Life Technologies Corporation Q4 2009 Earnings Call Transcript

Jan.28.10 | About: Thermo Fisher (TMO)

Life Technologies Corporation (NASDAQ:LIFE)

Q4 2009 Earnings Call

January 28, 2010 8:30 pm ET

Executives

Eileen Pattinson - IR

Greg Lucier - Chairman and CEO

Mark Stevenson - President and COO

David Hoffmeister - CFO

Bernd Brust - Chief Commercial Officer

Analysts

Quintin Lai - Robert W. Baird

Tycho Peterson - JPMorgan

Doug Schenkel - Cowen and Company

Derik De Bruin - UBS

Marshall Urist - Morgan Stanley

Jonathan Groberg - Macquarie Capital

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter and Full Year 2009 Life Technologies Corporation Earnings Conference Call. (Operator Instructions).

I will now turn the conference over to your host for today, Eileen Pattinson, Head of Investor Relations. Please proceed.

Eileen Pattinson

Thank you, operator and good morning, everyone. Welcome to Life Technologies' Fourth Quarter and Full Year 2009 Earnings Conference Call.

Joining me on the call today are Greg Lucier, our Chairman and CEO; Mark Stevenson, President and Chief Operating Officer; and David Hoffmeister, Chief Financial Officer. In addition, Bernd Brust, our Chief Commercial Officer is available during the Q&A portion of the call.

If you haven't received a copy of today's press release, you may obtain one from our website at lifetechnologies.com.

I want to remind our listeners that our discussion today will include forward-looking statements including, but not limited to, statements about future expectations, plans and prospects for the company. We believe these statements are based on reasonable assumptions, but actual results may differ materially from those indicated. It is our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

Additionally, we will be discussing GAAP and non-GAAP measures. A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our website.

I will now hand the call over to Greg Lucier.

Greg Lucier

Thanks, Eileen and thank you all for joining us. I hope you've had a chance to review the press release we put out this morning.

During today's call, I will cover our achievements for the year and our recent product announcements and our outlook for 2010. Mark Stevenson will talk about our integration progress over the past year and also provide some color on divisional performance. Finally, David will then cover more specifics on our financials for the quarter and the year as well as provide additional details on our view for 2010.

We had a terrific fourth quarter with 11% organic growth, which rounded out a strong year for Life Technologies. 2009 was our first full year after the Applied Biosystems and Invitrogen merger, and our teams around the world performed in an exceptional manner.

We ended the year with 7% organic growth, 300 basis points of operating margin expansion and $534 million in free cash flow. This performance was the result of a lot of hard work and executing on our three strategic imperatives; delivering on the integration, realizing the potential of the new company and investing for future growth.

Our first strategic imperative, delivering on the integration, is critical to our success. We methodically executed upon our integration plans, which enabled us to deliver over 100 million in synergies, considerably higher than our original expectations. In addition to the sizable synergies realized, we were able to merge the two companies into truly one company with a solid foundation of processes and systems.

We still have integrations in place to realize more synergies, but in 2009 we were able to complete all the basic actions necessary to operate as one company. In terms of synergy capture in 2010, by the end of this year we'll have taken actions for both revenue acceleration and cost reductions that will generate 175 million in synergies on an annual basis in 2011, one full year ahead of the original three-year integration schedule.

Beyond the accelerated integration efforts, 2009 was a strong year on a number of measures including organic growth, new product launches and productivity gains. As we announced yesterday, our development efforts last year set us up for an impressive line of new sequencing products to be launched in the next several months, which I'll speak about in a moment.

As you know, next-generation sequencing represents less than 5% of our revenues, and as such we also had numerous new products launched in other areas of our business, the most notable of which is our new flow cytometer, Attune. This product launched in December at the American Society of Cell Biology Conference to outstanding reviews from customers and industry experts alike.

Attune will begin shipping at the beginning of the second quarter and we already have customers lined up. The launch of this product represents our entry into the $1.4 billion flow cytometry market. In the next five years, we anticipate sales will exceed $100 million from our flow cytometry products.

In addition to the new instruments introduced this year, 2009 was another year of rapid releases for new reagent products and benchtop devices, and 2010 is shaping up to be even better.

I want to now take a moment to talk about our sequencing business and a number of new and very exciting products we'll be launching this year. You'll hear more about some of these products in February at the annual AGBT meeting, but today let me focus on the press release we issued yesterday.

As we announced, we are launching our new SOLiD 4 next-generation sequencing system this quarter, a system that we believe will deliver the highest quality genome on the market. It's important to understand that as sequencing becomes more of a clinical tool, meaning that as doctors begin to look at a person's genomic data as a basis for diagnosing and treating disease, it's critical that this data be as accurate as possible.

When you're talking about three billion base pairs, an error rate of even 1% will add up to 30 million mistakes. That's just not good enough when it comes to making decisions that affect peoples' health. That's why we're so excited about SOLiD 4. It will generate up to 100 gigabases of mappable sequence data per run, but more importantly it will deliver unparalleled accuracy.

In fact, by the second half of this year when the SOLiD 4hq package, an upgrade to SOLiD 4, will be available, researchers will be able to generate 300 gigabases of mappable data at 99.99% accuracy. Four nines. This is a remarkable achievement, and given that the system will lower the cost of sequencing a genome to about $3,000 later this year, we now have an instrument that delivers such accuracy and cost as to truly replace array-based technology.

