賽默飛世爾科技 (TMO) 2012 Q4 法說會逐字稿

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

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Carol Cox, Head of Investor Relations.

Ma'am, you may begin.

Thank you, Kate, and good afternoon, everyone.

Welcome to Life Technologies' fourth-quarter and full-year 2012 earnings conference call.

We issued our press release today, earlier at 1 PM Pacific time, and posted it on our website at LifeTechnologies.com, and was also filed on Form 8-K with the Securities and Exchange Commission.

Additionally, we have posted a deck of slides to accompany today's webcast, which may be found in the events and presentations section of the Company's investor relations website with our other earnings materials.

Joining me on today's call are Greg Lucier, our Chairman and CEO; David Hoffmeister, our Chief Financial Officer; Mark Stevenson, our Chief Operating Officer; and Ronnie Andrews, our Head of Medical Sciences.

They will also be available for the Q&A portion of the call.

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

Before we get started, I'd just like to remind everyone that our discussion today will include forward-looking statements, including but not limited to statements about future expectations, plans and prospects for the Company, corporate strategy, and performance.

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 the filings made by the Company with the SEC.

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 non-GAAP measures to GAAP can be found in today's press release or on our website.

I will now turn the call over to Greg.

Thanks, Carol, and thank you to everyone who is joining us today as we provide an overview of our fourth-quarter and full-year 2012 results, and expectations for 2013.

We started 2012 with a promise to our shareholders to grow our underlying business, invest in growth markets and regions, deliver on balanced capital deployment strategy, and introduce innovative new products to serve our customers even better.

Our performance during the year had its challenges, including a weakened macroeconomic environment that affected the life sciences industry globally, and uncertainty in NIH funding in the US in particular.

But our management team and employees remained focused, and were able to deliver against the promises we made.

We introduced game-changing products across all our business groups, expanded further into emerging markets, built the foundation for our molecular diagnostics business, and increased our global manufacturing footprint in China, Singapore, and Europe, allowing us to be ever more cost-competitive.

Now, let me turn to the results.

For the full year, we delivered revenue and earnings per share growth for the 13th year in a row.

Revenue increased 2.2% to $3.8 billion, and our operating margin expanded to 29.2%.

Non-GAAP earnings per share increased 7% to $3.98.

And our strong free cash flow totaled $662 million, enabling us to invest in growing our business and return $635 million to shareholders through share repurchases.

We finished the year strong with fourth-quarter revenue growth at 4.5%, excluding currency.

This growth was driven principally by Ion Torrent, and our research consumables and bioproduction businesses.

Non-GAAP EPS of $1.11 came within the guidance we provided, and included absorbing a negative $0.03 impact related to the benefit of the 2012 federal R&D tax credit being pushed from Q4 into the first quarter of 2013.

Additionally, we delivered results, even though a large order in our applied science business moved out of Q4 into 2013.

We have been very focused on driving our consumables business even higher.

Our mix of consumables and services is now 85% of our total revenue.

In addition, 2012 is the first year where over 50% of our revenue has been generated outside of the Americas, making us an increasingly global company.

Finally, we have focused over the last 18 months on reducing our exposure to academia and government, which we have been able to reduce by 10%.

While this is still an important customer base for us, given the leading-edge science taking place in those end markets, we have invested more heavily in expanding our footprint in the faster growing hospital and clinical end markets.

We continue to gain momentum as we expand into higher growth markets through a combination of strategic acquisitions, partnerships, and internal development.

During the quarter, and into 2013, we made acquisitions in our research consumables and applied sciences businesses, where we were able to immediately leverage our broad distribution capability.

In November, we acquired AMG, the developer of imaging systems for research microscopy, and the manufacturer of our FLoid cell imaging station.

AMG has grown rapidly by successfully developing a complete portfolio of cell imaging products across a range of functionality and price points, which allows us to compete more effectively with established players in a financially constrained environment.

With AMG, we are able to expand our product line of cell imaging instrumentation, while leveraging our own molecular probes, dyes, and reagents for a total work flow system.

In January, we acquired BAC, a leader in protein purification products with a unique set of innovative and proprietary affinity ligands, which are molecules capable of binding with specific proteins, and are typically attached to chromatography resins in a production scale, biopurification process.

Protein purification is a growing market, and a logical adjacency to our existing bioprocess business.

With this bolt-on acquisition, our bioproduction business is now squarely positioned as the provider of end-to-end solutions that are widely utilized in the bioprocess work flow, and can compete more fully across the protein purification market.

In January, we also announced we had entered into an exciting new partnership with Boston Children's Hospital to form Claritas Genomics.

This new company, in which Life will be a part-owner, will develop next-generation genetic and genomics-based diagnostic testing solutions for pediatric and inherited diseases, by standardizing their work on the Ion Torrent technology, including Proton, PGM, and the related consumables.

Life is providing capital and technical support to ensure our sequencers are optimized for the work flow that will be developed at Claritas Genomics.

We're very excited to have established what we believe is an innovative and flexible structure we can duplicate going forward, as we partner with select institutions to accelerate the adoption of genetic testing in pediatrics, and ultimately in advancing Ion Torrent's technology into molecular diagnostics.

During the quarter, we continued to execute on our development pipeline with two production introductions in our leading qPCR business.

