Agilent Technologies' (A) CEO Bill Sullivan Presents at Goldman Sachs Healthcare Conference (Transcript)

Jun.11.14 | About: Agilent Technologies (A)

Agilent Technologies, Inc. (NYSE:A)

Goldman Sachs Healthcare Conference Call

June 11, 2014 11:00 AM ET

Executives

Bill Sullivan - Chief Executive Officer

Analysts

Isaac Ro - Goldman Sachs

[No formal presentation for this event]

Question-and-Answer Session

Isaac Ro - Goldman Sachs

Okay good morning everybody, thank you for coming and welcome to the 35th Goldman Sachs Healthcare Conference. I am Isaac Ro, The Life Sciences Analyst very happy to have Bill Sullivan, CEO of Agilent here with us. As most of you know it’s been quite a busy last 12 months of the company. So for those of you on the webcast as well as those of you in the audience please feel free to send me an email if you want to ask a question or raise your hand we’ll get a mic over to you, keep it interactive but not to worry, I’ve got plenty of questions here and needless to say I am happy to have you. So thanks for coming and it’s good to have you Bill.

Bill Sullivan

Thank you.

Isaac Ro - Goldman Sachs

All right. So, just to start off I mean I think it’s pretty clear that we’ve seen a lot of change in the industry around you guys not just what you guys have been doing with consolidation around it. Can you maybe just give us a sense at a very high level as you think about managing the business for the long-term the importance of scale, scale across product lines across your customer reach and how important is that?

Bill Sullivan

We’ve actually predicted internally in the company in the 2008 2009 time period that we knew that this industry was going to consolidated, it’s a industry was a lot relatively small players, the margins are quite high and we really do think an industrial company would come at the space, as you know two things happened Danaher came into the space as an industrial and thermal has been very aggressive and consolidating this the overall market. What Agilent strategy given in size was while a bulk of our business back in those days was some electronic measurement we really saw the future of the company in the life science analytical tool space? We have great franchise in chromatography, but believe that we really need to be a broad line supplier.

So as a result of that we made an organic investment in mass spectroscopy and then we’ve bought the Varian assets to be able to expand our product offerings across the whole laboratory. So, today and if you look at it from the core laboratory and again the laboratory is this lab that has chromatography, mass specs and spectroscopy service and support in software we’re in a very, very strong position. It’s 89% of the company, we’re number one in chromatography coleader in mass spec and I believe growth opportunities in spectroscopy as we convert all of the Varian product lines to new Agilent products moving forward; very strong position, very strong, number two in service and support and number one in chromatography consumables. So our strategy in this consolidated market is make sure that we had a very, very strong position inside of these core labs, in regards with the food lab, energy lab or a pharma lab going forward.

In addition to that, we have 11% of the company moving into the clinic and diagnostics, it's an obvious adjacent space to be able to apply our capability, again we've done that through organic growth, through our Microarray, SureFISH, SureSelect technology and of course the recent acquisition in Dako gives the real beachhead in pathology.

So our focus on the clinic has been in the cytogenetics research labs and the pathology labs. But the message I would leave with you even in this consolidated market Agilent is very well positioned inside of the core analytical laboratory.

Isaac Ro - Goldman Sachs

Maybe if you could just add, spend a minute or two on product specifics, we've got the ASMS Conference coming at next that’s an obvious the important product franchise for you guys. Talk a little bit about between not just an aspect but also obviously your strategy to continue to be number one or two in a lot of these markets.

Bill Sullivan

In terms of the core, instrument platform we will continue to make investment to ensure that we have best in breed at the high end as well as having good enough and a whole spectrum of products both from lower end routine type measurement GC or LC or up into the triple quad time of light, we will also do the exact same thing in the spectroscopy area where we introduced the world's first microwave AA. We will of course continue to make investments in the whole OES optical emission spectroscopy. And so the core of our strategy has to be is to have best in class instrumentation.

