Life Technologies Corp. Q3 2009 Earnings Call Transcript

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Life Technologies Corp. (NASDAQ:LIFE)

Q3 2009 Earnings Call

October 27, 2009 8:30 am ET


Eileen Pattinson – Investor Relations

Greg Lucier – Chairman and Chief Executive Officer

David Hoffmeister – Senior Vice President and Chief Financial Officer

Mark Stevenson – President and Chief Operating Officer

Bernd Brust – President and Chief Commercial Operations Officer


Tycho Peterson – JP Morgan

[Matt] – Robert W. Baird & Co.

Ross Muken – Deutsche Bank Securities

Derik De Bruin – UBS

Doug Schenkel – Cowen and Company

Isaac Ro – Leerink Swann

Marshall Urist – Morgan Stanley

Jon Groberg – Macquarie Research Equities


Welcome to the Q3 2009 Life Technologies Corporation Earnings Conference Call. (Operator Instructions). I would now like to turn the call over to Eileen Pattinson, head of investor relations for Life Technologies. Please proceed, ma'am.

Eileen Pattinson

Good morning, everyone. Welcome to Life Technologies third quarter 2009 earnings conference call. Joining me on the call today as speakers are Greg Lucier, our Chairman and CEO and David Hoffmeister, our Chief Financial Officer. In addition, we have Mark Stevenson, President and Chief Operating Officer and Bernd Brust, Chief Commercial Officer joining us for Q&A.

If you haven't received a copy of today's press release, you can obtain one from our Web site at Before we begin, I want to remind our listeners that our discussion today will include forward-looking statement including but not limited to statements about future expectations, plans and prospects for the company.

We believe these statements are based on reasonable assumptions, but actual results may differ materially from those indicated. It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

Additionally, we will be discussing GAAP and non-GAAP measures. A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our Web site. For today's call, we'll be referencing a presentation that you can view on line. Instructions to access the Web cast are on our Web site.

Additionally, we will be posting the presentation to our Web site upon the conclusion of this conference call. Greg will begin today's call with highlights of the third quarter and an update on our integration progress. He'll be followed by David, who will give a more detailed review of the company's third quarter operating results and 2009 expectations. I will now hand the call over to Greg Lucier.

Greg Lucier

Thanks, Eileen, and good morning everyone. This quarter we continue the momentum we've had all year resulting in another strong quarter of revenue growth, operating income and free cash flow. In aggregate, our customers speak with our wallets and demonstrate how essential our products are to their all-important work.

Aside from the importance our products play in the work of scientists, our success is centered around sound operating rigor and demonstrated execution abilities. I'll go into more detail on the specific initiatives that we accomplished within the quarter, but first let me start with an overview of the financial results we released this morning.

In Q3, revenue grew 3% to $805 million. Excluding the impact from currency and the divested LIMS business unit, organic revenue growth for the quarter was 5%. Consistent with previous quarters, this growth was a result of year-over-year increases in both instrument and consumable sales.

Gross margin was a robust 67%, slightly higher than the previous year and a result of further integration related savings and continued positive price realization. We had another impressive quarter of operating margin expansion resulting in an ending operating margin of 27.3%, a 290 basis point improvement.

Operating income improved 15% or 20% excluding the impact of currency. All of this resulted in non-GAAP earnings per share of $0.73 and free cash flow of $164 million.

I think it's important to note that these results exceeded our own expectations for several reasons. First, the quarter started out fairly light from the revenue perspective in July but gained significant momentum as time progressed.

Given the slow start, we took measures to reduce non-revenue generating expenses. These cost measures resulted in meaningful operating expense declines quarter-over-quarter. A good portion of these expenses were project related and will, therefore, be spent in the coming quarters.

As I do each quarter, let me now give you an update on our strategic objectives for the year, growing our core business, flawlessly executing on our integration plan and investing for future growth.

Focusing on our core business simply means providing our customers each and every day with the highest quality, the most innovative products and services that make Life Technologies such an integral, essential part of life science research, forensics and bio-production.

To that end, it is critical that we have a strong research funnel and development pipeline and that we support these technologies with the most robust commercialization effort.

I believe the management of this business equation is what has matured the most in the last three years of our company, and that our organic growth today is as much driven by launching new products as it by price and volume.

To that end, this period we launch a plethora of new reagents and several cutting-edge systems such as the magic bench top device that simplifies and automates the sample preparation process for protein and nucleic acid separation. Additionally, we released the BenchPro Western Processor, a completely automated solution to Western blotting.

We also continue to make advances in our commercialization efforts. For example, in the third quarter, we added selected AB reagents to our Invitrogen sales team's responsibility. We had a record number of online orders through our e-commerce channels, with 70% of all North American orders processed across the Web.

In addition, we launched the Cell Resource Center, a Web portal that is the industry's first comprehensive online resource for cell biology information and technology, as well as added functionality to our Web site for chat and ratings and reviews.

Our Web site has been rated number one by our customers for the past several years and has proven to be an important element to achieving customer loyalty and consistent revenue growth. With this channel now approaching almost $1 billion in revenue, we plan to continue to invest vigorously.