We have already gotten tremendously positive feedback from our customers about what SOLiD 4 will help them achieve. Of course, one collaboration involving the SOLiD 4 System that we're particularly excited about is the one we announced this morning with the Ignite Institute for Individualized Health. As we announced in our release this morning, Ignite will acquire 100 SOLiD 4 Systems, creating the largest next-generation genome sequencing facility in North America.

Ignite is a unique organization, one that is focused on integrating R&D, commercialization and clinical care to create medical solutions fit for the 21st century, solutions based on personalized medicine. We're proud that Life Technologies will partner with such an innovative organization that is truly focused on translational research. As I said earlier, we're now at a stage where we need to look beyond the technological innovations to how the application of these technologies can be used to improve human health.

As sequencing becomes more rapid, accurate and cost effective, we also need to devote attention and resources to other factors. That's why we also announced yesterday that we will dedicate approximately $100 million over the next few years to solve the major challenges related to interpreting and understanding the data generated by sequencing. Our foundation will dedicate $5 million over the next two years to educating physicians on how to use this data to truly help their patients. I'm proud that Life Technologies has the drive and the capability to not just create the best sequencing technologies, but help the community use those technologies to make a difference in ways that really affect peoples' lives.

The use of life science tools and technologies in medical applications is already happening today, of course, specifically in molecular diagnostics, which is a $3 billion market growing at 15% annually. In 2009, we had over 300 million of sales related to molecular diagnostics, so we're already having a strong presence in this high growth market.

Our product offerings in this fast growing business range from reagents and OEM components to products that are cleared for diagnostic use in the U.S. and Europe. To further our participation in the molecular diagnostics arena, we will make investments in developing diagnostic content for our 7500 Fast Dx RT PCR instrument and our 3500 Dx capillary electrophoresis systems, as well as create new tools and components for research in this field.

In addition, we recently announced the acquisition of AcroMetrix, a provider of diagnostic quality control products. This acquisition allows us to further expand our diagnostic capabilities and also expand our direct channel to molecular diagnostics clients. The focus and investment we're putting on moving sequencing technologies into the clinic and making ever more molecular diagnostic tools that will fuel our revenue growth in the long term.

Now for our 2010 expectations. We expect that organic revenue growth will grow in the mid to high single digits. Including the impact of the previously announced mass spectrometry divestiture, earnings per share will grow 10 to 15%. I'll let David get more into the specifics about our expectations, but clearly we are anticipating another solid year of financial performance and value creation for our shareholders.

Beyond 2010, our outlook is equally compelling, with even more new products on the horizon and investments in markets such as food testing, molecular diagnostics and biofuels research adding to our growth rates. In the meanwhile, each and every day we remain focused on execution.

Since 2006, after we transformed the operating rhythm of the organization, we set out to be a company that could prioritize better than any and reliably complete those basic but essential tasks that make up great performance. Our results speak for themselves. Since that time, our earnings per share have grown from $1.46 per share to $3.04 per share 2009, in spite of the worst economic downturn in 60 years and a very large transformative acquisition. In 2010, we will continue to deliver this reliable performance.

I'll now hand it over to Mark Stevenson, who will provide some color on the integration and each of the divisions.

Mark Stevenson

Thank you, Greg. As Greg mentioned, one of our strategic imperatives is delivering on the integration. Now that Life Technologies has been operating for one full year as a combined company, I thought it fitting to make a few comments on the integration and the incredible company that is being created in the process.

Over the last year, we have worked diligently to extract the best attributes from both companies and create really a unique business with substantial scale and scope. The integration team made significant progress in 2009. However, there is still a lot of hard work to be done, and we remain focused on executing our integration plans.

With that said, I'll tell you a little bit about the progress we have made so far. Life Technologies has retained an incredibly talented workforce. Our sales teams were recently ranked number one by our customers in both instruments and reagents. Our extensive service and support teams are focused on providing the highest service level to our customers.

Our R&D teams manage the most comprehensive offering of technologies available, and in 2009 Life Technologies launched over 1,000 new product SKUs, and we will accelerate that pace in 2010 and beyond. We are making significant investments in research and development, so that we will remain on the cutting edge of science and technology. By doing this, we can not only meet the evolving needs of our customers, but actually accelerate scientific advancement by bringing relevant and innovative technologies to market.

The scope of Life Technologies is broader than either company could have achieved on a stand-alone basis. As a combined company, we serve over 160 countries around the world, we process 11,000 orders a day and distribute more than 8,000 shipments every single day. Our geographic presence and large volume of orders allows us to drive down the costs and become ever more efficient in our operations. The combination of Invitrogen and Applied Biosystems' strengths is really proving out to be a true competitive advantage that will sustain us into the future.

With that said, I'll move on to provide some specifics on the divisional performance. In the fourth quarter, Molecular Biology Systems grew approximately 15% organically to 422 million in revenue. The majority of H1N1-related products reside within this group and accounted for approximately four points of growth for the division. While we continue to partner with the CDC and other global health organizations to ensure H1N1 public health monitoring, we expect minimal revenue from H1N1-related products in 2010.

Organic growth was also positively impacted by the continued strength in the TaqMan arrays business, in addition to strong demand for qPCR instrumentation and reagents. Additionally, we saw an uptake in the sale of PCR instruments and consumables, a direct result of stimulus funding. For the year, Molecular Biology Systems grew 9% organically to 1.58 billion. Double-digit growth in the genomic assays and high single digit growth in PCR systems was offset by the expected decline in PCR royalties.