At ASHG, we announced the QuantStudio 3D Digital PCR System, a scalable chip-based instrument that features a simple work flow with minimal hands-on time.

This benchtop platform is disruptively priced at $30,000, enabling access to a broad community, and will compete in a global market that is expected to grow to $250 million by 2016.

We also announced the launch of our QuantStudio DX Real-Time PCR Instrument, which is CE-IVD marked for use in Europe, and represents a significant extension of Life's product offerings in the diagnostics arena.

Molecular testing is the fastest-growing segment of the diagnostics market, and QuantStudio has unique features to meet the needs of this market, including pathogen detection, gene detection, gene expression analysis, SNP genotyping, microRNA, and high-resolution melt analysis.

Through a partnership with Quidel and others, we will have a menu of infectious disease and oncology tests CE-IVD marked for the European and Asian markets being launched throughout 2013.

Bringing a high-value menu to market on regulated platforms such as QuantStudio DX allows us to further penetrate the clinical markets outside the US, and begin the democratization of our platforms.

Early in 2012, we laid out a strategy to build out our molecular diagnostics offerings and assets with a vision to become the most relevant provider of high-value information to assist physicians in the management of complex diseases.

Our first investments were building one of the strongest management teams in the industry, with expertise in this area to bolster our commercial and regulatory efforts.

Second, we built the foundation for this business with the acquisitions of three companies -- Navigenics, Pinpoint Genomics, and Compendia, through which we now possess arguably the most robust bioinformatics and physician portal capabilities in the industry, which will enable commercialization of high-value cancer diagnostics.

In a very short amount of time, we've been able to assemble capabilities in software and bioinformatics, and launch our first lab-developed tests, the Pervenio lung cancer test service.

Additionally, we now have a CLIA lab in one of our largest annotated databases of cancer patients' samples globally.

In 2013, and over the next several years, we intend to focus our efforts on strengthening our position in oncology and transplant diagnostics, by developing a rich menu of compelling assays and panels on multiple platforms.

As well, we plan to continue to create strong partnerships with leaders in these disease areas, and work to build out our molecular diagnostic capabilities, largely through self-funding initiatives.

We believe we are well-positioned to deliver a continuum of systems to improve community access to information that will improve patient outcomes, and reduce the overall cost of care.

New introductions continued, and continued the momentum of our installed base, that allowed us to more than double the revenue of our Ion Torrent franchise for the second consecutive year.

The fast-growing desktop market is highly competitive, and we estimate that our market share is now about 60%.

We see this as the largest growth segment in the clinical research area of molecular diagnostics, and look for Proton to grow that market share even further now.

During the fourth quarter, we continued to launch new products that enhance our next-generation sequencing offerings.

We launched the new 400 base pair sequencing kit for the Ion PGM sequencer, which produces reads 60% longer than comparable high-throughput benchtop sequencers, generating more complete bacterial de novo assemblies with longer contiguous sequences.

We also made progress in expanding our best-in-class Ion AmpliSeq panels.

These panels allow our customers to do fast and affordable targeted sequencing for genes or genomic regions, and provide the highest level of multiplexing with 3,000 targets per reaction, while requiring very small amounts of DNA, much less than other competitors, which is critical in research, especially related to cancer.

We've already seen thousands of customer designs in the first nine months of our custom AmpliSeq panels.

And with our new AmpliSeq community panels, we have a rapidly growing panel menu across cancer and inherited disease, which is increasingly being utilized for clinical research.

Last quarter, we launched our Ion Proton System Instrument, a platform whose speed, ease of use, and affordability will democratize genome sequencing by opening up the market to affordable clinical exomes and genomes.

We are extremely pleased with the high level of customer interest.

One full quarter into the launch, I'm pleased to say that we had our strongest quarter ever for Ion Torrent franchise, as continued strong demand for the PGM and a substantial sequential increase in the Proton systems fueled our growth.

We are seeing the real uptake of this technology as customers see how we have increased throughput, read length, and accuracy on the PGM, and are confident we will be able to deliver it again on Proton.

Proton with the P1 chip is the only benchtop sequencer enabling human exome and transcriptome analysis today.

With the P2 chip, Proton will enable whole genome analysis.

During the quarter, our businesses continued to generate strong free cash flow of $173 million.

At the beginning of the year, we communicated our commitment to return 50% of our available free cash flow to shareholders.

We ended the year having purchased $635 million or 14 million shares in total for the year, well above that 50% level.

We have continued to repurchase shares, and have completed another $105 million to date in 2013 already.

We have an additional $470 million remaining under our $750 million share repurchase program.

As we move into 2013, we're focused on three priorities we believe will help us drive our performance and increase shareholder value.

These include transforming our relationships with life science customers, meaning we're committed to providing our lab customers with the broadest array of tools and solutions, including web channels and sophisticated supply centers, so they can get their work done faster, more easy, and less expensively.

We think this will expand our market share.

Second, we're focused on winning in genetic analysis from discovery to diagnostics, where we have platforms and expertise to move further towards clinical use.

Finally, we continue to pursue growth in our applied markets where we can apply our expertise and innovation to new opportunities to expand our current business, or enter a new vertical in a very disciplined way.

