted our first annual Ion World customer conference, which was a resounding success with over 10 customer talks characterizing our competitive advantages and 450 customers in attendance providing positive feedback and indicating an interest in the Ion platform.

The road map we presented at Ion World showed that semiconductor sequencing technology continues to scale in every respect, and the scientists who shared their work at the event confirmed the system's relentless performance gains.

Ion Torrent has emerged as the most outstanding value in sequencing.

In just less than two years, read length has gone from 100 to 400 base pairs and accuracy has improved from Q17 to Q30.

Over the same period, the per-run throughput of semiconductor sequencing technology has increased 1,000-fold from 10 megabases to 10 gigabases, delivering an approximately 500-fold reduction in the sequencing cost per base to the user.

These improvements now enable any sequencing application, from targeted resequencing and microbial sequencing to exome sequencing and transcriptome sequencing and many others.

Given today's limited capital budgets, we are making it even easier for scientists to make a long-term investment in a technology that will outperform their legacy system today and scale to exponentially greater throughput over time.

We began shipping our Ion Proton System and the P1 chip in September.

We shipped over 100 systems in the third quarter.

We are extremely pleased with the level of customer interest.

The latent demand for Proton is more significant than we originally anticipated.

The overall cost of the capital purchased, the ongoing service costs, and run costs of traditional NGF instruments have significantly limited the number of research and clinical labs from participating in these markets directly.

We are also receiving positive feedback from our early customers as they get up and running on Proton Systems.

Several of our customers will be presenting data publicly over the next several weeks.

These customers are getting over 10 gigabases in two- to three-hour runs with 80 million reads, which is at the high end of the range we communicated and is a fourfold advantage over other benchtop sequencers.

Proton, using the P1 chip, is the only benchtop sequencer enabling whole exome and whole transcriptome analysis today.

And with the PII chip, it will enable whole genome analysis.

Enabling these speeds will make the Proton System transformational for medicine, hospitals, and testing laboratories, and will truly democratize genome sequencing and bring it into the routine clinical testing.

At Ion World, we announced we would be introducing two new automated template preparation instruments, the Ion OneTouch 2 System and the Ion Chef System.

The Ion OneTouch 2 System is ideal for labs with the proton and media throughput requirements, while the Ion Chef System is ideal for labs with any level of molecular biology expertise or for labs with high throughput requirements.

It automates the upfront sequencing workflow going from library to loaded chips with just minutes of hands-on time and is scheduled to ship in the first half of next year.

Ion Chef further simplifies sample prep workflow and offers twice the productivity.

Designed to support multiple Ion platforms, it can process either two PGM chips or two proton chips per run with minutes of hands-on time.

During the quarter, our business continued to generate strong free cash flow of $177 million.

At the beginning of the year, we communicated our commitment to a balanced capital deployment approach, where 50% of our available free cash flow would be returned to shareholders.

To that end, during the third quarter we spent an additional $208 million to repurchase shares, bringing our year-to-date total spend on share repurchases to $535 million, more than exceeding that goal.

We have an additional $612 million remaining under our $750 million share repurchase program.

The market dynamics we saw in the third quarter were largely as we expected, with strong growth in the emerging markets and slower growth in mature markets, like the United States and Europe.

We continue to see the broader macro slowdown negatively affecting our European results, and in the US we are now seeing some pullback in spending as awareness of potential cuts to the NIH become more widespread.

While we remain optimistic that Congress and the President will do the responsible thing and reach a bipartisan deal to avoid the fiscal cliff, we are also prepared if they don't.

The main point is that in this period of uncertainty, we, like others in this industry, have limited visibility to what impact political decisions will have on the purchasing patterns of our US research customers.

Based on these dynamics, we expect our organic revenue growth in 2012 to be at 2% and could be slightly below that level if uncertainty around a debt deal increases in the US market between now and the end of the fourth quarter.

We continue to look for ways to reduce our operating costs, including pulling back in some areas of discretionary spending in the fourth quarter.