But the customers demand that that they really want to have the total work flows solution related to the application that they are focusing on, again either environmental lab or formal lab or research lab, they’re very, very specific applications or research and development or verification. And that's why it’s so important that the investment we have made in our OpenLAB software is in fact continues to be executed. We believe, we are very, very close to being number one in terms of the lab software. We have double that investment to ensure that we have enterprise quality software to be able to effectively manage a total lab, both of our own equipment and or a lab with mix vendor equipment.

So I think that's incredibly important and then we also continue to make investments on the consumable side related to chromatography. So I think that's how you look at. We have to be able to provide that whole integrated solution, but the big wildcard is service and support and this has been the huge benefit of the Varian acquisition. Because we have a full line supplier and instrumentation, 20% of the company now is in service and support. We are very solid number two in this market, next to Thermo. And that ability to be able to manage the laboratory, day-to-day laboratory for customers, I think it will continue to provide us a very strong competitive position.

Isaac Ro - Goldman Sachs

As you think about -- just one follow-up there within the LC specifically. That market specifically has seen a lot of innovation in the sense that you get the higher pressure UPLC technology out there in the marketplace. Where you think we are in market adoption for UPLC; is that still an area where there is a lot of headroom?

Bill Sullivan

I think that again the high pressure system basically allows you to have more throughputs through the instrumentation; you have an improvement to sensitivity and resolution. And so this is going to be the continued migration of this technology, particularly important as many of these LCs or in front of the mass spectrometer that has much more, higher sensitivity and resolution. I believe that that will continue to move forward and that the growth part of the industry is clearly going to be in the higher performance instrumentation. And we even see that on the GC side where we have by far the largest market share on the GC, the continued demand for higher sensitivity, higher resolution. And it’s because of the sophistication equipment, you can get better feel of what is exactly and sample that you are testing, and of course then that feeds regulation and feeds additional testing moving forward. So I think that this industry just like most any technology industry will continue to drive demand and performance as we go forward.

Isaac Ro - Goldman Sachs

Just two other questions on the life science and the product portfolio, one around NMR and the other one on genomics. On NMR that’s an area where you guys have retrenched early part of last year. Give us an update how that’s going with your goals out for that business?

Bill Sullivan

So what we have done in terms of the NMR, our focus is how do we get this business back to profitability under Agilent to be very, very clear when I am talking about as the profitability of the hardware. Our service and support business and NMR is very profitable and that’s the different part of the organization. So we really demand each of the hardware divisions have to be able to deliver very substantial operating profit.

We have taken a couple of approaches to that. First of all, we have exited the OEM business where we made the big MRI magnets, the OEM magnets, we are exiting that business, but we still have I think roughly 18 months of backlog that we have to ship to meet customer requirement dates. We have transferred the consoles and the probes into our Penang facility. We have redesigned those to try to get cost out of them moving forward. We have a lot of work on the magnets, the biggest issue, the magnets are relatively straight forward, but the set up of the magnets, how quickly can we set them up, the efficiency of that is really important. We introduced our ProPlus, which is our first new Agilent product into the space that customer sees a real value. But the real key for us is not only just to make sure that we have a more efficient manufacturing process, we have to be able to come out with products that are clearly competitive against the other guy in this marketplace, particularly for us in the 400 to 700 megahertz area. And I think that’s really where the sweet spot of the market. This is a work in progress. The time taken order to delivery is a very long time and so this unfortunately is multiyear effort but we continue to make progress and we’re absolutely committed to really be a very credible supplier in this market.

Isaac Ro - Goldman Sachs

So it sounds like the area and the part of the value chain if you think about being a full line supplier that NMR provides is so that its worth making that investment for you guys to stay in that business?

Bill Sullivan

Yes, absolutely. I mean I -- and again, we are patient company. What’s happened is happened, and I am absolutely convinced the team will be able to offer our customers truly competitive products, of which we can actually make an acceptable return.

Isaac Ro - Goldman Sachs

Last one on genomics, that’s obviously an area of great change, you have a nice franchise there with couple of interesting products that have really done well. And at the same time, you are seeing competitors throwing capital at a number of assets, mostly in potential next gen sequencing platforms, you got the big grower in the room as well, how do you think about creating value in that business along what you have in the context of what other companies are doing?

