Caliper Life Sciences, Inc. Q3 2008 Earnings Call Transcript

Nov.10.08 | About: Caliper Life (CALP)

Caliper Life Sciences, Inc. (NASDAQ:CALP)

Q3 2008 Earnings Call Transcript

November 10, 2008, 5:00 pm ET

Executives

Joe Griffith – VP, Finance

Kevin Hrusovsky – President and CEO

Peter McAree – SVP and CFO

Analysts

Steven Crowley – Craig-Hallum Capital Group

David Clair – Piper Jaffray

Jodi Dai [ph] – Leerink Swann

Operator

Good day, ladies and gentlemen, and welcome to the Caliper Life Sciences third quarter earnings conference call. My name is Amesha [ph] and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator instructions) as I reminder this conference is being recorded for reply purpose.

I will now like to turn the call over to Mr. Joe Griffith, VP of Finance. Please proceed.

Joe Griffith

Good afternoon and thank you for joining Caliper Life Sciences third quarter 2008 teleconference. Before we begin, we will be referring to our presentation, which should available to you on the full disclosure website via your browser or alternatively maybe found on Caliper’s website under Investor Relations sub header Investor Events. This morning, Kevin Hrusovsky, President and CEO; and Peter McAree, CFO, will discuss Caliper’s financial results for the quarter ended September 30, 2008. Following these remarks management will take questions.

Management will be making forward-looking statements during the teleconference including projections of future financial results. Reference to what we expect, believe, intend to do, plan, hope, estimate, or other statements referring to future events or results are intended to identify those as forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties. Further information on risks faced by Caliper are included under the caption “Risks Related To Our Business” in Caliper’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on March 14, 2008 and in our other SEC reports. These SEC filings are available on the website maintained by the Securities and Exchange Commission at www.sec.gov.

Caliper does not undertake any obligation to update forward-looking or other statements in this conference call. To reflect any change in Caliper’s expectations with regards to such statements or any change in events, conditions or circumstances under, which any such statements are based.

During this call we will be referring to certain non-GAAP measures. A reconciliation of the non-GAAP financial measures we plan to use is available as an attachment to our earnings release. To the extent we use additional non-GAAP financial measures during this call. We will provide reconciliations promptly on the investor information location of our website.

I will now turn the call over to Kevin.

Kevin Hrusovsky

Thanks Joe. Let me begin with highlights. We made substantial progress on our strategic reconfiguration in the third quarter of 2008. We announced and closed two different divestitures of non-core product lines for approximately $21 million of proceeds. We did achieve our $34 million of revenue which was within our guidance of $33 million to $36 million of revenue.

We delivered positive EBITDA in Q3 ’09, despite substantial anticipated loss of the microfluidics licensing and contract revenue from 2007, which is about $4.8 million in 2007. We achieved $12 million of accumulated savings, from year-to-date 2008 actions. We strengthened our balance sheet with expectations of having $30 million plus available cash on January 1, of 2009, and we are striving to achieve breakeven EBITDA on 2008 with the strengthened balance sheet and top lines momentum.

So, that’s the summary of the key highlights from the quarter. I would like to now walk through a presentation with Joe referred to at the beginning. I just went through slide number three. I am on slide four, where I would like to talk about our strategic reconfiguration. Actually started back in 2003, when Caliper Corporation was in fact at that time called The Microfluidics Company.

We sold instruments, chips and I have lot of IP and since that time we have been vested in three different acquisitions, and we have been build an overall company that now is focused on applications within the pre-clinical drug discovery and development arena, as well as molecular diagnostic platforms.

Our primary focus now is on nucleic acid, protein cells and small animals, and so let me walk through a five point process that we have gone through in the strategic reconfiguration. First, let me define the next generation applications and technologies that we are focused on. Second, discuss the products that we have acquired or developed ourselves and we have leveraged internal infrastructure to achieve that.

Third, we streamline from maximum efficiency and productivity. Fourth, we sharpened our product line focus and strengthened our balance sheet, and fifth we have enhanced the growth and profitability using an SBU focus, that means the strategic business unit focus.

Slide five illustrates the reconfiguration at the highest level. You can see here the drug pipeline starting with DNA, RNA and proteins then going into cells and ultimately going into mice and small animal models and then human tissue models, and then finally actual trials in the human. It could take 15 years and $1 billion to get to this endpoint, and you can see at the bottom of the slide, there is five different areas that we’ve really put a lot of our focus on the last five years, primarily Oncology and Inflammation, where we now have very strong positions in both in-vitro and in-vivo platforms.