Assuming the benefit of these spending reductions, a potential pickup from improved currency rates, and a lower share count resulting from capital allocation commitments we are executing on, we are increasing the low end of our EPS range by $0.05 to $3.95 and maintaining the top end of the range at $4.00.

We continue to do our best to navigate through these uncertain times and remain committed to further diversifying our end-market exposure.

We are continuing to make investments in markets where we believe we have the growth opportunities that will make us increasingly more competitive and vibrant in 2013 and 2014.

And with that, I'll turn it over to David.

Thanks, Greg.

Good afternoon, everyone.

In my remarks today, I will provide an overview of our results for the third quarter and a more detailed commentary around our expectations for the fourth quarter and the full year.

As Greg mentioned, we delivered third-quarter revenue and earnings growth ahead of our internal expectations.

Revenues of $911 million grew 1.4% year over year, excluding the impact of currency, and were above the high end of the range of $900 million to $910 million we provided in July.

Our non-GAAP earnings per share came in at $0.92, ahead of the previous guidance range of $0.87 to $0.90, primarily due to a solid operational performance and the benefit of a lower share count as we continue to repurchase shares.

Our free cash flow for the quarter totaled $177 million.

At a more detailed level, revenue excluding currency by region was as follows.

The Americas declined 1%, Europe grew 2%, Asia-Pacific grew 10%, and Japan grew 4%.

Taking a closer look at our business-group results for the quarter, research consumables revenue decreased 3% to $384 million.

Excluding currency, revenue increased 1% over the same period last year, driven by growth in our cell culture products, sample prep products, and benchtop instruments.

Revenue for genetic analysis decreased 1% to $353 million for the third quarter, compared to prior year.

Excluding currency, revenue increased by 2%.

The growth was primarily due to a significant step up in Ion Torrent instrument sales as we launched the Ion Proton System late in September and continued strong demand for the Ion PGM instruments and consumables.

Offsetting some of this revenue growth was the expected headwind from SOLiD instrument sales and the decline in CE instruments, primarily due to one-time orders in the prior-year quarter and the timing of some sales.

While we had expected qPCR royalties to decline by approximately $7 million to $8 million year over year, the actual decrease was about $3 million, as our team was able to offset declines with additional royalty licensing programs.

Applied sciences revenue was flat at $174 million for the third quarter, compared to prior year.

Excluding currency, applied sciences grew 3%.

The increase was driven primarily by higher forensic kit sales and qPCR applied sciences instruments.

This increase was partially offset by lower sales of CE instruments due to one-time orders in the prior-year quarter and an expected decline in bioproduction sales, which tend to fluctuate quarter to quarter.

Gross margin decreased 50 basis points to 65.6%, compared to prior year, driven by the impact of unfavorable currency and an increase in Ion Torrent instruments, partially offset by lower SOLiD 5500 instrument sales.

On a sequential basis, gross margin was in line with the second quarter.

Operating expenses of $343 million were $3 million higher on a year-over-year basis, principally due to our continued investment in greater China and medical sciences.

On a sequential basis, operating expenses were down, as expected, due to our continued management of discretionary costs.

Our operating profit totaled $255 million, a decrease of 7% over prior year.

Third-quarter operating margin was 28%, representing a decrease of 140 basis points.

The decrease from the prior year was the result of lower gross margins and the higher operating expenses that I just discussed.

In terms of other income line items, we had $400,000 of interest income, a loss of $2.8 million on foreign exchange and other items, and interest expense of $29 million.

Our tax rate for the quarter was 27.3%, slightly lower than the second-quarter rate of 27.6%.

Our diluted share count for the quarter was 177.3 million, a decrease of 9.6 million over the prior year as we continue to repurchase shares as part of our overall capital deployment strategy.

In Q3, we repurchased approximately 4.4 million shares for $208 million and now have $612 million remaining on our current share repurchase authorization.

Moving on to the balance sheet and cash flow statements, we are ending -- our ending cash and short-term investments were $299 million.

This compares to last quarter's balance of $303 million.

Cash from operating activities was $197 million, capital expenditures were $20 million, and free cash flow was $177 million.

