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Life Technologies Corporation (NASDAQ:LIFE)

Q1 2010 Earnings Call Transcript

April 27, 2010 4:30 pm ET

Executives

Eileen Pattinson – Senior Director, IR

Greg Lucier – Chairman & CEO

David Hoffmeister – SVP & CFO

Bernd Brust – President & Chief Commercial Operations Officer

Mark Stevenson – President & COO

Analysts

Quintin Lai – Robert Baird

Tycho Peterson – JPMorgan

Doug Schenkel – Cowen and Company

Marshall Urist – Morgan Stanley

Jon Groberg – Macquarie Capital

Steven Lichtman – JMP Securities

Derik De Bruin – UBS Capital

Jon Wood – Jefferies

Jeff Ares – Leerink Swann

Dan Leonard – First Analysis

Peter Lawson – Thomas Weisel Partners

Ross Muken – Deutsche Bank

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2010 Life Technologies Corporation earnings conference call. My name is Tamina [ph] and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator instructions) As a reminder this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Eileen Pattinson, Head of Investor Relations. Please proceed, ma’am.

Eileen Pattinson

Thank you, Tamina, and good afternoon everyone. Welcome to Life Technologies' First Quarter 2010 Earnings Conference Call.

Joining me on the call today are Greg Lucier, our Chairman and CEO and David Hoffmeister, Chief Financial Officer. In addition, Mark Stevenson, our Chief Operating Officer and Bernd Brust, our Chief Commercial Officer are 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 thanks to all of you for joining us. I hope you’ve had a chance to review the press release we put out this afternoon. As you can see from our results, we delivered another quarter of strong top and bottom line growth and we are pleased with how we have started 2010.

Revenue grew 10% organically to $887 million, a result of terrific growth in both instruments and consumables. Operating margins expanded by 330 basis points to hit a record 29.5%. And earnings per share grew 21% to $0.87 for the quarter. This quarter marks the 14th quarter in a row that this Company has met or exceeded its financial targets on both the top and the bottom line. This milestone demonstrates how seriously we take our commitments to our shareholders. Our teams around the world have proven that they know how to put their heads down and get the work done, driving above market revenue growth with a relentless focus on execution.

As I do every quarter, I will take a few moments now to talk about these results in the context of our strategic imperatives delivering on the integration, realizing the potential of this new Company, and investing for the future. First, we made significant progress on our integration goals for the year. The sales force reorganization is complete and our reps are hitting the street with a singular purpose of adding value for our customers. Our ultimate goal is to become their partner of choice by providing unparalled customer service, and offering an expansive portfolio of innovative products that simplify and streamline entire workflows.

In addition, we announced the closure of two manufacturing site in Camarillo, California, and Bromborough, UK. The work to consolidate these operations into our facilities in Frederick, Maryland and Warrington in the UK is well underway and going successfully. These initiatives, as well as many others will generate an additional $20 million in annualized synergies. This brings us one step closer to our goal of putting action plans in place that will generate an additional $70 million in annualized savings by the end of this year.

Our diligence [ph] approach to the integration has not only paid off from a near term synergy perspective, but has set us up for success in other important ways. In particular, we’ve made great strides in realizing the potential of the new Company, which is our second strategic imperative. Let me now share with you some ways in which we optimize the value of our combined Company in the first quarter.

As I mentioned, we grew revenue 10% organically. Regionally, Japan was a standup performer with 23% growth for the quarter. Throughout 2009 our team in Japan executed on a strategy to optimize our commercial structure in the region. Among other actions, we increased the number of sales reps in the field and implemented a new dealer strategy that more closely aligned incentives with performance. These efforts position us well to take advantage of the additional research funding that the Japanese government released in the first quarter of 2010. As a result, we had strong sales across all of our businesses in Japan with a notable increase in sales of the new 3500 Genetic Analyzer and the Neon Transfection system.

Growth in Japan was also positively impacted from a lift in realized price and recognition of the last installment from the landmark police forensics deal. We are very pleased with this performance and recognize the tremendous efforts that our team in Japan is putting forth. However, this remains a very challenging region, and we expect growth to be in the low-single digits for the balance of the year now.

The Americas region grew 8% in the quarter with stimulus-related revenues contributing approximately 3% of this growth. While we did not see a significant ramp up in stimulus revenues for the fourth quarter, we are still confident – from the fourth quarter, we are still confident in our estimate of greater than $100 million over the life of this federal program. However, because of the slow ramp up in stimulus related spending, we believe that more of this revenue might now push into 2011 than we had originally anticipated

I’d like to now talk a bit about our last strategic priority, investing for future growth. As I’ve stated in the past, we expect to grow revenue one to two points faster than the market for the foreseeable future. One of the ways in which we will achieve this goal is the consistent introduction of new and innovative products. It is critical to have an eye on the future and anticipate the areas that will drive growth in the months and the years to come.