Metabolic, particularly with the on slot of diabetes been an epidemic throughout United States and the world with the BCDs reaching new levels of issue, and we also have a lot of focus on cardiovascular, which has some linkage to metabolic, central nervous system and we also putting lot of focus on toxicology given that there is continuous to be a lot of deaths and factors in all time record in the first half of this year, number of deaths from drugs in the United States.

Now, with those focuses of those different models, we try to create, what we called the I&I bridge. We’re trying to create testing platforms that allows a scientist to do exploration of these different models both in-vitro and in the actual small animal, and you can see the customers that are listed on the slide, with the primary folks that we work with defined what generation of technology is coming that they think is really going to enable them to bring drugs to market, and we focus now on automation platforms, microfluidics and imaging. Those are the three primary platforms that we’ve centered in on over the last five years.

The next slide, slide six just illustrates the way, in which we’ve achieved this. We start as Caliper, we acquired Zymark in 2003, we acquired NovaScreen in 2005 and the imaging business from Xenogen in 2006 and the good news is today, we actually have 65% of our revenue what we call next-gen products. These are products that we see growing double-digit and also have IP protection and they are within the strategic landscape of the I-to-I Bridge.

Secondly, we’re down to about 35% of our product line is what we would call profitable, but marginal to no growth we call them legacy products. Some of those legacy products do in fact focus right on the markets that were focused on, some of them were actually completely non-core and are outside of our landscape of what we’re trying to focus on in the market segments that we defined on the previous slide.

The next slide, slide seven is out attempt to illustrate two different concepts. On the left hand side, we’re showing historic and projected growth. These are in fact GAAP numbers that were showing. What we’ve done here is we pulled out this licensing revenue that we’ve had a lot of discussions over the last year above.

As we discussed a year and a half ago, we expected in 2008 that the licensing revenue for microfluidics would come to an end and you can see the little grey block on the left hand side. You could see that there was revenue throughout 2007 and when you get into 2008 it went away, that was a $11.2 million worth of revenue that generated over $8 million of EBITDA.

So, we knew going into 2008, we are going to lose $8 million plus of EBITDA just due to this loss of this licensing revenue. So, we set out to continue to reconfigure ourselves insure we have good cost measures in place, and on the right hand side you can see the actual product lines that we have reconfigured with, and you can see that the imaging is on the top growing very rapidly, services in the center cut that is also had pretty good momentum.

In ’08, we have had some delays in EPA and Pfizer that has impaired that performance, but it will coming back robustly in 2009, and in the research segment, which is comprised of automation and microfluidics, and you can see that is where lot of the licensing impairment came from, and as we just announced we did divest two product lines that also came out of research products. Let me try to show you more of the illustration to help you build your models so you can better understand our story.

To summarize, I do want to point out that our reconfiguration this year has enabled us to only reduce our EBITDA by $2.5 million despite losing $8 million of EBITDA or so from the licensing. So, you can see there is a lot more class momentum and revenue growth that was able to offset that issue.

We also believe our new EBITDA breakeven revenue was approximately $138 million to $140 million with today’s mix and that is with the level of licensing that we have in today’s mix which is primarily coming only from IVIS, and then finally, we think our new revenue mix that we have configured is going to grow to 8% to 10%, and we believe it will be a nearly breakeven in 2009.

The challenge here is that we do need to get some additional cost reduction, but we feel we are knocking on that door and given the performance that we have had this year. We feel comfortable that we are going to be able evolve into that. We are not there yet, but we are definitely striving to achieve that.

So on slide eight, what I would like to do now is summarize the streamline for maximum efficiency and productivity. If you look at the bottom of this page, you can see that we have actually accumulated $12 million of run rate savings. Most of that’s already been achieved by the end of this year.

There is a little bit of this cost it will take a couple of quarters into year to complete, but the lion share of this has been complete, that is a combination of the termination of the amount you leases the West Coast R&D consolidation that we announced back in first quarter. I got to tell you, I have never seen morale and motivation so high, as it is right now in this Alameda R&D facility. There is a lot of new products that we have launched plus new one’s coming.

This action of combining and consolidating so one building is really been exactly the callus that we thought it would be. We have also restructured into the SBU reconfiguration that we have talked about into those three different business groups, eliminated some senior levels of management, and got ourselves closer to the customer eliminated levels of bureaucracy.

We have also signed a five year lease with Sotax to acquire of our PDQ business that they will actually operate right out of our facility right here in Hopkinton, and there are some new savings yet to define that we will be looking for in 2009. So, that’s the summary, a very significant progress made very rapidly on that front.

The next slide, slide nine, just tries to illustrate for you these three different business groups. You got imaging, the top left it’s got the fastest growth rate. We see that market growing at 15% per year, a very significant progress that we have made by acquiring that company two years ago. In fact our accumulated growth has been at an annual rate over 20% to 25% a year, since we have acquired this.