Bill Sullivan

Yes. So the big debate that we have and again I think it’s in the industry is what will sequencing look like in gen 3, gen 4 moving forward. As you alluded to our target enrichment capability continues to be number one in the market, we have a great franchise, I think we have some very good software associated around our whole genomics effort and in our whole GeneSpring software product offerings and the issue is what is Agilent going to do from a reader moving forward in relation to clinical test. In the pathology area, we believe tissue based pathology testing is not going to go away, there will be continued demand for more and more advanced staining, the whole area of digital pathology is going to continue, but we know that there will be more and more genetic testing of cancer tissues as we move forward. And so the big debate that we have is what is our offering are going to be there, we obviously have the target enrichment part of that. We do have the capability to develop the whole integrated test with a partner to be able to provide that as a total workflow solution for the customer moving forward. But we have to be right to make sure that that reader and what it is going to look like and how we get that is in fact going to be what the needs are going to be required in the future as more and more genetic testing goes into the laboratory.

And so that’s the issue that we have moving forward and I’ve been very public about this if we want to do something we would like to have a product in the 18 month time period and once we get passed that the risk factor [to us] just goes very, very high just given the uncertainty of exactly what is the ultimate reader going to be in the industry.

Isaac Ro - Goldman Sachs

And that’s given the block can you change you want to have an 18 month to find the site virtualization.

Bill Sullivan

Yes.

Isaac Ro - Goldman Sachs

Okay. Just last here on the genomics and what uses the ducktail into diagnostics and then the opportunity incrementally seems to be that pushed the product, the technologies out of research labs and into clinical lab. There is a lot of uncertainty there because on the one hand it seems like the technology has a ton of potential utility but you don’t have the pathway for reimbursement. So give us a view on how the clinical market will shake out for genomics just as an absorber here?

Bill Sullivan

I think it’s going to, well, it’s going to happen moving forward. There are huge ethical moral issues that are going to have to be sorted out by society moving forward. And so it’s going to take longer than what we imagine moving forward. But where we are today in pre-needle, post-needle testing, nature fertilization testing, all of that this is enormous capability that is available to society and society is going to have to decide how it’s going to be used moving. But just having daughter they said that my second grand job is amazing how much genetic testing is already going on today to try to identify feedback from the fetus and I think that that work is going to continue and we have a very, very strong position in that area, the whole cytogenetics area.

Isaac Ro - Goldman Sachs

And really wish you well. In diagnostics, you have obviously the Dako franchise is at starting point to really get to a junk start. How do you think about [clinic eye] on top of that, there is obviously a lot of other areas in diagnostics where you don't yet have a platform. So, with Dako the starting point, how do you build the clinical on that?

Bill Sullivan

So, right now our focus has been in the cytogenetics and pathology area moving forward. The pathology lab is different than the cytogenetics lab, we do believe that is going to come together overtime and that is our strength. Our focus right now has been depth not breadth, every acquisition we have made has always been associated to some core capability that we had. In the example of Dako we had our own FISH technology for advanced staining that we have developed ourselves and so we will be very, very prudent to make sure that if we go to another lateral that in fact that we have core capability that we can link into that moving forward.

So right now it’s all hands on deck to make sure that we hit a return on what’s 11% of the company moving forward.

Isaac Ro - Goldman Sachs

Can you talk about some of the adjacencies around Dako that would make sense dramatically to build on to once you get to the other side?

Bill Sullivan

Yes. The whole area is going to be in the genomics area. And I mean that is by far the most obvious area moving forward. The big debate on the Class one immunoassay is the whole role of mass spectrometer into the clinic, we already do a lot of work in pain management and testing on people who taking some sort of opioid derivative.

And so that's really the real debate of -- and that's clearly on an adjacent space moving forward. I am still somewhat skeptical in terms of how much the mass spectrometer will really penetrate into that space. You are also seeing a lab develop tests, a lot of work that’s in the whole protein biomarker area, where people today are using mass spectrometers for example on some various cancers through biomarkers.