Moving on to guidance, we are expecting revenue growth of 3% to 5% over 2012 results of $3.8 billion, driven by another significant increase in our Ion Torrent franchise sales for the third consecutive year, and expansion in our applied and emerging markets.

Additionally, we expect to gain momentum from the roll-off of a portion of the headwinds we had in 2012.

The low end of the range, 3% growth, already assumes sequestration could reduce our revenue by approximately 1%, if implemented.

While the fiscal cliff reduces the sequester's threatened NIH cuts from 8.2% to 5.1%, there is now meaningful risk sequester will occur, at least temporarily.

We, therefore, believe it's prudent to take a conservative approach here, and revise as events unfold.

For non-GAAP EPS, we are expecting results in a range of $4.30 to $4.45, implying 8% to 12% growth over 2012 results.

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

We are continuing to make investments in markets where we believe we have growth opportunities, such as next-generation sequencing and molecular diagnostics, that will make us increasingly more competitive and diversified.

As we look ahead to 2013 and into 2014, we think many of these challenges to growing our top line have improved, and that through disciplined capital deployment, we can grow our bottom line while still making the necessary investments to be even more competitive over the next three to five years.

Before I turn the call over to David, I would like to briefly address our annual strategic review.

As you know, we recently issued a press release announcing that our Board of Directors had engaged outside financial advisors to assist them.

While we normally would not have announced this, we believed it was prudent in light of speculation in the media.

The Board's annual review started last Summer, when our stock was trading in the low $40s.

The Board engaged financial advisors to help in valuation work, and reviewing opportunities to create value for our shareholders.

As any thorough review would entail, all ideas are on the table, including pursuing our current strategy, which has yielded solid results, or something different.

The Board has not decided on any specific course of action, but any decision will be based on what the Board believes is in the best interest of shareowners to further create value.

I recognize that many of you have many questions on this topic.

At this time, I am unable to comment further or provide any additional information.

The Board's review is ongoing, and we will update you as appropriate.

In the meanwhile, the more than 10,000 Life Tech employees around the world remain totally focused on our customers and making 2013 another great year.

With that, I'll turn the call over to David.

Thanks, Greg.

Good afternoon everyone.

In my remarks today, I'll provide an overview of our results for the fourth quarter, and a more detailed commentary around our expectations for 2013.

As Greg noted, we had a solid finish to 2012, growing our full-year revenue over 2%, and our non-GAAP EPS 7%.

For the fourth quarter, revenue excluding the impact of currency increased 4.5% to $999 million.

Our non-GAAP earnings per share came in at $1.11, driven by mid-single-digit revenue growth, and the benefit of a lower share count as we continue to repurchase shares, somewhat offset by a higher tax rate.

As a reminder, our guidance had assumed that the R&D tax credit would be renewed in Q4.

As you know, it wasn't.

If we had realized this tax benefit in the quarter, our Q4 earnings per share would have been $1.14.

Our free cash flow for the quarter totaled $173 million.

Revenue excluding currency by region was as follows.

The Americas grew 0.3%, Europe grew 5%, Asia-Pacific grew 18%, and Japan grew 6%.

All regions benefited from a strong demand for Ion Torrent products.

In addition, we continued to see stable academic end markets in the Americas.

Europe was also relatively stable, with additional growth due to timing of orders in our pharma and biotech end markets.

We saw growth in Japan, primarily due to Ion Torrent products, and Asia-Pacific showed continued strength due to growth in Greater China.

Taking a closer look at our business group results for the quarter, research consumables revenue increased 2% to $409 million.

Excluding currency, revenue increased 4% over the same period last year.

Full-year revenue increased 1% to $1.6 billion, or 2% excluding the impact of currency.

Revenue growth in the quarter and full year were driven by growth in our cell culture products, sample prep products, and benchtop instruments.

Revenue for genetic analysis increased 2% to $401 million for the fourth quarter compared to the prior year.

Excluding currency, revenue increased by 4%.

Full-year revenue, including currency, was flat at approximately $1.5 billion.

Excluding the impact from currency, revenue grew 1%.

Revenue growth for the quarter and the full year was primarily due to substantial growth in our Ion Torrent business, with continued strong demand for the PGM and the Ion Proton Systems.

Offsetting some of this revenue growth was the expected headwind from the decline in solid instrument sales, and qPCR royalty payments.

While we had expected an approximate $10 million decline in qPCR royalties in the fourth quarter, we were able to partially offset those declines with additional royalty licensing programs.

For the full year, our qPCR royalty decline was about $20 million, $10 million less than the $30 million we had anticipated at the beginning of the year.

Applied sciences revenue increased 8% to $190 million for the fourth quarter compared to the prior year.

Excluding currency, applied sciences grew 10%.

The increase in the quarter was driven primarily by increased sales in bioproduction.

For the full year, applied sciences revenue grew 7% to $719 million, or up 8% excluding currency, primarily due to growth in forensics and bioproduction.

Our fourth-quarter gross margin increased 20 basis points to 64.6% compared to prior year, driven by manufacturing fixed cost leverage, partially offset by a higher mix of instrument sales, and the impact of unfavorable currency.

Full-year gross margin was 65.6%, an increase of 40 basis points, primarily due to improved product mix and higher realized price, offset by the decrease in qPCR royalties and unfavorable currency.