Return on invested capital was approximately 9% for the quarter.

Our ending debt as of September 30 was approximately $2.5 billion.

This balance is made up of our senior notes of $2.3 billion, plus some short-term debt.

We expect to end the year within our target leverage range of 2.0 to 2.5 times EBITDA.

Now let me take a moment and talk about our outlook for the rest of 2012.

As Greg said, we expect our revenue growth, excluding currency, for the year to be approximately 2%.

Our intention is to offset any additional macroeconomic pressures through continued reductions in discretionary spending.

As a result of these initiatives, we continue to expect our operating margin to expand in a range of 25 to 50 basis points for the year.

Given our additional share repurchases in Q3, we're now expecting our full-year share count to be in the range of 179 million to 180 million, down from the 180 million to 182 million we'd previously guided to.

We expect our tax rate to be about 27.5% for the full year, assuming the R&D tax credit is reinstated in Q4.

Taking into account these factors, we are increasing the lower end of our EPS range by $0.05 to $3.95 and maintaining the top end of the range at $4.00.

And now, let me provide additional color on the fourth quarter.

Gross margins are expected to be up year over year, largely due to manufacturing productivity related to savings in material costs and lower inventory write-offs from last year, partially offset by lower royalty revenue and higher instrument sales.

Our operating expenses are expected to be up year over year as we continue to invest in medical sciences, partially offset by a reduction in discretionary spending.

Currency has fluctuated considerably from month to month and continues to be highly variable.

Net of the hedge benefit, currency at September month-end rates could negatively impact revenue by $11 million and EPS by a couple of pennies for the fourth quarter.

Given these assumptions, we expect Q4 EPS to be in the range of $1.08 to $1.13.

Those of you who saw our press release may have noticed that we had a section in there about subsequent litigation, and let me comment on that.

About an hour prior to our earnings call, we received an unfavorable verdict in our litigation with Enzo Biochem relating to CE sequencing products during the period 1998 to 2004.

The relevant patent expired in 2004, prior to the acquisition of AB, so the verdict does not have any impact on our CE business going forward.

The jury ruled that Life Technologies had infringed Enzo's intellectual property relating to reagent sales and gave a verdict in the amount of $48.5 million in favor of Enzo.

As a result of today's verdict, we will record a GAAP-only expense of $48.5 million for the third quarter ended September 30, 2012.

This will result in a reduction of GAAP net income of approximately $31.5 million, or $0.18 per diluted share.

The current financial tables in our press release filed today do not reflect this expense, but we intend to file updated financial tables in an amended Form 8-K in the next two business days.

As you recall, we had a similar situation with our litigation against Promega earlier this year where the jury ruled against us.

We appealed, and subsequently the verdict was overruled.

While we can't predict the outcome of litigation, we strongly disagree with the Enzo verdict and intend to vigorously challenge it in the trial court and on appeal.

And with that, I'll hand the call back over to Carol.

Great.

Thanks, Dave.

And Jonathan, we'll open up the call now to questions and answers, and could just ask and remind everyone that we have a number of analysts on the call, and if you could limit yourself to one question per person and then get back in the queue, we would greatly appreciate it.

(Operator Instructions).

Jon Groberg, Macquarie.

Thank you for taking the question.

So Greg, if I can just focus on the topline for a second, you mentioned a lot of, obviously, the uncertainty out there and some of the headwinds.

If we think about -- one of the issues this year was obviously the falloff in SOLiD.

Can you maybe talk a little bit of how you're feeling with respect to Ion?

You made a number of announcements, obviously, that you went over again on the call here, but maybe what you're seeing in terms of Proton demand, any more detail you're willing to provide, and maybe how you think that translates into early next year?

And then maybe also, there's been a lot of questions around emerging markets.

If you could maybe just comment a little bit around what you're seeing in China and emerging markets?

Thanks.

You bet.

Thanks, Jon, for the question.

You know, we're very positive of the Ion Torrent franchise.

You've seen just in the last 90 days, pardon the pun, a torrent of new product launches with the P1 chip, the announcement of the PIII chip, entirely new sample preparation instruments, as well as chemistries, and an increasing uptake of the AmpliSeq panels being used in translational research.