And finally by focusing on our core it means we periodically pause and ask if we're in the right businesses. You will recall that in September we announced plans to sell our stake in our mass spectrometry joint venture to Danaher Corporation for $450 million.

Danaher also signed an agreement to acquire our partner in the J.V., MDS Analytical Technology. MDS shareholders have now approved the MDS portion of the sale and, as such, we expect to close this transaction in the fourth quarter.

Our teams have worked diligently in the last two months to ensure a smooth transfer of the business to Danaher and limit disruptions to our customers. As evidenced by a strong financial result, our core business focus is paying off. There's no letting up in our work to deliver to our customers the very best products, services and support.

As to our second strategic objective, flawless execution of our integration plans, we continue to do very well. As you can see from our integration scorecard tracker, all areas of the project remain on track. We announced last quarter that our integration efforts have gone so well that we now expect to achieve $95 million in synergy realization in 2009, $15 million more than original expectation.

Today I'm pleased to report that we've already put in place actions to achieve $90 million of savings by the end of the year and the remainder to come is in the fourth quarter. This is another indication of how well our plans have gone, and once again, I'd like to thank everyone involved with the integration efforts for all their hard work and dedication.

As we said last quarter, our integration leader Mark Smedley and his dedicated team of resources are also responsible for transitioning our mass spectrometry business to Danaher and, therefore, we expect the transition to go smoothly.

In early July, we began to further integrate our product offerings by adding 1,400 Applied Biosystems SKUs in Invitrogen sales channels. Enhancements to our systems to support new pricing, quoting, invoicing and distribution processes for these SKUs were completed by the end of the quarter.

We've seen a modest revenue benefit from these actions thus far, and expect to see an acceleration in revenue synergy capture over the next few quarters now. Customer feedback on the addition of the products to the Invitrogen Web site and the dual-branded supply centers has been strong and overall, the effort is going smoothly.

The final focus area for us in 2009 and beyond is to make investments to fuel future growth. We see enormous potential for our business to make significant impact in the areas of personalized medicine, regenerative science, synthetic biology and companion diagnostics in the months and the years to come.

To do so effectively, we must invest both by ramping up our R&D efforts, as well as by making wise external investment and technology acquisitions. Our commitment to furthering innovation in advanced genomics technologies is a great example of how we continue to invest in the growth of our company.

During the recent ASHG conference last week, we announced the commercialization of SOLiD 3 Plus, an upgraded platform offering higher through-put, shorter run times, more cost effective reagents and new software to make data analysis easier and shorter.

This upgraded platform along with the newly launched 3500 Series Genetic Analyzer, a system that sets new standards for through-put, data quality and ease of use, we see once again we're able to provide scientists with improved platforms and methods to advance research in this important field, furthering our goal of becoming the premier provider of life science tools for our customers.

Many of you have heard me say before that to be a great company we must also be a good one. I truly believe that it's our responsibility to give back to the communities in which we reside and reduce our negative impact to our environment.

To that end, we have made some major accomplishments in Q3 that I would like to highlight today. In the area of philanthropy, the Life Technologies Foundation made nearly $2 million in grants this quarter. By the end of the year, the foundation is on track to award approximately $5 million to organizations that advance scientific education and promote activities that use biology to improve human life.

In Q3, we were also recognized for our global citizenship and sustainability efforts. Life Technologies was named for the second year in a row to the Dow Jones Sustainability Index, which recognizes leadership in business, environmental and social issues.

We were also named in Newsweek magazine as one of America's greenest companies. I could not be more proud of our initiatives to reduce our impact on the environment. As they say, going green makes green. Our work to reduce waste, energy usage, and our carbon footprint also makes us ever more efficient.

One final note before I hand the call over to David, as many of you already know, there has been a recent change in our investor relations group. Amanda Clardy, who has led the IR team since 2006, has been named the chief marketing officer for the company and as such will be transitioning out of her role at investor relations.

Her terrific leadership has helped build a greater investor relations team that will now be led by Eileen Pattinson. Eileen joined Invitrogen in 2005 and since that time has held various leadership positions within the finance organization.

I would like to thank Amanda for all her efforts leading investor relations activities for the past three years and welcome Eileen into her role. Under Amanda's watch, our stock has risen 146% to where it is today, and now we're counting on Eileen to do the same. No pressure, Eileen.

Eileen Pattinson


Greg Lucier

I will now hand the call over to David and he'll give you more details on our financial results for the quarter.

David Hoffmeister

This quarter, we grew revenue 3% to $805 million. Excluding the impact from currency and divestitures, revenue grew 5% organically. We're clearly pleased with this level of organic growth, especially given our expectations going into the quarter.

There are a couple of items to note. First, our H1N1 related product revenue was roughly equivalent to Q2 levels at approximately $14 million. We didn't anticipate revenue this high, but we're pleased that our 7500 Fast and Fast Dx Real-Time PCR instruments remain the standard for accurate, timely detection of the flu virus and now serve as the de facto standard for global H1N1 surveillance.

The other item to note is that our royalty revenue, which was expected to decline in the range of $12 million to $15 million in Q3, only declined by approximately $7 million. This is a direct result of our licensing team finding a number of new customers for our intellectual property.