To that end, we have spent considerable efforts fine-tuning our innovation techniques over the last 24 months and focus our efforts on several key areas, including genetic sequencing, synthetic biology, flow cytometry, benchtop devices, and PCR. In addition to meeting the needs of our research customers, investments in these areas will increasingly move us into higher growth in commercial and clinical realms.

We will go into more detail about our investment strategies at our upcoming investor day in June, but I will give you a few highlights of some of our recent product introductions now.

Yesterday, we issued a press release about the debut of the industry’s first benchtop proteomic and epigenetic sample preparation system, the MAGic Sample Processor. In line with our strategy of offering innovative products that simplify and streamline workflows, this new device cuts protocol times in half and dramatically reduces experimental errors by automating manual processes. MAGic utilizes microfluidics, thermal controls, and integrated magnetic separation technology, which enables researchers to more easily perform technically challenging experiments in protein purification and epigenetics.

We are particularly excited about this launch as it is another product in a growing line of innovative, productivity-enhancing benchtop devices. And I might add, it combines the very best of Life Technologies’ engineering, Dynal bead technology, and our consumables channel [ph]. It is a product that couldn’t have been created without the creating of Life Technologies.

In addition to the launch of MAGic, last week at the America Association for Cancer Research, we unveiled several new technologies, including research only KRAS and BRAF mutation analysis reagents that can be analyzed using the 3500 Genetic Analyzer.

We also announced our newest innovation in real-time PCR, the ViiA 7 Real-Time PCR System. The ViiA 7 System offers maximum productivity, ease of use, and instrument to instrument consistency. While the ViiA 7 System is currently for research use only, it was designed with clinical applications in mind. We expect to get a CE IVD mark later in the year and ultimately plan for 510(k) in the U.S. Gaining these clearances will extend the application of the ViiA 7 System beyond research lab and into clinical and diagnostic markets. The launch of the ViiA 7 System is part of our broader strategy to extend our leadership position in PCR by setting new technology standards. We began executing upon this strategy in 2009 when we acquired Cytonix for intellectual property related to digital PCR technology and then followed that with the acquisition of BioTrove for its OpenArray platform, enabling high throughput traditional genotyping into PCR as well as digital PCR reads.

Today, I am pleased to announce the acquisition of Stokespile [ph] whose ground-breaking technology redefines the current play-safe paradigm for the PCR process, generating orders of magnitude more date in less time. Stokespile has developed the microfluidics based system for high throughput, highly flexible genotyping, gene expression analysis, and digital PCR. This technology is well-suited to meet the ever-growing demand for higher throughput genomic analysis in agriculture, drug discovery, translational research, and other applications being fuelled by the rapid rate of discovery from next generation sequencing systems such as ours. The acquisition of Stokespile is another very exciting step forward as we continue to build out and redefine the PCR industry.

These combined assets will enable our vision of delivering (inaudible) performance and quality, fast, easy, and configured for customer throughput and flexibility needs. Building out our PCR franchise through both internal development and the acquisition of technologies is just one example of how we are investing in our future. We have programs in place that will ultimately drive our business forward and it’s a smart and efficient allocation of resources to these programs that will set us up for success in the years to come.

With that, I will turn it over to David who will provide a little more color on our divisional performance and overall financial results. David?

David Hoffmeister

Thanks, Greg. This quarter we grew revenue 13% to $887 million. Currency had a positive four point impact on reported revenue growth and acquisitions and divestitures had a negative one point impact. Excluding the effect of currency, acquisitions, and divestitures, revenue grew 10% organically.

This performance was the result of strong volume growth and better pricing in most areas of the business. In addition, growth was positively impacted by three items in particular. As Greg mentioned before, we recognized $8 million in revenue from the last installment of the Japanese police order. We also benefited from spending related to the supplemental budget in Japan which added $4 million in revenues.

And finally, revenue associated with the NIH stimulus totaled $10 million. These three items added about 3% to the overall growth rate.

Before I walk through some of divisional highlights, I’d like to point out a relatively small change in our division structure that went into effect at the beginning of the year. In order to better align certain technologies within our divisions, we created a new business unit called Applied Molecular Testing, which is now part of the Molecular Biology Systems division. Going forward, all of our animal, biosecurity, food, and environmental testing products will be accounted for in this new business unit.

In addition to this change, we moved certain products associated with our pharma analytics business from Genetic Systems to Cell Systems to more closely align our product offerings for pharmaceutical and biological production. As a result, product lines totaling approximately $50 million in revenue were moved between divisions. For year-over-year comparison purposes, we’ve posted a worksheet on our website that restates divisional revenue for 2009. In addition, we will be providing more detail during the post earnings Q&A call later this afternoon.

