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Life Technologies (NASDAQ:LIFE)

Q3 2011 Earnings Call

October 25, 2011 4:30 pm ET

Executives

Gregory T. Lucier - Chairman and Chief Executive Officer

Amanda Clardy - Chief Marketing Officer

David F. Hoffmeister - Chief Financial Officer and Senior Vice President

Mark P. Stevenson - President and Chief Operating Officer

Agnes Lee -

Analysts

David Ferreiro - Oppenheimer & Co. Inc., Research Division

Derik De Bruin - UBS

Bill Bonello - RBC Capital Markets, LLC, Research Division

Amit Bhalla - Citigroup Inc, Research Division

Jonathan P. Groberg - Macquarie Research

Daniel Arias - UBS Investment Bank, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Nandita Koshal - Barclays Capital, Research Division

Vijay Kumar - Deutsche Bank AG, Research Division

Doug Schenkel - Cowen and Company, LLC, Research Division

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Tycho W Peterson - JP Morgan Chase & Co, Research Division

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

Unknown Analyst -

Operator

Thank you for standing by, and welcome to the Life Technologies Corporation Q3 2011 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded, today, Tuesday, October 25, 2011. I would now like to hand the conference over to your speaker today, Ms. Agnes Lee, Director of Investor Relations. Please go ahead.

Agnes Lee

Thank you, Vivian, and good afternoon, everyone. Welcome to Life Technologies Third Quarter 2011 Earnings Conference Call. Joining me on the call today are Greg Lucier, our Chairman and CEO; and David Hoffmeister, our Chief Financial Officer. In addition, Mark Stevenson, our Chief Operating Officer, will be 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.

Gregory T. Lucier

Thanks, Agnes, and thank you, all, for joining our call today. I hope you've had a chance to review the press release that we issued earlier this afternoon. As you will have seen, our year-on-your non-GAAP revenue increased 7% including currency and 4% without currency. This translated to almost 30% operating margins and $0.94 of non-GAAP earnings per share. We're pleased with these results, especially given the tough macro environment we're all facing. Our broad range of consumable products continue to be sought out after customers who want to ensure the highest quality tools for their everyday research needs.

Because of the breadth of our product lines, we're exposed to all types of labs and customers that provides us with a useful perspective. Let me take a moment to share some color on what we're seeing in various end markets.

There's been a lot of discussion recently about government funding on research. In our view, it's clear that funding in developed markets is going to be less than it was historically. That said, we believe this environment has settled for the next few months, specifically in the U.S. and Europe. But there remains multiple end markets that are stable, even demonstrating very attractive growth. A few of those markets are government-funded research in emerging markets and applied markets such as food and animal safety and molecular diagnostics.

In addition, the biotech segment for us is still growing quite nicely as demand for our Bioproduction offerings increases.

As it relates to regional growth, we see the same macroeconomic trends we saw in the second quarter prevailing again in this quarter, leading to growth by region of 2% in the Americas, 5% in Europe, 14% in Asia-Pacific and a decline of 2% in Japan.

This year, we have placed a greater intensity on increasing our competitiveness in core markets. Our goal is to remain the vendor of choice by providing a complete range of product offerings that fit every level of budget and research need. Further, we continuously look for ways of adding value by providing more convenient and efficient ways to purchase from us. One such new example is our new lifetechnologies.com website, which went live several weeks ago. This new site was designed around the users that visit our website every day to find the latest scientific protocols and purchase their lab essentials. This website has been live in beta form for over 2 months, and we received extremely positive feedback from the user community. We're happy to present this new site to our customers and expect it will make their purchasing experience with us even easier and more favorable than ever.

Other bright spots within the quarter include our applied businesses such as molecular diagnostics and forensics, as well as several new product introductions. As I said earlier, the applied markets continue to present good growth opportunities for us as demonstrated through a large forensic order delivered to the Russian government this quarter. We have also just received China SFDA clearance for our 3500 diagnostics CE instrument. In addition, we have announced several molecular diagnostic collaborations recently that are worthy of note, specifically an agreement with GlaxoSmithKline to develop a QPCR-based companion diagnostic for an innovative cancer therapy. You should expect more of these types of companion diagnostic arrangements from us in the future.

Beyond expanding our presence into new areas, our innovation engine continues to deliver new products every quarter. In the past few months, we added to our consumables franchise with new reagent kits for both the research and applied markets such as our new VetMAX animal health diagnostic kit and our MagMAX kit, which is used to isolate RNA and DNA from cancer tumor tissues. In addition, we have made incredible progress with the Ion Torrent technologies and remain ahead of our technical roadmap and milestones. We released 8 important new products for this system. We also started to develop our access for the 318 chip, which is expected to launch by December. With this chip, we will achieve a 100-fold increase in throughput in less than one year. The Ion Torrent technology helps us deliver on our vision of democratizing sequencing, enabling researchers in any-size lab to access and utilize our products. We believe the market is expanding beyond large core lab, and this is what we hope to enable through our product offerings.

In addition, the trends toward decentralization and greater demand for desktop sequencing increases the need for confirmatory testing and downstream analysis. The Applied Biosystems Sanger sequencing and QPCR technologies are the gold standards for this confirmatory testing, and we expect it to continue to be an important part of the workflow as genetic research that starts in next-generation sequencing moves towards applications in other commercial markets.

