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Millipore Corp. (NYSE:MIL)

Q1 2009 Earnings Call

May 07, 2009, 4:45 pm ET

Executives

Joshua Young - Director, IR

Martin Madaus - Chairman, President and CEO

Charlie Wagner - Corporate VP and CFO

Analysts

Jon Wood - Banc of America

Ross Muken - Deutsche Bank

Marshall Urist - Morgan Stanley

Tycho Peterson - JPMorgan

Derik DeBruin - UBS

Isaac Ro - Leerink Swann & Company

Peter Lawson - Thomas Weisel Partners

Operator

Good afternoon. My name is [Chastity] and I will be your conference operator today. At this time, I would like to welcome everyone to the Millipore Q1 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

Mr. Young you may begin your conference.

Joshua Young

Thank you very much [Chastity]. Good evening everybody. I would like to welcome you to Millipore’s first quarter 2009 earnings conference call. My name is Joshua Young and I am the Director of Investor Relations for Millipore and joining me on today’s call are Martin Madaus, Chairman, President and CEO; and Charlie Wagner, Chief Financial Officer.

In addition to the earnings release we issued earlier today, we will also be referencing a slide presentation as part of today’s call. This presentation can be viewed by clicking on the webcast link on millipore.com, or by accessing Millipore’s Investor Relations website. A PDF copy of the slides will be posted to our website after the call.

We will also be referencing non-GAAP information. A reconciliation of our GAAP financials to our non-GAAP financial measures is included in our earnings release and posted on our website.

Before we begin, I will make the usual Safe Harbor statement that during the course of this conference call, we will make forward-looking statements regarding the future events or financial performance of the company that involves risks and uncertainties. The company’s actual results may differ materially from the projections described in such statements.

Factors that might cause such differences include but are not limited to those discussed in today’s earnings release and in our Form 10-K, as well as other subsequent SEC filings.

Also note the following information is related to current business conditions and our outlook as of today, May 7, 2009. Consistent with our prior practice, we do not intend to update our projections based on new information, future events or other reasons prior to the release of our second quarter 2009 financial results which we will issue in August.

Now, I would like to turn the call over to Martin Madaus.

Martin Madaus

Thanks, Joshua; I will speak briefly about the first quarter results before getting into a more detailed commentary about our performance.

I am very pleased to report that the first quarter was an outstanding quarter of financial performance for Millipore. This performance is especially impressive when you consider that we are operating in one of the most challenging economic environments we have experienced quite sometime.

We have reported strong revenue growth in the quarter. This top-line performance was driven by a rebound by our process division. The division generated best performance in the past six quarters as our large North American biotechnology customers return to higher levels of spending.

Our bioscience division also posted solid results in a competitive environment while many of our peers are reporting decline in revenues.

Our strong top-line performance this past quarter reflects the resiliency and attractiveness of our business model. We have build a differentiated portfolio of consumable products and services that are less effected by reductions in capital spending. But approximately 90% of our revenues derived from consumable products and services we are well positioned to grow during this tough economic down cycle.

Millipore’s business is down globally and also across several end markets such as pharmaceuticals, biotech, academic research, medical devices. Additionally our exposure to industrial markets is small which makes us less effective by the current steep decline in those markets.

In addition to our healthy top line growth in Q1, another key takeaway, significant operating leverage we generated in the quarter. This high level of operating leverage led to exceptional earnings and free cash flow growth.

In the middle of last year, we decided to implement initiatives that would increase our operational efficiency. In retrospect, these were clearly the right decisions, and the financial benefits of these actions were reflected in our Q1 results.

Sharp rebound of our revenues combined with a more efficient cost structure resulted in one of the strongest quarter of profitability and cash flow we had ever had.

With this brief introduction of summary, let me now move into more specific commentary about first quarter.

First quarter revenues grew 3% to $408 million, excluding a 7% unfavorable effect from changes in foreign currency exchange rates. Revenues in the quarter grew 10%.

From a division perspective, we exclude the effects of changes in foreign exchange rates to Bioprocess division grew 13%, while the Bioscience division grew 6%.

From a profitability perspective, we increased our non-GAAP operating margin by 310 basis points in the quarter to 22.2%. On the bottom-line, we recorded $1.06 in non-GAAP earnings per share. This represents a 33% growth over Q1 of last year.

Our free cash flow outstanding totaling $69 million more than doubling what we reported last year. So, I think these numbers speak for themselves. Our Q1 results were strong across the board and we are off to a great start for the year.

Let me move in to some more details of the drivers behind these results and I will start with the Bioprocess Division.

One of the most significant drivers of the divisions rebound was the performance of the biotech accounts in North America. We indicated last quarter that many of those companies had finished reducing their inventory levels and would return to higher levels of spending in 2009. After the Q1 results, I can confidently confirm that this actually has happened.