Now, I will get into the divisional highlights. Molecular Biology Systems grew approximately 10% organically to $432 million in revenue. Our PCR business grew in the teens, driven by particularly strong demand for instruments in the Americas and Asia as well as the Japanese police order that I referenced earlier. Genomic Assays also performed well with double-digit growth in the Americas, Asia-Pacific, and Japan. Lastly, the Molecular Biology Reagent business benefited from strong sales for reagents in all regions.

Genetic Systems grew 12% organically to $238 million. CE, our largest technology group in this division grew mid-single digits for the quarter, driven by growth in both consumables and instruments. Consumables continued to experience solid growth in research and applied applications. Instrument growth was driven by strong sales in clinical research, particularly for the newly launched 3500 Genetic Analyzer, partially offset by a year-over-year decline in instruments sold into applied markets due to a large sale in the first quarter of last year.

And finally, we continue to gain traction in next generation sequencing as we improve the ease-of-use and the performance of the SOLiD platform. Ongoing improvements in the technology, new product launches such as the SOLiD PI system, along with investments in our field support sales teams and marketing are paying off. A good example of this is the British Columbia Cancer Agency’s purchase of 10 SOLiD 4 units for their research. The accuracy of the SOLiD system is increasingly recognized by thought leaders as critical for cancer related research.

Cell systems had revenues of $214 million, representing 8% organic growth. Growth in this division increased compared to prior quarters as pharmaceutical and biotech end markets started to improve. This quarter saw a double-digit growth in bioproduction, driven by new drug introductions, and the timing of large customer orders.

Primary and stem cell systems also posted strong growth in the quarter, driven by demand for both media and reagents.

And lastly, our Dynal beads based business grew in the double digits on large orders from molecular diagnostic customers.

In terms of organic growth by region, the Americas grew 8%; Europe grew 5%, Asia-Pacific 25%, and Japan 23%.

As I mentioned earlier, currency added four points of growth to revenue for the quarter, net of our hedging program. The positive impact to EPS was approximately 7% or $0.07 including foreign currency impacts accounted for in revenue and other income.

First quarter non-GAAP gross margin was 68.3%, an increase of approximately 160 basis points over prior year. This improvement was primarily due to price, currency, synergies, and manufacturing productivity. On a sequential basis, gross margins increased by 330 basis points due to increases in price and royalty revenue and higher productivity in our plants. Keep in mind that gross margins in the fourth quarter are typically lower, so sequential increase was expected.

First quarter operating expenses were $343 million, an increase over prior year levels of 8% with currency, and 6% without currency. Operating expenses increased due to increases in R&D, depreciation, and cost associated with employee stock options. Sequentially, operating expenses were relatively flat, mainly due to delaying some investments until we had a better understanding of how stimulus related revenues would flow in the quarter.

Operating income was $262 million, an increase of 27% over prior year including the impact of currency, and 20% excluding currency. Operating margin was 29.5%, representing 330 basis points of improvement year-over-year, including the impact from currency. This level of operating margin expansion resulted from improved gross margins, synergies and other operating expense reductions. As we’ve said before, our goal over the next several years is to consistently deliver 50 plus basis points of operating margin improvements.

In terms of other income, we had $1 million of interest income, $3 million from currency gain, and $1 million of expense from our mass spec joint venture. Interest expense for the quarter was $30 million.

Our non-GAAP tax rate was 30%, slightly higher than guidance due to the expiration of the federal R&D tax credit. We believe that this tax credit will be renewed at some time during the year. If renewed, the credit will reduce our full year tax rate by approximately one percentage point. Therefore, we expect our full year tax rate to be between 29% and 29.5%.

Our diluted share count for the quarter was 190 million shares. As you will recall, our share count is impacted by our stock price due to our convertible debt and employee stock options. We continue to expect a full year diluted share count of 192 million to 194 million shares, assuming an average stock price for the year between $52 and $55 per share.

GAAP diluted earnings per share were $0.48, which includes the gain of $0.14 per share on the sale of the mass spec division, $0.25 of acquisition related amortization expense, $0.03 per share of non-cash interest expense associated with the adoption of APB 14-1, $0.08 per share of business integration cost and other items, and $0.17 per share of accelerated amortization of debt issuance cost resulting from the early repayment of debt.

On a non-GAAP basis, which excludes these items, diluted earnings per share were $0.87, a 21% increase over last year.