And so that's the obvious one that we already participate today, the question really comes in is what is the mass spectrometer really have to look like to be a Class 3 device and to really be certified to be able to do these types tests.

Isaac Ro - Goldman Sachs

Well so have mass spec already.

Bill Sullivan

Absolutely. But there are other lab develop tests. There are Class 1 devices there. We have not made the efforts and moved that into a Class 3 device, for our Class 3 tests.

Isaac Ro - Goldman Sachs

It sounds like there is a lot of stuff here, there is genomics, there is the mass spec that you already in the staining. I mean there is a bunch of different directions, how do you prioritize them and how do you, when you think about allocating the capital of the Agilent survive company. How do you prioritize those things?

Bill Sullivan

Pretty straight forward. I mean first of all, because of our manufacturing efficiency, we're able to spent more in research and development and our competitions as per [SAM] we have to be careful at the end of the day somebody with an absolute budget much bigger than yours we'll eventually win overtime.

And so we have to -- that our number one priority is on the pathology side. We have got to get Dako up to market growth rate, we've got to be able to get the Agilent FISH Technology on a new auto standard moving forward, we continue to have to drive all of our effort into the clinic in terms of the genomic side moving forward. And we, I believe can continue to make advances in mass spectrometer in Class 1 type lab develop tests moving forward.

Our focus right now and I have been very, very clear is that we've got a driver operating margins into the 20s. We have to drive our return on invested capital higher moving forward and we just have a lot on our plate, so right now is executing the strategy that I believe we clearly articulate it moving forward, get the separation done and we are going to see, we are going to have still very, very strong balance sheet moving forward and then decide what is the next strategic investment we want to make.

Isaac Ro - Goldman Sachs

Last question on diagnostics then we’ll move onto financials. It sounds like from everything you said that if we look 12 months, 18 months out, as you guys are sort of independent and able to prioritize your resources, is it fair to say diagnostics is the number one area of investment and focus that combining the new company will have tapping for incremental growth?

Bill Sullivan

If you look at the overall business that we have, the core lab instrumentation business is going to be in the 4% to 6% growth. Our service business of course has been a lot higher than that, a lot of that is as we are going through a phase where a lot of the customers are outsourcing this service and support. And so we will pick that up and that will kind of eventually (inaudible) out to the overall growth of the market.

We believe that the diagnostics opportunity we have is going to be 8% to 10% growth moving forward and that’s why we made the bet. We believe that that will be the fastest growing part of the business. And you see it already in the data that we have, our fastest growing part of our business has been in our clinic and diagnostics business already is the strongest part of the business, I mean quite frankly the kind of lousy life science quarter last quarter which we are saying as an anomaly but the core clinic and research grew 7% last quarter.

So that really is from a just the size of the market, the opportunity and how small we are. I do see that as the long term growth driver for the company.

Isaac Ro - Goldman Sachs

Okay. You mentioned the life science quarter being a little challenged, so maybe just a quick update on how you feel about how the team’s executing in the context of the rest of the fiscal year that sort of like the shift, is it still your view that the business until over the back half?

Bill Sullivan

Absolutely, we gave the guidance last month and what we thought the second half of the year is and again that’s our view of what will happen.

Isaac Ro - Goldman Sachs

Okay. And maybe just as segue to that the time to do a quick tour around the world. There is a lot of anecdotal things changing in the global markets, particularly in the emerging markets. So if we start for example with China, you’ve always had a strong franchise there. The economy there has slowed down a little bit but at the same time it seems like it’s relatively stable. So is it fair to say that that’s a reflection of what you guys are seeing at least in the Agilent side?

Bill Sullivan

I think the Agilent situation is that business in China has slowed down. We believe that the reorganization of the China FDA is going to impact to that moving forward. We have had the first mover advantage in China that’s clearly disappeared where we are turning in 40%, 50% growth numbers. China is the biggest country and the fastest growing country in this space and so there is just enormous competition for each one of these tenders that go out. And so, you have a slowing environment and a much more competitive environment. And quite frankly in the short term until you manage through the compares, we are at a disadvantage because we are the person to be just given our past performance there.