We saw a healthy growth from many of these accounts that generated steep declines last year. However, this does not necessarily mean we can simply extrapolate great Q1 results for the rest of the year. We expect our growth to slow in the remaining three quarters.

But I can confidently say that I expect that our full-year Bioprocess growth rate will be solid and the division is back on a growth trajectory.

I am particularly encouraged by division’s first quarter performance because our strength was not just isolated to North American biotechnology customers.

We also generated very good performance in Europe where we saw declines in Q3 and Q4 of last year. And while we have a smaller percentage of revenues derived from biotech customers and as a reminder, 50% of the divisions total revenue come from outside of biotech.

Again, this speaks to the robustness of our business model. We are present in multiple markets that are less affected by the global recession and we have strong presence across all major geographies. So, this makes one attractive footprint and this helps us to drive performance.

From a product perspective, if you exclude the effects of currency, all three of our business units in the bioprocess division generated double-digit revenue growth in the quarter.

The process monitoring tools business which sells products that are used in both quality assurance laboratories on the manufacturing floor, continued it's strong performance. And this business unit was the only area of Bioprocess to generate growth last year and it continues to be a very consistent performer.

Our sterile sampling system call NovaSeptum is helping to drive a significant portion of our growth in this business unit. This is a disposable products used on the plant to collect sterile samples of raw materials and also in-process drug product.

Moving onto Upstream Bioprocessing and this business unit which is almost exclusively comprised of our biotech related business. It benefited from higher insulin and from the strong performance of one of our Cell Culture supplement product which is called [Exide]. Due to the high concentration of biotech customer and this part of our business, in this part of our business we tend to have a very significant quarterly fluctuation in this business unit's performance. And with the return in biotech spending which I mentioned earlier Upstream was now the fastest growing portion of our business in the quarter.

Moving on to the division's largest business unit Downstream Bioprocessing, they generated very strong results in Q1, benefiting from our highly innovative products mainly in the categories of virus filtration and conjunctional flow filtration. Our revenues in the Downstream business unit are reflective of the fundamentals of the biotech production market and since most of our products used for monoclonal antibodies vaccine production are contained in the Downstream Bioprocessing business unit. You should expect that this part of our business will see the greatest impact from higher levels of biotech manufacturing activity.

We have been very active with investments and R&D and partnerships to broaden our offering as well as entering new markets such as real-time contamination testing, ion chromatography, animal free cell culture supplement and also disposable bioactive. Feedback from these moves from customers has been very positive and this is because these products have truly features and benefits that are superior to competitive offering.

And as our products are adopted by customers and specified into their processes. We expect to gain market share and capture a higher percentage of our customer spending. Very important event for bioprocess in the first quarter was the launch of our Mobius FlexReady Solution. And with the launch of this innovative platform we have clearly demonstrated our leadership in the dispose of our manufacturing market have received a various strong response from our customers.

FlexReady sets a new standard in disposable manufacturing technology. And this is a system that comes as a pre-validated solution incorporating our industry leading filtration products to simplify customer operations and media buffer preparation, tangential flow filtration and virus filtration. This is an important part of our growth strategy FlexReady is the first in its series of new innovative and proprietary platforms that will be launching over the next year. This solution has targeted and customers are producing smaller volume products such as vaccine manufacturers or plants manufacturing drug for Phase I or Phase II of clinical trials. And what it really does it helps customers to have more flexibility in their operations while lowering also cleaning validation and labor cost. It's a good example, how we are delivering on the promise of innovation, creating new industry standards.

Our bioprocess business is driven by the success of biopharmaceuticals as a drug class and less sold by individual molecules. Millipore has products that are used in the production of more than 95% of monoclonal antibodies that are in the market today and therefore it's the industries aggregate biotech drug volumes that matter most of our business and you should not be overly focused on a single approval for a new drug or indication. So it's the aggregate.

Overall, our business will continue to be driven by the fundamental trend of many pharmaceutical companies moving a higher percentage of their new product pipeline business into biopharmaceuticals. Some pharma companies have had very little or no presence in biotech just a few years ago as now almost 50% of a drug pipeline in biotech drugs.

So I said on many of these earnings calls bioprocess is an attractive business, but it’s also a business in which you can see significant fluctuations in demand from our customers. And as a result you should not expect a consistent growth rate on a quarter-to-quarter basis and you should evaluate the divisions performance on a 12 to 24 month interval.

So, while we are pleased with the revenue growth we have generated this quarter, we know that this growth rate will moderate over the course of the year. Even with this moderation we will still expect to generate very solid growth in '09.

So in summary, we had an outstanding quarter of revenue growth in bioprocess start a year like this is usually very good sign, but on the other hand we are operating in an environment that is characterized by unprecedented uncertainty which is limiting our visibility into the future. Our Q1 performance confirms the strength of our business our strategy.