Moving on to the balance sheet and cash flow, our ending cash and short term investments were $642 million. This compares to last year’s balance of $648 million. Cash from operating activities was $71 million, capital expenditures were $30 million, and free cash flow was $41 million. As a reminder, free cash flow is lower in the first quarter due to the payout of annual employee bonuses.

Return on invested capital increased 0.5% to 8.6%. We are making good progress towards our goal of a 10% return on invested capital in the next couple of years.

Paying down debt continues to be our top priority. To that end, we use the proceeds from the sale of the mass spec joint venture and the bond offering, as well as cash on hand to pay off term loans amounting to $1.97 billion. As a result, our ending debt as of March 31st was $2.64 billion. This balance is made up of our convertible debt of $1.15 billion and senior notes of $1.5 billion.

Our leverage ratio is approximately 2.7 times, and we still expect to be between 2.0 and 2.5 times by the end of the year. Since the merger of Invitrogen and Applied Biosystems, we’ve paid off $900 million in debt.

I’ll now move on to our expectations for the rest of the year. Our full year guidance is unchanged. Revenue growth is expected to be in the mid-to-high single digits and EPS is expected to be in the range of $3.30 to $3.50. As we stated in our Q4 call, the impact from the NIH stimulus is the main driver between the mid- and the high-single digit revenue growth.

As Greg mentioned earlier, the impact from the stimulus was approximately the same as we saw in the fourth quarter of last year, $10 million. At this point, we expect that the impact of stimulus funding will be spread over a longer period of time with more of the spending now pushed into 2011. We’ll keep you updated on the impact of the stimulus funding as we move through the year.

As is our practice, I will also give you a few specific items to take into consideration for the coming quarter. First, in regard to the stimulus, as we stated on the Q4 call, we intend to reinvest approximately half of the operating profit from the stimulus back into the business to fund future growth opportunities. These reinvestments will begin in the second quarter and will be primarily focused on R&D and commercial projects in emerging markets such as China and India.

Gross margins are expected to decrease sequentially as price is normally strongest in the first quarter. Additionally, in the second quarter we expect to sell a higher mix of instruments, which are lower margin than our consumables.

Operating expenses are expected to increase sequentially due to increases in investment in emerging markets and R&D as well as the full quarter impact of new hires and merit increases that went into effect at the beginning of April. Our currency guidance is unchanged. We continue to expect the impact on revenue will be one to two points of additional growth for the year, including the impact of our hedging programs.

And lastly, we’ve received questions on the impact to our business of the eruption of the volcano in Iceland, and we are pleased to report there has been no material impact on revenue. Delivery times did increase slightly due to a switch to – a switch from air to ground freight. However, we were able to supply our customers from stock at our European distribution centers.

And with that, I will now hand the call over to Eileen for Q&A.

Eileen Pattinson

Thank you, David. Because of time constraints, I’d like to ask everyone to limit themselves to one question and one followup question. If you have additional questions after that and you would like to ask please get back in the queue and we can take any remaining questions on the post call scheduled for later this afternoon.

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 Baird. Please proceed.

Quintin Lai – Robert Baird

Hi, good afternoon. Nice start to the year, guys.

Greg Lucier

Thank you.

Quintin Lai – Robert Baird

First question, Greg. With respect to the NIH stimulus and it’s getting – it looks like it’s going to be spread out a little bit further, could you tell us a little bit about what are your customers doing, is it just being more cautious? And then with respect to your reaffirmed guidance, is it that other markets or new products will help make up for that little push-out?

Greg Lucier

Well, Quintin, I think the first quarter shows that even with a lower stimulus spending than perhaps we all envisioned we still grew organically at 10%. And so I think it shows that the teams are executing and that we may be perhaps gaining share, and so as we look at now stimulus being spread out over more quarters than we originally thought, I think what we are counting on and we’ve demonstrated it that we can execute, we can grow, and still achieve the financial estimates that we’ve given you and others for the 2010 year.

Quintin Lai – Robert Baird

And then just a quick followup, what percent of your sales are being generated by new products over like the last two years?

Greg Lucier

Eileen may be I will turn that to you in terms of that particular fact.

Eileen Pattinson

We actually haven’t given out that level of details in terms of new – revenue generated by new products, but we’ll get into more detail, Quintin, at the analyst day in June.

Quintin Lai – Robert Baird

Super, thank you, guys.

Operator

Our following question comes from Tycho Peterson with JPMorgan. Please proceed.

Tycho Peterson – JPMorgan

Hey thanks for taking the question. David, in your comments a minute ago, you just talked about some of the commercial investments in China and India. Can you elaborate a little bit on what that entails?

David Hoffmeister

Why don’t I hand that over to Bernd.