Most of our business turned in a strong performance for the quarter. Molecular Biology Systems grew approximately 8% organically to $394 million in revenue. The majority of the H1N1 related products resides in this group and accounted for approximately 4 points of growth for the division.

Because the H1N1 virus continues to be a very real public health concern, we expect that demand for these products will continue in Q4 at roughly the same levels as we saw in Q3. Aside from H1N1-related sales, this division also benefited from strong growth in qPCR instruments and reagents and continued growth in our transfection related portfolio of products.

Genetic Systems had revenue of $216 million, representing 7% organic growth. Our largest business in this division, CE Research, grew in the low single digits this quarter driven by new instrument sales in the Asia Pacific region and licensing revenue.

Our Applied Markets business, which includes kits and CE systems, grew in the double digits. In Japan, we won an order to outfit the entire Japanese police force with our 3130xl CE sequencer. This is an example of how this gold standard in sequencing continues to have viable markets and growth opportunities today even though it's a technology that's been around for a while.

And finally, we continue to gain traction in Next Generation Sequencing as we improve the usability of the solid platform. Continuous improvement in the technology along with investments in our service, sales, and marketing are paying off.

Cell Systems had revenues of $189 million, which were flat organically over the same period last year. This division is a tale of two cities with many of the businesses such as our Dynal beads and stem cells growing in the double digits, offset by a year-over-year decline in our bioproduction business. We had several bioproduction customers purchase less in the quarter than they previously forecast.

Our Mass Spec division revenue grew 3% organically to $111 million, driven by growth in all regions outside of North America. Sales into applied markets remained strong and we are beginning to see some pick up in pharma sales, particularly in China and Europe, which returned to positive growth.

Year-to-date, organic growth for this division is negative 4% in line with our expectations of flat to down 10% for the year. In terms of organic growth by region, excluding the Mass Spec division, Europe grew 8%, Asia Pacific 21%, Japan 7% and the Americas grew 1%.

However, it's important to note that all royalty revenue for the company is accounted for in the America's region. Without the impact of royalties, the Americas grew 5%. Currency this quarter reduced revenue growth by approximately 2%, net of our hedging program. The negative impact to EPS was approximately $0.03, including foreign currency effects accounted for in revenue, other income, and the Mass Spec venture.

Before I begin with the financial comparisons, let me remind you that we are comparing all of our non-GAAP financial results to the pro-forma income statements that we've posted on our Web site that combined Invitrogen in the AB for all of 2008.

Third quarter non-GAAP gross margin was 67%, an increase of approximately 20 basis points over prior year. This improvement was primarily due to synergy realization, improved price, and a reduction in royalty expense. This was partially offset by lower royalty revenue and currency.

Third quarter operating expenses were $320 million, a decrease of approximately $13 million from prior year levels, as a result of synergy realization and currency. Sequentially, operating expenses declined by approximately 4% as a result of cost controls implemented early in the quarter.

Operating income was $220 million, an increase of 15% over prior year, including the impact of currency and 20% excluding currency. Operating margin was 27.3%, representing 290 basis points of improvement year-over-year, including the impact from currency.

This level of operating margin expansion resulted primarily from revenue growth, synergy realization, and other operating expense reductions. In terms of other income line items, we had $1 million of interest income and $6 million of income from our Mass Spec joint venture.

Interest expense for the quarter was $37 million. This expense does not include the accelerated amortization of issuance costs resulting from the early retirement of debt. This is an important point to note, as last quarter we stated that these accelerated fees would be expensed at the time of payment and that we would include the amount of the acceleration in our non-GAAP results.

Upon further review, we've decided that due to the non-recurring and non-cash nature of the fees, we will exclude them from non-GAAP earnings. In Q3, the impact on GAAP EPS of accelerated amortization of issuance costs resulting from the early retirement of $200 million of debt in the quarter was $0.03. Our non-GAAP tax rate was 29.1%. We still expect our full year tax rate to be approximately 29.5%.

Our diluted share count for the quarter was $183.4 million. As you will recall, our share count is impacted by our stock price in the quarter due to our convertible debt and employee stock options. Assuming an average share price between $45 and $50, share count in the fourth quarter would be approximately 186 to 188 million shares.

GAAP diluted earnings per share were $0.22, which includes $0.29 per share of acquisition-related amortization expense, $0.04 per share of non-cash interest expense associated with the adoption of APB 14-1, $0.15 per share of Biosystems integration costs in other items, and $0.03 per share of accelerated amortization of debt issuance cost. On a non-GAAP basis, which excludes these items, diluted earnings items per share were $0.73.

Moving onto the balance sheet and cash flow, our ending cash and short-term investments were $580 million. This compares to last quarter's balance of $583 million. Cash from operating activities were $200 million. Capital expenditures were $36 million and free cash flow was $164 million.

Our ending debt as of September 30 was approximately $3.2 billion. This balance is made up of our convertible debt of $1.1 billion and term loans of $2.1 billion.