Let’s turn over to Bioscience, excluding changes in foreign currency the divisions revenues were 6% in the quarter, very solid performance especially when you consider how few of our science peers reported this level of growth in the quarter. For the second straight quarter our life science business unit drove the growth of the overall division. This business unit primarily serves the protein research in cell biology market and contains the houses of different consumable products that research to conduct the experiment. There are many different kits and sample preparation products in this division and they have generated lot of the growth.

This is encouraging because it's evidenced that there continuous to be a healthy, underlying level of research activity in our current market. Revenues from new products also made good portion of our performance in the quarter, but as I have talked about before in the past such as this snap ID, western bolting instrument, they continue to perform well and gain market share.

We are also seeing a strong demand for our stem cell products, the emulation of restrictions in stem cell research that are current due in the quarter help to facilitate lots of interest in the product and therefore good performance in our stem cell portfolio.

Revenues from acquisition of Guava Technology which we closed in late February will also reflect in life science performance this quarter. Guava product line met our expectations for the quarter, we are excited about our ability to drive long-term growth in the flow cytometry market, with this technology.

Moving on to Lab Water, our Lab Water business delivered solid growth in the quarter but we saw this first time of a slowdown in Q1.

This is obviously a difficult environment to cell instrumentation which I am sure it's not a surprise to any of you. We have seen sales cycles lengthened and slow growth for Lab Water, hardware, laboratory renovations and expansions have been delayed and customers are canceling many of the expansion projects which is curtailing the number of instruments that you can sell.

The good news is that 60% of our Lab Water business is in service of consumables which continues to grow nicely in the quarter and our growth in Europe was also very good. While the Lab Water instrument business facing a challenging year, I am convinced that our franchise is very strong. We expect the business unit will continue to generate growth due to our superior product offering. Our work like and sales and services.

Moving on to drug discovery, our drug discovery business continues to perform well. Most of the growth is driven by our multiplex immunoassays and given its strong growth we are continuing to invest in and expand this business.

So for example during the quarter we purchased the assays associated with Epitome Biosystems called also the EpiTag technology. It's an exciting new technology and the technology acquisition will help us to expand our presence in the fast growing multiplex immunoassay market by offering scientists a broader portfolio in this space for cell signaling assay that can be used on the Luminex platform.

Our Bioanalytical services continue to perform well in the quarter but other portions of our service business have been adversely impacted by our slower spending from large pharmaceutical customers. And these are typically larger service contracts that could be up to a $1 million sometimes more. And they usually get renewed every 12 month. But right now they are being delayed in the current environment of reduction in spending.

Moving on to the geographies, from a geographic perspective the division generally double-digit growth in Europe which was primarily driven by strong life science performance. We are seeing really good execution in Europe, we are successfully expanding the Millipore brand into fast growing areas such as cell biology research.

Our growth in North America slowed slightly that was mostly inline with our growth rate over the past several quarters. Although our growth in Asia slowed significantly compared to our growth over the past several quarters and while China continues to be very good for us, we experienced very slow demand in Japan and India as a direct result of the global economic crisis.

From a customer perspective our academic and government business was stable while we clearly saw a slowdown from our pharmaceutical customers. Many of our pharmaceutical customers are currently focused on cost containment and we are seeing a reduction in R&D spending or decisions on project are simply being putting on hold because there are reorganization's going on.

This is obviously not surprising given the amount of consolidation that has been announced and been implemented right now in the pharmaceutical industry. And we expect that this will take a few quarters before many of these customers have a clear sense of their research priorities and return to a more steadier purchasing.

In the interim we have very low expectations for our pharma related business over the year. Many of you have asked what impacts these stimulus packages have that have been announced by various governments on our bioscience business. The fact that these stimulus packages focus on scientific research creates overall a long-term positive for the division.

And they also have brought a level of stability to our academic and government customers, which is for this division the largest class of customer.

We expect that these stimulus packages will be good for our business over time as research to secure the grants and initiate more research at the bench and that helps to drive demand for our product.

So after four straight years of high single-digit organic growth Bioscience Division started showing some signs of a slowdown in Q1. But despite the slowdown we generated above average growth in the first quarter and we continue to expect healthy growth for the year due to a high consumable exposure, geographic diversification and the success that we have with our new and innovative products that we bring to the market.

So far before I hand over to Charlie, I want to leave you with a few closing thoughts, we had a really great first quarter. We are off to a very strong start for the year. Our Bioprocess business is rebounding, our Bioscience business has remained stable and we are benefiting from the operating efficiencies we implemented last year.

However, we have to acknowledge that our operating environment that is uncertain that's not led itself to great visibility. We clearly see risk in our Bioscience business and our overall performance in certain Asian countries has slowed down.

While we saw more upside opportunities, and downside risk materialize in Q1, we still are not immune from what is happening around us, and we do not expect to sustain the level of financial performance we generated in Q1 through the rest of the year.