In summary, we are executing well and focused on optimizing our core business. Despite the slowdown in government research funding this year, we don't expect it to get materially worse in the near future. We are benefited by the fact that we have such a diverse portfolio that we aren't tied to the fate of any one technology or end market. Nonetheless, we are repositioning the company for a slower growth environment. We are doing this by lowering our cost structure, focusing our R&D efforts and optimizing a way in which we market and sell our products. Above all else, we remain committed to continuing to provide our customers with outstanding products and services.

Before I turn the call over to David, I'd like to mention the recent management change. As of today, Bernd Brust will be taking a consultative role to work on several special projects for the company. I'd like to thank Bernd for his years of service with Life Technologies and for his help this last year as we formulized the approach into the molecular medicine market.

With that, I will hand it over to David to walk you through the details of the quarter and our outlook for the remainder of the year.

David F. Hoffmeister

Thanks, Greg. Taking a closer look at divisional results for the quarter, the Cell Systems division non-GAAP revenue was $244 million, an increase of 10% over the same period last year. Excluding the impact from currency, revenue grew 6% year-over-year. This performance was the result of solid growth in all regions and most product lines, including low double-digit growth in our Bioproduction business.

The Molecular Biology Systems division non-GAAP revenue was $426 million, an increase of 3% versus prior year. Excluding the impact from currency, revenue for the division was flat due to the general funding environment. One exception is our QPCR franchise, which grew, driven by new products launched in the last year and increased consumables sales.

The Genetic Systems division non-GAAP revenue was $256 million in the quarter, an increase of 12% over the same period last year. Excluding the impact from currency, revenue increased 8%. One of the items that positively impacted growth in the quarter was the Russian forensic order that Greg mentioned earlier. In addition, growth in this division was driven by strong sales of the Ion Torrent PGM and associated products, partially offset by reduced sales of 5500 products.

Ion Torrent sales were approximately $20 million for the quarter, an increase of 50% sequentially. We also shipped over 400 OneTouch sample prep systems. As Greg mentioned, we are currently ahead of our technical milestones for Ion Torrent, and we expect to continue to see a tenfold improvement in throughput every 6 months with this platform.

In aggregate, revenue increased 7%, or 4% excluding currency. Third quarter non-GAAP gross margin was 66.1%, 70 basis points lower than prior year. Higher price realization and productivity were offset by negative mix from higher instrument sales, lower royalty revenue and currency.

On a sequential basis, however, gross margin increased by approximately 190 basis points primarily due to lower manufacturing overhead costs, currency and a positive benefit from product mix mainly due to fewer 5500 upgrades and increased sales of core consumables. Third quarter non-GAAP operating expenses were $340 million, an increase of 4% over prior-year levels. As a percent of revenue, operating expenses decreased over 110 basis points year-on-year.

Sequentially, operating expenses decreased by $3.5 million due to restructuring initiatives and controls on discretionary spending, partially offset by an increase in employee benefits.

Non-GAAP operating income was $273 million, an increase of 8% over prior year. Third quarter operating margin was 29.4%, representing an increase of 40 basis points year-over-year. The increase in operating margin over the prior year was a result of our continued focus on realizing operational efficiencies throughout the company.

In terms of non-GAAP other income line items, we had $1 million of interest income, a loss of $3 million from currency and other items and interest expense of $31 million. Our non-GAAP tax rate was 27.1%. As you may recall, our tax rate in the third quarter of 2010 was lower than normal due to significant onetime benefits from the reorganization and integration of acquired entities.

Our sequential tax rate decreased by 80 basis points primarily due to domestic manufacturing incentives and onetime adjustments related to settlements of prior-period tax audits.

Our diluted share count for the quarter was 186.8 million shares, a decrease of 3.3 million shares over prior year. Dilution from our employee equity plan was more than offset by our ongoing share repurchase program. In the last 90 days, we've repurchased approximately 2.6 million shares for $100 million, 1.9 million of which occurred in the third quarter. This repurchase will offset nearly all of the dilution from the Ion Torrent milestone payment scheduled for early 2012. The 3 million shares associated with that payment were added to our weighted shares in the third quarter, when the technical milestones were achieved.

GAAP diluted earnings per share were $0.52, which includes $0.32 per share of acquisition-related amortization expense, $0.02 per share of noncash interest expense and $0.08 per share of business integration and other charges. On a non-GAAP basis, which excludes these items, diluted earnings per share was $0.94.

Moving on to the balance sheet and cash flow statements, our ending cash and short-term investments were $636 million. This compares to last quarter's balance of $565 million. Cash from operating activities was $174 million. Capital expenditures were $32 million. Free cash flow was $142 million. Return on invested capital was 8.6%, and we remain on track to achieve our goal of 10% return on invested capital by 2012. Our ending debt as of September 30 was approximately $2.7 billion. This balance is made up of our convertible debt of $450 million and senior notes of $2.3 billion.

Moving on to our expectations for the full year, we are reaffirming our full year guidance at this time. We expect full year revenue growth of 2% to 4%, excluding the impact of currency, and full year non-GAAP EPS of $3.70 to $3.80. We expect to exit the year at the lower end of this range.