We have done very strong performance. We had very strong performance on that product line. The services were primarily looking at share gain in this segment and that’s about $20 million of ’07 revenue, and down the bottom right is where we are doing a lot of the strategic reconfiguration.

We are moving our resource business, which is a combination of automation in microfluidics; we are really pointing it towards molecular applications. We are trying to get a large proportion of these technologies focused on molecular applications and we are divesting, but we call legacy products that are not focused on our core market segments, and those would be the non-core products of which two of them we just announced, and we do think there is going to be some additional small ones that could be achieved potentially in ’09.

There is nothing that’s urgent here. We are monitoring this very closely to ensure that we have got the right complete understanding on those product lines. So, in summary imaging we’re focused on market expansion like expanded therapeutic areas and modalities. Research, we are reconfiguring growing towards molecular applications shedding the non-core products, and then in services we are going to after share gain using the patented Imaging and LabChip technology to gain share.

The next slide, slide ten illustrates the recent divestiture. We did mention that we divest the PDQ and AutoTrace product lines which had an overall revenue of about $15 million in 2009, and we did collect proceeds of about $21 million, and the good news here and exciting news here is that $21 million of proceeds represents about a 180% premium over the way we are valued today and that’s just using a revenue multiple of 2009 as our basis.

Secondly, we do estimate that we will have cash of $30 million plus on January 1, in fact today all this money was wired into our banks is already completed. We had $18 million wired to our banks today from both Dynex and Sotax as well as we collected $1 million of our own. So, we had a very strong collection day over close to $19 million today. So, the concern that some have had in the past where we stated unequivocally that we were going to try to get through 2008 without needing to go to these troubled and impaired equity markets to raise cash.

Now, you can see that we have done this in a very strong way by getting very good value for product lines that in other peoples hands will be very valuable. They can grow this, but in our hands because it’s not the focus of our company they made no sense for us to continue to carry them and defocus where we think we have got a tremendous opportunity in molecular applications, imaging and CDAS services.

So, slide 11. It’s just a slide now to illustrate both the Q3 performance as well as looking-forward. Let me start with GAAP numbers on the left. We did have minus 26% growth in the Q3 for research products, but remember a lot of this issue was due to this licensing, plus the impairment of the dilution of us selling off these businesses and that dilution as well as that these product lines were not in our suite spot from a market standpoint.

If you remove those from a pro forma basis which we have shown at the bottom that how we are removing the pro forma components which would be the licensing plus the PDQ and audit rates product lines. Our growth in Q3 was negative 2% for research products and that’s primarily timing and you might recall again, for one of our customers did go bankrupt earlier in year, but its primarily timing that indicates that minus 2%. For the full year we are going to at 6% growth for research products and we believe going forward based on the reconfiguration we feel 7% growth is going to be achievable.

Imaging we had 54% growth, before we went into this quarter we warned people that we had an impaired Q3 of last year. We were going to expect to see some pretty big numbers and we did and so our Q3 growth on a pro forma basis is equal basically 53% there is a little bit of licensing that was treated differently with pro forma, but in 2008, we are projecting 17% growth and going forward continuing at that 15% growth rate. Services we had the impairment of Pfizer and EPA delays, although both of those contracts are robust and moving forward we see very strong momentum.

So, overall 2008 we got minus 2% growth and services, but going forward we feel very comfortable with the 12%. Already have a lot of backlog built forth ’09 both and the EPA and the Pfizer contracts. So, total revenue in Q3 from a pro forma basis standpoint grew 12%. If you look at the GAAP measures it was minus 7% we’re through a lot of those bad comps with the licensing going forward. Our overall 2008 when you remove those the businesses that we have restructured out as well as the licensing will grow at 8% and going forward projecting 10%. So, we don’t see that as a major stretch.

The next slide is to exact same slide expect for its shows year-to-date growth as opposed to the actual Q3 growth, and you can see that on a pro forma basis research products is actually grown to 11% year-to-date and we are projecting that we will have some half year to Q4 performance that will bring down the overall growth in 2008 to 6%, but still very strong in for a lot of a minimal to new products that we have launch particularly in microfluidics and is Zephyr liquid handlers and imaging once again we’ve had 24% year-to-date growth, a very strong growth and then services minus five primarily due to the impairment Pfizer and EPA.

The next slide; slide 13, is just basically now looking forward, I wanted to describe to you, how we plans enhance the growth and profitability three business units. First, let me talk about research. We did launch, we will launching at February, a molecular liquid handler and we already launch this Staccato, and the liquid handler Zephyr we are now just changing the software to do molecular biology preparations. We’ve already had a very good year on this, but we do expect in Q4, we will sell 20 units of that Zephyr plus the Staccato. Next year, we are expecting to sell 100 units and that’s going to be up from 50 units in 2008.

