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Executives

Carol Cox -

Gregory T. Lucier - Chairman and Chief Executive Officer

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

Mark P. Stevenson - President and Chief Operating Officer

Analysts

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

Jonathan P. Groberg - Macquarie Research

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

Amit Bhalla - Citigroup Inc, Research Division

Ross Muken - Deutsche Bank AG, Research Division

Bill Bonello - RBC Capital Markets, LLC, Research Division

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

Derik De Bruin - BofA Merrill Lynch, Research Division

Doug Schenkel - Cowen and Company, LLC, Research Division

Isaac Ro - Goldman Sachs Group Inc., Research Division

Life Technologies (LIFE) Q4 2011 Earnings Call February 7, 2012 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Life Technologies Corp. Q4 and Year-End 2000 (sic) [ 2011 ] Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today, Ms. Carol Cox, VP, Investor Relations. Ma'am, you may begin.

Carol Cox

Thank you, Mary. Good afternoon, everyone. Welcome to Life Technologies' Fourth Quarter and Full Year 2011 Earnings Conference Call. A press release was issued today at 1 p.m. Pacific Time or 4 p.m. Eastern Time today and posted on our website at lifetechnologies.com, as well as filed in Form 8-K with the Securities and Exchange Commission. We also posted a deck of slides to accompany today's webcast which may be found in the Events and Presentations section of the Life Technologies Investor Relations website with our other earnings materials.

And joining me on today's call are Greg Lucier, our Chairman and CEO; David Hoffmeister, our Chief Financial Officer. Additionally, Mark Stevenson, our Chief Operating Officer, will be available during the Q&A portion of the call. If you have not 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. Important factors which could cause actual results to differ materially from those in forward-looking statements are detailed in filings made by Life Technologies with the SEC. It's 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, Carol, and thanks, everyone, for joining us on today's call. It's fair to say that 2011 was a challenging year for the company as we faced macroeconomic headwinds and constrained spending by some of our customers. At that time, we evaluated what actions we needed to undertake in an uncertain environment and started executing against them. I'm pleased to announce that even in the face of these obstacles, we were able to deliver top line growth and increased our bottom line for the 12th consecutive year since the IPO of Invitrogen.

For the year, we grew our revenue 4% and took prudent efforts to reduce our costs, helping drive a 40-basis-point increase in operating margins and 5% increase in our non-GAAP earnings per share for the year.

If we exclude the impact of currency, our operating margins actually expanded an impressive 110 basis points for the year. We continue to expect to grow our operating margins at a rate of about 50 basis points per year and ultimately believe we can achieve operating margins in the mid-30% range.

Our free cash flow for the year totaled $710 million, a new record high. These results are a testament to the strength of our core businesses, our market expansion strategies and our ability to quickly take actions to reduce operating expenses and optimize our investment spend.

We finished the year strong, growing our revenue in the fourth quarter 4%, increasing our operating margins 470 basis points and increasing our non-GAAP EPS by 18%. This growth was driven by solid performance in our consumables products, a record number of Ion Torrent PGM shipments, which I'll talk more about later, and continued strength in our BioProduction business even as we faced hard comps from last year's fourth quarter.

During 2011, we made solid progress expanding our business in emerging markets, where we are developing a local presence to take better advantage of the opportunities. We named a new head of Greater China, which includes mainland China, Taiwan and Hong Kong, to take our operations to the next level. Today, we have nearly 900 employees in this region, and we expect to add another 250 in 2012. We're building a direct sales force across China to ensure broader and deeper penetration of our products and, earlier in the year, brought online much larger warehouse facilities across that country in Beijing, Shanghai and Guangzhou to better ensure product availability and faster delivery to our consumers.

In early 2012, we continued to make progress, announcing an agreement to form a joint venture diagnostics business with China, DaAn company, a leading company in the molecular in-vitro diagnostics to form Life Technologies DaAn Diagnostics. We expect to leverage both companies' clinical sales forces to drive acceptance of a broad menu of CE-based kits and instruments in the Chinese market. This approach leverages our expertise in platform development and DaAn's expertise in regulated markets with kit development and commercialization.

On the commercial side, we launched our new website in the third quarter, making our customers' purchasing experience much better and allowing us to capitalize on the growing happening in eCommerce. We do over $1 billion a year in eCommerce and have an incredible infrastructure that allows us to move biologically active products to countries all over the world in 3 to 5 days. Think of us as the Amazon.com for life sciences. When researchers are setting up new labs in emerging market countries, they come to Life Technologies because our brands are well established and scientific protocols cross the developed research markets. Using our website, they can easily select and purchase the products they need.

We continued to build our product portfolio in 2011, introducing 800 new SKUs. I would like to highlight the November launch of our FLoid Cell Imaging Station. FLoid is a good example of how we are listening to our customers and developing products that help them do their work faster, easier and less expensively. FLoid allows researchers to quickly verify cells, creating high-quality images at the benchtop with an efficient and fully integrated solution that does not require specialized training. It's also 1/3 of the cost of conventional fluorescent microscopes and is compatible with our full line of Molecular Probes reagent products.