A few more specifics are as follows: At September month-end exchange rates, currency is expected to have little or no impact on our financials in the fourth quarter. Full year interest expense, net of interest income, is expected to be $128 million. Other income and expense, which includes foreign exchange gains and losses, is expected to total $10 million in expense. The full year tax rate is expected to be approximately 27.5%. Average diluted share count for the year is expected to be in the range of 185 million to 187 million shares. Full year free cash flow is still forecast to be in the range of $625 million to $650 million for 2011, including $100 million of onetime restructuring costs.

And one final note on future expectations, we are currently in our budgeting process for 2012, and we'll be issuing our 2012 guidance early next year as we typically do.

And with that, I'll hand the call back over to Agnes.

Agnes Lee

Thanks, David. We will now turn to Q&A. [Operator Instructions] Operator, we are now ready for the Q&A portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question is from the line of Quintin Lai with Robert W. Baird.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

So Greg, I appreciate -- thanks for giving the kind of extra color on the end markets. Looking for just some more thoughts here, as you're talking about academic markets looking stable from here, have you seen a change in their behavior? Are the customers buying smaller lots, bigger lots, consumables, instruments? I'm just kind of curious on what you're seeing now.

Gregory T. Lucier

Quintin, as we said at the end of our second quarter earnings call, we probably were the first to see the slowdown in academic, just given the large footprint we have in that space and around the world. And I think you're now starting to see the same words coming from our peers in the industry. So we had about a 90-day head start on taking actions internally to this external environment, and we feel we're in a pretty good spot now. In terms of their buying behavior, I think it stabilized, as we said in our script, from when we first indicated this at the end of the second quarter. It's not gotten worse. It's not gotten better. It's a new level of frugality and conservation in terms of the money that they have. And so that's kind of what we're conveying back to our investors today.

Quintin J. Lai - Robert W. Baird & Co. Incorporated, Research Division

And then kind of as a follow-up to that, the restructuring that you're doing now, are you looking at living in this environment, and to that extent, how does that restructuring impact, let's say, like, R&D for new products?

Gregory T. Lucier

So as we had said back at the second quarter earnings call, we would undertake a restructuring starting at that point. We have executed on that, and sequentially, our operating costs have gone down about $3.5 million, but on a full year basis, much larger than that. So that disruption is behind us now, and we're moving forward. The savings are really coming from being more efficient administratively, fine-tuning the R&D programs and then also in terms of manufacturing efficiencies. So in terms of R&D, to your question, look, I think we will still spend somewhere between 8% and 10%, which is a good, robust investment in innovation. And we feel that that money is deployed in a very high-return way, and so I think we're actually comfortable with where we're now positioning R&D going into 2012.

Operator

Your next question is from the line of Jon Groberg with Macquarie.

Jonathan P. Groberg - Macquarie Research

Just 2 questions, one a macro one and then more of a micro one. Greg, I guess by almost any metric you want to look at, obviously, the stock price of Life is reflecting a value that is probably not as good as it should be relative to what's going on in the business. I mean, you have peers of yours who aren't even growing revenues that traded 2x or more your valuation. So I guess how are you thinking about where the stock is and what it is that you need to do in order to get that value reflected more fairly?

Gregory T. Lucier

You know, Jon, each and every day, we wake up and we manage the company. We don't manage the stock. We feel great about where we are positioned right now. We feel that we have a really good handle on the macroeconomic environment. And I think you can see that now reflected in our operating in margins. They're some of the highest in the industry, and as I've indicated, it could go a little higher from here. So it's a very efficient machine. It's a machine that can see the end markets clearer, probably, in some cases, sooner than others. And we actually feel that we're highly competitive now entering into 2012.

Jonathan P. Groberg - Macquarie Research

If I could just -- and maybe as a follow-up, if we're in an environment where a couple of years, as you alluded to, funding is just tough, would you be more inclined to -- and your stock just doesn't reflect very good valuation because of that funding environment, would you be more inclined just to wait through that, or would you be more inclined to try and take a more proactive step to do something?

Gregory T. Lucier

Well, I'm not sure what do something means. If do something means create shareholder value, then we're all for that. And that has to take a number of measures from driving return on invested capital higher to driving our organic growth higher, if we can, in this environment and just being smarter than everybody else. And that's what we'll be measured on.

Jonathan P. Groberg - Macquarie Research

I guess, I meant more like being more aggressive on a significant buyback or looking to do something a little bit more extreme in that sense. That was the basis of the question.

Gregory T. Lucier

Yes. And look, we have continued to return capital to shareholders, $100 million again this quarter. And we're prudent, I think, in our deployment of capital, and I think you'll see us continue to be consistent with what we've been doing over the last couple of years.

Jonathan P. Groberg - Macquarie Research

Okay, that's fair. And then a quick follow-up, if I could. On Ion Torrent, you're obviously getting a pretty big installed base, it looks like, at this point. Just curious if you can now start to give any kind of insight from an annual consumables standpoint, utilization standpoint, if you're seeing any trends that are worth sharing at this point.

Gregory T. Lucier

Yes, good question. Let me have Mark weigh in on the consumables consumption of the Ion Torrent and what we're seeing there.

Mark P. Stevenson

Yes, Jon. So as we've scaled the technology and really delivered on the Ion roadmap here, particularly with the introduction of the 316, we're now seeing good uptake on the reagent usage, and also, now we should see OneTouch. So we're getting about $50,000 per instrument, and we expect that to go higher as we go into Q4, start shipping the 318 chips yet and get close to 60K, 70K rate that we expected as we entered with this technology.