On a sequential basis, the fourth-quarter gross margin declined 100 basis points, primarily due to higher Ion Torrent instrument sales.

Operating expenses of $347 million were $19 million higher on a year-over-year basis, principally due to the impact of recent tuck-in acquisitions in our molecular diagnostics business and in greater China.

On a sequential basis, operating expenses were up slightly, as expected, due to currency and the molecular diagnostics acquisitions.

Our operating profit for the quarter totaled $299 million, an increase of 1% over prior year.

Fourth-quarter operating margin was 29.9%, representing a decrease of 70 basis points.

The decrease from the prior year was primarily due to the higher operating expenses I just described, and unfavorable currency rates.

On a full-year basis, we expanded operating margins by 20 basis points to 29.2%, slightly below our guidance range of 25 to 50 basis points.

Our margin expansion was driven primarily by an increase in gross margins, an improvement in currency, partially offset by higher expenses related to acquisitions.

In other income line items for the quarter, we had $700,000 of interest income, a loss of $800,000 from foreign exchange and other items, and interest expense of $30 million.

Our tax rate for the quarter was 27.2%, higher than the prior year fourth-quarter rate of 26.7%, mainly due to the R&D tax credit.

As a result, the full-year tax rate was 27.6%, higher than the prior-year rate of 27.3%.

Our diluted share count for the quarter was 175.8 million, a decrease of 8.8 million compared to the prior year, as we continue to repurchase shares as part of our overall capital deployment strategy.

In Q4, we repurchased approximately 2 million shares for $100 million.

As Greg mentioned, we have also repurchased another $105 million [in] shares since the beginning of 2013.

Moving on to the balance sheet and cash flow statements, our ending cash and short-term investments were $276 million.

This compares to last quarter's balance of $299 million.

Cash from operating activities for the quarter was $221 million.

Capital expenditures were $48 million, and free cash flow was $173 million.

Free cash flow for the full year totaled $662 million.

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

Our ending debt as of December 31 was $2.4 billion.

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

We ended 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 2013.

As Greg said, we are expecting revenue growth excluding currency to be in a range of 3% to 5% for the year, driven by a continued ramp in Ion Torrent sales, and growth in applied sciences, as well as the roll-off of the majority of the headwinds we had in 2012.

Our range does include assumptions related to sequestration.

Recall that we have previously indicated that full implementation of sequestration could be a 1% headwind to revenue growth, based on our exposure to the NIH and other US government funding.

Therefore, should sequestration be implemented, and in place for the balance of the year, we would expect our revenue growth to be at the low end of the guidance range, or 3%.

Currency at December month-end rates is expected to have a small negative impact to our 2013 revenue of about $2 million, and about a $0.01 negative impact on the bottom line.

We expect our operating margins to expand in a range of 25 to 75 basis points, and to be at 31% as we exit 2013, driven by continued improvements in operational efficiencies, and Ion Torrent moving to profitability.

Offsetting some of this expansion is continued investment in emerging markets and molecular diagnostics.

Given our additional share repurchases in Q4 and at the beginning of 2013, we are now expecting our full-year share count to be about 175 million.

We expect our tax rate to be 27.6% for the full year.

This rate includes the federal R&D tax credit benefit of approximately $0.03 for 2012 that will be realized in the first quarter of this year.

Taking into account these factors, we expect EPS for 2013 to range from $4.30 to $4.45.

We plan to update our currency expectations based on month-end rates at the end of each quarter.

While we cannot predict how rates will move throughout 2013, if all currencies moved against the dollar by 5% and our mix of foreign currency stayed the same, the impact on earnings per share would be about $0.23.

We expect free cash flow to be in the range of $700 million to $750 million.

Our free cash flow includes approximately $45 million of one-time expenses related to restructuring, which is about the same as we experienced in 2012.

I'd now like to take a moment to provide some additional details on our expectations for the year and the first quarter that I believe will help you update your financial models.

We expect our revenue and earnings to be weighted to the back half of the year, primarily driven by continued growth in Ion Torrent and applied markets.

Revenue in the second and third quarter should be relatively in line with each other, with Q3 revenue slightly lower than Q2 due to the seasonal slowdown we normally see in the third quarter.

Q4 should be our highest quarter for revenue and earnings.

Turning to the first quarter, we expect our revenue, including currency, to be in the range of $950 million to $965 million, which assumes sequestration may be implemented on March 1. Non-GAAP EPS is expected to be in a range of $1.02 to $1.07.

Gross margins are expected to be down year over year, largely due to product mix, as we derive a higher portion of our revenue from Ion instrument sales.

Operating expenses are expected to be up year over year, as we make the investments I mentioned earlier.

Currency at December 2012 month-end rates would negatively impact revenue by about $11 million, and EPS by a negative $0.04 for the first quarter.

As I said earlier, we plan to take the full $0.03 benefit from the retroactive 2012 R&D tax credit in the first quarter.

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

Great.

Thanks, David.

We'll now open up the call to question-and-answer period.

Again, I would just like to remind everyone -- we would greatly appreciate it if you could limit your questions to one, so that we can accommodate as many people as would like to ask questions.

You can get back in the queue for any follow-up questions.

Kate, if you could open it up, I'd appreciate it.