Innovation in our genetic solutions business accelerated in 2011. As you know, we offer a full range of genetic solutions in our core product portfolio, from discovery to confirmatory analysis, as well as all the tools needed for downstream molecular biology and cell analysis experiments. Complementing these core offerings is Ion Torrent's game-changing semiconductor technology, which brings simplicity, speed and scalability to genetic sequencing and allows us to play at every stage of discovery and translational research.

A year ago, we laid out a road map for our Ion Torrent franchise, arguably one of the most groundbreaking cutting-edge technologies we've seen in a long time in life sciences. The road map called for an unprecedented 10x increase in throughput every 6 months. We've reached every technical and commercial milestone we promised in 2011, launching the 314, 316 and 318 chips, and reached an impressive milestone when we shipped well over 700 PGM systems during the year. And if you look at this next-generation sequencing technology, we're really just getting going.

A month ago, we announced we're taking orders for our new benchtop Ion Proton Sequencer that is designed to sequence the entire human genome in a day for $1,000. We expect to launch the Ion Proton I Chip in mid-2012, which will allow researchers to sequence exomes in a few hours and the Proton II Chip 6 months later that will sequence human genomes, also in a few hours.

With the PGM and the Proton, we really have a family of semiconductor sequencing products now. PGM is best-in-class solution for panels of genes and small genomes. It has completely redefined the category, and we think we'll open up vast new horizons in terms of clinical medicine. This platform is expected to drive growth in 2012 and beyond.

I've talked about our achievements in innovation. Now let me move on to another area where our capabilities are our key strengths. We have a history of performance focus, and I have a great example to share with you. Recently, Industry Week magazine named our Austin, Texas, plant one of its top 10 plants in North America for 2011, making it the very first biotechnology facility to win that prestigious award. Other winners this year include Lockheed Martin and Toyota. I want to congratulate our Austin employees and thank them for their hard work and dedication.

At the senior level, were recently added 2 new members to our leadership team who will play a critical role in growing our business in the areas of medical sciences and research and development. Ronnie Andrews joined us at the end of January as our new President and Head of Medical Sciences. Ronnie has more than 20 years of experience in the diagnostics industry, including leadership positions at Abbott, Roche and most recently was the CEO of Clarient, which was purchased by GE Healthcare. He is an important addition to our executive team as we grow our Medical Sciences business, particularly as we drive our first line of medicine agenda forward.

Ronnie is one of the most dynamic and respected leaders in the diagnostics space and brings deep expertise in commercializing diagnostics, particularly in the molecular domain. He'll apply that expertise to expand our presence in the molecular diagnostics space through partnership strategies, targeted acquisitions and continued innovation around the workflows.

Dr. Alan Sachs recently joined us as the Head of Global Research and Development. In his new role, he will serve as the key liaison to the external scientific community and play a strong role in our R&D effectiveness and productivity initiatives as we work to increase our return on R&D. Alan's background includes serving on the faculty of University of California, Berkeley, where he was an Associate Professor in the Division of Biochemistry and Molecular Biology. He then spent 10 years as a leader at Merck Research Laboratories in the areas of molecular profiling, RNA therapeutics and exploratory and translational sciences.

Before I move on to our outlook for 2012, I would like to address the topic that is top-of-mind of our investors, capital deployment. We generate a large amount of free cash flow annually, and I want to take a minute to talk about what we have done in the past, our strategy going forward and the criteria we use to evaluate potential acquisitions.

Our approach over the last few years has been balanced as we have returned over 50% of our cash to equity and debt holders and used the remaining 50% to invest in acquisitions to support key franchises or expand into new markets. In any given year, we may have to pay down more debt or find strategically interesting acquisitions that could skew this ratio. But we are committed to a balanced approach going forward. In fact, since our third quarter earnings release, we have purchased over $100 million worth of our shares under the share repurchase authorization and have another $300 million remaining. We intend to continue to execute on this share repurchase in the near term.

Turning to our strategy. We have and we will continue to invest in our business through a variety of vehicles, including acquisitions and capital investments, both of which we believe are necessary to drive further growth. We believe in the medium- to long-term growth opportunities in life science and tools industry. And to capitalize on this growth, we expect that acquisitions of various sizes will continue to be a component of our strategy. However, we will take a disciplined approach in evaluating those deals. We understand that investors demand a high rate of return, and we are fully committed to meeting this demand.

As for the criteria by which we evaluate acquisitions, first, we target attractive markets. Once we have identified an attractive market, then and only then we look at specific companies in that space. As we evaluate these opportunities, we're targeting a greater-than-10% return on invested capital. If a target is a bolt-on or adjacent acquisition, we would expect to get that return within 3 years. If it's a larger platform deal, like our Ion Torrent deal was in 2010, we would target no more than 5 years for that rate of return.