On the LabChip side, we are going to try to grow molecular LabChip platforms. You may recall we launched the GX just about three months ago; it’s been an astounding success in the first quarter that we launched it. I believe we had over 15 unit sold and the first quarter that we launched it. We’re expecting 30 units of that platform plus EZ Reader in Q4, total of a 100 units in 2009 that’s up from 70, once again very robust growth. Now we’ve got real product momentum out of these products that we’ve spend several years in building out. So, we are now excited and we will continue to look for setting non-core product lines.

In imaging, we launch the Kinetic’s Real Time, there is one of the most exciting launches; since I have been here it was over in our trade shows at SMI. We’ve got a lot of attention. There were rows and rows of people that went through out booth. We are also continue to expand the therapeutic from oncology and to these other areas like infectious disease, central nervous system etc. We are expecting to sell 45 plus IVIS units in Q4. We believe we can probably gets of 50 plus, but we want to make sure we’re conservative. 150 IVIS units, is what we’re projecting in 2009. Again a very robust part of our franchisee, we’re continued to build that up.

In the area of services, we know we’ve got the EPA in Pfizer backlog, its build up. We are expecting to $1 million in Q4, $5 million next year up from $3 million this year. Once again that’s a lot of that’s in-house and we feel very strong about that and I also point out that we are growing very rapidly in Asia. We are expecting full-year growth this year to be 20% and we will do a retake on that in 2009. We feel very good that we’ve got good momentum with the selling agents we have in Asia as well as very strong Caliper personnel.

On the next slide, just takes the same slide and that will talks a little bit longer term. Some pretty important events that occurred this year that I want to point out. Number one is, we licensed the plastic chip technology, you might recall back eight years ago, we had this lawsuit with the CLARA and we won a lot of proceeds $40 million of proceeds, but we never get plastic rights from that settlement, and we won off to Monogram this past year and we now have licensed plastic chips, which we think to create a whole new level of economics for microfluidics, which we think are going to be extremely important to break into some of the diagnostic applications and the continue to improve the profitability of microfluidics.

We also have a next-generation product that we started to conceptualize. That’s going to allow us to do sample prep for next-gen sequencing, and we think this is going to rapidly expand our market and the combination of plastic chips and this move into next-gen sequencing. We think it’s going to be a very important part of our evolution.

We’ve also conceptualize a handheld point of care diagnostic instrument. We think its gain changing technology, and we have actually already begun to introduce that to some partners that have a lot of interest and excitement around that possibility. That’s more or likely three or four year out, but we think that it’s got really premise based on the partnerships that we’re starting to look at forming at this point.

I mean imaging, we mentioned new modalities. We are working on that in R&D as well as looking at working at small tuck under acquisitions to continue to expand this market leadership position that we have, and in services we are trying to capitalize on this outsourcing trend, and we know we’ve got a large fixed costs investment that now each revenue dollar we bring in is going to bring almost 80 plus percent contribution to the bottom line. So, we’re now at a very important moment for our services to begin contributing from profitability standpoint.

We are going to continue looking at Asia, exploring that there is even direct channel opportunities to improve our margin and accelerate our growth and we also will continue looking at external partners to expand our market penetration of these, what we’ve call best-in-class technologies that we’ve been able to form and configure.

In summary, I’d just like to state that Caliper is streamlined and focus on three strategic business units. We’re excited about the next-generation product portfolio, which is now 65% of our revenue. So, IP protected and it’s focused on what we consider to be robust markets in applications for the next five years. We got strong top-line outlook driven by imagining, molecular applications in research and diagnostic in EPA.

Good opportunity to achieve breakeven cash profitability in 2009 with costs savings in place already with the $12 million that we mentioned and strong top-line trajectory and enhanced balance sheet with the $30 million plus available cash on January 1, almost that cash by the way is now already in our banks based on those wire transfers today. Those deals have not only been announced, but they closed today.

An additional opportunities we believe to further focus, but nothing immediate in that category and from our metric standpoint, we look at Q4 revenue guidance of $34 million to $37 million in achieving EBITDA break-even in our 2009, we are expecting build to growth the 8% to 10% revenue growth I mean break-even EBITDA is getting – we are getting close to that. We still got work to do, throughout project that we will provide our guidance for 2000 and this is in our guidance as you – we will provide that and our Q4 release, which will be into Q1 ‘09 timeframe.

So that is both the strategic summary and a very high level of summary of our quarterly performance. We like to now as turnover to Peter, who is going to provide some perspectives regarding the financial aspects of our performance in the quarter and take a look at our guidance going forward and then we will recap with some Q&A following Peter’s remarks. Peter?