(Operator Instructions)

Our first question comes from the line of Jon Groberg with Macquarie.

Your line is open.

Greg, thanks for your comments around the process.

My question will just assume it is a go it alone.

The first question is, you mentioned some comments around looking at adjacent markets, but also particularly molecular diagnostics, focusing on internal funding.

Could you talk about what your capital allocation priorities would be in 2013, given your comments about 2012?

And then just as a quick follow-up about the year as well, can you maybe just talk about you had some really good growth in China, you ended with pretty good growth in applied sciences, I think you said one deal fell through into 2013.

Could you maybe talk about some of those markets that have been growing pretty quickly, how confident you are that those will sustain themselves in 2013?

Thanks.

You bet.

Let me start with the capital deployment question, and then how it relates to acquisitions.

So just to reiterate, we are committed to the 50/50 balanced capital deployment strategy, and so if you were to forecast our free cash flow this year, let's just round the number to $700 million, half of that will go into buybacks, half of that will go back into funding growth.

In the area of funding growth, with respect to things beyond capital expenditures, which as you know, is a very reasonable, stable amount of money for a Company like ours, we would target areas that we think will give us faster growth.

Our acquisition of that ligand Company that goes into our bioprocess business is a great example of the perfect acquisition for us.

It's reasonable in size.

It's a tuck-in acquisition, and it allows us to be exposed to other elements of what is a nicely-growing business of bioproduction.

Ronnie Andrews, in his leadership of Medical Sciences continues to scout for other technologies, other pieces of real estate that we need to be the vendor of choice in these more complex diseases like cancer.

Although I would just say that we have clearly made a decision that, given how we see the future of diagnostics, which is different than what people would normally think about diagnostics as practiced in the past, there's not a lot of available real estate out there right now that interests us.

Therefore, we grow organically, we invest organically.

So that's our thoughts on capital deployment.

In terms of the markets, we are really pleased with the bodybuilding we did in China over the last 18 months.

We took some flack about 18 months ago for going direct.

It hurt us in a quarter.

Since then, we've been on a tear as we hired hundreds of people in direct sales force, we've acquired dealers, and we think we now have one of the largest commercial footprints in that very important economy.

and our results show it now, that it's paying off in terms of having that more substantive, broad-based, scientific conversation with customers across many, many different cities, territories in China.

Lastly, I'd just say that this idea of globalization is critical for us.

We realize that no matter what happens in the United States, it will probably be a slower growing market for the years to come and therefore, you're seeing us expand our direct presence, as I said, not only in China but the Middle East, Russia, Africa, we see ourselves in ever more countries having ever more scientists than any other Company in this space, and we think that's going to allow us to have faster growth that can be had in this marketplace.

Great.

Thanks a million and congrats.

Our next question comes from the line of Tycho Peterson with JPMorgan.

Your line is open.

One of the things you commented on is the plans to get Ion Torrent to profitability embedded in your 31% operating margins that you laid out.

Can you talk to some of the steps you're taking there, including the manufacturing move to Singapore?

You bet.

So there's a few points we would make here.

One is simply that there is a fair amount of fixed cost of R&D investment, personnel investment in that business, and that as the revenue scales this year, we have reached the kind of release altitude and get to the point of profitability.

That's probably the most important driver.

The second one is that we, ironically, have sold many more instruments than we had in our original deal model when we brought Ion Torrent into the family, and that's good because it's building the installed base, and now what will follow is more consumable sales, and so we're really confident that's going to add to the margins for 2013.

And then the last is what you say, in terms of where we're locating manufacturing and how we're doing manufacturing engineering, not only on the instruments but on the reagents, where we're bringing some in-house into Ambion and some of our enterprises like that allows us to have a higher gross margin in our manufacturing.

So those three elements combine to give real confidence that Ion Torrent's going to be a nice contributor to the bottom line compared to 2012.

Okay.

Then just a follow-on to your comment on capital deployment earlier.

With Boston Children's you put some of your own money to work here, in funding new business venture.

How often are you looking at doing initiatives like that, versus straight up R&D collaborations, versus building it internally?

The Claritas Genomics opportunity for us was unique.

Boston Children's arguably is the finest pediatrics hospital in the world.

They have very distinct ideas and world-class personnel of how to make genomic analysis into pediatric care mainstream.

And so we wanted to partner with them to not only have them fulfill their aspirations, but also help us refine our systems, our work flows, our procedures, that we could then take that technology in many other places.

What was unique about that opportunity was the business structure, as I referenced in my comments, is flexible, and we actually see others becoming part owners of Claritas Genomics or partners with Claritas Genomics at various pediatric centers around the world.

Ronnie Andrews has other business ideas that don't involve us investing, that involves us just partnering with regional healthcare systems, and we'll deploy that as well in 2013.

Okay.

Thank you.

Our next question comes from the line of Dan Brennan with Morgan Stanley.

Your line is open.

Just be interested in the research consumables growth that you generated this year, certainly seems like a bit of a break-out, and while you were against an easy comp from last year, I'm just wondering if you could comment on what you're seeing there and how you're thinking about that business going forward into 2013.

There's no doubt that the research consumables marketplace was difficult in 2012.

We did see some bright light in the fourth quarter, and you can see that by our results.