Isaac Ro - Goldman Sachs

India, you had changes in the local government there, hopefully more funding to infrastructure investment, at the same time we know a lot about the maturation of the generic pharma industry there. So talk a little bit about your views in India going forward, is it reasonably hopeful?

Bill Sullivan

Well it’s hopeful in the sense and again being an outsider that the government hopefully would be more pro business, more investment; deal with the infrastructure with China. I also believe that the industry itself is going to have to reinvent itself that obviously had a great run on the generics area but they have to be able to meet FDA demands in terms of the quality of the manufacturing, their manufacturing process moving forward. They are going to have to deal with all the biosimilars and what are they going to do as we go to biologics moving forward. And so I think the industry itself and the India is going to have to also reinvent itself after a very high run. So, we’re hopeful that it gets better moving forward but government changes take a long time to move forward and reinventing themselves also takes time.

Isaac Ro - Goldman Sachs

Sure. Let me just wrap up with Russia and South America. Russia’s geopolitical uncertainty and then in South America, you’ve got couple of major sporting events, the World Cup, the Olympics, so potentially reasons to be optimistic on the infrastructure spend with an eye on moving, some spending disruption in the short-term. So on those two items, maybe an update on how you’re seeing the business trend?

Bill Sullivan

So, in terms of Russia, this is more of an issue for Keysight. Keysight does substantially more business in Russia than the new Agilent does. And so the Russia and the issues that on the new Agilent are immaterial.

In terms of Latin America, the vast majority of the business is in Mexico or in Brazil. Obviously anytime there is some sporting event; people put a lot of investment in drug testing and so forth. Brazil has been the growth engine, mostly in their efforts to try to bring generic drugs to large parts of the population moving forward. The impact in Brazil has been more of their economy, some of the economic and political issues they’ve had in Brazil moving forward. And again, not to say any disrespectful, Latin America, but we’ll get great runs and then there will be some sort of kind of speed bump that you have to be able to manage through. On the other hand Brazil with over 200 million people given their investments in the pharma industry, their ag business, we’re very, very excited about the opportunities we have, we continue to make big investments. And of course, our business in Mexico has been quite solid for many, many decades. So, the real growth opportunity long-term is really in those two countries, with Brazil having the theoretical upside as being really a real player in the global economy for us.

Isaac Ro - Goldman Sachs

Okay. I think if we just bring things back home, you obviously hopefully in the short strokes here getting done with the separation of the two companies. Just remind us will you stand there, what are some of the key operational hurdles you need to clear between now and the time the deal finishes up?

Bill Sullivan

So, the big hurdle that we have is really key is the August 1st, when Keysight will be an independent subsidiary of Agilent that is going very, very well. The tables be changed we will start invoicing under the Keysight names, we'll be working with customers to get all of their backlog orders converted to make sure that when they pay us in money doesn't go to Agilent as opposed to go to Keysight. We will start funding the organization. If you looked at the recent Form 10, a lot of the assets are moved and now will start put money in there moving forward.

So, August 1st is a big milestone, we've done a great job of getting registration in almost every country now around the world moving forward. And so as we go into early November, when we have the distribution than the big task again is for them to get the debt funding done and then we will go to the process of trading on this synthetic market to set the price of the two companies and then we'll do the distribution.

So, the message I would have we are right on track, things are going well and don't expect any issues as we move forward in terms of what we control in terms of execution.

Isaac Ro - Goldman Sachs

Anything from an accounting perspective is changed in terms of regulatory hurdles you need cross, it's always one of those things where you do tangle two companies as a lot of potential unknown, so maybe just from the mechanical accounting?