So we're very pleased with how this franchise just continues to grow.

And it's tracking the original deal model when we acquired Ion Torrent about two years ago.

So as we look to 2013, we see another just phenomenal year of growth of this franchise.

And because of these new product launches, because of the buildout of more focused sales teams now to call on laboratories that are doing translational research, we think that we'll have, again, another just banner year of sales growth.

Maybe turning our attention, then, to your second question of emerging markets, I think you can see our strategy playing out is that as we see this research reagent and instruments industry mature and consolidate, our goal is to vertically integrate ever more forward into our distributors and countries where we're seeing really strong growth.

Every time that we do that, we can have more direct conversations with scientists, we broaden the available products we sell, and we just have faster growth.

And so, we're staying the course.

We like our strategy.

We're investing where the growth is, and we think that ultimately this industry centers around just a couple big players and we're certainly going to be one of them.

Great.

Thanks a million.

I'll hop in as you suggested, Carol.

Thanks, Jon.

Amanda Murphy, JPMorgan -- I'm sorry, William Blair.

(Technical difficulty) so I think this was discussed last quarter as well, but you've been running at that 1% run rate, and obviously there's uncertainties around funding, but how are you thinking about that business next year and longer term?

Is it fair to say there's some pent-up demand there or do you think you can drive that growth back up to what is a more normal run rate?

I'm sorry, Amanda.

The first part of your question got cut off, so if you could repeat the first part.

I'm sorry.

I was just asking about the underlying consumables business and just if the growth rates there, obviously there's a lot of uncertainty for the rest of this year, but I was curious how you're thinking about that for the longer term.

It's been running at that 1% sort of growth rate.

Is this something where we can think about pent-up demand next year when we're past all the uncertainties or what's the right sustainable growth rate for just the base underlying consumables business?

You bet, so let's look at that question maybe by geographical split.

So in Europe, we've seen the industry, just due to the external market demand, ease down to that lower single digits.

And we think in at least the next year, that's about where it's going to remain.

If we go over to Asia and the emerging markets, like Middle East and South America, we're seeing much more robust growth for those consumables.

And so, we think actually that continues to grow at a nice pace in 2013.

So the real question mark, then, of your question is the United States and what happens, and clearly we've seen this moderation of demand in 2012 due to all of the uncertainties coming out of Washington DC.

Look, our hope is that this thing settles out here between now and hopefully the beginning of the year, and that we enter into 2013 in the United States with more reasonable, consistent demand going forward.

Certainly that's what all the universities, research institutes want, and at least we're hopeful that smart minds and mature minds prevail in Washington to bring about some certainty here in government funding.

So we'll have to see, but our hope here is that the United States returns to a little bit better growth, in which case I think you'll see us move up from that 1% growth that we've experienced this year.

Okay, got it.

Thanks, guys.

Tycho Peterson, JPMorgan.

As we think about guidance and what you're implying here for the fourth quarter, you are calling for a nice acceleration.

And Greg, you talked about the backdrop getting a little bit more difficult heading into the fiscal cliff.

So can you talk about what gives you conviction in maybe 4% growth or so off a more difficult comp?

Is that all Proton or are there other factors there?

Let me take that one, Tycho.

This is David.

There are a couple of things in there.

Certainly Proton and PGM are both important factors.

They continue to accelerate.

And you know, absent some significant change in the macroeconomic environment, we think that growth will continue.

Second, bioproduction was down in the third quarter.

We think that will come back to growth in the fourth quarter.

And then, finally, we have some new products that we're introducing in research consumables and we think there will be a step up there.

And then, finally, as we talked about in the third quarter, there are a number of large deals in forensics that we expect will close in the fourth quarter.

So it's basically those four things.

Okay.

And if I could just squeeze in one quick follow-on, can you comment on the LabCorp announcement today?

Just curious if you wanted to say anything.

Thanks.

We're well aware of that litigation.

We think it's baseless and we'll defend our position vigorously.

Okay, thank you.