We also think some of our results were internally driven, by some of the great work Mark Stevenson and his team has done in repositioning the portfolio to have various price points for various different functionality of choices for customers.

And also, by increasing our exposure to faster-growing geographies like China, like India, like Korea.

As we look to 2013, we're hopeful that it will be a bit better marketplace than it was in 2012, but as David said, more of our growth really comes from some of the headwinds that we had in 2012 evaporating and then continued growth in our applied and our genomics business.

Great.

Thank you.

And then maybe related to that, just if that's a consumable franchise, are you willing to give us any color towards the applied and the genetic business as we look towards 2013, and how we should think about those businesses growing, and any specific commentary within the genetic analysis business outside of Ion Torrent, your other businesses within that?

We're not prepared to give overall guidance by segment at this particular call, but per your question can give a little bit of color commentary.

The CE business and Mark, I'll have you chime in here, will continue to be flattish or so, but on a fairly large franchise, we think that's pretty good, given that more and more customers in the diagnostics side see that as the gold standard for confirming next-generation results.

So that continued resiliency of that business, we see staying in place through 2013.

In the applied side, I think we'll have another good year of our bioproduction business.

It's a very well-run organization with a very good management team there, and then our forensics business and farm to fork are going to have, we think, record years.

Particularly even in food safety, where we'll grow at very high double digits again this year.

So we see these franchises as being areas we want to invest in, per an earlier question, not only in organic development but acquisitions, and I think that's where you'll see more of our tuck-ins take place.

Great.

Thank you very much.

Our next question comes from the line of Derik DeBruin with Bank of America-Merrill Lynch.

Your line is open.

So David, I'm just wondering your share count forecast for the year is $175 million(sic-see press release "175 million") for 2013, which is basically what you had in the fourth quarter.

I'm just curious as to, given that you bought some shares in Q1, just what you're assuming in terms of the share count in that sense.

I think it's going to be the share count's about in line with 175 million, and we have it in the guidance, and our guidance assumes performance of the business and some potential share count, share repurchases going forward.

Okay.

And for the 3% to 5% constant currency growth guidance, are you assuming for the contribution from the various acquisitions which you've done, what's BAC adding, AMG?

The acquisitions in total are something less than 1% of total growth.

Great.

I'll get back in the queue.

Thanks.

Our next question comes from the line of Amit Bhalla with Citi.

Your line is open.

Greg, can you just talk a little bit more about the Ion business, can you talk -- I know you said in your prepared comments a 60% share of the benchtop market.

Can you talk about your share in competitive situations, and give us an update on what your thoughts are on P2 timing?

You bet.

I'm going to have Mark take that one.

Mark, go ahead.

Yes.

In regard to the first part, we find actually all these sales are competitive.

I think in this next-generation space, every customer we speak to is involved in looking competitively.

So when we quote our benchtop share at 60%, we have all been competitive sales we've been engaged with.

In terms of the progress we're making, we feel really pleased with the progress we have made on the P1 chip.

As we have seen with the other chips, we roll them out.

We continue to iterate and get improvement on that chip.

We take those learnings from those chips and apply them to the next chip.

We do that with the 3 series and so we're doing that currently with the P1 chip.

The P2 chip is on plan for us.

We have set out a schedule previously to say approximately every six months we say to the team, let's launch a new chip and we continue on that track, so you would expect in the middle of this year to have the second chip come out, taken the learnings we're doing with our customers now in the P1 chip.

Thanks.

Just a quick follow-up on Europe.

Can you just give us a little more granularity on the business segment, and maybe performance, northern versus southern Europe, because consistently Europe shows like it's been a growth market for you, especially this quarter.

Yes.

The European business continues to do well in spite of a very challenging macroeconomic environment.

I think part of that is it's very well-run.

We think it's one of our really solid management teams.

But also, they did the hard work a few years ago to reposition their business to areas such as the Middle East, Africa, and Russia, where we are experiencing faster growth.

If there's a look in terms of your question on the north and south, clearly the Northern part of Europe is growing faster than the Southern part of Europe, and some of that growth is being driven by these larger orders in our applied business, that continue to take place in some of the countries across the European, Middle East and Africa landscape.

Thanks, Greg.

Our next question comes from the line of Amanda Murphy with William Blair.

Your line is open.

I had a question on China, if I may.

So obviously the vertical integration strategy has been very successful.

I'm just curious, how you are thinking about China just in terms of 2013, is there one specific segment that you expect to outperform, and then also just sort of longer-term, how should we be thinking about sort of sustainable growth rates in China?

Thanks.

I think we're targeting a double-digit growth in China.

I think on a longer-term basis, Dave, correct me, about a 15% growth is a reasonable expectation, and our guidance in 2013 presumes a moderate level growth like that.

Even though we had higher in 2012 our guidance always is best rooted in being conservative and prudent.

We think it's a great market for life sciences.

We never saw any slowdown.

We think they are investing in their university infrastructure, their government research institutes, and the rise of the commercial pharmaceutical market is helping us as well.

So we'll continue to invest in our commercial infrastructure, our web channels, supply centers, all the things that have been a formula for success in this research market for us in Europe, in the United States, we're now applying with real strength into China.

Okay.

Thank you.

Our next question comes from the line of Ross Muken with ISI Group.

Your line is open.