Cell Systems had revenues of 211 million in the quarter or 4% organic growth. Strong growth in many of the business areas, such as our magnetic beads and stem cell technologies, was slightly offset by a year-over-year decline in our Bioproduction business. The decline in Bioproduction this year can be mostly attributed to customer-specific issues. We expect that this business will return to a more robust growth in 2010. Total year revenue for Cell Systems was 789 million or 4% organic growth.

Genetic Systems had revenue of 234 million in the quarter, representing 13% organic growth. For the full year, Genetic Systems had revenue of 907 million or 9% organic growth, after accounting for the LIMS divestiture. Revenue for CE systems and consumables sold into the research market was flat in the fourth quarter and for the full year.

This result performance is of particular note since we expected the market would decline in the high single to low double digits as genome centers decommission CE systems in favor of next-generation sequencing systems. We now believe that the decommissioning process is largely complete, and going forward we expect this business to be relatively stable. CE systems and kits sold into applied markets, such as forensics and environmental testing, grew double digits in the quarter, and we expect that this business will continue to grow at a similar rate in the coming year.

Finally, next-generation sequencing continues to gain traction in the market with strong double digit growth in the quarter. We expect that the full suite of next-generation sequencing platforms that Greg spoke about earlier will continue to drive strong growth in the years to come.

Finally, in our Mass Spectrometry division, our joint venture with MDS, revenue growth 7% organically to 130 million. All geographies contributed to growth year-over-year, with Japan growing in the double digits. On a full year basis, this division declined 1%, in line with our expectation of flat to down 10% for the year.

As you are aware, we are in the process of selling our stake in this business to Danaher Corporation. We are in the final stages of this process and now expect the transaction to close shortly.

Now I will turn it over to David Hoffmeister for a full description of the 2009 results and our outlook for 2010.

David Hoffmeister

Thank you, Mark and good morning, everyone. I'll now take you through the financial details of the fourth quarter and the full year 2009 results.

This quarter, revenue grew 14% to $874 million. Excluding the impact from currency and divestitures, revenue grew 11% organically. This was a strong quarter for organic growth with good performance across all our businesses and geographies.

For the full year, revenue grew 5% to 3.3 billion. Excluding the impact from currency and divestitures, revenue grew 7% organically. We're very pleased with these results, especially in the face of a large integration and a tough economic environment.

Let me briefly highlight a couple of items that we have mentioned in the past that contributed to growth again this quarter. Demand for our H1N1-related products was approximately 15 million for the quarter, resulting in full year revenues of about 45 million. Also, an order in the Japanese police force outfitting them with our 3130xl CE sequencer and sample preparation kits, totaling 20 million for the year, contributed nine million in the quarter. These are two good examples of how the broader capabilities of Life Technologies better position us to capitalize on these types of opportunities as they arise.

In terms of organic growth by region, excluding the mass spec division the Americas grew 9% in the fourth quarter, Europe grew 11%, Asia Pacific 23% and Japan 9%. Currency this quarter contributed approximately 4% to revenue growth, net of our hedging program. The positive impact to EPS was approximately $0.06 of earnings per share, including foreign currency impacts accounted for in revenue, other income and the mass spec joint venture.

On a full year basis, currency decreased revenue growth by approximately 2%, net of our hedging program. This impacted EPS negatively by approximately $0.19. The divestiture of the LIMS business had a negative one point effect on reported revenue growth in the fourth quarter and half a point impact on the full year.

Moving on to other items, fourth quarter non-GAAP gross margin was 65%, an increase of approximately 130 basis points over prior year. Positive price realization across the portfolio, positive currency impact, synergies and lower royalty expense all contributed to the gross margin improvements, offset slightly by the negative impact of lower royalty revenue.

On a sequential basis, gross margins declined as expected by 200 basis points as a result of lower price, a higher mix of instruments and OEM orders and the recognition of higher manufacturing expenses as we drew down inventory at year-end. As a reminder, gross margins in the fourth quarter are typically lower for these reasons.

For the full year, gross margins equaled 66.3%, an improvement of 70 basis points over prior year. Positive price, lower royalty expense and synergies from the merger drove the increase, which was partially offset by the negative impact of lower royalty revenue and currencies.

As expected, fourth quarter operating expenses of 342 million were higher than the previous quarter and the prior year. The increase resulted from investments in the commercial organization, in marketing programs aimed at capturing the stimulus and other opportunities, R&D programs for benchtop instrumentation and sequencing and depreciation as investments ramped up over the year. In addition, we entered into several collaborative R&D partnerships in the quarter.

Total operating expenses for 2009 equaled 1.3 billion, a $7 million decline year-over-year. Fourth quarter operating income was 226 million, an increase of 30% over prior year, including the impact of currency and 19% excluding currency. Our operating margin was 25.8%, representing the 300 basis points of improvement year-over-year including the impact from currency. This operating margin expansion primarily resulted from higher gross margin and decreases in head count-related expenses as a result of the merger. As expected, operating margins declined on a sequential basis due to lower gross margins.

For the full year, operating income equaled 879 million, an increase of 18% over the prior year including the impact of currency and 22% excluding currency. Operating margin expanded 300 basis points for the full year to 26.6% including the impact of currency, and 27% excluding currency. Full year operating margin expansion was a result of improved gross margins and decreased head count expenses due to synergies, partially offset by increases in depreciation and purchased services.