Peter McAree

Thank you, Kevin. As Kevin said, I will spend a few minutes on the details of the financials we will then go back to Kevin to recap some of the remarks and then we will go to Q&A. Let me start in on revenues, our revenues for the three months ended September 30, 2008, were $34 million compared to $36.7 million for the three months ended September 30, 2007.

Within the quarter, our revenue from products and services was $30.5 million up $1.9 million from the third quarter of 2007 and was comprised of product growth of 8% and service growth of 4%. This overall products and service increase was driven predominantly by continued growth of our optical molecular imaging product line.

Our Q3 revenue breaks down into the three core SBUs that Kevin had introduced as follows: First, I will discuss our research SBU. In Q3 of 2008, our revenues were $17.7 million and this compared to $23.9 million in the third quarter of 2007, a GAAP change of minus $6.2 million or minus 26%.

As Kevin noted earlier, the major explanation behind those change was approximately $4.8 million of decline in license and contract revenues from collaboration contracts, an another $1.3 million of this decline came from the divested businesses that we earlier talked about.

Excluding these factors, research revenue performance was down a more modest 1%, which included primarily about $250,000 of loss data point revenue from Amphora, which was the customer that we are not business earlier this year.

Looking forward, we expect to see strong ongoing performance from our newest LabChip products as well as the Staccato Automated sample preparation platforms, which is supported by healthy pipeline of opportunities.

In our Imaging product lines, we had $10.6 million of revenue in the third quarter ended September 30, that compared to $6.9 in Q3 of last year and increase of $3.7 million or 54% breaking the down a little further, within imagining we saw 75% product revenue growth compare to the third quarter of 2007, which was not a particularly strong quarter to the great funding delays a year ago. The product revenue increase this quarter included a 29% increase in unit placements and the higher ASP due to a favorable mix of spectrum units.

We continued to instruments placements we are also seeing steady improvement in reagent sales and this is also true from microfluidics research products. Moving on to CDAS in the third quarter of 2008 our revenues were $5.8 million this compare to revenues of just under $6 million in the third quarter of 2007, or a GAAP change of minus 200,000 or minus 3%. Within CDAS we have $1 million quarter-on-quarter decrease related to EPA and Pfizer beyond these two customers however we saw an increase in all other CDAS service platforms of approximately 800,000 notably within in-vivo imaging profiling services in vitro Government services.

As Kevin mentioned earlier with our SBU realignment in Q3 we have put a greater level of focus in to more selling and marketing resources into CDAS to continue driving new outsourcing growth opportunities. On a geographic basis non-U.S. sales were about 30% of total revenues in Q3, ‘08 versus 24% in Q3, ‘07 and FX currency translation in the third quarter had less than a 1% impact on our top line in very minimal impact to our bottom line in the quarter.

Moving onto gross margins. Overall gross margins declined approximately 800 basis points mainly due to license and contract revenue decline which we commented on earlier product gross margin was 40% in Q3, this was up 1 point from year ago on the benefit of higher volume, which was partially offset by direct material and other variable cost increases. Service gross margin was 38% now this was down 8 points from a year ago in the major impact here was increased rents and other facility cost and additional personnel resources put in place during the year on the expectations of higher revenues coming from CDAS as I noted our CDAS revenues were down.

On a sequential quarter basis service gross margins increased approximately 7 points in this occurred due to EPA and Pfizer which began to get back on track here on the third quarter. Commenting on expenses, our operating expenses declined approximately $3.9 million or 20% compared to the third quarter of 2007. This decline included among other changes, accumulative impact of cost savings initiatives, Kevin have run through those earlier on one of the slides. Also we had lower accrued compensation costs, and a recovery of prior incurred legal expenses as a result of a mediation settlement.

In Q4, we expect total ASNR, administration selling and research expenses of approximately $18 million including approximately $5 million for R&D and $13 million for SG&A. For the quarter this represents a decrease of about $3.3 million or 16% compared to the fourth quarter of 2007. The decrease includes a $1.4 million of litigation provision that occurred in Q4 of last year and then the remainder of the decrease is due to the accumulative effects of cost initiatives over the last 12-months.

Relative to earnings, our operating loss was $4.8 million in the third quarter of 2008, compared to $2.6 million in the same period of 2007. Primarily reflecting the negative effect on margins of the license and contracts revenue decline and a $2.7 million restructuring charge we recorded related to the partial closer of our Mountain View, California facility. We announced this restructuring in Q1 and the chart was closely inline with what we expected. Bottom-line net loss for the quarter was $5.4 million or a loss of $0.11 per share. This included restructuring charges of $2.7 million and severance charges of $300,000.