Bill Sullivan

No, there are no issues, I mean it's interesting, I mean just from an operational standpoint our electronics business has always been on [OERP], the life science and [apply] has always been on SAP. So splitting those things are done, we've always been very detailed in our cost accounting. So that's no issues, there are no regulatory issues, there is really no IP issues and I mean at all really no overlap moving forward. So again we're highly confident this will be seen at the IRS a tax free spend of a new entity moving forward. So I don't see anything and the only issue can be is that if, who knows what happens September the debt market. I mean theoretically outside of our control there could be some catastrophic events, but outside of that we're right on track for the separation.

Isaac Ro - Goldman Sachs

Okay. As you look at the pro forma Agilent after the deal you have an opportunity to revisit long-term profitability and goals that you want to hit for growth. And if we look at just those numbers today as they seem, the margin’s a little bit below the peer group just given the product mix you’ve a lot so opportunity. So if you could maybe talk about the top two to three prior unit put to work here to trying to improve the profitability of pro forma business?

Bill Sullivan

So we have made in terms of profitability our operating margins roughly 90% and very, very clear they should be 22%. We're going to do that in two very straight forward ways. One is that we will continue to drive manufacturing efficiency, we own all of our manufacturing facilities around the world, we separate them, we'll continue to consolidate and we believe we can improve our gross margins inclusive of any ASP erosion by one point per year, so that's very straight forward.

The second one is that we have deliberately made a large investment of developing a life science channel and our research and development is two to or three points higher than the competition as a percent of revenue. If we can in fact grow in the high end range of our 4% to 6% growth, we will grow into that investment and get the leverage moving forward, we've committed to what the incremental is going to be in the 30% to 40% range in terms of an incremental.

So what we need to do to get to 22% operating profit is very straight forward, execute our performance strategy to drive efficiency and then drive the revenue growth to absorb the investment that we have made on the life science side moving forward. So we know what we have to do, technically we can do it tomorrow and not make the investment, but I think that this is very important for us to make the investment ensuring that we have a very credible life science sales channel as well as that we are putting in this incremental investment and R&D to make sure that we have a competitive position in this consolidating market.

Isaac Ro - Goldman Sachs

One of the things that you guys have always done that I think separates you from peers is talk a little bit more on guidance standpoint about incremental margins, and returns on invested capital goals, will some of those metrics change post in terms of how you guide us for your goals in the business?

Bill Sullivan

I think at the analyst day that we had in March, we were very clear on what to expect on the model in this growth range which is roughly rounding 5% or 5.5%. We are very explicit in terms of the incremental will be. The synergies with the separation, the burden will be on Agilent. Again, we want to make sure Keysight is launched as cleanly as possible. And so we will have little bit more of these synergies, some of that will be offset as we buy down our debt to make sure the bondholders are hold, but we have been very, very clear on the model that we had shown of what type of return we will get assuming that we can hit our revenue goals.

Isaac Ro - Goldman Sachs

Okay. We are coming up on about five, six minutes also, so I wanted to stop and take some questions from the audience.

Unidentified Analyst

There has been a lot of management disruption at one of your competitors and I am wondering, has that had any impact on the competitive dynamics in LC-MS space?

Bill Sullivan

Yes. It’s hard for me in terms of talk about the competition, there is a lot of competition in this area. And I think on the chromatography side, we are in great shape; on the mass spectrometry side, we actually when we talk about mass spec, we have the GC-MS, the LC-MS and ICP-MS. And so in aggregate, we believe we are a co-leader in the mass spec area on moving forward. And then we have the big battleground over the software.

I think that the integrated supplier in this lab with the broader portfolio, best in class instrumentation with the software and applications is going to win long-term and that’s why we’ve put our strategy together. And it’s going to be interesting to see what happens in the market where people are trying to defend their niche versus broader line suppliers. And so I think history will be the answer but I am very, very pleased in where we are as we go into the separation of the company.

Isaac Ro - Goldman Sachs

Okay. Let me just kind of get back to the long-term picture here. As we think about areas to innovate, you guys have really perfected a lot of instrumentation platforms but as I think about what a lot of these technologies are doing, they are sitting on more and more data and there is a challenge of interpreting that data whether it would be genomic data, or proteomic data all of it. How do you look at -- you guys talked about investing in new software engineering, you have a big team, maybe there is a lot of visibility but you have [pigment] service. So maybe put some more detail around the investment you are making in software, how that can create competitive advantage?