In terms of other income line items in the quarter, we had two million of interest income and approximately 16 million of income from our mass spec joint venture. Other income for the full year consisted of five million of interest income and 46 million of income from mass spec. Interest expense for the quarter was 36 million and 150 million for the full year.

Our non-GAAP tax rate for the fourth quarter was 26.2%, resulting in a full year tax rate of 28.5%. The tax rate in the fourth quarter was lower than in previous quarters due to higher income in lower tax rate jurisdictions. Specifically, we had increased sales of instruments manufactured in Singapore where we have a significantly lower tax rate.

Our diluted share count for the quarter was 187.3 million shares and 181.4 million for the full year. As you'll recall, our share count is impacted by our stock price due to our convertible debt and employee stock options.

GAAP diluted earnings per share for the quarter were $0.26, 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 APB14-1 and $0.19 per share of business integration costs and other items, and $0.02 per share of accelerated amortization of debt issuance costs resulting from the early repayment of term loans. On a non-GAAP basis which excludes these items, diluted earnings per were $0.80 for the quarter.

For the full year, GAAP diluted earnings per share were $0.80, which includes $1.43 per share of acquisition-related amortization expense, $0.17 per share of non-cash interest expense associated with APB14-1, $0.59 per share of business integration costs and other items; and $0.05 per share of accelerated amortization of debt issuance cost. On a non-GAAP basis, diluted earnings per share for the year were $3.04.

As a reminder, there is a full reconciliation between GAAP and non-GAAP measures in today's press release and on our website.

Moving on to the balance sheet and cash flow, our ending cash and short-term investments were 648 million, including approximately 41 million held as restricted cash. For the quarter, cash from operating activities was 264 million, capital expenditures were 77 million and free cash flow was $187 million, resulting in full year free cash flow of $534 million.

We repaid 150 million of term loan B during the fourth quarter and 425 million of term loans A and B for the full year. We ended the year with approximately 3.1 million of debt. The balance is made up of our convertible debt of 1.1 billion, in addition to term loans of two billion. As a reminder, 350 million of convertible debt is classified as short term with a put call date of August 1 of this year.

I'll now move on to our outlook for 2010. Before I get started, you should note that all guidance I'm providing today assumes we close the mass spec divestiture in the next few days.

As Greg mentioned earlier, we expect to grow revenue organically in the mid to high single digits. Due to the high volatility of currency rates in 2009, we are providing a range for the possible impact on revenue from currency in 2010. The effect on revenue is expected to be in the range of one to two points of additional growth, including the impact of our hedging program. The low end of the range is calculated using the 2009 average rates and the high end is calculated using year-end rates. For modeling purposes, you can choose the rates that you feel are most appropriate.

Non-GAAP earnings per share are expected to be in the range of $3.30 to $3.50. We expect free cash flow to be in the range of 575 to 600 million. Capital expenditures are expected to be 150 to 175 million, including approximately 30 million of integration-related capital.

Our free cash flow forecast also includes approximately 100 million of one-time expenses related to the integration. These costs will be excluded from pro forma earnings, but they're nonetheless cash, so they will lower free cash flow in 2010.

Additional items impacting free cash flow during 2010 include the full-year impact of cash bonuses paid to Applied Biosystems employees versus 2009 when bonuses covered only half the year, and cash impact from the divestiture of the mass spec business. It's important to note that as in the past our free cash flow will be back end loaded in the year due to normal working capital fluctuations throughout the year and the payout of annual bonuses in the first quarter.

A few other items related to our expectations in the coming year include the following. We've included the impact from the stimulus in our forecast. As we've stated in the past, we expect to receive in excess of $100 million in revenue over the life of the program. The exact size and timing of this is difficult to predict since the funds are just beginning to flow.

In the last half of 2009, we had approximately 50 million of revenue as a result of stimulus funding and we expect stimulus-related revenues to slowly ramp up in the first half of the year with the majority of the benefit realized in the latter half of 2010 and into 2011.

As these benefits materialize in 2010, we plan to take the opportunity to reinvest approximately half of the operating profit impact back into the core business to drive future organic growth. We will focus the investment in several areas, including sequencing technologies, which Greg mentioned earlier and accelerating the expansion of our commercial organization in some of our faster growing markets such as China.

Synergy savings for 2009 were 95 million, and we exited the year at a run rate of over 100 million on an annual basis. In 2010, we will put actions in place to achieve additional 70 million in synergy savings on an annual basis. You can expect that the annualized run rate exiting 2010 will be $175 million.

Royalty revenue is no longer expected to decline in 2010. Due to the efforts of our licensing team, the previously announced decline of 10 to 15 million has been offset with revenue from new license agreements. At this point, we still expect royalties to decline by 20 million in 2011.

We expect operating margins to expand between 100 and 125 basis points. This improvement will largely result from capturing additional synergies.

The pro forma tax rate will be approximately 29.0 to 29.5% depending on the geographical mix of income throughout the year. Interest income will fluctuate depending on our cash balance. Our average interest rate on investments is approximately 50 to 60 basis points.

Interest expense is expected to be in the range of 120 to $130 million, depending on the timing of debt repayment and interest rate fluctuations. Inclusive in this number are any changes in capital structure which may come as a result of the waiver we filed yesterday. The waiver seeks agreement from our current lenders to permit the issuance of debt securities, the proceeds of which would be used to repay the term loans. The waiver is effective for up to six months.

Also included in interest expense guidance is the expectation that we would make the following debt repayments during 2010 to reach our target leverage ratio of 2.0 to 2.5 times EBITDA. We anticipate making 140 million of mandatory debt repayments on the term loans and approximately 290 million utilizing the proceeds from the mass spec divestiture.