The loss compared to a net loss of $2.4 million or minus $0.05 per share in the same quarter of 2007. Adjusted earnings per share on a non-GAAP basis was a positive of $0.01 compared to a positive $0.03 for the third quarter of 2007. This reflected primarily the decrease of approximately $4.5 million of contribution related to non recurring contract and license revenues compared to the third quarter of 2007, which was partially offset by cost improvements we had made.

Relative to the balance sheet our ending cash position was better than where we were expecting to finish the quarter due to timing of cash collections. We consumed approximately $1.7 million of cash during the quarter ending with $8.9 million on the same level of credit facility borrowings. With sales of the PDQ and AutoTrace businesses that we announced today, we have greatly enhanced our cash position and expect to total cash in the neighborhood of $23 million to $25 million at year end with an additional estimated $8 million to $10 million of borrowing capacity.

We are also expecting to renew our credit facility during the fourth quarter extending its maturity into late 2010. Once completed we believe this will ensure that we have more than adequate cash resources through the end of 2010 and then beyond we expect to be cash positive. Q4 outlook in our press release earlier today, we provided our revenue outlook for the fourth quarter of $34 million to $37 million. This takes into consideration the anticipated effects, of the sale of both the PDQ and AutoTrace business lines.

The delay of our next task order under the EPA ToxCast program until the second quarter of 2009. As well as unfavorable currency movements that we are anticipating. We roughly estimate that will be EBITDA neutral now in Q4 and minus $5 million for the full year, and so purposes of this calculation EBITDA is operating incremental loss adjusted for stock-base compensation, depreciation and then intangibles amortization and restructuring of severance charges.

So that’s the details on financial and I will hand it back to Kevin.

Kevin Hrusovsky

Thanks a lot Peter and what we would like to do now is open up for questions regarding Q3 performance, strategic reconfiguration and, commentary around the outlook going into next year. So, we would like to open it up at this point.

Question-and-Answer Session

Operator

(Operator instructions) And the first question comes from the line is Steven Crowley with Craig-Hallum Capital Group. Please proceed.

Steven Crowley – Craig-Hallum Capital Group

Good after noon gentlemen.

Kevin Hrusovsky

Hi, Steve.

Steven Crowley – Craig-Hallum Capital Group

First of all congratulations on bolstering the balance sheet in a pretty reasonable manner it appears.

Peter McAree

Thank you.

Steven Crowley – Craig-Hallum Capital Group

Couple of questions about the business. I think you gave us a road map to figure out, units for IVIS in Q3. It looks like they where may be 31 units and 32 units of IVIS molecular imaging, is that in the ballpark?

Kevin Hrusovsky

Yes, that is right Steve.

Steven Crowley – Craig-Hallum Capital Group

And you’re telegraphing 45 for Q4?

Peter McAree

Well, I think that what we’re seeing there is that it’s going to be 45 plus. We are continuing to see a good mix enhancement with the spectrum and now with the kinetics. We are not sure we will see any kinetics in Q4, but the amount of dollars per unit, I think continues to look very good. So, getting the revenue growth in Q4. We now we had a phenomenally strong quarter last year in Q4. So, getting to a place of ensuring some level of growth versus last years strong quarter was overly what we feel we can achieve this quarter and we may not need to get 50 units to get there.

Steven Crowley – Craig-Hallum Capital Group

Okay, that is helpful. In terms of; I assume then your pipeline you must feel pretty good about the level of activity in the pipeline you have for the business?

Kevin Hrusovsky

We do, in fact this SMI was probably the most successful by far we’ve ever had. Customers come to us two days before the show to present and the combination of their presentations and then the launch of Kinetic’s, really gave us a lot of momentum. This is the highest number of leads we’ve ever created at a tradeshow for this product line. So, we feel very comfortable and confident that we continue to build it out.

Steven Crowley – Craig-Hallum Capital Group

Great. Now in terms of the delays you experiencing with ToxCast, to switch gears on you. What can you tell us about the feel that you have for the eventual materialization of significant business there and what kind of delays are you experiencing now or there some questions or does it just look residual or budget wise. What can you tell us about that situation?

Kevin Hrusovsky

The good news is that, we actually have seen some positive movement from EPA and they were – I think in 2007, we actually had about $2.5 million roughly of revenue from the EPA, they were take a few hundred thousand. This year, it looks like it’s going to be less. We think whatever amount that’s been is less, it’s going to be build up to go potentially behind the $2.5 million next year.

In addition they actually did comeback to us and ask for somewhat of a secondary screen, which it wasn’t part of the original contract and we think that explains some of the delay, but it also for the validates that they do believe very much in the results they were getting now just want to get additional perspective and inside around the results. So, I think all of those thinks tell us that we are in a pretty good position, we believe for 2009 even though they was disappointing that we weren’t able to deliver this in 2008.