We have now paid $275 million of the debt associated with the applied Biosystems acquisition. As we indicated previously we intend to use the proceeds associated with the divestiture of the mass spec business, which we estimate to be $290 million to further pay down this debt. In addition to this, we intend to pay down another $100 million late in the fourth quarter. Total debt repayment for the year will be approximately $665 million.

In the first three quarters of 2009 revenue increased 6% organically and operating margins have expanded by 300 basis points including the impact from currency. We feel good about our results thus far, and are now focus on the fourth quarter and working towards finishing out the year.

With that in mind, I'll now move on to our expectations for the rest of the year. We expect fourth quarter organic revenue growth to be in the high single digits. With that level of organic growth we now expect full-year, non-GAAP EPS to be in the range of $2.90 to $2.95. This guidance includes several items that are important to note.

First, we've included the expected Q4 impact from the NIH stimulus in our forecast. In Q3 we saw a couple of million dollars of revenue from stimulus funding, mostly in instrumentation, but also in some other areas, such as stem cell research. As we stated in the past, we expect to see a more meaningful amount of revenue from the stimulus in 2010.

As you can imagine the exact size and timing of the stimulus revenue is difficult to project especially since the funds are just beginning to flow to our customers. With that said, we now believe that we will see revenue of approximately $5 million to $10 million from stimulus funding in the fourth quarter.

Second, we expect the divestiture of the mass spec business will be completed in the fourth quarter. For modeling purposes it's important to note that historically more than half of mass spec revenues and income occur in the third month of the quarter.

Third, our forecast includes a revised estimate of the impact of currency. In the fourth quarter, we expect currency at today's rates and with our hedging programs to increase growth rates by approximately two percentage points.

With that, let me provide some additional financial details on the coming quarter. As we noted previously we expect PCR royalty revenue in Q4 will decline by approximately $5 million to $8 million. Gross margins are expected to be sequentially lower due to lower royalty revenue, lower realized prices and a higher mix of OEM and instrument sales.

Operating expenses will increase sequentially due to a variety of factors including increases in certain project-related costs and the impact of new hires added late in Q3. In addition, expenses associated with employee stock options granted at the end of September, will appear in the fourth quarter.

We expect capital expenditures to ramp up and be in line with our guidance of $175 million to $200 million for the year, including $50 million of integration-related capital.

Finally, free cash flow for the year is expected to be approximately $500 million. This is an increase to our previous forecast, which was $475 million. And with that, I'll now hand the call back over to Greg for closing remarks.

Greg Lucier

Thanks David. As you can see from our results today, we are truly realizing the benefits of the incredibly hard work from our employees and a laser focus on executing our strategic imperatives for the year. As we continue to strengthen our core business by building on what we do best, creating innovative products for our customers, we are actually changing the way research is done, making it faster, simpler and easier to understand.

The promise of our combined company is really starting to come through, not only financially, but also in the way customers think about us. We are being approached by clients to take on bigger challenges and bigger projects that could transform science and medicine. We've never been more encouraged by the future we see.

With that, I'll hand it over to Eileen for Q&A.

Eileen Pattinson

Thanks, Greg. Operator, you can now open the lines for questions.

Question-and-Answer Session


Thank you. (Operator Instructions). Your first question on the line comes from Tycho Peterson – JP Morgan.

Tycho Peterson – JP Morgan

Hey, good morning. Congrats on a terrific quarter. I'm wondering if we could get a little bit more color on the comments you made around pricing. It sounds like you had some traction this quarter, and then David in your comments you talked about that being a little bit of a headwind in the fourth quarter.

So if you can just kind of, I guess, kind of help us think about how we think about the traction from the additional ABI SKUs, and then how you're thinking about pricing, obviously on a go-forward basis in the next year.

Bernd Brust

From a comment here on the fourth quarter, that's more normal around the timing of pricing. As you know we raise our list price traditionally in the beginning of the year and as we go through the year we just see slight degradation throughout the various quarters, and where that usually Q4 is the lightest in pricing. But nothing really unusual from we traditionally see. We believe moving into 2010 that our pricing strategies will continue in the same lines that we've seen in past years.

Tycho Peterson – JP Morgan

Maybe one for Mark on just the positioning of the SOLiD 3 Plus, and if you can help us think about some of the developments for the coming year as well, I know you've talked in the past about automating the upfront sample prep. If you can talk a little bit more about how you're looking at that – that'll be helpful, too.

Mark Stevenson

Virtually on the SOLiD 3 Plus, I mean, we again increased the through-put of the system. We got up to 30 gigs and actually one of our customers presented data on a 50-gig run during the meeting at ASHG. So we're really making great progress on through-put and continue to demonstrate great accuracy. This customer showed finding a result just with this single run.

We're continuing to improve on the software so we introduced new software in that, a Bioscope System. We're making good progress in also making the front end steps and during the early part of next year we plan to introduce that automation of front sample prep end.

Tycho Peterson – JP Morgan

And then maybe just one last one for Greg, now that we're coming up on the one year anniversary of the (ABDL), can you just talk about from an infrastructure standpoint where you see the investments going forward between geographic or I know you've talked a little bit about some of the clinical opportunities. So how do we think about headcount and where you're going to be making the investments in the coming year?