We generated significant operating leverage in the first quarter which will put us in a good position to achieve our profitability targets for the year, strong start we are able to fund additional R&D programs to accelerate innovation.

So as a result you will see our operating expenses move higher over the next three quarters.

Finally with our strong free cash flow in Q1, we now have substantially lower net debt, we have stayed true to our commitment we made back in 2006 to focus on reducing our financial leverage and generate synergies from the acquisitions we completed. Today we have significant a amount of financial flexibility.

Strong cash flow forecast for the year, we expect that will continue paying down debt, but our focus will increasingly return to completing bolt on acquisitions. Similar to the transactions we have already announced this year.

With that I will turn it over to Charlie.

Charlie Wagner

Thanks Martin and I will now provide some additional details on Q1 and update our full-year outlook for 2009. To begin with the discussion of our GAAP performance in the quarter. Revenues grew 3% from the first quarter last year excluding a 7% unfavorable impact from changes in foreign exchange rates, revenues grew 10% in the quarter. This performance included a 1% contribution from our acquisition of Guava Technologies a transaction closed in February.

Our GAAP operating margin increased to 17.5% from 14.5% in Q1 2008 and earnings per share were $0.95 compared to $0.55 in Q1 2008. The increase in profitability is primarily due to the improved gross profit as a result of the higher business volume and a favorable product mix.

Our SG&A costs were relatively flat on a year-over-year basis, as higher employee related expenses were offset by the favorable effects of foreign currency translation. And our GAAP pre-tax income also benefited from $9 million gain on our acquisitions of Guava Technologies related to the favorability of the purchase price compared to the fair value of Guava's assets.

Charges that reduced our GAAP profitability included $2 million of higher year-over-year cost relating to our global supply chain initiative and $1 million to $2 million of cost relating to our acquisition of Guava Technologies.

Effective January 1, we adopted the provisions of FASB, APB 14-1 which relates to the accounting for our convertible debt. In connection with this accounting we recorded nearly $4 million of non-cash interest expense during the quarter. We have adjusted our historical financial to reflect this new accounting rule and we will include the charge in our non-GAAP reconciliation throughout 2009.

From a geographic perspective excluding the effects of foreign currency translation revenues in the Americas increased by 14% compared to the first quarter last year primarily driven by the rebound of our bioprocess business in North America. Europe grew 11% and Asia-Pacific revenues were flat compared to Q1 2008.

Our results in Asia were affected by relatively weaker performance in Japan as that business faced a difficult year-over-year comparison. Additionally, our Q1 performance in certain Asian countries such as India was weak due to a combination of economic factors and weakened local currencies.

The bright spot in Asia continues to be China which is sustaining a high level of growth we have seen over the past few years.

On the next slide we show our Q1 2009 non-GAAP operating results and I would encourage you to review the non-GAAP reconciliation table in the press release for the detail of our adjustments.

As Martin mentioned earlier our Q1 non-GAAP performance benefited from a substantial amount of operating leverage partly from the initiatives we put in place last year to improve operational efficiency.

Our Q1 2009 non-GAAP gross margin of 56.3% was an increase of 260 basis points on a year-over-year basis due primarily to increased volumes as well as the favorable product mix. The favorable mix was a result of strong performance of certain higher margin products in Downstream Bioprocessing and our life science business units.

Non-GAAP SG&A expenses represented 27.9% of sales compared to 28.3% in Q1 2008, a decrease of 40 basis points, primarily due to the higher revenue base and favorable currency translation.

Non-GAAP R&D spending was essentially flat on a dollar basis and decreased 10 basis points to 6.2% of sales from the first quarter of 2008.

R&D spending was lower in Q1 of 2009 primarily due to the favorable impact of an R&D tax credit that we received from the French government and for the full-year we expected this tax credit will total $4 million to $ 5 million.

The operating leverage I mentioned earlier resulted in non-GAAP operating margin of 22.2% in Q1, a 310 basis point improvement from the previous year.

Our non-GAAP tax rate in Q1 was approximately 25% and our net interest expense was $11 million, approximately $4 million lower than last year due to lower debt balances and lower interest rates.

We reported a $1.06 in non-GAAP EPS, an increase of 33% over Q1 2008. One factor impacting the comparability of our Q1 performance was that we benefited from anomaly in the fiscal calendar that resulted in four extra selling days in Q1 compared to the first quarter of last year.

Our quarters generally end on the 13th Saturday of each quarter and since our year-end is on December 31, our first and fourth quarters do not consist of precisely 13 weeks. So, the extra days in Q1 are simply related to the way the calendar falls this year. You know some of our Life Science tools peers also saw the same impact in Q1.

Higher number of days in Q1 will be offset by a loss of five selling days in the fourth quarter. So, this dynamic will be inconsequential to our full-year results. Even without the impact of the extra days in Q1, our first quarter performance still clearly exceeded expectations. Somewhat offsetting the positive impact of having the extra selling days in Q1 with the adverse impact from changes in foreign currency, changes in foreign exchange rates, reduced our earnings per share in the first quarter by about $0.09.