We did trying to explain in some of this is out of our control. The biggest think, it’s in our control at this point is making sure that the data we provide them is the best quality possible and in the results that they get to give them correlation. We do have evidence that they are getting the correlation, which is the good news. The bad news it’s taking a little bit longer than it was originally hoped.

Steven Crowley – Craig-Hallum Capital Group

And the eventual opportunity, you’ve referenced for this program it was much bigger than several million dollars or $3 million a year let’s call it. Is that still the opportunity for you or has that been reset in terms of the ultimate annual revenue dollar opportunity for you?

Peter McAree

It’s been clear there Steve, as well as we also have stated that the range of revenue was from $2.4 million I believe up to 60. So, we never said that we would be at the high-end. What we did say those we felt fairly confident that they would at least get to the low end based on the contracts and they actually did that in the first year.

So, they exceeded the low end the first year. Now, our believe if its works the way that appears its working we are going to start to see upside where revenues could grow to sum significantly higher than, 2 or 3 million a year, but there is no way for us to model that at this point is given the performance to date this guys seem to be very slow and actually executing against the commitments that they make. So, we don’t really want to model it but there’s absolutely upside potential now that it does appear that the data is confirming.

So, going into 2009 we feel very comfortable that we are going to get at least 2.5 and hopefully greater than that, but it could actually be, significantly greater depending on how they decide to roll this out. Obviously the elections, new government coming into play, so lot of moving part that’s probably plagued, some of the government machine, but there is at least at this point positive feelings around where the new regime will take this particular program, but it is obviously early and that will become more clear in 2009.

Steven Crowley – Craig-Hallum Capital Group

Very good final question for me and I will hot back in the queue. It looks like in your traditional revenue or historical revenue breakdown there was a nice top in license fees in contract revenue that up to $3.5 million range from what’s been mid to high 2s, was that regular way licensing business or did you get a little bit extra there and how should we think about that line.

Peter McAree

Yes, we did mentioned I think in the last quarter call, Steve that we were working on some small amount of microfluidics licensing so we did definitely see some it 2008, Q3. Almost less than a $1 million but, other was some there so I would think that most of what you seeing there was due to that small deal that we did do. I would say however that we do see continue to strong moment in the IVIS licensing which is a very good news opposite the overall long-term prospects and we are seeing probably some small upside year-to-date versus maybe what you that model for that particular product line is well licensing for IVIS. So, there was a one time pop in summary microfluidics but we are over achieving we believe license for IVIS.

Steven Crowley – Craig-Hallum Capital Group

Thanks for taking my questions.

Peter McAree

Sure, Steve.

Operator

And the next question comes from the line of David Clair with Piper Jaffray

David Clair – Piper Jaffray

Hi, guys how are you?

Kevin Hrusovsky

Hi, David good.

David Clair – Piper Jaffray

Just a quick question on guidance, I was looks like the divestitures, were running probably about $3 million a quarter. Is that the way to think about it?

Kevin Hrusovsky

Yes, the divestures unfortunately our back end loaded typically Q4 you see as much as 40% of the yearly revenues. So, you do see a back end loading on lot of the automation, particularly in some of the markets these are serving in this case, one are lines that goes into the water testing market the another one goes into the development side of pharmaceutical. So, its typically back end loaded.

David Clair – Piper Jaffray

So, we should I mean I guess the question, that the guidance, you have add just it full year outlook. How much of that is the divesture that you mentioned foreign currency in the press release I am just trying to get an apples to apples.

Kevin Hrusovsky

Yes, I mean I will start this here, and you can comment. I do believe we probably have somewhere around $5 or $6 million worth of divestiture products that we won’t see in Q4 that is basically because of products in a longer with us we probably also have almost a $1 million worth of currency headwind in Q4. Then I think that the any difference there might be some of the EPA delay which we want to see in Q4 from EPA.

David Clair – Piper Jaffray

Okay. I am sorry, go ahead.

Peter McAree

I was just commenting to Kevin those are the right effects.

David Clair – Piper Jaffray

Okay and then you guys have talked a little bit about those in the past in the next gen sequencing, initiative, that the sample program initiative that you guys have going on. Can you just kind of give us little bit more color there, I mean any timeline we should be thing of any kind of data we should be looking for or any color would be great.

Peter McAree

Sure, David this is pretty existing area that we continue to try up figure up the best way for us penetrate initially we 5 to 4 minute partnership of one of the larger next Gen sequencing company’s was going to be preferred way to go. Interestingly, the work that we did in that area did unearth some additional opportunities to do some product line, expansion in the area of oncology molecular biology sample prep.