Bernd Brust

Hi, Tycho, how are you. In China and India, I mean the focus really continues to be for us to get closer and closer to our customers, that really that means a couple of things. We continue to invest in our IT infrastructure, making sure our websites are in local language and has accessibility to local markets that way as well as continuing to invest in direct sales forces for both those countries.

Tycho Peterson – JPMorgan

Okay. And then with regards to the flow cytometry business, you’ve talked about that being a pretty large market; I think $1.7 billion or so. Can you talk a little bit about how the early reception to Attune has been and how you are approaching the go-to-market strategy?

Greg Lucier

Mark, you want to grab that one?

Mark Stevenson

Yes, I can add to that. So, yes, we see it’s a big opportunity, actually $1.4 billion was the number we put out for the size of the market. We’ve just started shipping our first early access units to customers here in the U.S. and shipped our first units into Europe. The reaction has been very positive, particularly around the ability to detect rare events, so the ability to slow the flow down and to do something that other systems can't do in traditional flow has been well received by the market.

Tycho Peterson – JPMorgan

Okay, and then, Mark, just one last one on the enhancements to SOLiD that you highlighted at EasyBead. Can you talk a little bit about how EasyBead has done and what the customer reception has been to SOLiD 4?

Mark Stevenson

The customer reception on EasyBead has been very positive. I mean really that was one of the major bottlenecks they were finding. And so just being able to automate that front end is a big relief for many of those customers who wanted to get into the accuracy, but needed that automation up front.

And then on SOLiD 4, really the combination of the new pricing and the roll out of the new software and system in there has been well received. We’ve been very active in this quarter in rolling that out and a good update on the SOLiD 4; we had our best quarter ever as you saw in our results.

Tycho Peterson – JPMorgan

Okay, thank you very much.

Operator

Our following question comes from Doug Schenkel with Cowen and Company. Please proceed, sir.

Doug Schenkel – Cowen and Company

Hi, good afternoon.

Greg Lucier

Hi.

Doug Schenkel – Cowen and Company

So, first question, I believe you said that there were some signs the biopharma end market is starting to improve. Could you just provide a little bit more color in terms of exactly what you are seeing and would you be willing to tell us what biopharma sales growth is incorporated into your guidance?

Greg Lucier

Well, in the latter part, I don’t think we are willing to disclose that level of detail, but on the first part of your comment, as we look at the first quarter of 2009 and then compare it to the first quarter of 2010 there clearly has been a recovery in research spending across the biopharma customer base for us. Now, it’s still not having returned to 2008 levels, but it’s coming back quarter-by-quarter nicely and that type of incremental return is what we have thought about and included in our 2010 estimate.

Doug Schenkel – Cowen and Company

And any chance you would be willing to speak to whether you are seeing demand across all areas of pharma spending, meaning is it more an early-stage or it’s late-stage, do you have that level of detail available?

Greg Lucier

Well, screening campaigns as an example greatly dropped off when the economic crisis hit. We are starting to see screening campaigns return again. And we are also seeing more spending back into the basic research areas as well. And so I’d say there is just overall a better tone and tenor to the research spending in that customer base.

Doug Schenkel – Cowen and Company

And one more question, Greg, I think you were over at the GET conference today at Boston or was that I think you were scheduled to be there. You know there is a decent focus I mean the focus of that meeting was on personalized genomes. One of your challenges in second generation sequencing has been the fact that you were second to the market. Do you expect this challenge that you’ve had over the last couple of years with SOLiD to be different in this area of sequencing, I mean do you think you are better positioned at personalized medicine?

Greg Lucier

Well, I think as Mark referenced, we believe SOLiD has a distinct accuracy advantage versus other platforms, and customers that are discriminating are starting to understand that and we think that really allows SOLiD to be a preferred platform for medical applications. And that’s where all our efforts really ever more are focused is this move more towards the clinical application of sequencing. So, that is, as Mark said, why we had one of our best quarters ever in SOLiD and why we feel that while we may have been second, we might just be first in terms of the medical application of sequencing.

Doug Schenkel – Cowen and Company

Okay, that’s great. And actually, if can slip one more, and, Mark –

Eileen Pattinson

Doug, you need to get back in the queue.

Doug Schenkel – Cowen and Company

You got to catch on, okay. Alright, I will get back in the queue. Sorry about that and thanks for taking my question.

Eileen Pattinson

Thanks.

Operator

Our following question comes from Marshall Urist with Morgan Stanley. Please proceed, sir.

Marshall Urist – Morgan Stanley

Yes, hey guys, good afternoon. So, first question, if we just cut the business as consumables growth versus instruments in the quarter, can you tell us kind of what the relative organic growth rates were?

Eileen Pattinson

So, Greg, I can take that. We actually grew low-double digits in both areas of the business.