Bill Quirk, Piper Jaffray.

(Technical difficulty) the Middle East is perhaps beating a dead horse here, Greg, but just wanting to think a little bit about your comments regarding the slowdown.

Can you talk to us -- is this -- how recently have you seen this?

Is this perhaps related at all to the election or do you think this has everything to do with the impending fiscal cliff, and assuming that, as you mentioned, cooler heads in Washington prevail, that we'll get that ship righted?

I don't have any more insights than what I said.

I think what you've heard from the Corporation, then, is that we're really clear-eyed about what's happening here around us.

Once the election gets settled and the work gets underway to avoid the fiscal cliff, and based on all of that mix, we're still improving the bottom end of our guidance and, as David answered, we're expecting actually better organic growth in the fourth quarter because of some factors that are unique to us.

So all of that commished together produces the earnings per share that we're forecasting right now.

Got it, and if I could sneak in a quick follow-up to David.

Just thinking about the better-than-expected RT-PCR royalties in the third quarter, should we expect that to roll into the fourth and into 2013 as well?

No.

For the fourth quarter, we expect our royalties, qPCR royalties, to be down around $10 million.

Okay, got it.

Thanks, guys.

Tony Butler, Barclays.

(Technical difficulty) questions.

Greg, I appreciate the amalgamation of diagnostic assets that you've put together, but you launched a really interesting lung cancer test in the quarter and I remember what Ron Andrews said in the previous quarter, but can you actually -- what I didn't exactly get from his discussion and now that this has been launched, what's the actual go-to-market strategy here?

Can you tell me or are you actually going directly to physicians, and are they then, therefore, ordering or is there some other method?

And then, the second question, perhaps more for David, is Japan obviously strong.

I understand the weak comp, but sequentially it seemed to look better.

Is there something going on there that was unusual in this quarter?

Thanks very much.

You bet.

So with the Pervenio lung cancer test, it is the first of a broader menu in lung cancer that is going to be emerging from the Company, and because of that, we have invested in building already here in the third quarter we think an extremely experienced channel, direct sales force, to start calling on those surgeons that are doing this type of work.

We're going to be doing the testing initially in the old Navigenics CLIA lab, but ultimately our goal is to seek an IVD approval for that test and then democratize it in a kit form on our instruments worldwide.

So that's the strategy, is to go direct, and again we're extremely excited that, as you'll see, this is the first of a broader menu to really focus in on lung cancer.

Maybe just I'll take the second part of your question, and David can complement it, but our Japanese business is extremely well managed.

It just continues to do well in what is essentially a flat economy over there, so I don't think there's anything extraordinary in Japan, per se, other than just some good performance.

But David, maybe you want to add a little more color to it.

No, that's absolutely right.

I mean, ION sales were strong, forensics was strong, offset by lower SOLiD sales.

But if you look at the previous quarters, Q2 was 2%, Q3 was 4%, and we grew again around 4% this quarter.

Thanks much.

Derik De Bruin, Bank of America.

Hi, it's Derik.

Can you hear me?

Yes, we can.

Great.

So I'm curious.

You said you shipped 100 Protons during the quarter, so how much of those are recognized as sales?

And I'm just curious in the ASP and just overall on what the backlog is on the Proton?

Well, let me comment on how many were recognized in terms of revenue, and then Mark can comment on the pipeline and what we see for Q4.

Basically, all of them were recognized when shipped.

We went through the same process that we went through on SOLiD and the PGM to establish installation as being basically perfunctory, and so we recognize revenue upon shipment.

And we did go into the fourth quarter here at -- this is Mark, Tycho, with a backlog of instruments that will ship, and when our installing those instruments and getting them up and going and working through that backlog.

It was a large bolus of shipments we obviously shipped to the end of the quarter, and now our service and support team is preparing for labs and getting ready, and some of those early customers who've had their instrument installed will be presenting data next week at the American Society of Human Genetics.

And then, the final part of your question was what the average selling price was, and it was roughly $200,000.

$200,000.

Okay, all right, and I guess I'm going to sneak in one final one since Mark called me Tycho.