We do not expect much additional negative EPS impact from currency during the remainder of the year based on exchange rates today. Cash flow from operations during the first quarter was approximately $84 million, factoring in CapEx spending of $16 million, we generated approximately $69 million of free cash flow. This free cash flow is very strong and compared with last year's first quarter is driven by improvements in working capital and much higher profitability. We increased our cash balances by approximately $57 million this quarter and our net debt at the end of Q1, 2009 was approximately $900 million a year-over-year improvement of almost $270 million. The weighted average interest rate on our debt was just under 4% in Q1 compared to 4.6% in the previous year.

Moving onto working capital. At the end of the first quarter net accounts receivable were $289 million compared to $275 million at the end of 2008. Day sales outstanding were 67 days at the end of the first quarter compared to 66 days at the end of 2008 and 74 days at the end of the first quarter last year. Our collections performance continues to be excellent, we have not yet seen any deterioration of our receivables due to the impact of the current economic environment on our customers.

Inventory at the end of the fourth quarter was $253 million a reduction of $6 million from the end of 2008 due primarily to the favorable effects of currency. We ended the first quarter with 129 days of supply which is consistent with the fourth quarter of 2008 and an improvement of 9 days from the first quarter of 2008.

Now turning to our guidance for 2009. We are off to an excellent start to the year despite an economic environment that remains difficult. The first quarter has increased our confidence in our full-year outlook, but our Q1 performance cannot be simply extrapolated to build the full-year forecast. The strong start will allow us to fund projects and make further investments into the growth of the business. Additionally, the global economic recession represents a downside risk and we expect to see weakness in large pharmaceutical accounts and certain Asian countries for the remainder of the year. Despite these risks the strong fundamentals of our markets are high percentage of consumable revenues, coupled with our geographic and divisional balance should enable us to generate solid results in the coming year.

For 2009, we expect our reported revenue which includes the impact of the Guava acquisition will be between a 1% decline and 1% growth over 2008. Based on today’s exchange rates, we believe we will a report the 4% unfavorable impact from changes in foreign currency. Excluding the impact of currency, we expect to generate revenue growth between 3% and 5% in 2009 which is basically unchanged from our previous guidance. We are however, raising our full-year non-GAAP EPS and free cash flow guidance to reflect Q1 favorability. We now expect to generate non-GAAP earnings per share of approximately $3.75 to $3.90 per share compared to our previous guidance of $3.70 and $3.85 per share. This EPS estimate is based on a projected non-GAAP tax rate of 25% to 27%.

We are also increasing our guidance for free cash flow in 2009 and expect free cash flow, to total approximately $220 million compared to our previous guidance of $210 million. As a reminder we defined free cash flow, as cash flow from operations less capital expenditures.

So to summarize, a key takeaways from the first quarter we will begin 2009 on an excellent note with outstanding financial performance. We generated improved operating leverage in an economic environment that continuous to be challenging. And although we believe our growth will slow from the rates realized in the first quarter, we are increasing our earnings and cash flow guidance for the year and expect that our annual performance will stack up great favorably compared to the sector.

With that let me turn the call over to Joshua to begin the Q&A session.

Joshua Young

Chastity can you please sum up the Q&A roster?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Jon Wood with Banc of America.

Jon Wood - Banc of America

Hey, good afternoon.

Martin Madaus

Hi John.

Jon Wood - Banc of America

So Martin, on the Bioprocess business did you see any material contribution from new product, capacity builds or new indication builds or was the rebound primarily a function just the resumption of normal purchasing patterns.

Martin Madaus

I think predominantly there is the resumption of normal volumes that has the biggest impact. I know there are a few molecules that we are ramping up. I really don’t know whether they individually made a big impact. But we know there are few molecules that just got approved. So just probably little bit of that in there.

Jon Wood - Banc of America

Okay. And then on the broader side has the instrumentation there been impacted at all by the capital spending related weakness.

Martin Madaus

Well it depends on the end market, we see continued strong growth on academic markets but we see the pharmaceutical markets have pulled back a bit.

Jon Wood - Banc of America

Okay. And Lab Water instrumentation did it actually grow on a constant currency basis?

Martin Madaus

We don’t break that out.

Jon Wood - Banc of America

Okay. And then Charlie could you give us whatever impact the FX had on the margin profile.

Charlie Wagner

John we don’t break it down that carefully for this purpose. So what I can tell you is, it was $0.09 on EPS.

Jon Wood - Banc of America

Negative?

Charlie Wagner

Negative.

Jon Wood - Banc of America

Okay, alright. Thank a lot.

Operator

Thank you. Your next question comes from the line of Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank

Good afternoon and congratulations on a strong quarter.

Martin Madaus

Thanks.