Greg Lucier

Well, let's first talk about headcount. We'll be adding heads into Asia in 2010 quite aggressively. Our China business is really flourishing and we'll add a lot more heads in the China both for sales and service and back office capabilities. We're going to be adding more heads around sequencing.

We're ramping up our R&D efforts on a number of different platforms, not just solid, but technologies beyond that in single molecule sequencing. And so that's basically headcount in terms of the key areas that we're accentuating.

In terms of dollars, as we said in the past we're going to primarily focus on paying down our debt, but you'll start to see from us in the ensuing weeks and months announcements of more strategic technology acquisitions.

Nothing large, nothing transformative, but more additive to the portfolio we have. And I would say that many of these acquisitions will focus around really building out our applied business and continuing to build the platform of molecular diagnostics.


Your next questions comes from the line of Quintin Lai – Robert W. Baird & Co.

[Matt] – Robert W. Baird & Co.

Hi guys. It's actually [Matt] in for Quintin. Congratulations on the quarter. So first, just with the NIH and kind of the NIH expectations for Q4 and as we move into 2010 I think we understand the big money related to sequencing and instruments but Greg, maybe could you talk a little bit about the NIH as – in general is going to impact the rest of your business like CE and cloning?

Greg Lucier

Well, beyond particular earmarked projects you're basically seeing a rising tide lift all boats. There has been more money going through R1 grants which then, it's up to the PI to determine what they need to buy for their particular lab and their experimentation. And so part of our thinking is, is that our general reagent business, our stronghold in PCR and core CE sequencing will benefit from just increased expenditures coming through the NIH.

[Matt] – Robert W. Baird & Co.

Thanks for that. And then with respect to H1N1, you guys did such a great job really placing a lot of instruments for H1N1. Now that these boxes are in the labs, how are you thinking about possibly broadening the test venue maybe to stay closer to the patient?

Greg Lucier

That's a great question. As David mentioned, our instrument really has become the de facto standard for H1N1 surveillance here in this country and really around the world now. But since staying focused on the United States the, really I think, interesting opportunity for us is that those instruments reside in government labs across the 50 states.

It's those same labs that do a whole host of testing beyond flu. And we are developing a whole set of assays whether it's around other areas of infectious disease or the like. And maybe Mark, you can talk to some of the other areas that we're developing technology now for that installed base that's existing.

Mark Stevenson

Yes, one of the examples would of course be in the food testing area. We see a lot of interest in pathogen testing such as E. coli 0157 outbreaks. We've ranged – introduced a range of assays for E. coli and listeria, salmonella, expanding out that range. And then there are other areas that we think in that install base as we get into more diagnostic-based testing we can apply onto that platform. So it is a good platform to broaden out our assay consumables.


Your next question comes from the line of Ross Muken – Deutsche Bank.

Ross Muken – Deutsche Bank Securities

You've obviously done a phenomenal job on the cost side of things. The synergy capture number continues to come up. Where are we in sort of the cost realization spectrum of both from an acquisition standpoint in terms of how much wood have you chopped on ABI in terms of getting that to be far more profitable?

And then as we go forward, as we think about kind of the incremental margin contribution in both next year and the following, where is the next level of savings coming from? Is it more stickiness on some of the pricing programs that you've done? Is it the revenue capture that you talked about that you expect to build next year? What's sort of the next big leg, because obviously you've done a great job on sort of the original plan?

Greg Lucier

You know Ross, 2009 was really about achieving the basic back office synergies. And I think, as you say, the team has done a really terrific job in capturing them. 2010 will be about two other things. One is about revenue capture, and I'll have Bernd talk to that. But the other is about really supply chain efficiencies.

Now we've made some really great progress in the last six months gearing up for what we think will be terrific procurement savings, really important facility consolidations, and then key expansions into low cost countries where we can get further efficiencies. So 2010 will be about getting those supply chain efficiencies and increased revenue capture, and Bernd why don't you give Ross a few inputs on that.

Bernd Brust

On the revenue capture next year we're really just going to obviously continue the efforts we began this year. Pricing initiatives will continue, throughout the world our focus has been very much in the U.S. and Europe in the beginning of the merger of the two companies.

We started this year by bringing some of the AB products into the Invitrogen team's bags and that will continue where we make sure that that team takes on some of the heavy load related to run rate business for the AB portfolio.

And more and more customer integration as far as there's quite a difference still in maybe core AB customers where Invitrogen wasn't strong and vice versa and picking up the balances of portfolios of those customers is really making traction. So as we continue those initiatives, we think in 2010 we'll see further acceleration.

Ross Muken – Deutsche Bank Securities

Great, and on the stimulus, David you sort of gave some guidance for Q4. I know it's very hard to predict, but what are you using? Are you looking at sort of the order rates on the instrument side and making some rough assumptions for consumables? Are you – is there kind of a backlog of solid instruments that you're kind of sort of baking in there? I'm just trying to get the sense for how you're kind of coming up with the early estimates.

And then as we sort of turn the page to next year, are we still thinking across the portfolio that the genetics analysis piece is sort of where we're first going to see and then it sort of flows through the rest of the company as labor comes on and general utilization goes up across NIH campuses?