I'm going to sneak another one, which is (laughter)

Sorry.

That's okay.

I'm better looking than Tycho.

Fair enough.

On the M&A deals that you've done recently, how do we look at the revenues from those going forward?

And how do we (technical difficulty) about that?

I mean, was there any contribution for revenue this quarter on -- from the M&A deals and how do we sort of -- I'm just curious on how do we model that?

Yes, so there was really no revenue at all from any of those acquisitions in the quarter and de minimus revenue even in the fourth quarter from these deals.

If anything, we're absorbing the additional cost structure to be investing into this oncology franchise that we're building out.

Great.

I'll get back in the queue, thanks.

Jeff Elliott, Robert W. Baird.

Yes, thanks for the question.

I was hoping you could comment on what you're seeing from the pharma and biotech end market, what you are seeing for demand and pricing?

And just if I could sneak in another one, any impact you're seeing from Sandy?

I know it's early.

On the first one, you know, the pharmaceutical/biotech field is mixed.

It's a bit better than the academic environment, but I think when you answer the question, you've got to go more account by account and understand the dynamics at each one.

So it's a stable demand.

It's better than academia, and in that customer subsegment, the biotech is even better than the big pharma.

On Sandy, I would just say it's probably too soon to tell in terms of what impact it will have at all on the quarter.

Daniel Brennan, Morgan Stanley.

Hi, thanks for taking the call.

Maybe just on Proton, maybe just some more color about maybe the types of customers, if you could give us some insight there, researchers, clinical, maybe kind of big centers versus smaller.

And then, related to that, the Company's ability to scale to meet the anticipated demand?

With regard to the distribution of customers, it really was a mixture of customers.

I would say the majority went into smaller sort of academic labs getting up and going.

There was a relative proportion went into the clinical labs.

It's roughly about the same breakdown as we've had in PGM, so I would say about 20% to 30% of that is going into our clinical segment and the rest into research at this point.

We are very well set up in terms of the demand in terms of building the instrument.

We are, as I mentioned, working through the backlog.

It's just a large number of labs that now we've shipped to that we need to just work through that backlog to get customers set up in their labs and set up and running, and we're working through that as we go through this quarter.

And any color on whether some of the placements are competitive or are you -- in terms of a lot of the smaller labs, maybe this is the democratization.

You're just -- it's kind of greenfield, but I'm just wondering.

Is there any breakdown between where there was a competitive win versus a lab that didn't have any sequencing before?

Thank you.

No, we're certainly seeing competitive in all of the sales.

Everyone is comparing ourselves and the competitor, and we're coming out well in terms of what we know we're strong on, which is the speed of the turnaround of the assay, the overall scalability to scale up and get an exome done now in Proton in a couple of hours.

And then, just the price per data point.

A lot of these labs just don't have the cost and the infrastructure to invest in bigger capital instruments, and so the price point that we have in the Proton just opens up this market to be democratized.

Great, thanks a lot.

Shaun Rodriguez, Cowen and Company.

Hi, guys.

Thank you.

On the Q2 call in the context of your third-quarter and full-year guidance, at that time you were targeting about 4% organic growth in the fourth quarter with, I believe, the two key drivers being Ion and particular applied science orders.

So you had a bigger applied science third quarter than at least we expected, so I just wanted to know if those particular applied science orders are still expected in Q4 or whether some of those might have come in earlier than you originally intended.

We do still expect the orders in Q4 and we did close some deals in the third quarter, but we expect approximately -- the deals that we're anticipating in the fourth quarter remain essentially the same.

Okay, thank you.

And one more quick one, if you could talk about how utilization is trending on PGM, and here I'm thinking more among your earlier adopters and whether you're seeing the launch of Proton have a material impact on PGM.

Thank you.

We're not seeing the launch of Proton have an impact on the consumption of PGM.

In fact, what we're generally seeing is an increased uptick in the consumables, particularly as we've worked through -- we're now introducing the improved sample prep, the OneTouch.

We've improved the informatics on Torrent Reporter.