Ross Muken - Deutsche Bank

There was a lot of noise made in the Biotech channel this quarter about inventory destocking and you heard some different commentary from some of the large players about, script performance. As you sort of look out, I mean, I know we obviously saw a nice stabilization in the comp in the following quarters pretty easy. But I think any clarity or any changes or any sort of actions you would have seen would be helpful or review of any thoughts on some of the things they have been discussed publicly, by some of the large peers.

Martin Madaus

Yes, I know Ross, what you are talking about it, we haven’t seen that in the inventories yet, on the bioscience and certainly not on the bioprocess side, we saw bioprocess return to a more normal inventory level and we haven’t seen that on the bioscience side yet, I know there was talk about it, but we have not been impacted by that.

The only softness, I clearly pointed out and what we iterate is that, we clearly see a pull back in R&D spending by pharmaceutical companies and when you look at the trends for R&D spending for this year is forecasted to be that or even declining. So that has some impact also on laboratory activity which impacts us.

Ross Muken - Deutsche Bank

Excellent. And on the stem cell side, obviously quite a bit of change at the senior levels in politics in terms of the outlook. And as we look to stimulus is quite bit around general medicine etcetera, I know you mentioned some of the scrip, can you characterize any more interest levels around those product lines and talk a bit about your strategy there and what you are doing to kind of better whether it’s kit or create specialized work flows for some of the early work you think is going to go on there?

Martin Madaus

Yes, so today our business stem is in research and we have multiple product lines. And we have quite an effort under way to validate these various product lines for stem cell applications. So for example we came out with kits on a Guava instrument that can be used for stem cell research which is good. There are than some other areas that where you have truly unsolved problems where some investment and new product development is needed.

So, we are doing that and we are starting to understand what our contribution could to be therapeutic use of stem cell. So, as a company I think we are quite well positioned to spend the entire range from research and development to also eventually production.

The production of therapeutic stem cells is quite evasive way and there are some very significant challenges to overcome which creates a very good opportunity for companies like Millipore. It’s a good opportunity so as research progresses there will be a whole new market created in therapeutic stem cells and then we started to look into that.

Ross Muken - Deutsche Bank

Excellent congrats again.

Martin Madaus

Thank you, Ross.

Operator

Thank you. Your next question comes from the line of Marshall Urist from Morgan Stanley

Marshall Urist - Morgan Stanley

Yes, hi guys good afternoon. The first question on the selling days issue. I appreciate you guys calling it out. Could you help us just quantify what it added to the quarter particularly between Bioprocess and Bioscience and I know Bioprocess probably has a little bit different selling cycle. So, how should we think about it? How that helped the quarter?

Martin Madaus

Yes Marshall, we have not really broken it out, the impact specifically average daily revenues or some such measures is not really relevant for our business. And certainly when we look at the full-year, the impact of the number of days is completely inconsequential. So, we have given you the number of days that the delta year-over-year and you can just take the estimate from that.

Marshall Urist - Morgan Stanley

Okay. But would it be fair to say that the impact in Bioscience is probably greater than it is in Bioprocess?

Martin Madaus

No. Not necessarily.

Marshall Urist - Morgan Stanley

Okay. Thanks. And then, second piece, and you gave some color around gross margins, I just wanted to understand a little bit more what happened in the quarter? Was there things within the Bioprocess mix that helped the quarter beyond just Upstream in terms of that Downstream business since that’s so much of the total. Was there other things with the disposable within there that also helps on the mix side?

Charlie Wagner

Yes. Absolutely, if you look at the Downstream business and some of the filtration products in there, virus filtration and other products, as that business rebounded in North America, that carries a very attractive margins with it.

Marshall Urist - Morgan Stanley

Okay. Got you. And then was there any impact of price in the quarter?

Charlie Wagner

There was some but we don’t break it out separately.

Marshall Urist - Morgan Stanley

Okay. Thanks. And then last question, I think you mention that operating expenses are going to up over the rest of the year. So, should we be thinking that R&D might track towards the sort of 7% target that you guys have talked about in the past?

Charlie Wagner

You know, towards I would say. It's hard to say. If the R&D is as you know, there are great projects. So, I would be moving to 7 not so sure, but it will go up.

Marshall Urist - Morgan Stanley

Okay. Great. Thanks guys.

Operator

(Operator Instructions). Your next question comes from the line of Tycho Peterson with JPMorgan

Tycho Peterson - JPMorgan

Hi, good afternoon. Congrats on the quarter.

Martin Madaus

Thank you.

Charlie Wagner

Thank you.

Tycho Peterson - JPMorgan

A question on disposable manufacturing, I am just wondering are your discussions getting more strategic, or is it very much still on a product-by-product basis. I mean is there any topic of kind of standardizing going forward for new products on disposable, or how do we think about the ramp there?