So on the guidance, as it relates to the sequester, where are you assuming that impacts the business?

Is it more on the reagent side?

Is it more on instrumentation?

Is it on legacy versus some of the newer products?

How are you at least contextually putting that into the forecast?

Ross, this is David.

I think we're assuming that it's going to have an impact across the product portfolio, probably next-generation sequencing is going to be less impacted by that.

As we said all along, what we've seen with a reduction in funding, instruments are clearly impacted, because people can delay purchase of an instrument.

But that starts to have an impact on consumables as well, and we've seen that.

So at this point, we're assuming that it's going to be across the portfolio.

Okay.

On the capital deployment side, I know we talked about the share repurchase, but just so I'm sure, it seems like you were active in Q4, maybe early in Q1.

Is that going to be through a 10b5-1?

What's the method by which you're applying that to market at this point?

Well, what we've typically done is we've done open market purchases, primarily conducted you through 10b5-1s.

We would assume we would continue to do that going forward.

Okay.

Great.

Thanks.

Our next question comes from the line of Tony Butler with Barclays.

Your line is open.

This is Alison Yang asking a question, two quick questions for Tony.

The first one on the strategic review I realize probably limited discussion we could have, but just curious if there's a time line for which investors should expect an outcome or disclosure?

The second question's for Mr. Ronnie Andrews.

Can he discuss sort of the recent acquisitions in the medical science portfolio, Compendia, Navigenics and Pinpoint, how should we think about revenue contribution in 2013, should we expect revenue contribution?

Similarly for the pharma collaboration with Bristol, how should we think about the timing of product launches and revenue upside?

Thank you so much.

I'll take the first one and then have Ronnie take the second.

As I said in my prepared remarks, the review is ongoing, and we will update shareowners as appropriate.

That's all we're going to say at this time regarding the annual review process.

Ronnie?

Yes.

So obviously the strategy behind Compendia, Navigenics, was really to build a robust pipeline and capability around bioinformatics and the ability to transfer data into knowledge for physicians, and so we're very excited about those acquisitions last year.

The teams worked very diligently to get them to a point where we now have, and are able to use these capabilities, and so your question's very intuitive.

The first place we want to go with this right now is to pharma.

There's a significant interest in pharma to have the ability to work with a Company that can be a one-stop shop and carry a test, a companion diagnostic from, and instill those designs using Compendia, all the way through to IVD approval either in Europe through IVD CE marking or in the US through FDA clearance.

Clearly the Compendia and the ability to push that information through the Navi portal into the hands of treating physicians allows for real-time decision making and it's something that you'll see deployed.

The revenues for next year, for 2013, are really small this year, but as we start to gain and garner some of this new content and begin to democratize these platforms into the community, as we get DX approval of the QuantStudio in the United States and see some of that menu hit the market, that will all start to happen and unfold third and fourth quarter this year, and you'll start to see some of these revenues start to pick up as we enter 2014.

Thank you.

Our next question comes from the line of David Ferreiro with Oppenheimer.

Your line is open.

I appreciate the commentary that you've made, that you've become less levered in academic spending, but could you give a greater explanation as to why you think 1% headwind to revenue would be conservative enough under sequestration, given the high level of fixed costs in NIH grants now?

Thanks.

Sure.

We'll do a two-for here.

I'll start off and Dave can take the back end.

In our guidance on the low end, presumed sequestration would be in effect starting March 1 and go through the balance of the calendar year, it's a very conservative estimate.

For the last 12 months, we've been communicating to shareowners just what the magnitude of sequestration would be, when it was to be impacted, I should say implemented January 1, which was about an 8% cut.

At that time, our calculations were based off how much of our business comes from the NIH, translated through then to what its impact would be on our growth rate, if you cut it by 8% or so.

And the math just revealed a 1 point hit to our revenue.

So it's fairly straightforward math for us, and since then, obviously some things have changed.

The sequester got moved out a few months and its impact would be less than the 8% and that's how you end up with the guidance we're now providing.

I think that's it in a nutshell.

The one thing I would add is we said our exposure to US government funding is somewhere between 10% and 15%, depending on the level of funding, the year, et cetera.

In this environment, our latest calculation is that it's closer to 10%.

So the 1% assumes the higher end, 15%, times the full sequester cut of 8%, and that gives us the 1% headwind to our total revenue growth.

So I think that there's a little cushion in there for us, although David, as you've pointed out in some of your reports, some of the lab or research spending is fixed cost, so more of it may take out of discretionary.

And that's how we think we've got it covered, or hope we've got it covered, is in that difference between the 10%, which is what we think our real exposure is, and the 15% we've used in the calculation.

Thank you.

Our next question comes from the line of Jeff Elliott with Robert Baird.

Your line is open.

Yes, thanks for the question.

One of your large NGS competitors recently did an acquisition in the reproductive health area.

I'm curious, have you seen that impact demand for your NGS instruments?

That acquisition has impacted our sale of instruments to the positive.

There were other companies in that space, other partners that they had in that space that saw that as a competitive affront, and it has opened up all new channels and discussion of opportunity for us.

Did that answer your question?

Yes, it did.

Thank you.

Our next question comes from the line of Dan Leonard with Leerink Swann.

Your line is open.