Greg Lucier

Well, Ross this is Greg. In terms of being able to estimate the amount of impact from the stimulus obviously it is just that, an estimate. But we're basing it in the fact that we can track what grants have been awarded to an institution.

In our follow-up then we can usually assess fairly well if they've started to spend the money against the particular award and then we can obviously track to our order board what came in from the lab, whether it was instruments or reagents. So that's how our estimates are really based. It's both on fact and then follow-up with these clients.

And then on the last point you say about do we see more business coming from instruments versus reagents initially, I think that's generally true and Bernd can give some more color on the fact that we saw some beginnings of that at the end of the third quarter, more now in the beginning of the fourth quarter that we're seeing an increased rate of some instrumentation orders.

Bernd Brust

I think that's right Greg. If you look at the – all those small numbers that David mentioned, the few million dollars in Q3 and $5 million to $10 million in Q4, much of that really is coming from the instrument lines across the spectrum of the portfolio actually and obviously we believe the outcome of that will be increased reagent consumption as those instruments come on line and users are there to operate the instruments.


Your next question comes from the line of Derik De Bruin – UBS.

Derik De Bruin – UBS

When you start – can you remind us what the FX impact was on the operating margin and EPS year to date? I'm just trying to get a sense of how we, now that currencies have moved back, how we should start thinking about this for 2010, particularly net of your hedging programs?

David Hoffmeister

Yes, Derik we can provide that detail. Why I think that's probably better provided as a follow-up call so we'll pull that together and we'll have it there. Do you have another question?

Derik De Bruin – UBS

Yes, absolutely. I guess, once again, just type of, I know you're not going to give guidance for 2010 but I'm just curious in broad terms of you've got the – held mass spec business offset by some of the debt repayments. You've got a lot of moving parts in terms of synergies and stuff.

I guess certainly when you start looking at EPS growth for next year are there any general guidelines? I mean are we looking at double digits, mid teens, I mean, can you just give us some feel back on how you see the business giving all the moving parts?

David Hoffmeister

You know Derik, we think we're going to have a good 2010. That's about what I'll say at this point.

Greg Lucier

Yes, I mean Derik, we're just in the process now Derik, like most of the companies I'm sure you're following going through, are planning for 2010. We don't see anything that would lead us to believe that we wouldn't continue on the trajectory that we're on, but I think it's premature at this point to comment on any specifics on 2010.

Derik De Bruin – UBS

Okay and just one follow up question. Can you comment on the cell culture business, a couple of your – one of your competitors was saying their business picked up in 3Q, admittedly off of easier comps but also from some flu vaccine sales. Can you just talk what you see in terms of your pharmaceutical customers there and specifically why there were the – their orders were off.

Greg Lucier

You know Derik as we've said in the past; you really can't compare us to our colleagues in this industry. We all have our own set of customers with their own set of dynamics and it's still a great business, it's a lumpy business and we had some lumpiness in Q3 so that's really all we can say.


Your next question comes from the line of Doug Schenkel – Cowen and Company.

Doug Schenkel – Cowen and Company

Let me just start with a question on royalties. Can you remind us what the negative impacts of royalty expirations were in each of the first and second quarters and clearly you did a good job managing against the royalty expiration from the third quarter. How likely or unlikely is it that you can continue to do a better job than your guidance range in managing against the royalty expirations in the quarter?

Greg Lucier

Well, in terms of the actual numbers I think they can get that data for you in a follow-up call, Doug, but more broadly of our efforts to offset the natural year-over-year declines we see in that PCR patent family, let me just kind of go back to the beginning.

First of all, that patent family, as you know, extends over a very long period of time, all the way out into 2017 as I recall. So we're going to have these PCR royalties with us for a long time, albeit though they do go down between now and that time I just mentioned.

Now having said that we assembled a team about six, seven months ago; we brought together the best licensing people out of AB and Invitrogen. They've now been together for about six months and you're now just starting to see the product that they've produced, which is the ability to start offsetting these royalty declines.

Now they have some really exciting ideas and I think that this is something that we'll probably share in more detail in a coming earnings call/slash investor day early next year, but suffice it to say when we did the merger with AB one of the comments I made was we understood the patent family around PCR and we felt confident that over time our work could not only retard the reduction of it but maybe even increase it. And I would say we're on track on that goal here only 10 months, 11 months into the merger.

David Hoffmeister

Doug, the actual numbers are royalties declined $7 million to $8 million in the first half of the year and as you recall we said they would accelerate – the decline would accelerate in the second half. Third quarter royalties were down $7 million?

Doug Schenkel – Cowen and Company


David Hoffmeister

And Q4 we're estimating that it will down another $5 million to $8 million.

Doug Schenkel – Cowen and Company

And then maybe if I could ask another pricing question, and I guess this would probably be for Bernd. You talked about a slight degradation expected in pricing in the fourth quarter, which of course is the norm for Invitrogen historically.

But isn't there a bit of a catch-up still going on in terms of applying the Invitrogen pricing strategy to AB products? And then I guess longer term is there any reason to think that you cannot get the typical 2% pricing increase annually next year and beyond.