Martin Madaus

Today, it's certainly a devise business where people sell components and customers assemble themselves these components. With the introduction of the Mobius FlexReady, we are the first company to offer a unit solution that is standardized. So we are basically all the different pieces that come ready assemble, pre-validated and tested for certain use and with a first company come up with a standard. So we will help driving standardization and that's what's new. We also have decided with the acquisition of Newport in 2006 to really invest into this field. So it will see us starting actually in a couple of months come out with some new products that bring us into new fields of disposable bio-manufacturing.

Tycho Peterson - JPMorgan

Okay. That's helpful. And then with Guava in terms of kind of flow cytometry, are you seeing consumable pull through from your existing bid, does that I am just wondering how we think about revenue synergies, formatting on that instrument portfolio?

Charlie Wagner

I really don’t know whether, I know we launched the range of products, but I do not have that information yet.

Martin Madaus

We are confident Tycho that the kits that we are developing for that platform are key part of the solution and that systems will pull reagents. But it's a bit early to describe that the order of magnitude or the impact.

Tycho Peterson - JPMorgan

Okay. On Lab Water, are you expecting any sort of rebound into the back half of the year, I don’t know if it would be shared instrument grants or otherwise.

Martin Madaus

If more labs are being build or there is more money available we could benefit a little bit from that not counting on it right now.

Tycho Peterson - JPMorgan

Okay in the release I think you called about the animal free business fees the CellPrime. Can you just talk us as to how large a business that is today, can you talk about [Exide] as well doing pretty well in non-animal preside?

Martin Madaus

CellPrime is a significant product, but it's under 100 but its in the tens of million once it reaches peak sales. But these products take a long time to generate really significant revenues, but it’s a sign that we are expanding our product line. So it’s a significant product over time.

Tycho Peterson - JPMorgan

Okay. And than just lastly, can you comment on the specialty markets leverage some of these other the non-core business?

Martin Madaus

Yes, what we call industrial business we have more of that business in certain geographies. So, there is more of that business in Japan for example that's what we see definitely some impact just a very slow demand. No car manufacturers that use filters or beverage and Europe on the other hand more stable going sideways. Those I would to the major, major impacts in those markets.

Tycho Peterson - JPMorgan

Okay, thank you very much.

Operator

Thank you. Your next question comes from the line of Derik DeBruin with UBS.

Derik DeBruin - UBS

Hi, good afternoon.

Martin Madaus

Hi Derik.

Derik DeBruin - UBS

So what was the annual run rate on the Epitome and the Guava revenue is that, adding about a point to the overall revenue growth rate for the year?

Martin Madaus

Yes, that's about right.

Derik DeBruin - UBS

Okay. And I just want to go back to the question that Ross asked, on the last call you said expected a stronger first half than a stronger second half of the year for your Bioprocess business and now you are commenting about the next 9 months same like that’s maybe moved up a little bit there. Is that just, is that are you saying slower 9 months, they were slower in the next quarter because of basically the unusually large size in 1Q or is there a change?

Martin Madaus

No, I mean Derik we have updated the guidance, we did make that comment in the earlier call. I think at this point now we have a quarter behind us a slightly different view on the way that the year is going to fall, obviously we are off to a very strong start. And so some of what we thought might occur later in the year has occurred earlier in the year, based on that we have updated the guidance.

Derik DeBruin - UBS

Okay, fair enough. And just some housekeeping stuff. I didn’t quite catch the French R&D tax credit could you walk me through that?

Charlie Wagner

We would expect it will be in the range of $4 to $5 million for the year.

Derik DeBruin - UBS

Okay.

Charlie Wagner

It's recorded in our R&D line.

Derik DeBruin - UBS

Okay, it's in the R&D line, okay.

Charlie Wagner

Yes.

Derik DeBruin - UBS

Alright and did you say the non-GAAP SG&A was 27.9 the percent of sales?

Charlie Wagner

Yes, that’s correct.

Derik DeBruin - UBS

Okay. And just one final one. So the $0.15 for the acquisition that's, is that's also included in the $1.06 0 right?

Charlie Wagner

No its not.

Derik DeBruin - UBS

Okay, great. Thanks.

Charlie Wagner

Welcome.

Operator

Your next question comes from the line of Isaac Ro with Leerink Swann.

Isaac Ro - Leerink Swann & Company

Hi guys thanks for taking the question.

Martin Madaus

Hi Isaac.

Charlie Wagner

Hello.

Isaac Ro - Leerink Swann & Company

Hi, just a follow-up on disposable Bioprocess just wondering, how often do you find when you go in to the customer for example with the new Mobius system. And see that they actually are looking for disposable components as opposed to a solution because they are looking at retrofit existing stainless steel apparatuses and may be making some of the more permanent investments last a little bit longer is that sort of key variable that you are still fighting?