We will be doing some work with partners, but the specific design that we were talking about earlier around fraternization, which is a way to get the right length on the right number base pairs of DNA prior to going into the next-gen sequencer that specific product line, it does appeared as it’s better suited for us to make our own direct investment and approach that market directly as opposed to through a single partner just because I think we limit ourselves fairly significantly as you watch the emergence of this market.

I mean there is even some new players that are in public yet that have technologies that are emerging and as we’ve looked at our landscape, I think we’ve concluded it’s going to be best for make our own investment and so, we would expect it a rollout would occur in 2010 for that product line and I think the next conference call, we should be in a better position to provide a little more granularity around just how big of a product line. We think this could be come for us as well as better granularity around the timing of a release, but I would predict that it’s probably going to be about 16 months to 18 months development on our part.

David Clair – Piper Jaffray

Okay, that’s it for me. Thanks a lot, guys.

Kevin Hrusovsky

Sure David.

Operator

(Operator instructions) The next question comes from the line of Isaac Ro; please proceed.

Jodi Dai – Leerink Swann

Hi, this is Jodi Dai [ph], in for Isaac. Thanks for taking our question.

Kevin Hrusovsky

Sure, your name is Jodi?

Jodi Dai – Leerink Swann

Yes.

Kevin Hrusovsky

Hi, Jodi.

Jodi Dai – Leerink Swann

Hi. My first question is about; I think are you planning on increase price for 2009 and what kind of price increase might you take? We are just trying to get a sense of the top-lien growth?

Peter McAree

We are attempting to put some level of pricing movement, what we will be able to realize still the biggest variable, but we are attempting to put around 5% increase into the product lines. There is some pluses and minuses there, some product lines might get a little more than five an some would be less, but we’re trying to get something of the magnitude of 4%, 5% through, but it’s too early to tell.

Jodi Dai – Leerink Swann

Okay, sure. Thanks and then what are you hearing from pharma on R&D spending? Also can you provide more colors on the Pfizer contract delay, I mean the first half? Thanks.

Kevin Hrusovsky

Sure, the first part of that question was, commentary on pharma? Yes, in general we have seen continued robust buying patterns from pharma, it’s fairly typical to see that in the second-half of the year as I mentioned earlier. So right now we have not seen any real pullback from pharma and no indication that in 2009 that there will be pullback, but certainly as you can see by the measures that we have been taking around cost reductions et cetera, we are trying ensure that we are well prepared for whatever this economy might bring, but right now, it is actually been fairly robust as evidenced by the growth we are seeing in our core product lines, where I do think that we might see more of an issue is with bio-techs, particularly small bio-techs, where maybe cash has become very, very precious for them and they basically created a survival model around their cash positions and their runways being shorten.

So I do believe that this is probably where, if anywhere the markets going to be less receptive to make an investments and interestingly, this is probably the area that we are least exposed. We have a lot of large pharma relationships and we have now moved very aggress fully into academics and government agencies, but we have really don’t have a lot of exposure in small biotech, but we do expect that this could a mounting area if concerned if concerned based on what we have been at least been learning from the market.

Jodi Dai – Leerink Swann

Also some colors on the Pfizer?

Kevin Hrusovsky

On Pfizer, we do have this contracts in place unfortunately we did not get realize align share of that so, about of half of that contract maybe a little less, but we think around half of it will in fact move into 2009 and so, we are also hearing positive of our comments from the regarding the – reupping again subsequent to the contract which will probably take us through the end of Q2 at a minimum maybe a little bit in the Q3, but a reup around that would be really would be really exciting for us, which appears like that is where they are heads alright now.

I think we have done real well Pfizer the last few years, but I guess another point is pretty important here that is that we’ve also tried to lessen our concentration on Pfizer by growing the non-Pfizer revenues and the theme of business development folks that we have done in our Xen Bio to in-vivo side of our CDAS operations have done a really bang up job and growing that revenue.

I think year-to-date, that revenue growth was probably been north of 3% and the non-Pfizer maybe even north of 50% and the non-Pfizer relationships and so that is to us really important we are going to continue droving that out.

Jodi Dai – Leerink Swann

Okay, sounds good. Thanks.

Kevin Hrusovsky

Welcome.

Operator

(Operator instructions) There are no questions at this time.

Kevin Hrusovsky

Great, we really appreciate everybody’s attention. So, this is a very important time for us, we feel we’ve made a lot of movement around both getting our cost structure in place to allows us to get over the profitability, as well as we now a mix of products that we believe our real products that have got real traction in the marketplace, true commercial products around some real exciting molecular biology type applications as well as IVIS Imaging and also on our services that we think to have a lot of potential in ’09. So, we really want to thank you for your support and we will talk to you all very soon. Thank you, bye-bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect.

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