Operator

Your next question is from the line of Tycho Peterson with JPMorgan.

Tycho W Peterson - JP Morgan Chase & Co, Research Division

Wanted to start off with a question on China. That was somewhat of a problematic area for you in the second quarter, and obviously, you've made some nice progress there. Can you just walk through, Greg, if you worked through all the headwinds that you commented on last quarter on the dealer networks? And then as we think about the opportunity for the 3500 in China, how are you thinking about that ultimately rolling out?

Gregory T. Lucier

Sure, Tycho. As we said again at the second quarter earnings call, we saw China returning to its historical growth rates in the third quarter and beyond, that we had accelerated some changes at that time, and we knew they were the right changes, but we moved pretty fast. So we're very pleased to show here in the third quarter that, in fact, China did come back to near its historical growth rate at 16%. And we really believe that the changes we've made here can be built on going forward. Now having said all that, there's more work to go. We believe that China can grow faster than that, and so our goal is to, obviously, deliver on that over the next couple of quarters. In terms of the CE instrument being approved, I think that's very, very important milestone. That's an important product that a lot of content will be developed around in China. And we're putting in place some important partnerships that we'll be announcing that will make that, I think, a real stalwart and an important part of virtually every diagnostic lab in that country. So stay tuned for more announcements.

Tycho W Peterson - JP Morgan Chase & Co, Research Division

And then as we think about the genetic analysis business overall, you obviously had some nice traction with the forensics business this quarter. Can you talk about how sustainable those trends are and then any color on just the underlying CE trends? You obviously talked about the 5500 being a little bit soft, so if you could just talk about that.

Gregory T. Lucier

Sure. So the forensics business for us is one of our great franchises. In this quarter, we had the Russian tender, but through the course of the year, we always have a number of tenders like the Russian one, whether it's in South Africa or Brazil. These countries are standardizing on our instrumentation and our consumables and entering that data into their databases. It is a very sticky business. It's also a lumpy business. But it's one where we continue to establish our self as the real standard in crime-fighting using DNA around the world. So good business and lots of technology innovation to come in that area. As you suggest, it's also an important area of growth for our CE instrumentation. As we've said, CE is certainly a mature product, but it's one with some very interesting growth attributes left. We see in research, it's becoming an important tool for confirmatory testing off of next-generation sequencing. And whether it's in forensics or, increasingly now, molecular diagnostics, in validated settings, it's a product that's just at the very beginning, actually, of its life cycle. So because of its high accuracy and because it has found its way into these very important applied businesses, it's a business that, I think, people, perhaps in the investment community, wrote off too soon a long time ago, and I think we've been able to demonstrate it's a business that has real staying power.

Tycho W Peterson - JP Morgan Chase & Co, Research Division

And then just last one on -- I’m sticking with technology. It seemed like coming out of last quarter, there was some view that QPCR was going to be somewhat difficult in the near term, more on the instruments side, and needed to fill out more focus on assays. Obviously, you've introduced the QuantStudio at ASHG. Do you have a renewed sense of enthusiasm on the outlook for PCR for realtime?

Gregory T. Lucier

I'm just going to say a few words and hand it to Mark. Mark has personally been engaged in really, I think, revitalizing that business over the last 100 days in terms of how we want to reposition it, coming into this QuantStudio, which is a very important product launch. And Mark, maybe you can talk about the QuantStudio and assays and how we see QPCR going forward.

Mark P. Stevenson

So I mean, the QuantStudio builds on acquisition a couple of years ago now of the open array and really integrates to allow people to do a high range of complexity of experiments all the way from research into this validation. It also now gives us a nice portfolio at the top end there in the mid-range with our Viia 7, the entry level with our step 1 [ph] and step 1 plus [ph]. So we're well positioned to cross the range of the end systems. And also, our investment on assays, new assay format has allowed us to continue to grow that business and really use our sales channel and power and now our new website to ensure we get the attachment necessary after we sell those initial instruments. So it's working out very well, that strategy.

Operator

Your next question is from the line of Amit Bhalla with Citi.

Amit Bhalla - Citigroup Inc, Research Division

Greg, I appreciate that you're still in your 2012 budgeting process, but if I recall last quarter, you did talk about mid-single-digit revenue and double-digit EPS growth for 2012. So I'm wondering, does that still hold, or should we table those expectations as well?

Gregory T. Lucier

At this point, we're in the process of putting the plan together, and I think it's premature to comment on what it's going to be in 2012.

Amit Bhalla - Citigroup Inc, Research Division

Okay, so that's a yes. I'll take it. Can you then also go into the Cell Systems business? Obviously, Bioproduction was a highlight, but could you comment also on some of the other product categories within that group?

Gregory T. Lucier

Mark?

Mark P. Stevenson

Yes, within that product group, we have a diverse set of brands and portfolios. Really, it's all a good run rate consumable business, some of our brands like Molecular Probes have continued to be well adopted there. This is really what we had delivered to our channel and that new website. So it's really a nice diverse portfolio, and I think a lot of what we'll find just scientifically, some of the researchers as they discover genetically what's going on, they want to validate those, and they're using some of the cellular techniques to understand that. So again, the breadth of our portfolio plays well in the research lab as we work downstream just to the genetic analysis.

Amit Bhalla - Citigroup Inc, Research Division

And just a quick one on pricing. I know that was something that was a positive for you. Any way you can quantify the pricing impact in the quarter?