Charlie Wagner

Well, its very early on the Mobius FlexReady, so this system is just being rolled out, it generates lot of interest and in fact the interest we are getting from customers who exactly have the issue, the systems that they have to assemble and then retrofit and then validate and make them work. So that's why it's clearly based on unmet customer need. We of course, still fell components we sale back, we sale assemblies, we sale all the different components too. So, we are not excluding that from our offering. I think of this new solution as something that goes above and beyond of what's available today but we still sale components and bags on a standalone basis.

Isaac Ro - Leerink Swann & Company

If you look at sort of the early adopters for this kind of platform, is it sort of the smaller biotech some might little more agility in their fixed cost structure. And the flow companies that are maybe more going to look of smaller more scaleable ways to limit bioprocess?

Martin Madaus

Yes, those two, I mean it could be someone in process development, which just needs the flexibility and the speed and predictability, and it could be a smaller biotech which is simply doesn’t want to spend the time and the money on buying all these stainless steel equipment, those are the two groups. And as you know tighters are increasing and new molecules come in higher concentrations, you will be able to tap into more of the clinical development market and eventually even get to maybe commercial scale for highly concentrated product.

Isaac Ro - Leerink Swann & Company

Okay. And then just separately on NIH stimulus, are you seeing any pick up in RFP activity can you talk a little bit about what your sales force on the channel late in the quarter maybe as some of the grant deadlines came up.

Martin Madaus

We see more grant writing activity, mainly for larger pieces of equipment which impacts us less and again we will see a modest impact on this. And on the other hand it’s not so clear yet where exactly all that money will go but it will be a positive. I think it will go first into instrumentation.

Isaac Ro - Leerink Swann & Company

Okay. And then just lastly if you could maybe split even just roughly between your academic versus your drug industry customers, can you give us a rough sense of you know what the two are relative to each other in your business?

Martin Madaus

In the Bioscience division, I would guess Academia is maybe 30% to 40% definitely largest customer group and in the Bioprocessing business roughly half is Biotech and the other third is classical pharma and then remaining portion is what we call beverage or industry.

Isaac Ro - Leerink Swann & Company

Thank you very much.

Operator

Thank you. (Operator Instructions). Your next question comes from the line of Peter Lawson with Thomas Weisel.

Peter Lawson - Thomas Weisel Partners

Martin with a return on the Bioprocess business is visibility improved, does that change in anyway from two years ago?

Martin Madaus

The visibility has improved a little bit. We have better information on inventory levels from some of our key accounts, we made a big efforts to make that happen and we will continue to work on that and getting at least some certainty on the supply arrangements on that. So, overtime I think this definitely improved, we have slightly better visibility but the visibility is still not good and that’s why we are still cautious about the outlook.

We have managed that very tightly but frankly where we have surprises in the past was when, forecast policies were changed, or projections were changed on a relatively short notice. It's a bit of a nature of biotech, so it is in a way, unavoidable. But I do think it is slightly better.

Peter Lawson - Thomas Weisel Partners

Then, China, have you seen any slowdown there and how big is China for you? Are you going to see any benefits from the stimulus packages there?

Martin Madaus

I think we do. We saw it already. They just continue to grow strong. We have a strong organization on the ground which is growing. We expanded some of our service offering and we think it significant in our international market, significant enough to call it out. And I think we break the country (inaudible). I think that everything looks like it is going to continue as strong as it has.

Peter Lawson - Thomas Weisel Partners

Where do you see that kind of stimulus spend, is it into hospitals?

Martin Madaus

No. It is the research.

Peter Lawson - Thomas Weisel Partners

Okay. And then, you talked about the weakness in the service business? Would you elaborate on that and how big is that business for you?

Martin Madaus

That’s a drug discovery. It's a small business for us. And what drug discovery was one of the faster growing business over the last period. And we see drug discovery in our overall limit. More inconsistent there are some very good products that are going very well. But some of the drug discovery services that are basically contracts with larger pharmaceutical companies have either been not renewed or postponed or reduced. So, that’s definitely negative impact. And necessary was spending cuts, either you know, that we organizing, emerging things on hold, or they just cutting on R&D laboratories.

Operator

Thank you. We have reached the allotted time for questions. I would now like to turn the call over to Martin Madaus for closing.

Martin Madaus

Okay. So, I thank you for joining us this evening. We are off to a great start and we have a great opportunities to generate attractive revenue earnings and cash flow growth in 2009. We will be hosting an Analyst Day with investors in New York on Wednesday May 27th at New York Stock Exchange. This is a great opportunity to learn more about our business and meet the key members of our senior management team. If you are interested in attending you will need to contact Joshua and RSVP as soon as possible. That line is in few weeks. We have already lot of people signed up. If you don’t RSVP we cannot accommodate you at the event. Also looking forward to seeing many of you at the upcoming Merrill Lynch and Deutsche Bank Investor Conference. Thank you for attention this evening and good night.

Operator

Thank you for joining today's conference call. You may now disconnect.

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Source: Millipore Corp., Q1 2009 Earnings Call Transcript
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