Can you give us an update on Ion Torrent box pricing, how the ASPs are holding up?

And also I know you were doing some catch-up on installations, if you can give us an update on the progress there, that would be appreciated.

Thank you.

Yes, the first question on the ASPs on the instruments, they've remained approximately the same as we've gone throughout the year.

So between the early access site that we did initially and further units as we placed, the approximate ASP has remained fairly constant throughout the year.

What's also surprised many of the investors is the number of units also, on the PGM, remained approximately the same this last year to 2011.

So we see a continued uptake for the two sort of price points where people want to get into a benchtop unit at the PGM price, into a panel of genes, and where people want to get into a desktop unit and do with the P1 chip, transcriptomes and exomes.

And then the installations on Proton?

As far as the installations, we've now caught up with the majority of ones that we shipped at the end of the third quarter.

We did ship a large number at the end of the fourth quarter and we're still working through some of those installations and training.

Pretty much as we did with the PGM, it does take some time for someone to get both installed and proficient, and then we're working with those customers as they continue to improve their performance, as we continue its rate and improve the system.

It's a continued very fast ramp, and so you'll continue to see improvement, just as we've done on the 3 series chip, as we launched with the P1 chip and installed the Protons.

Thank you.

Our next question comes from the line of Doug Schenkel with Cowen & Company.

Your line is open.

Actually, maybe just really a quick follow-up to Dan's first question.

Did you say PGM placements in 2012 were about the same as 2011?

Is the answer to the ASP question, does that basically mean that ASPs on both Proton and PGM held up pretty well over the course of the year?

In terms of the ASP, it did hold up for the year.

And in terms of the units, it was approximately the same number, yes.

Okay.

Thanks for that.

And then just a few clarifying questions on guidance, this is just kind of a little mini guidance lightning round if you will.

First, what's the PCR royalty headwind you expect in 2013?

Second, when do you expect Ion to get to breakeven is this still by year end at the operating line?

Third, R&D spend declined 4% year-over-year in 2012, and declined nominally Q3 to Q4.

Based on your commentary on operating spend, should we expect this to reverse a little bit in 2013?

And the last one, Q1 revenue is typically a lot lower than Q4 due to normal seasonality.

Q1 guidance obviously incorporates that same trend.

Were you a bit more conservative due to sequestration, or any other dynamics that you might have seen in Q4?

Thank you.

Okay.

So let me see if I've got all these, and if I don't capture all of them, Doug, just re-ask the question.

QPCR royalty headwind, in 2013, we're expecting to be $15 million.

Ion Torrent profitability, we expect it to hit breakeven to slightly above by the end of the year.

R&D, we're expecting R&D as a percent of sales to be basically flat.

And then let me see, Q1 your question was it tends to be lower than Q4 and we expect that basic pattern to hold for next year.

And did we factor any other conservativism in there?

The basic thing is, no, I think we expected basically stable markets, with the impact of sequestration, is primarily what's driving our outlook for Q1.

Mark, add anything there?

That covers it.

You got all four, David.

Thank you.

Thank you.

Our next question comes from the line of Peter Lawson with Mizuho Securities.

Your line is open.

David, just a couple of quick questions around sequestration.

What would be the bottom line impact?

And then on emerging markets, what's the scale of that business that drove that double-digit growth?

Thank you.

So on the sequestration, basically there the rough math is 1% on the top line at standard Company margins of 65%, 66%.

That would be the flow-through to the bottom line.

Got you.

Thank you.

And then emerging markets?

The emerging markets, so could you just elaborate that on your question there?

Just you mentioned in the prepared script about driving double-digit growth.

How big is that revenue?

For all of our emerging markets, our emerging markets are roughly 10% to 15% of our total revenue.

Got you.

Thank you so much.

Kay, this will be our last question.

Okay.

Our final question comes from the line of [Amil Divan] with Credit Suisse.

Your line is open.

Thanks for squeezing me in here.

One on the emerging markets, just following up on that last point, you mentioned some of the deals you did this year in China and Chile.

Just wondering, should we expect more of those sorts of acquisitions as you grow out there, and in which countries maybe would you highlight?

And then the second one just quickly on taxes, you mentioned the benefit of the R&D tax credit sliding from last year to this quarter, just curious what else is going on there.

Surprised that the full year rate maybe wasn't a little lower, and how we should think about that rate going forward.

I'll take the first one.

Dave, you can take the tax credit or Ronnie do you want it?

Just checking.

In 2013, we have a road map of number of countries where we will either build or buy and to create a broader distribution capability in that particular country.

So I think it's a safe assumption.

You'll hear a few more acquisitions in terms of expanding our commercial footprint in 2013.

And on the tax rate, basically it's a case of lower income as a percentage of our total income in some lower tax jurisdictions.

So for example, many of our instruments, QPCR instruments and will be our Ion Torrent instruments, we're going to manufacture in Singapore.

Sale of those instruments as I said in a funding-constrained environment have grown less than they would have, and that's impacting our effective tax rate.

Okay.

Thank you.

Great.

Thank you everyone.

This concludes our fourth-quarter and full year 2012 earnings conference call.

As always, if you have any additional questions, please just contact us here directly at the Company, the Webcast replay will be available on our website for the next three weeks.

Thanks again.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone, have a great day.