Bernd Brust

Hi Doug, As far as the question on continued pricing obviously we want to make sure we price our products competitively. At the same time be as aggressive as we can in getting the right price for our products. The numbers we've set out and we've seen traditionally we believe we continue to get on our products specifically to Q4.

There's no doubt that this year some of the pricing on the AB portfolio, given the new initiatives that weren't in place before are a little bit healthier. We've seen it obviously in the first three quarters of this year as well and so that same downturn that we may see in the traditional fourth quarter of Invitrogen we also believe will hit us on the AB side a little bit.

Doug Schenkel – Cowen and Company

And then last question and then I'll get back in the queue, it's a stimulus question. You talked about maybe getting some orders it sounds like probably late in the third quarter run off from stimulus given the way you talked about stimulus during the quarter where do you expect much of an impact? So I just wanted to make sure that was the case.

And then again, another longer term question. Do you expect that well, maybe you won't see the same degree of upfront instrument bolus that some others in the group might see, given that they have a higher instrument sales mix? That over time Life is going to see a more consistent and prolonged benefit that'll last several years, just given the fact that there is probably the possibility or likelihood of continued consumables pull-through?

Greg Lucier

Yes, I think on this last point I would just echo what you say. Every instrument we sell now with the divestiture of mass spec consumes a lot of consumables and so part of the strategy that Bernd is putting together is just how do we capture the lion's share of all those consumables that will be needed by not only our instruments but our competitor's instruments as they get installed?

Bernd Brust

And to that point, what we're doing to capture that revenue we are bringing in a significant number of additional sales resources in the U.S. next year that will primarily focus on the larger academic accounts are the recipients of these funds so that any reagent pull-through on those instruments, both ourselves and our competitors, are going to come our way.


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

Isaac Ro – Leerink Swann

First thing, on just next gen sequencing, I was wondering if I heard you right when you mentioned that with headcount adds in that business area that you might be looking at sort of a parallel development path for single molecule technologies versus solid and I'm wondering if that's right?

And secondly, just maybe if you could lay out what you think the key strategic considerations need to be in that business for you guys as it relates to sort of the competitive landscape today, both with the current generation and other single molecule platforms potentially around the corner?

Bernd Brust

So firstly on the program itself we do already have a parallel program. So as well as investing in solid and the future generations of solid, we have a program ongoing in a single molecule effort that is progressing well and we believe we'll be introducing a competitive platform in the coming market here.

As regard to what we think when we look at this market, we think there'll be continuing an opportunity for these short read systems such as our solid system where the through-put really allows you to do experiments in sequencing and comparative sequencing that'll continue to be the case for the next three to five years. And so we'll invest in that through-put. We'll invest in that accuracy.

We think the single molecule programs will be particularly good and the advantage we see in that is what we get long run reads with high accuracy. And so we're developing the chemistry and we think that'll be most important as we come into this marketplace to be able to show that to the community and we'll start demonstrating and showing some of that data during next year 2010.

Isaac Ro – Leerink Swann

And then just a second question on H1N1 and the continued strength you saw there, I'm just wondering if you could maybe comment on the type of incremental funding that you're seeing for that type of product? Is it at the state level maybe for additional equipment or is it really more pull-through on the consumables for the installed equipment you already have at the various state labs?

Bernd Brust

At this point I think we have seen the bolus of new instruments that were placed – ordered for the H1N1 testing specifically. At this point it's fairly, or mainly [Rage] and pull-through our SuperScript and AgPath, our reagent portfolio [DEB] are being purchased by those users now for testing.

Isaac Ro – Leerink Swann

And then just lastly, to clear up on the media business, could you maybe comment if there was any customer specificity regarding the weakness there this quarter? And I'm wondering is there maybe a timing element there that snaps back in the fourth quarter? And then just lastly, big picture on that business, how do you look at the opportunities to grow faster than the market? Is there incremental opportunity with chemically-defined media type products?

Greg Lucier

Well on that last point clearly virtually all new biologics now are being done in chemically-defined media and our format there is AGT, that's advanced granular formulation, really has captured a big share of the market for new biologics. So we're very pleased with that.

Just in terms of quarter-to-quarter sales of this business, I would first just step back and say you have to remember this is probably less than 4% or 5% of the company. It's a fairly small portion now of the new Life Technologies and because of just the way that our customers run their factories there is a fair amount of perturbation in ordering between quarters. That's basically all we saw here in Q3.


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

Morgan Urist – Morgan Stanley

So a few things, the first thing I just wanted to make sure the royalty offsets that you guys talked about that you were able to put in place are continuing, right? So that it's not like we'll see sort of it's not shifting sort of shifting royalties out into 2010 or beyond?

Greg Lucier

That's correct.

Morgan Urist – Morgan Stanley

And then on the CE front it was another, obviously, good quarter. You guys have been hesitant to talk about how sustainable this is going to be. So where are you guys thinking we stand on that front right now and are you kind of getting more positive that that business is going to see sustainable growth?