Our diluted share count is approximately 190 million at today's stock price, but it will increase if our stock price increases due to dilution from our convertible debt, as well as stock options. Assuming an average share price between 52 and $55, the share count would range between 192 and 194 million shares.

Finally, here are a couple of other variables that may further help in modeling the business. First, you can assume that every point of organic growth contributes about $0.07 of earnings per share and every 10 million in operating expenses equals $0.03 per share. Second, in order to help estimate the effect of currency, we've calculated the impact on earnings per share if all currencies moved against the dollar by 5% and our mix of foreign currencies stayed the same. In this scenario, the impact on earnings per share would be $0.10.

With that, I'll hand the call back over to Eileen so we can answer any questions that you may have. Eileen?

Eileen Pattinson

Thank you, David. Operator, we are now ready for the Q&A portion of the call.

Question-And-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Quintin Lai with Robert W. Baird. Please proceed.

Quintin Lai - Robert W. Baird

Hi, good morning and congratulations on a nice year-end.

Greg Lucier

Thank you, Quintin.

Quintin Lai - Robert W. Baird

On the third quarter call, you kind of gave out a 2010 outlook of mid-single digit organic. Now here we go into 2010 now and you're looking at mid to high single digits and minimal expectations for H1N1. So could you tell me a little bit about what do you see incrementally better since then? Then as a follow-up, any outlook on the potential for NIH funding 2011 and onward based on what President Obama's been talking?

Greg Lucier

Sure. Thanks. I think one of the primary drivers for the higher organic growth in 2010 would be the timing of the stimulus. It's clear now most of it will fall into 2010 versus our earlier thinking that some more of it would have fallen into 2009 per the proclamations from the politicians. So again, I think that's the primary driver for higher organic growth in 2010.

The second part of your question was relating to the NIH. As you know, the NIH ex-stimulus got approximately 2% increase in the current fiscal budget 2010. In our current discussions, at least we have heard, is that the NIH will probably get another increase in fiscal year 2011. We don't think it will be held flat, but obviously it's subject to a lot of negotiation yet to be had. We're actually encouraged that the NIH in this current environment of potentially flat discretionary spending will actually be one of the budgets that does get an increase.

Quintin Lai - Robert W. Baird

All right. Thanks. I know you've got a lot of questions, so I'll jump back into the queue.

Operator

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

Tycho Peterson - JPMorgan

Hey, good morning and congrats on the nice quarter.

Greg Lucier

Thank you.

David Hoffmeister

Thanks, Tycho.

Tycho Peterson - JPMorgan

Maybe just start off on the new product introduction. Can you talk a little bit about the go-to-market strategy for SOLiD 4, how you approach your current installed base and maybe just any color on pricing, consumables? Then also with Ignite, it looks like you're getting payments over three years. So if you could talk a little bit about whether there's a change in the payment terms for your customers going forward that would be helpful.

Mark Stevenson

Yeah, Tycho. This is Mark. So we started discussing with our customers SOLiD 4 over the last couple of weeks. We're excited to accelerate that. I mean, some of the investments you saw us make during Q4 was really accelerating the R&D. The customers have been very positive in the response we've got. Really going to our installed base, new customers; we've always said we felt this had the highest potential to upgrade our existing customer base. So we've really been going to them, explaining the roadmap and how we've accelerated that. So they're very excited about that and particularly on the accuracy. They're beginning to see the difference it makes in the results to really ensure that they're not getting any false positives in that. So very positive response as we've gone to those customers and we upgrade and outlaid the path for the year.

We expect payment terms will be as normal for customers that we deal with, no change in that policy. We were very excited to the partnership we announced this morning with Ignite, really in line with our strategic priorities about how do we translate this closer to the clinic. Ignite, with its capabilities and its vision is really all about taking that much closer and translating these discoveries we're making really into a clinical practice.

Tycho Peterson - JPMorgan

Then can you comment on your assumptions for consumables on the new instrument?

Mark Stevenson

So we would expect the consumables to ramp up in a normal way. With the capacity now to go to the $6,000 genome and then 3,000 at the end of the year, we'll expect the pull-through to be very high during the usage of that as people replace other technologies now to ramp up on that.

Tycho Peterson - JPMorgan

Okay. Then Greg, in your comments you talked about trying to kind of accelerate I think the pace of product introductions. Are we going to see kind of a big bolus in the next couple years from some of these R&D efforts, and can you talk a little bit about how we should be thinking about R&D spend? Then if you can also include any comments on M&A and your appetite for smaller tuck-in deals right now that'd be helpful.

Greg Lucier

Sure. Well, I think you've started to see early signs of what has been a very aggressive innovation agenda by the company. So, the development and now launch of the flow cytometer product, which is very disruptive, very proprietary technology, now with SOLiD 4 continuing to show and demonstrate that it is in our belief the most accurate chemistry to read the genome, and you'll hear more in the coming month at AGBT of some other major breakthroughs. You can expect that pace of innovation to continue coming out of the company. As Mark was mentioning, one of the primary motives for bringing these two companies together was to drive the scale around R&D, to really create ever more innovation in life sciences. You're seeing the very early stages of that.

In terms of the overall spend on R&D, we hover around 10, 10.5%. As we accelerate our organic growth, we think the R&D spend will stay in and around that percentage. Now we're dealing with some very large numbers, and numbers that are far larger than our competitors that allow us to have this scale of innovation that we hope will be unmatched.