Gregory T. Lucier

Yes, we’ve continued to get realized price in the 1% to 2% range as we have in previous quarters.

Operator

Your next question is from the line of Bill Bonello with RBC Capital Markets.

Bill Bonello - RBC Capital Markets, LLC, Research Division

Just a point of clarification. Did you say that you now expect the 2011's EPS to be at the low end of the range of guidance, or did I hear that wrong?

Gregory T. Lucier

No, we said that we expected that both revenue and EPS that we’d be at the low end of the range.

Bill Bonello - RBC Capital Markets, LLC, Research Division

At the low end? Okay.

Gregory T. Lucier

Yes.

Bill Bonello - RBC Capital Markets, LLC, Research Division

And so -- I guess I'm just trying to -- just to understand that a bit, I get that you'll lose $0.06 of currency benefit that you had been expecting in Q4, but on the flip side, Q3 was about a $0.05 higher than the high end of your guidance range. So, what else in Q4 might be looking a bit weaker than you'd previously expected?

Gregory T. Lucier

Nothing. It's those things.

Bill Bonello - RBC Capital Markets, LLC, Research Division

So had you always kind of expected to be at the low end of the range?

Gregory T. Lucier

No, we're expecting -- we gave the range, we expect to be within that range.

Operator

Your next question is from the line of Jon Wood with Jefferies.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Just a question on mix. So, I think you guys gave some of the puts and takes the last quarter, but just to make sure, the mix was a negative year-over-year in the third quarter? What do you expect for the mix for the gross margin side in the fourth quarter?

Gregory T. Lucier

We expect -- typically in the fourth quarter, our margin is down somewhat. And we would expect that it would also be impacted this year by our increase in consumables sales. So as the PGM continues to -- on its current pace, that will have a negative impact on the margin.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Okay, so definitely negative year-over-year in the fourth. And then the last one on capital re-allocation, so you bought back some stock, I guess, to offset the Ion Torrent dilution. So is it a reasonable assumption that it's unlikely will see anymore on the buyback side until the bond payment, kind of, the cash portion of Ion Torrent how happens in 1Q '12?

Gregory T. Lucier

Could you state your -- that final question again?

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Yes. I was just saying, is it likely we will see buyback ahead of, I know you got a bond payment in the first quarter, assuming you take it out, and then you've got an Ion Torrent -- the cash portion of the Ion Torrent in the first quarter of '12. So I'm just asking, will you deploy capital in front of those 2 events? Or is it -- or should we wait until after, to see incremental buyback?

Gregory T. Lucier

I think we have to wait and see how things unfold. I mean, we purchased 100 million in the quarter, but that will essentially offset the milestones -- the amount of stock that would be a milestone payment. So, we'll see how the year unfolds and make a decision then.

Amanda Clardy

And Jon this is Amanda. Just to clarify one thing from your previous question when David answered the question on gross margin, we were referring sequential, and then you summarized that "Okay, that's definitely going to be down year-on-year", that's not what we were talking about, we're talking sequentially.

Jon Davis Wood - Jefferies & Company, Inc., Research Division

Oh, it's sequentially -- Amanda, so sequentially, there is incremental headwind in the fourth quarter?

Amanda Clardy

Yes, as Ion Torrent ramps up, as well as some of our other instrumentation. But we did not specifically say it was going to be down year-on-year.

Operator

Your next question is from the line of Derik De Bruin with Bank of America.

Derik De Bruin - UBS

So, I want to talk about the molecular biology systems. So when I start looking back over the last few quarters, yes, you go back to the start of Q1, 2010 where you had 10% organic revenue growth then it went to [indiscernible], then it was flat, then negative 1% in Q4 2010, then it's been negative 3%, negative 2% and then flat. So if you're telling me you're getting 1% to 2% price realization from most this year, that essentially means that for this year, you've had essentially no volume growth in the molecular biology business. Now, when I go back and I think about the old Invitrogen business even during tough academic funding situations, there was always some sort of volume growth in the business and the MBS business is a majority of those products. What's going on with the business, and when do we expect to see -- when can we expect to see growth again? Or does this business basically kind of tread water?

Gregory T. Lucier

Well, I think you're actually starting to see a rebound in the business, first of all, per the quarterly growth statistics you quoted Derik, so that's the first point. I think the second point is, that the 1% to 2% price is an aggregate across the portfolio, and so it happens higher than that in other parts of the portfolio than perhaps in the area we're focusing on right now. And then lastly, I would simply say that the primary area we're now focused on to bring that overall growth rate of Molecular Biology higher is in the overall QPCR franchise. And that was a bit of the question that Mark answered before. So, I think that's where we're focused. That's the work we're doing, and we hope to have that business I think coming back to reasonable organic growth rate in the next couple of quarters here.

Derik De Bruin - UBS

Well, I'm also wondering, has there been a change in the -- I hate to keep harping on this, but has there been a change in the competitive environment, have things got tougher in that market? I'm just, as I said, it just -- the trends are just kind of disturbing to me?

Gregory T. Lucier

I don't think there's been anything dramatically changing there. I think it just requires more focus on our part. I think these are things that we believe we can control better and execute better upon. And so it goes back to some of these earlier questions of, can we do things that overall drive our competitiveness and results, and the answer is yes. And I think you're now picking at an area where we have an opportunity for improvement.