Mark Stevenson

Yes, Marshall, we've certainly been surprised a little bit by how strong CE has remained in some of the research segments and we're seeing that with labs still use CE to do some of their finishing experiments. And it kind of reaffirms our view that we see actually a continuum of these sequencing technologies across both CE both solid and now into the single molecule that we'll continue to offer.

We also, of course, introduced in this market the new 3500 instrument which will go into some of these hospitals and diagnostic labs. So that'll also begin to give us strength in the CE market. It's a very easy to use system, very straightforward for the labs who just want to do some simple straightforward sequencing.

Given that we've been more positive in these results, however, the more medium trend is over time still for next generation sequencing to replace this research segment and so we still expect declines over time offset by this large growth in diagnostics and forensic market that'll go on in the CE applied market segment.

Morgan Urist – Morgan Stanley

And then on that, just getting maybe a little more granular there, can you give us a sense of how much on the – how much of the growth in CE is being driven by consumables versus instruments?

Mark Stevenson

Well, the majority of the growth will still come in the future from continued use in consumables. The instruments over time we would still expect to decline as there's not that many more placements going on outside these diagnostic labs and forensic labs.

Morgan Urist – Morgan Stanley

But in the current – in the last few quarters has it been mostly instruments or are we seeing sort of equal contribution from consumables and instruments in CE?

Mark Stevenson

In CE it's a balance because you have some of the balance of the new forensic placements going in that are balancing some of the growth in consumables.

Eileen Pattinson

[Antoine], we have time for one more caller.


Your final question comes from the line of Jon Groberg – Macquarie Capital.

Jon Groberg – Macquarie Research Equities

I think most have been asked. Just one question, Greg, you mentioned and I think you kind of guided in fact after the second quarter that some of your – you thought some of the investments you'd made SG&A would be up sequentially and you said that given what you saw in July you kind of put some of those on pause. Can you just talk about what kind of investments those were specifically and how we think about those coming back online?

Greg Lucier

Well, when we did the early in the quarter expense control part of it was non-project related and that was just tightening up on travel and the usual things companies do. Then the other part was project-related which just allowed us to shift our focus of when we start these programs a month or so out into the fourth quarter.

And that's why I guided to say that some of these expenses will return in the coming quarters. Part of it here for us was we have a number of different R&D projects that we want to get launched and so we just shifted the launching of those R&D projects out, like I said, about a month or so.

David Hoffmeister

Then there were some marketing programs we said last quarter. It was basically R&D and marketing.

Jon Groberg – Macquarie Research Equities

So is there any reason to think that on the travel side are there stuff, or do you find that – some companies I'm talking to are saying we're finding we can actually do a lot more with less so some of these costs just probably won't come back? Or do you think some of these more discretionary items that you talked about will come back as well?

Greg Lucier

Well, I think we showed that we can have great results by saving and tightening the belt a bit more, so like really every company out there we're doing more with less and I anticipate that will continue.

David Hoffmeister

You're absolutely right, Jon, we're driving efficiencies, but as I said in my prepared remarks that we do expect that expenses, operating expenses in the fourth quarter will increase.

Jon Groberg – Macquarie Research Equities

And then last question here, you made some comments around – there's been a few discussions around kind of the next generation of sequencing. You mentioned things you might be doing internally on single molecule.

As we move to this next iteration of kind of cheaper, easier-to-use, how complete is that technology portfolio, Greg? Or you mentioned acquisitions on maybe moving into more of some of the applied diagnostic markets, but what about just on the technology front associated with what you perceive to be kind of the future of sequencing?

Greg Lucier

Well, your question is how complete. Clearly we have a very exciting clear roadmap for solid over the next couple of years, and as Mark mentioned that will be higher throughput, more accuracy, more usability with automation. We also have had the ongoing program around single molecule which will get launched and we think will be a game-changer in the field of single molecule sequencing.

And then I would say we have a fairly large team, obviously, probably the biggest in the world out scouring the generation technology even beyond that. And we're working on intellectual property. We're working on licensing. We're working on collaborations with a generation technology that even exceeds single molecule.

And when Mark talks about the continuum I would only back that up to say look, we are going to be over the course of time the sequencing company and we'll have a range of technologies to offer to customers and we're very serious about that commitment.

Jon Groberg – Macquarie Research Equities

Could I just ask a theoretical question there, Greg, to follow up? If you saw some technology that would rapidly cannibalize your CE business, would you be willing to – would you be – some people, it's hard as a public company in terms of what to do sometimes, but would you be willing to cannibalize your existing cells to make sure that you had that business?

Greg Lucier

That's an easy question, of course. I mean look, if you're going to – if substitution's going to happen you want to be the company that substitutes yourself and that's really not a conflict inside this company because it happens all the time.

It's just the case of in your example CE would be a little bit bigger than other examples we've certainly done to ourselves over the past five to six years. But the answer is absolutely yes.

Eileen Pattinson

Thank you. We are out of time. Thank you for joining us. This concludes our third quarter earnings conference call. This webcast will be available via a replay on the website for three weeks. Thank you again for joining the call.


Thank you for your participation in today's conference call. This concludes the presentation. You may now disconnect. Good day.

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