Tycho Peterson - JPMorgan

Then...

Greg Lucier

Acquisitions, sorry.

Tycho Peterson - JPMorgan

Your appetite for tuck-in M&A and...

Greg Lucier

Yes. We're very, very comfortable with the current portfolio inside the company. Invitrogen did a lot of acquisitions to build up a platform, AB did a few. The combination of the two, we believe has a very strong portfolio as it is. Therefore, we don't have to do any large acquisitions to add to this. However, we do have a good sense of paranoia that sometimes the best ideas are outside our company, and so we will continue to do smaller tuck-in, primarily oriented around technology acquisitions to bring it into the family.

Tycho Peterson - JPMorgan

Okay. Then just a last one, a clarification on the royalties. Can you give us a sense as to whether your ability to kind of offset there was a function of going back to customers and getting paid what you were owed? Or was it adding the digital PCR patents to the estate and being able to leverage that a little bit more?

Greg Lucier

Really all of the above. As I mentioned to some folks at your conference, we have reformulated the licensing team. It's a very capable group of people. They've gone back to existing licensees. They've looked back into our portfolio and gone out to license other technologies. This year they achieved, I think, nice progress to mitigate the decline we were expecting. They've got their work cut out to start for 2011.

Tycho Peterson - JPMorgan

Okay. Thank you very much.

Operator

Our next question comes from the line of Doug Schenkel with Cowen and Company. Please proceed.

Doug Schenkel - Cowen and Company

Hi. Good morning and thanks for taking my questions.

Greg Lucier

You bet.

Doug Schenkel - Cowen and Company

It sounds like you guys had a pretty good solid quarter, maybe even picking up some momentum. Could you talk about whether or not there was any notable change in competitive win rates, maybe talk a little bit about stimulus impact to that business and how things are differing across different geographies?

Greg Lucier

Let me take the first part of the question. So what we said was we saw some impact of the stimulus in the quarter, about eight to 10 million in the quarter. We think it's now starting to come through the pipeline. In terms of win rates, we believe that the creation of the organization is allowing us to pick up increased market share at key accounts around the world on key areas of technology, whether it's customers wanting to consolidate their purchases into one vendor and save a lot of processing costs or in other areas like qPCR instrumentation where we had a very robust fourth quarter. So we feel good about our win rates and we think in the coming years that we'll be able to actually increase the market share in this industry.

Bernd, do you want to add any color commentary to maybe some of the emerging markets?

Bernd Brust

Sure. I mean, first I think in general on the selling organizations around the world, the combined organization, you really now have the reagent or consumables sales force have now focused on both the AB and Invitrogen portfolios, which gives you a tremendous pull-through and allows the traditional legacy AB team to focus more on instrumentation and get a bigger footprint on that side. We're seeing some tremendous payoffs happening on that end.

Emerging markets around the world, we continue to see tremendous growth in Latin America, China, Middle East and other countries. Along those lines, we continue to invest in those areas to capture share and be as close to those customers as we can, and those investments will continue to happen.

Doug Schenkel - Cowen and Company

That's helpful. Then David, you were really clear in providing background on why gross margin pulls back sequentially as it always does in the fourth quarter. Despite that, the Street was actually a little bit higher with our forecast. So that's probably just a function of poor modeling, but I just want to be clear. Was gross margin about where you expected it to be, and what was the FX impact in the quarter?

David Hoffmeister

Gross margin was where we expected it to be. If you look back on last year, the pattern is almost identical on a relative basis. In total on an EPS level, gross margin was or I mean currency had a $0.06 impact.

Doug Schenkel - Cowen and Company

Okay. One last question, it's probably best for Greg. Your stock performance has lagged the group a little bit in the early part of 2010, recognizing that you guys just outgrew the group in the year by about 700 basis points and generated 300 basis points of operating leverage. Some of the reasons I've heard from some of the bears thrown around have been concerns about your long-term growth outlook and how much leverage there's going to be in the model, not just this year but beyond. So I want to give you an opportunity to address these concerns. Could you maybe talk a little bit about what you think the long-term targeted rate of organic growth is beyond 2010? Could you talk a little bit about whether or not it's right to think that operating margin could exceed maybe the historical peak for Invitrogen, which I believe was about 30%?

Greg Lucier

Thanks for the question. I think there seems to be a disconnect between the enthusiasm and confidence inside the company and some voices that you describe outside the company. We actually have never been more bullish on the future of the business. I don't know why there would be any even justification for why our growth rates would somehow go down after 2010. Whether it's just the increased pace of innovation, the innovation that can allow us to enter very big markets like flow cytometry and molecular diagnostics that we're now talking about, or our enhanced global footprint where we can be closer to customers than any other company in life sciences and grow our share, to just new emerging opportunities even beyond the current consideration of what we were even doing as independent companies two years ago, such as biofuels research. There is just a enormous amount of opportunities for this new platform company to grow. So I would just say that there's a big disconnect between how we feel and the confidence we see in the future to the voices you describe.

Doug Schenkel - Cowen and Company

I'll just, I guess get to the second part of that and then I'll get back into the queue. From a margin standpoint, are we anywhere close to where you guys think you can be over the next few years?