Operator

Your next question is from the line of Doug Schenkel with Cowen and Company.

Doug Schenkel - Cowen and Company, LLC, Research Division

Let me start with a question that I think is a little bit related to Derik's questions. In the past, even going back to the old Invitrogen stand-alone days, when there were macroeconomic headwinds or there were concerns about the funding environment, volumes for consumables tended to hold up a little bit better than instruments, largely just because of the price point, and as we all know, in a period of concern, you can pull back on spending on capital, but to some extent you still got to spend on the consumables if you're going to keep your projects moving. The way you report today, I think it's hard to see if that's happening or not. Could you maybe just speak to anything you may be seeing in terms of whether or not that same resilience is there on the consumable side and keeping these dynamics in mind, how instruments are holding up as well?

Gregory T. Lucier

Sure. Why don’t Mark and I take a crack at this. But first, overall, the portfolio continues to be -- obviously very heavily weighted towards consumables, and the trends that you described in terms of consumables being more essential in terms of the need to reorder is certainly still in place. And that's why we think Life Technologies is a very resilient company through tougher economic times. I think the other point that I just really should come back to, on Derik's question since you bridged to it, is the fact that inside that Molecular Biology portfolio is a very large patent of state where we get royalties. And we've been very transparent and that -- some of those royalties are going down over the course of time. Now, that creates headwind this year. We're offsetting it to some extent. But that's still a headwind that we've had to work through and it's -- one of the largest drops we've had to deal with is in 2011. So that's also just a little bit of what's going on that I think should color your discussion, and when you look at those results from Molecular Biology. Mark, do you want to add anything else about consumables versus instruments.

Mark P. Stevenson

Yes. I would just add that the general thesis that you point too is still very much one that we're executing again, that the everyday needs whether there on these consumables and we have very strong brands behind these, using the Invitrogen brand, you go to our new website, you'll see all the 8 key brands listed across our website, it's very much what we're doing, and then at a more granular level, we know as people are challenged in their budgets making sure we have consumables at the right price points and the right package sizes, invest in our distribution so we get in there quickly to our customers so that's focus on that core business, it's very stable for us, carries on in that consumer ware and then you got these other headwinds against that. So, that's what you're seeing within that portfolio, and I think we'll, over time, overcome these slight quarter-to-quarter variances you may see.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And David if I could just ask you a couple cleaning up questions. If FA -- if we just look at foreign exchange rates where they are today and I apologize if I missed this, what would be the benefit on the bottom line for next year? And what's the right way to think about the annual benefit associated with the recent restructuring?

David F. Hoffmeister

Okay, on the exchange rates, what we said before, I mean, that the biggest impact would be on our hedges, that were a headwind for us this year. At the current exchange rate, they would add about $0.25.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay, so that hasn't changed a lot?

David F. Hoffmeister

No, that's the same as previously. I did say in my script that in terms of next quarter, we expect that current exchange rates -- that currency will have little or no impact on results.

Doug Schenkel - Cowen and Company, LLC, Research Division

And then in terms of the restructuring for next year, I think it was $3.5 million benefit in Q3, but what's the right way to think about that on an annualized basis as we're looking towards 2012?

David F. Hoffmeister

Yes, it was really in the quarter, it's $3.5 million in operating expenses, then we got about another $1.5 million that's in cost of goods, manufacturing overhead takeout. So about $5 million for the quarter. And what we're saying is, for the second half of the year, we expect it to have an impact of $10 million to $20 million. Yes, you can extrapolate from that to next year.

Operator

Your next question is from the line of Dan Arias with UBS.

Daniel Arias - UBS Investment Bank, Research Division

David, just a question on one of the out-year financial goals that you've targeted previously. Given the puts and the takes on the P&L and the balance sheet right now, do you still feel like a 10% ROIC by next year is a likely scenario?

David F. Hoffmeister

Yes.

Daniel Arias - UBS Investment Bank, Research Division

Okay, thank you. And then Mark, I guess one on Ion Torrent. Can you comment on the preferences for PGM consumables? Are you finding that customers are more gravitating towards the 318 chip right now for throughput? Or are they more interested in say the 14 or -- 314 for cost effectiveness as they do their initial runs here?

Mark P. Stevenson

Well, we're seeing really different applications in different price points. So the 314 which we've now priced at $99, it allows people to do small amplicons and small bacterial genomes, very efficiently, very cost effectively. And really the volume at the moment is still in the 316 chip, which is what's been available in this third quarter, we're just in early access with the 318 and as people start to look at that, with getting to one gigabyte or more, then you'll start to see different applications. So we expect it to continue to be different price points, different applications right on the PGM as people choose different applications for it.

Daniel Arias - UBS Investment Bank, Research Division

Okay. I know it is probably a little bit early, but any comments on the reception by customers to the solid improvements in the Wildfire technology?

Mark P. Stevenson

Well, we expect that the customers’ existing users as they get their 5500 up and running, will be very pleased with some of the improvements we've been making overall actually, on the 5500. And so we had good reception from some of the users as we get this improvements out and plan to roll them out in various releases to the customer base.

Operator

Your next question is from the line of David Ferreiro with Oppenheimer.

David Ferreiro - Oppenheimer & Co. Inc., Research Division

All my questions have been answered.

Operator

The next question is from the line of Ross Muken with Deutsche Bank.