Marshall Urist – Morgan Stanley

Okay, great. And then just I mean I realize that you may be pushing out some of the stimulus into next year, but maybe talking about – so are expecting kind of this $10 million level to continue over the next few quarters? Do we still see some incremental growth off of that and kind of is that making you comfortable still with organic growth guidance for the year.

Greg Lucier

Well, we feel comfortable about the organic growth guidance for the year. We’ve reaffirmed that. But in terms of particular amount of stimulus in the ensuing quarters, I will defer it to you, Eileen, in terms of disclosure.

David Hoffmeister

Well, I think (inaudible) Greg, this is David, if I can add, in our guidance, in our revenue guidance we’ve said a growth for the year of mid-to-high single digits. And that basically covers that range of stimulus. So if we get more stimulus we’ll move towards that high-single digit growth. Lower level of stimulus that we have we’ll be closer to mid-single digits. And I think no one knows. You know we are watching it very closely. Bernd has a dedicated team that’s following it, but it’s really beyond our control. We’ll just see how it flows out.

Marshall Urist – Morgan Stanley

Okay, great, thanks.

Operator

Our following question comes from Jon Groberg with Macquarie Capital. Please proceed, sir.

Jon Groberg – Macquarie Capital

Hi, thanks a million for taking the question. Just two questions. The first is you mentioned on the Genetic Systems and CE that you continue to see some growth and I am curious one of the labs that reported last week was saying that even though people are very interested, states are very interested in forensics and human identification, that given the budget situation that many of these are there, just not able to do what perhaps they would like to do. And I am just curious if you are seeing any of that impact or expect to see some of that impact as you go throughout the year?

Greg Lucier

Mark, you want to handle that one?

Mark Stevenson

Yes, I mean so far our demand for the forensic sample analysis far outstretches both capabilities of lab and to some extend funding. So to the extent there is more funding available, I mean this year we were fortunate The Debbie Smith Act here in the U.S. was reauthorized fully at $151 million and that gets trickled down to the states. Clearly, the states are under some pressure, but mostly we see the political pressure and will always still to fund the increased DNA testing both here in the U.S. and as we’ve seen internationally with Japan coming on board and strong growth in other countries around the world. It still is a double-digit growing market for us.

Jon Groberg – Macquarie Capital

Okay. And then, Greg, one of the aspects of the story that was very interesting about in vitro and maybe it’s gotten lost a little bit is your e-commerce channel. And just I noticed that you are doing pretty good 18% in the quarter. Maybe you can just talk about any initiatives you have there kind of where that’s falling and the relative importance of where you look to invest looking forward?

Greg Lucier

Well, we have a goal internally to try to surpass the $1 billion of e-commerce across both the Invitrogen site and the AB.com site, which you know a billion dollars of e-commerce I think in any industry there is probably only a handful that are doing that level of sales. When we combined the two companies, we combined the two e-commerce teams and actually added to them and so we’ve got a very large team and infrastructure now. And as Bernd said, the real work is to add what maybe as some sophisticated features in other industries into this one, and more importantly in some way is to localize the sites into China, into Japan, into other languages to really drive that revenue growth and it’s been very successful for us and so we continue it.

Jon Groberg – Macquarie Capital

Thanks a million.

Eileen Pattinson

Operator?

Operator

Our following question comes from the line of Steven Lichtman with JMP Securities. Please proceed.

Steven Lichtman – JMP Securities

Thank you. Good afternoon. First question I had was, did this quarter include any placements of SOLiD to Ignite and if not when is that expected to start this year?

Greg Lucier

Bernd, I will turn that to you.

Bernd Brust

Hi, Steven. No SOLiD units were placed with Ignite yet. As you know, Ignite is still finalizing its business plans. We are all set to continue to partner with them as they finalize how they will get to commercialize soon here. So, at this point, now SOLiD units have been place.

Steven Lichtman – JMP Securities

Okay. And then just the follow-up on foreign currency, may be just a little bit more details on the hedging program, just given the strengthening of the dollar, we are still keeping it in that 1% to 2% range. How are you keeping it still in that positive 1% to 2% impact of the top line and do you expect the bottom line impact to be the same as you thought a couple of months back? Thanks.

Greg Lucier

Yes, at this point we don’t see any significant change in our projection.

Steven Lichtman – JMP Securities

(inaudible)

Greg Lucier

No, again either the top line or the bottom line should still be covered by our guidance.

Steven Lichtman – JMP Securities

Okay, great. Alright, thank you.

Operator

Our following question comes from Derik De Bruin with UBS Capital. Please proceed.

Derik De Bruin – UBS Capital

Hi, good afternoon.

Greg Lucier

Good afternoon.