Greg Lucier

What we've said is that we can grow operating margins 50 basis points per year. In the past, we sometimes were asked the question, is there a limit at, let's say, 30% operating margin? We said we don't know. I guess my answer today would be, I don't see any reason why that represents a ceiling on the growth of the profitability of the company. As we increase our investment in proprietary technologies, we should be able to extract higher margins in the company. So I don't see any reason why we can't continue to drive 50 basis points improvement each and every year for several years to come. So I don't see a ceiling on that profitability of the company.

Doug Schenkel - Cowen and Company

Okay. Thanks a lot. I appreciate you taking the questions.

Greg Lucier

You bet.

Operator

Our next question comes from the line of Derik De Bruin with UBS. You may proceed

Derik De Bruin - UBS

Hey, good morning.

Greg Lucier

Good morning.

Derik De Bruin - UBS

Just a couple of questions then I'll jump back in the queue on this. So on looking at the Cell Systems business, it was about 4% organic growth in 2009. I guess, how much of this do you attribute to changes in the cell culture process in the sense that customers are starting to get higher yields from some of their cell culture stuff and this is a volume decrease? Just talk about where you see trends in the Cell Systems business going.

Greg Lucier

As Mark mentioned, we think that this is an area that was impacted by some economic factors in 2009. We see it returning to historical growth rates of high single digits, low double digits here in 2010 for Bioproduction. There is no question that there is increased efficiencies taking place. At the same time, we believe our share of the molecules on the market is increasing as well. Now the other point I would say is that our guidance for Cell Systems in 2010 is mid to high single digits. So we see it returning to its historical growth patterns this year.

Derik De Bruin - UBS

That's helpful. Thanks. Going to the SOLiD 4, can you tell us what the cost of the upgrade is and how much of your installed SOLiD base would you expect to upgrade? I guess also the question, is what is the installed base of SOLiD?

Mark Stevenson

Well, with regard to the upgrade, we're making it very affordable for our customers to upgrade to the system. So it'll be $10,000 to upgrade from the customers that are 3 Plus now to upgrade to 4. We expect that the majority of customers will upgrade that installed base and will continue to expand out on that. Then they'll also want to add in the EZ Bead System, which is $50,000 into that, which as we explained in the press release will cut their hands-on time by about 90%. Also improve the efficiency of that upfront ePCR process.

So the installed base is growing bigger and bigger. We're not giving specific numbers, but we've made a lot of traction in the progress in the market and we think this will continue to reinforce the great roadmap we have by laying out what we're going to do to the end of the year. We've consistently beat and accelerated where we said we'll be on our platform, and now delivering on the platform.

Derik De Bruin - UBS

Great. Just one final question. You alluded to investing in your own molecular diagnostic content. Would you care to elaborate?

Mark Stevenson

Well, we're doing that in several ways. So one, we're doing it in partners. So we announced, for example, the partner earlier in the year with Asuragen, and we're developing that out, now going into clinical trials with BCR/ABL test. There are other partners that we're discussing with to bring proprietary content onto our platforms. We also see through these translational medicine collaborations that you see us setting up there'll be new and novel content discovered there that will come out again onto our platforms. So there are two ways that we see that coming through, both through partnerships and through the partnerships of taking this novel content onto our existing platforms.

Derik De Bruin - UBS

Great. Thank you.

Operator

Our next question comes from the line of Marshall Urist with Morgan Stanley. You may proceed.

Marshall Urist - Morgan Stanley

Yeah, hey guys. Good morning. So first question just on the synergy opportunity in 2010. The incremental $75 million you guys talked about, can you give us just an idea of where that's coming from, price, cost realization, kind of what are the major drivers in 2010?

Greg Lucier

It's 70 million. As you mentioned, it's a combination of revenue and costs. As we said when we kicked off the synergy discussion at the beginning of this year, that initially it was going to be predominantly cost. As time went on we would get more revenue synergies and that's what we expect to happen. So there's going to be a greater mix of revenues.

As far as costs go, we're going to continue to get synergies from purchasing. We identified earlier plant consolidations, other manufacturing opportunities. We expect to get those, as well as some consolidations and efficiencies in distribution.

Marshall Urist - Morgan Stanley

Okay, great. So sort of following on that, how should we be thinking about gross margin in 2010?

David Hoffmeister

What we've commented on is at the operating margin level, you can expect operating margins to expand by 100 to 125 basis points.

Marshall Urist - Morgan Stanley

Given some of the investments you guys have talked about in R&D and SG&A, should we assume that the leverage there is coming on the gross margin front given you've talked about some of these manufacturing synergies?

David Hoffmeister

Yes, you can assume that we will get significant expansion or leverage in our margins, gross margins.

Marshall Urist - Morgan Stanley

Okay, great. Thanks. Just one other follow-up question on SOLiD, just to follow-up on a previous question. When you guys talked about the price of the genome coming down, is there any change in how you're pricing consumables? Or is this an accuracy, decreasing the coverage that you need sort of per genome to get to the same level of data?

Mark Stevenson

Yeah, it's really technological advances that we're making in this. The first advance that we're making in SOLiD 4 is a combination of new reagents, these total precision reagents that we've increased, and also the EZ Bead. That allows us to reduce the cost down for our customers down to $6,000. Then as we go to SOLiD hq, that upgrade will come from greater density from smaller beads. So it's a very straightforward upgrade for our customers also later in the year, and that'll get us up to the 300 gigabases and allow our customers to do runs of $3,000 to get a genome done.

Marshall Urist - Morgan Stanley

Okay, great. Just to be clear, there's no change in the pricing policy on consumables?

Mark Stevenson

There's no change in that, no.