Vijay Kumar - Deutsche Bank AG, Research Division

This is Vijay in for Ross. Couple of quick housekeeping questions. Could you quantify the impact of the Russian order in the Q, and well as, what was the benefit from M&A?

Gregory T. Lucier

So the impact of the Russian order was about $9 million in sales at standard margins.

Vijay Kumar - Deutsche Bank AG, Research Division

And M&A?

Gregory T. Lucier

And the M&A, it was -- the only M&A that we had it would have been Ion Torrent, and it's $20 million in sales associated with Ion in the quarter.

Vijay Kumar - Deutsche Bank AG, Research Division

Sure. And maybe one, big, big picture question. And I'm just trying to dig through Ion Torrent and given the [indiscernible] commentary on the industry excess capacity, sort of how are we supposed to think about ramp up of Ion Torrent, is it sort of in the key sense lapse depending on common funding or are people sort of making bets based on excess capacity? And how are we to think about Ion Torrent's?

Mark P. Stevenson

Yes, this is Mark. And the way you should really think about it -- there's a high end genome center market, which we're seeing less demand in that high-end capacity whether there is already a lot of capacity. Where you should look for the Ion Torrent and PGM is really this new market of desktop sequencing where researchers for $50,000 can really get going with a next-generation sequencing market, get a very fast turnaround, get a sequence run in 2 hours. And that's the market that we are seeing great adoption, and really is the market that were penetrated today with a QPCR and CE, and that's thousands, and tens of thousands of units around the world. So that's the market we see for this product in the next couple of years.

Vijay Kumar - Deutsche Bank AG, Research Division

Sure. Maybe if I could just sneak in one last question. Could you sort of give some color on what royalty roll-off would be next year?

Gregory T. Lucier

The royalty roll-off, is that what you've said?

Vijay Kumar - Deutsche Bank AG, Research Division

Yes.

Gregory T. Lucier

Yes. We've indicated earlier that the royalty roll-off will be in the range of around $30 million.

Operator

And we have a follow-up question from Tycho Peterson with JPMorgan.

Tycho W Peterson - JP Morgan Chase & Co, Research Division

Just one for Mark. Has any of the developments in particular Wildfire portable over to the PGM? And can you also comment on how the grand challenges are being received, I mean, are you actually getting active suggestions from users about improving instrument?

Mark P. Stevenson

Well, yes. Certainly on the first one, a lot of the improvements that we see as we've really simplified the upfront sample prep, are getting a lot of synergy now. Not only do you see Wildfire, and you see what we've done with the OneTouch. If you also look what we've done with the AmpliSeq technology that uses our QPCR expertise to really make the sample prep really straightforward, so we can get a one-day targeted sequencing protocol. So the progress we've made, and sort of comment to the second part of your question with this quarterly releases, every quarter we release new milestones on the competition guidelines. So we have set a really high bar for people just in the progress that we've in delivering on this milestone. We do have tremendous interest. We have more than 1,000 people registered in the competition, and so we're really looking forward to paying that out and having even greater improvement and that's what the competition is all about. Obviously, we'll continue to raise the bar each quarter with what our internal team is doing.

Tycho W Peterson - JP Morgan Chase & Co, Research Division

And then you talked at ASHG about submitting PGM for a 510(k) approval next year. Just -- can you just talk about how you're seeing that fitting into the diagnostic landscape, relative to CE and some of the other technologies?

Mark P. Stevenson

Well, we see that the PGM roadmap would be -- we submit during next year and we would expect to get first clearance in Europe with CE-IVD and then in 2013, a 510(k). We see it fitting where customers really want a fast turnaround time in some of these experiments where they have a set of genes that they'd want to do in one go and those are the applications that we'll look to develop on a diagnostic application. Where we see CE, maybe there's 1 or 2 genes that they want to do or you have long reads like we've submitted the CE -- the 510(k) that is currently under review with the FDA is in transplant diagnostics, where CE is well-established as a gold standard in that HLA testing.

Tycho W Peterson - JP Morgan Chase & Co, Research Division

And just one last quick one. We're seeing a lot of emphasis on informatics by users and the industry in general, can you just talk to your efforts there and offsetting both the data storage and then the analysis burden?

Mark P. Stevenson

Well, one of the key things we've done with Ion Torrent is, make available the standard file formats, and we have a growing user community, developing tools and applications on this standard format with Ion Torrent. And so, that's really helping to address some of the user-community needs. In addition, we're highly focused on the internal algorithms, compressing data, as well as we're developing a software package to allow particularly the cancer research as we do this end-to-end workflow to go all the way from taking a block out of a cancer sample and an FFPE sample, all the way through to analyzing that data in a genome panel set. So that's some of the development that we're doing and presented at HSG.

Operator

Your next question is from the line of Isaac Ro with Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

First off, on the Ion Torrent earnout, just wondering if there's anything remaining there? And if so, how would that be broken out between cash and stock?

Gregory T. Lucier

Dave?

David F. Hoffmeister

At this point, the milestones have been met and the payment is 60% cash, 40% stock. And the repurchase that we did essentially offsets the stock portion of the earnout -- final outcome payment.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay, that's great. And then secondly, on Cell Systems, you obviously -- strong report there, at least versus my numbers, and I'm wondering if there are any unusual items beyond what you mentioned in the press release, you mentioned an improvement in Asia. Is there anything specific there that maybe tied to the improvements you're making China or was it really, more of just, sort of regional strength for that business?