Derik De Bruin – UBS Capital

Hey, I jumped on the call late, so my apologies if you have asked this, but I am curious just on the Cell Systems strength, I am curious just like have you seen a real boost from the stem cell initiatives for that funding was from – coming from California. They had to build (inaudible) has any real meaningful funds come from that or have you seen – as that tied up the budget? And I also kind of want to take that on just a followup on the Cell Systems, so it’s like what are you seeing in terms of bioproduction, picked up yet? Have some of the recent contamination issues at some of the big companies, have that had an impact on your customers getting more concerned about quality control?

Greg Lucier

Well – I mean this is Greg. Overall, Cell Systems had a very good quarter and as you referenced bioproduction had in particular a good quarter. And the contamination issues you referenced didn’t impact us, but as you say I think further stimulates another part of our business, which is – use of PCR technology and quality control. So, we see a very robust future of applying that technology to bioproduction.

On the stem cell side, as you know we started that business several years ago and brought in some real strong leadership and that’s a business now that continues to grow at very strong double digits spurred on by NIH work, California, overseas, and just the general move towards primary cell usage. So, it’s been a great business for us and continues to do so.

Derik De Bruin – UBS Capital

And just one quick followup question. I just jumped on late, but the R&D spend was a little bit below where I thought it was going to be tracking for this quarter. Are you still expecting that to ramp up specifically towards the back half as you move forward the year?

Greg Lucier

Well, as we said in our guidance, in the second quarter, we do plan incremental investments in R&D and so you will see the R&D line tick up going forward here.

Derik De Bruin – UBS Capital

Great. Thanks.

Operator

Our following question comes from the Jon Wood with Jefferies. Please proceed, sir.

Jon Wood – Jefferies

Hey, thanks a lot. So, it looks like you will be with – I mean I had you below your – within your target leverage ratios, but I think I heard David say 2.7. It looks like you will be well within that in the second quarter. Is it reasonable to assume there are some share repurchases that could begin here in the second quarter?

Greg Lucier

Well, I think our use of capital hasn’t changed. So, number one use is pay down the debt and you are right, Jon, we want to get between 2.0 to 2.5 times and that we have said we’ll certainly be there by the end of the year. I don’t know if we’ll be there in the second quarter. We also, in terms of paying down the debt, we have a convert that’s callable in August. That’s $350 million. And at the current level of stock we would call that at that point in time.

Once we are within our range, and we have been, second use of our cash is to look at acquisitions, primarily tuck-in and key technologies. And then our philosophy still is to return excess cash to shareholders. So, at that point we would look at share buybacks, but that will probably be end of the year or 2011.

Jon Wood – Jefferies

Okay. And are you willing to disclose anything, I mean I know you announced a tuck-in today, and then I saw on the tape about a month ago a German Company, (inaudible) disclose what in terms of invested capital to assume from these deals in the second quarter.

Eileen Pattinson

So, Jon, we haven’t released any information around those two acquisitions in terms of more than what you’ve already got.

Jon Wood – Jefferies

Okay. And the only way you can pay down debt at this point right is the convert, right, because I think you are fixed on the senior notes side at this point. Is that correct, David?

David Hoffmeister

Yes, that’s correct. We have the $1.2 billion roughly of converts outstanding that are – have put call dates over the next three years.

Jon Wood – Jefferies

Okay, thanks a lot.

Operator

Our following question comes from Jeff Ares with Leerink Swann. Please proceed, sir.

Jeff Ares – Leerink Swann

Hey guys, thanks for taking the question. Going off of the earlier question about SOLiD and TGen, I remember when that was announced at the time you said there were more potential deals like that in the pipeline. I am wondering if you can provide us with an update on that.

Greg Lucier

Mark and Bernd?

Mark Stevenson

Yes, you will see in the coming pipeline more focus as Greg mentioned where we see these interests in the translational medicine group and TGen is a great example of actually taking what we are discovering about cancer and applying that. And an example again, you saw this last quarter and was in our numbers was the group in BC Kansa [ph] which is really taking a discovery to translational medicine approach. There will be more of those during the coming year and you will see that is announced as we do those deals.

Jeff Ares – Leerink Swann

Okay, great, thanks. And as a followup, could you provide us a little bit of an update on how project Starlight is going and if you guys still target again early access customers by the end of the year?

Mark Stevenson

So, we got very good reception from the technical data that we showed at the scientific meeting, the AGBT, just tremendous interest in some of the features of the system particularly in its ability to do recursive sequencing to go back over and improve both the accuracy and the read length. We are beginning now to talk with the early access customers that saw some of these presentations and would expect to more fully engage with them at the end of this calendar year.