So those are really the main drivers of that increased chip and consumable usage, so we're seeing a good demand.

And then, we've added onto that the new AmpliSeq chemistry, and so that's seen a considerable uptake for us in just demand for customers running panels on their PGM.

So we see a good uptake on that, and that's really a separate market to what people will run on their Protons, which will be exomes.

Dan Leonard, Leerink Swann.

Thank you.

I'll turn this brief two questions into one.

Hoping you could give us an update on your progress on installing the Protons you shipped.

And then, secondly, appreciate the color on the Ion Chef.

Wondering if you could offer us some color on feedback on the OneTouch version 2.0 and what gets customers incrementally excited about that, or where the differences lie between the first version.

Thank you.

You bet, so I'll take the first part and Mark will take the Ion Chef.

In terms of our installation schedule, as Mark had said earlier, we have a very methodical schedule between now and the end of the quarter to get all of our installs up and running.

We have followed the first couple of weeks a very, I think, focused strategy on a few customers to start, and you'll actually be seeing some of the results at the ASHG conference next week where they're getting record output of the Proton device.

So we're extremely pleased with how it has been installed, how it's scaling up, and now how we're moving out in terms of faster installation across all those customers that got the instruments.

Mark, I'll defer to you in terms of that and Ion Chef.

So in terms of the OneTouch 2 specifically, we've got very good feedback on that.

We've made a number of improvements on the system as we launched the OneTouch 2, which is the sample prep for the Proton, and we've also made available upgrades for the OneTouch existing system for our PGM customer, so good improvement from that.

And then, the Ion Chef, which we unveiled on our roadmap, will be available in the mid half of next year, and really that allows us to automate as customers get to even higher throughputs and want to automate further that sample prep load and completely walk away from those two chips.

That allows them that flexibility and automation.

Okay, thank you.

Isaac Ro, Goldman Sachs.

Just want to, David, ask a quick accounting question about the FX.

I think you gave the net number on the impact to the P&L, but I was wondering if you could maybe help us walk through the impact through the various OpEx items so we model this right going forward.

Thanks.

I'm not sure.

You know, that's probably a question better handled off-line.

I'm not sure I understand exactly what you're trying to get at, but it's probably too much detail to take everyone else through.

(Multiple speakers) I can clarify.

I want to make sure there were no significant items this quarter that were sort of a function of FX, either through SG&A or R&D, that we should be aware of as we model those items going forward?

No, there's no difference in the way FX would impact our expenses this quarter than have been in the previous quarters.

Okay.

That's all I needed.

Thanks so much.

Ross Muken, ISI Group.

Hi, this is Vijay for Ross.

Thanks for taking my question.

I had one on your resumptions on price capture heading into fourth quarter and 2013 for the base consumables business, given the tightening budgets.

What are your thoughts around price capture?

Well, maybe the best way to answer that question is looking forward into 2013.

I mean, 2012 is basically done at this point.

So as we look to 2013, we're expecting that the industry structure which allows a couple points of price to continue to be the norm and we'll be announcing price changes in the first quarter of next year accordingly.

Vamil Divan, Credit Suisse.

So just, this is sort of similar to the question I think Amanda asked earlier on the consumables side.

Just in terms of the [GA] business, trying to get a sense of how you guys view the longer-term growth rates there, not so much for the fourth quarter, but looking into next year and even beyond, if you want to say anything, given the uptick we're seeing from PGM and Proton.

And then, I guess my second question, which is somewhat related, I know you've talked about seeking FDA clearance for PGM this year.

Just how long do you think that process will take, just given that we don't really have great clarity from the FDA at this point in terms of what they're looking for and kind of how you envision the timing going into getting final clearance?

It's Mark.

I'll take the first part on the genetic analysis.

I mean, really, as we look forward slightly different to the research consumables where it's more into the macros, the real driver of growth will be in the Ion Proton.

In the rest of the GA portfolio, you'll see, we think, continued stability in our qPCR franchise, which we're the leader in and continue to innovate in that, in products that you've seen in ASHG, and you'll continue to see innovation with us next week at ASHG.