Gregory T. Lucier

I think there was just overall good performance by that set of products.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay. And it’s not something that -- I know it can be a lumpy business. How should we think about that business pacing throughout the next few quarters. Anything ahead that would sort of imply a pivot in the trend line we're seeing here?

Gregory T. Lucier

Well, other than BioProduction, as we've always said is a bit of a lumpy business, which would then impact that overall growth rate quarter-to-quarter, but any other factor beyond that, we're not aware of.

David F. Hoffmeister

Long term, we've always said, Isaac, that is a growth rate that's in the high-single digit range over a 2-year period. We've been through a period now where we had just exceptional growth, we're not expecting it to continue forever, but we don't see any dramatic change in the quarter or 2.

Operator

Your next question is from the line of Nandita Koshal with Barclays Capital.

Nandita Koshal - Barclays Capital, Research Division

I guess, I'll start with a few Ion Torrent questions. Mark, if you could talk about the proportion of Ion Torrent systems that have been placed, now that you have a fairly large installed base, the proportion that are in current or pre-existing life sequencing customers versus new customers for Life?

Mark P. Stevenson

Yes, we have not broken out those proportions, but I can tell you it's very widely distributed, and really I think, you got to look -- nearly all customers will probably have Life a product already since we have such a broad portfolio. There are many that are new to next-generation sequencing, because before, they just couldn't afford the kind of capital involved in a large purchases of a next-generation or the complexity. So there are definitely new customers in that set.

Nandita Koshal - Barclays Capital, Research Division

I see. And maybe it’s -- more qualitatively comment on the split between research labs and maybe diagnostics uptick there, and if there's any change in the distribution strategy for Ion Torrent versus the old sequencing systems?

Mark P. Stevenson

Yes. Today, the majority is still being used in research labs and in some of the work that is being done in labs that are intended to, later validate into diagnostic use. But the majority today is a research, but clearly the trend as we look out, and the reason we've laid out a pathway to work with the FDA and other regulatory authorities is to take this into the clinical setting as we think the rapid turnaround time of this technology, particularly as you look at trying to turnaround in a day, will be ideal for a clinical setting.

Nandita Koshal - Barclays Capital, Research Division

Right. And then I think from a growth margin perspective, a couple of questions on sequencing business as well. One, in terms of Ion consumables, I'm assuming those are fairly high gross margins, where is the installed base in terms of ramping up to that 60,000 to 70,000 run rate that you talked about? And then are there any 5500 upgrades still in the pipeline?

Mark P. Stevenson

So on the first part, I mean the user base is just ramping up. Now as I mentioned, we are at about $50,000 for the install base for this third quarter. So we're just beginning to ramp and users getting used to their systems and getting running on their systems. So we're at the beginning of that phase. With regard to 5500 we've almost cleared the backlog of upgrades. We will have that complete during this quarter. And then we'd expect the consumable usage to come up as those customers get up and running on their new systems.

Nandita Koshal - Barclays Capital, Research Division

Okay, that's very helpful. And maybe David sort of a segue on the gross margins there. I guess you said PCR instruments and some of the instrumentation heavy nature of Q4 should be up, bit of a source of pressure plus Ion Torrent. Is there anything else that is a major dynamic we should think about sequentially on the gross margin? And then just long term, could you talk about a target run rate of cost savings from the restructuring program?

David F. Hoffmeister

No. Other than what you said, in terms of the increased instruments sales in the fourth quarter, that's the primary driver, and the primary driver of that is Ion Torrent. So that's the sequential -- again difference in terms of the potentially lower gross margin in the fourth quarter. And then as I mentioned earlier in the call, the impact of the restructuring actions that we're taking this year on next year, a good estimate at this point in time is we've said that we are targeting $10 million to $20 million in the cost to take out in the second half of this year, and so you could take whatever we end up with this year and apply it to next.

Agnes Lee

Vivian, we have time for one more question.

Operator

And your next question is from the line of Sam Leenert with Leerink Swann.

Unknown Analyst -

I'll squeeze 2 into my one. Can you remind us what the tech milestones were for Ion Torrent, where those milestones sited as the 318 chip or something beyond? And then follow-up regarding the molecular, or the companion diagnostics agreement you announced today, can you help us understand your thinking on the build versus buy decision in molecular diagnostics? Do you have all the internal capabilities to build a companion diagnostics standalone business internally?

Gregory T. Lucier

So on the first one, we have not disclosed the elements of that milestone. And so, we'll stay consistent with the policy. On the second one, in terms of companion diagnostics, we think we actually have probably the best toolkit of any company that is talking to pharmaceuticals -- entities, because it ranges from QPCR platforms that are the most prevalent in the world to the CE platform, also incredibly prevalent, now Ion Torrent. And obviously, an incredible background of 1,500 scientist. And so I think we present ourselves with high degree of credibility and an installed base that really helps them wanting to get these companion diagnostics distributed when their drug gets approved. So, as I've said in the script, this is -- it's not the first, but it's one we wanted to announce and there will be more announcements though in the future.

Agnes Lee

This concludes our Third Quarter 2011 Earnings Conference Call. If there are any additional questions, please feel free to contact me. The website will be available via replay on our website for 3 weeks. Thank you again for joining us this afternoon.

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