Jeff Ares – Leerink Swann

All right. And one – I mean you talked at the time at AGBT that you would be seeing some other data later this year. Any idea of timing for that like may be (inaudible) spring or–?

Greg Lucier

We will release some of that data as we go through. We haven’t targeted since it’s not a commercial product particularly in meetings but there will be clear experiments we’ll do and continue to share that with the community.

Jeff Ares – Leerink Swann

All right. Thanks a lot.

Operator

Our following question comes from the line of Dan Leonard with First Analysis. Please proceed, sir.

Dan Leonard – First Analysis

Hi, thank you. My first question is on the revenue guidance. Besides what you mentioned in Japan as well as tougher year-over-year comps, is there anything else that we should think about mitigating your revenue growth for the balance of the year?

Greg Lucier

David?

David Hoffmeister

No, I think that you know the two things that we mentioned were Japan, which had just a phenomenal first quarter. As Greg pointed out, that team has done a great job. But we don’t expect growth to continue at that rate in the subsequent quarters. And then the other wild card is what we’ve talked about as well is the stimulus.

Dan Leonard – First Analysis

Okay, thank you. And my followup, either Greg or David, could you walk me through the thought process in closing Camarillo and what steps you’ve taken to mitigate any disruption from that closure?

Greg Lucier

You bet. Frederick, Maryland has become ever more of the R&D center for our Cell Systems business. And we have a lot of very talented R&D people there. And so we wanted to centralize the antibody piece of that overall portfolio into Frederick. I would also say that by making it closer to our large distribution center there in Frederick, we can have much more rapid delivery times for the myriad of antibodies that we do provide.

Now, in terms of not having disruption, we’ve gotten pretty good at these transfers as we’ve brought together AB and Invitrogen and so the same team that transferred production out of Foster City in 2009 is on the job here in Camarillo and we’ve built up substantial inventories in Frederick ahead of time before we have phased out production in Camarillo.

Dan Leonard – First Analysis

Okay, thank you.

Operator

Our following question comes from Peter Lawson with Thomas Weisel Partners. Please proceed.

Peter Lawson – Thomas Weisel Partners

Greg, I wonder if you could just talk to what’s happened with the NIH, meaning what’s the drug in force behind that delay.

Greg Lucier

Well, I think that’s more a speculation than anything if were to give you answers. I think people are generally being cautious. I think they are trying to use other monies first. And I think that’s just how we are seeing this play out right now. Now, there is a deadline to this program. It has to all be spent by 2011 and so it will get spent. It’s just a question of at what pace.

Peter Lawson – Thomas Weisel Partners

Thank you. And then just as a followup on the clinical market, you talked about that. What’s your strategy there for diagnostics and can you talk in any kind of revenue number over the next couple of years for that market?

Greg Lucier

Well, we already do in excess of $300 million a year in molecular diagnostics. We, as I have said to others, have a very strong franchise and the fundamental tools and technologies that go into other people’s diagnostics test. Secondly, we continue to get our platforms, our interim [ph] platforms validated and certified. And as I had mentioned, with the new ViiA 7, that’s certainly our goal with this new PCR platform. So, we will have ever more instruments for molecular diagnostics.

And then selectively we are making smaller acquisitions like we did with AcroMetrix around molecular diagnostic controls. So we like our strategy. We think it’s kind of a smart incremental way to build out from our core strength. And it’s giving us nice growth.

Peter Lawson – Thomas Weisel Partners

Okay, thank you so much.

Operator

Our following question comes from Ross Muken with Deutsche Bank. Please proceed.

Ross Muken – Deutsche Bank

Good evening. So, as we think about kind of the portfolio as you have evolved it, we’ve obviously had a great amount of new product introductions and you’ve set this sort of goal to grow above the market. I mean as we look out on kind of the longer term basis, as you look at sort of the biopharma and academic markets, I mean is your view on sort of the growth trajectory there changed at all, whether it’s based on global mix or sort of what’s gone on from recovery perspective broadly from – in terms of the economy?

Greg Lucier

You know, Ross, our view hasn’t changed. We actually have remained confident that 2010, ’11, and really as much as anybody can have a portal into the future of 2012 look pretty good for us. And so we think the next couple of years just due to our disciplined execution, our international footprint, and all of these new products continuing to come out of the R&D labs, we feel we can continue to grow above the market, as we have demonstrated.

Ross Muken – Deutsche Bank

Thanks a million, Greg.

Greg Lucier

Yes.

Eileen Pattinson

Thank you. This concludes our first quarter 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 followup Q&A call for investors and analyst at 7’O Clock PM Eastern Time. You can find dial-in information on the Investor Relations page of our website and then in the press release we issued this morning. Thank you again for joining us.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect and have a wonderful day.

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