Marshall Urist - Morgan Stanley

Okay, great. All right, I'll get back in the queue. Thanks a lot, guys.

Greg Lucier

You bet.

Operator

Our next question comes from the line of Jonathan Groberg with Macquarie Capital. You may proceed.

Jonathan Groberg - Macquarie Capital

Hi, good morning. Just a couple questions. I was most interested in the comments, at least around the business and the outlook that you made, Mark on the research CE market that you think the decommissioning is done and that you actually expect stable revenues going forward. Can you just maybe describe kind of what you're hearing, why you're willing to say that and what you're assuming in terms of additional advances that are made in other kind of longer read, lower cost technologies going forward?

Mark Stevenson

Well, we see most of the high throughput applications have already actually switched to next-generation sequencing. I mean just the tremendous progress that has been made in the short run technologies as they got longer both in comparative sequencing and de novo sequencing, that switch has already occurred. So the decommissioning that we're seeing and the transfer out of those experiments has actually occurred already.

What we see in the research market is where people want to do a single experiment and perhaps look at a part of a genome and just do one run, instruments like the 3500 that we introduced that run into smaller labs, into smaller clinics is a very cost efficient way to run that out, to validate that sequence and then translate that into a clinical setting. So that's where we're seeing research applications and good pickup continue in that CE market and continuing to run CE instruments in that space. So that's why we feel comfortable about, as we've seen this year, the stabilization of that business. We're aware obviously of the long run technologies. Again, we'll talk about our single molecule technology coming in at the AGBT conference. We see a good place for that in the market, but it's complementary to other next-generation sequencing tools. We think it's also complementary to CE. We'll be able to have the full breadth across CE short and long runs as we go forward here.

Jonathan Groberg - Macquarie Capital

So if I take what you've said in the past about the CE research business, it's maybe somewhere around a 430, $450 million business for you, which is a pretty substantial business. You're saying that regardless of newer technologies, advances, you think that's about the rate at which that market will stay, the CE research market, using CE technology?

Mark Stevenson

Yeah. What you have to keep in mind with your numbers in the market is as we see the CE applications continue to get used into more clinical applications, that validation like we've done on the 3500 to get a CE-IVD mark and now in discussions to take the CE into a 510(k), those applications continue to get into more translational applications into the clinic, and that's when CE is a robust and proven technology. Particularly for a quick experiment, that's exactly what you want to use, the right fit for that application.

Jonathan Groberg - Macquarie Capital

Okay. Thanks for clarifying the view there. Then just one more on sequencing if I can. On the SOLiD, can you maybe describe two things; one, you've had you and your competitor both introducing systems that are going to make significant advancements here. A lot of promises more towards the back half of the year, I guess. How does that dynamic play in the near term in terms of how you think customers are going to go about purchasing instruments? Does this delay purchases towards the back half of the year? You described what entailed going from the 3 to the 4. Can you maybe just describe as you go from the 4 to the hq what kind of upgrades you need to go to these smaller beads that you described?

Greg Lucier

Well, we don't see the market slowing down here in the first half of 2010. I think our announcement here with Ignite is a good example that this is a very robust market. In terms of what's driving it, for us the message is really around accuracy, that the technology is now taking us to a point where you can do really important translational research and accuracy is the key element when you're doing this sequencing. So we see that opportunity opening up here in 2010 for our organization.

In terms of the upgrade to hq, I'll defer to my colleagues here. Again, it's not a very expensive upgrade once you're into SOLiD 4, which as you heard from SOLiD 3 Plus to 4 is only about $10,000. So we've tried to make this very economical for our installed base. We've continued to tell our customers that the SOLiD platform, the SOLiD technology has still lots of runway from here. As they invest in us, we invest in them.

Mark Stevenson

Yeah. I think that I'd just add that what you're not seeing here is any discontinuance of a platform, the switch. So the customers don't feel as they move up that they need any switch. So they continue to invest. They'll invest in SOLiD 4, and later in the year, they can add this upgrade which will add the extra smaller beads on. So they see a path and they just want to get going. They feel now is the time to get sequencing.

Jonathan Groberg - Macquarie Capital

Like on the smaller beads, when you talk about an upgrade, do they have to replace a camera or anything like that in terms of the optic side of things? I'm just curious what exactly they upgraded.

Mark Stevenson

There may be smaller engineering upgrades that go as we've done in the past with SOLiD 3 to 3 Plus, but there's nothing significant that they'll need to upgrade in this.

Jonathan Groberg - Macquarie Capital

Okay. Then, lastly and I'll jump in the queue. On pricing, can you maybe talk about what you've realized in 2009, kind of on average for the year? If that was any different than previous years, given the merger here with AB? Then whether or not you expect anything different in 2010?

David Hoffmeister

In previous years we've said we've realized somewhere between one to 2% in net price, and that's about what we got this year. We were very pleased with the pricing impact we were able to get on the AB side of the business. We're going to continue that going forward. Our outlook for 2010 is another one to 2% in realized price.

Jonathan Groberg - Macquarie Capital

Great. Thanks a million for the detail.

Eileen Pattinson

All right. Thank you. We've run out of time, and this concludes our Fourth Quarter and Full Year 2009 Earnings Conference Call. This webcast will be available via a replay on our website for three weeks.

As a reminder, we will be hosting a follow-up Q&A call for investors and analysts at 11:00 Eastern Standard Time. You can find dial-in information on the Investor Relations website and in the press release issued this morning.

Thank you again for joining us this morning.

Operator

This concludes today's presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!