And then, we continue to see on the research side a modest decline in the CE part, offset by the continued use of CE in validation of clinical samples.

With regard to the submission for the Ion Torrent PGM, what we've decided to do is continue to work and lock down the protocol on the reagents.

We've really made so much improvement in the read length and the sample prep.

We're focused on locking that down to make sure that the system we submit really has our best read length and accuracy.

We're about to lock that down soon, and then we'll prepare and submit our 510(k).

It's unknown to us the exact time it will take, and just from previous experiences of the 510(k) process, that could be anywhere from six months to 12 months.

Okay, thanks.

I guess I want to follow up just on that.

Have they given any sort of guidance?

Just in talking to the clinical customers, they like when things are obviously locked down and stable, and obviously you have to [stay] like that, too, but just the fact that you're making these updates so rapidly, will there be a way to keep up with the updates, or once you file, are we going to see some sort of gap before we get another approval for an updated platform for clinical use?

For the PGM Dx specifically, we'll lock it down for clinical use, so that's typically what we would do, and then any further updates would improve them.

So it will be a system that's validated and that also will reduce the number of updates, and that's what the clinical customers that we're currently either running in a CLIA lab or we're running outside the US in a regulated environment, that's what we'll do for those customers.

Okay, thank you.

Bryan Brokmeier, Maxim Group.

A little bit into the backlog, which you commented on earlier, the backlog of the Ion Proton.

Would you expect with the backlog you ended with or where you are right now and with ASHG coming up and your expectations for the number of orders that you'll receive there, do you anticipate a sequential increase in Ion Proton shipments in the fourth quarter?

Yes.

And I guess just a little bit more on that, and how should we sort of think about the consumable pullthrough and the ramp of that for the overall PGM business, particularly now with the Ion Proton installed base?

I think we're still -- we have no reason to go away from our original assumption in terms of what the PGM usage has been.

We're currently somewhere around $50,000 per year per PGM.

What our original assumption was that as more and more applications are developed, that would ramp up to around $80,000, and $80,000 basically is three runs per week with a $500 chip.

Great.

Thank you.

Yes.

Peter Lawson, Mizuho Securities.

(Technical difficulty) that still remains a large stumbling block for adoption, it seems.

What's going on there for Life?

And then, we've also heard a number of accounts returning Ion Torrent systems.

What's happening there?

Yes, Peter, the first part of your question got cut off, so what were you saying is a stumbling block?

Oh, bioinformatics, just the fact that there's this extensive buildout that MiSeq and HiSeq have had for the bioinformatics side of things.

Just wondering what's going on inside Life help and support customers?

Let me take the second part first, which is this kind of urban legend that there's a bunch of returns of Ion Torrent.

I think that would be completely erroneous, and in fact, that would be negligible, at best, if any.

So I think analysts have focused on not, but I think that is misinformation.

On the first part about bioinformatics, Mark, maybe you could talk a little more at length on that.

Yes, we've heavily invested in two aspects, I would say.

One, we've essentially put the server for the genome center in the box, so when you get a Proton, you've actually got all the IT system and the reader board and everything is on the latest electronics, so that's a major change.

And then, the second investment is to make it easy in the interpretation through the Ion Suite and the Ion Reporter.

We've a large set of informatics tools that help people take, say, for example, their cancer panel that they've done all the way through to read that out to do their clinical research.

So that's a big investment that we've made to make it simple.

The third part we're doing is enabling the Ion community, so third-party plug-in softwares can enable.

That may be include plugging software now like the Compendia that Greg mentioned earlier, but also other third-party tools plug into that.

Greg, so you've seen returns, but they're of low number?

I would clarify.

We've seen no returns.

(Multiple speakers) no returns, complete misinformation.

Thank you.

Jonathan, do we have any more questions or is that everyone?

This does conclude the question-and-answer session of today's program.

All right, great.

Thank you, everyone.

If you want to provide the replay information, that would be fine, and we're happy to take calls here at the office afterwards.

Certainly.

The archived webcast of today's program will be available on Life Technologies' website for three weeks.