Bill Sullivan

What we need to have and I believe that we are on the verge of doing that is to having an enterprise level software to be able to manage the lab and effectively collect the data for analysis moving forward. On top of that of course is the content of how the analysis gets done moving forward. This means that we have got our compatibility of drivers. I think we’re making progress in the industry to reach agreement to make sure the drivers are there. But it really is as how does the customer install, in our case OpenLAB into their laboratory and to have a very, very high quality enterprise system to be able to manage their lab, collect the data and all the associated issues moving forward that in terms of lab notebooks and all the association that goes around with an enterprise level system. We are absolutely committed to do that. We’re absolutely committed to migrate our customers. Again we have hundreds of thousands of applications based on older technology. That’s always the downside of an older company; you just have decades and decades of legacy. But we have consolidated in the company all of our software effort under one team, before it used to be segmented by product line that’s kind of been the [scar] to the industry.

We’re working on industrial or industry standards and we have in fact dramatically increased that budget to ensure that we can in fact get to market. And again by next year we will have a completely integrated chromatography and mass spectrometry platform. And so I am very, very excited about the progress that we’re making. And I believe we can become a real leader in this industry. It is highly fragmented, we would argue that we’re very closed to very, very strong number two in this whole laboratory software and very close to number one but it is the very fragmented effort right now and we’re doing everything possible to the right leadership in the space.

Isaac Ro - Goldman Sachs

Last question from me would be as we think about the dynamic of pricing that you’ve got a lot of high-tech areas in your portfolio where innovation curve just getting push forward, theoretically you should be able to recoup some price for that. At the same time lot of the budgets, whether they’d be academic or [funnel] are really relatively constrained. So, you talked earlier in the very beginning about the points of scale, we just talked a little bit about innovation, at least some kind of software. So when you put it all together in the context of your end markets, how do you feel about your ability to raise price on annual basis going forward?

Bill Sullivan

I think the way to look at it is and on price, most of us have thousands and thousands of various products. So I tend to look at it what is the gross margin number in the industry. And we track it by competitors, by their mix of products, and I’m sure they do the exact same thing. The gross margin in this industry quite frankly hasn’t changed for whole lot over a period of time. Just for what you’d said, yes the tenders are more competitive; on the flip side of it, the people are always bringing new technology, they bundle their software, they have got consumables, they try to change their mix of consumables versus hardware which I think consumables inherently have higher gross margins. So, as a result of that over time, you have a pretty stable gross margin profile in the industry and that's the attractiveness of this industry is that you don't see a lot of volatility as a result of that.

So, the net of all the gives and takes is a pretty predictable outcome, depending on the mix of the portfolio.

Isaac Ro - Goldman Sachs

What would you say the right pricing number will be going forward in your estimate?

Bill Sullivan

Actually, I tend not to look at that way. I mean we have all the data. So we have so many different products and so I track all the discounts and everything, it's all automated. Many of you know, we have a completely integrated system. I get orders on my iPhone four times a day and I get revenue every morning when I feed the dogs. So, I can feed the dogs, get fed well enough depending on the how the revenue works a day before, but the -- it's really the aggregate of the mix and how people are able to where you have pricing pressure, where can I add greater value moving forward. And that's how we tend to manage this.

And then what happens is, is that you have these big tenders in the big government where everybody says okay, I want to win this tender. And so what it will -- what type of discounts that people willing to make and then they can factor that into their overall portfolio and the gross margins.

So, I -- again when you have such portfolio with so many different products, I tend to look at the overall macro trend as a predictability of gross margin of which then drives your expense structure and then ultimate operating profit.

Isaac Ro - Goldman Sachs

(Inaudible).

Bill Sullivan

Yes.

Isaac Ro - Goldman Sachs

Alright. Thanks much for coming. I appreciate and see you again.

Bill Sullivan

Okay. Thank you.

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