Now as we move to guidance, I want to mention that we have headwinds and tailwinds from 2011 impacting our top and bottom line growth which are unique to this year, 2012. Because these items require a fair amount of disclosure to ensure that the impact is transparent, David will walk through the specifics in detail in his prepared remarks. In the meantime, I want to talk about how we are expecting our underlying business to grow in 2012.

First and foremost, we are approaching guidance from a conservative perspective because we think it's the prudent thing to do. We expect that our academic and government customers in developed markets will continue to be cautious, as they were in 2011. In the U.S. and Europe, we're assuming the markets remain challenged but stable. In our emerging and applied markets, such as food and animal safety and molecular diagnostics and in our BioProduction offerings, we're assuming growth opportunities. Finally, we expect our Ion Torrent franchise to grow significantly as we continue to place PGM and Proton instruments and pull through the associated consumables.

With all of these components in mind, we are guiding to organic revenue growth of 2% to 4% over 2011 revenues of $3.7 billion and a non-GAAP earnings per share in the range of $3.90 to $4.05, implying a growth of 5% at the low end and 9% at the high end of the range over 2011 non-GAAP EPS.

We are expecting free cash flow in the range of $650 million to $675 million. David will walk you through the details of the onetime cash payments we expect to make in 2012 that impact that free cash flow.

As we move into 2012, we are confident the markets we compete in will remain stable to what we saw in 2011 or possibly do even better as macroeconomic challenges lessen and a decision on sequestration in the U.S. likely happens later in the year. However, should any of our end markets deteriorate, we are prepared to take action to quickly reduce our costs.

Looking beyond 2012, I am very excited about the assets we have at Life. Our strong cash flow and 80% recurring revenues provide stability and support and continued investment in our Ion Torrent platform in emerging and applied markets, both of which will fuel growth into the future.

With that, I'll turn it over to David to provide a more detailed overview of our results and guidance for 2012.

David F. Hoffmeister

Thanks, Greg, and good afternoon, everyone. In my remarks today, I will provide an overview of our results for the fourth quarter and the year, as well as provide greater details on our 2012 guidance.

We ended 2011 with a solid quarter, growing our revenue and earnings and coming in slightly better than we expected for the year. We expanded our margin, lowered our expenses as a percentage of revenue and leveraged these results to grow our non-GAAP EPS by 5% for the year.

At a more detailed level, revenue increased 4% to $970 million and increased 3% excluding currency. Organic revenue growth by region in the quarter was as follows: the Americas was flat versus a strong fourth quarter in 2010, Europe grew 4%, Asia Pacific grew 10% and Japan grew 4%. For the full year, the Americas grew 2%, Europe grew 3%, Asia Pacific grew 9% and Japan declined by 3%.

Taking a closer look at our divisional results for the quarter. The Genetic Systems division increased 13% to $278 million over the same period last year. Excluding the impact from currency, revenue increased 11%. For the full year, Genetic Systems grew 8%, and excluding the impact of currency, it grew 7%.

For both the quarter and the full year, Ion Torrent continued to contribute to the growth in this division, driven by strong sequential sales of the PGM and associated products which were partially offset by reduced sales of SOLiD products. We also continued to see good growth in our forensics business and low single-digit growth in our CE business overall.

The Molecular Biology Systems division revenue decreased 1% to $441 million for the quarter compared to prior year. Excluding the impact from currency, revenue for the division decreased 2%. For the full year, Molecular Biology Systems was flat, and excluding currency, it was down approximately 2%. For both the quarter and the full year, the decline in revenue was due to the expected decrease in qPCR royalty payments and the continued lower spending by government and academic customers. To better understand the underlying results in this division, it might help you to know that the decline in qPCR royalties was a 1% headwind in both periods.

The Cell Systems division revenue increased 3% to $244 million for the fourth quarter compared to the prior year. Excluding currency, revenue grew 1%. This performance was the result of tougher comparables for the BioProduction business, which grew approximately 20% in the same period last year.

For the full year, Cell Systems grew 7%, and excluding currency, it grew 6%, driven by increased BioProduction sales and higher sales across the majority of our other Cell Systems businesses.

Fourth quarter non-GAAP gross margin increased 20 basis points to 64.8% compared to prior year, driven by higher realized price and higher manufacturing productivity. These benefits were partially offset by the negative impact of higher sales of Ion Torrent instruments, which carry a lower gross margin than the company average. Additionally, we executed on an early termination of a supplier agreement, which had a negative impact on margins in the quarter.

For the full year, gross margins decreased 150 basis points primarily due to the currency hedges and a higher sales of 5500 upgrades and PGM instruments.

As expected, on a sequential basis, gross margin decreased by approximately 130 basis points primarily due to product mix that included increased sales of Ion and BioProduction, lower fixed-cost absorption related to year-end inventory management, the termination of the supply agreement and the typical year-end decline in pricing, all of which was partially offset by favorable currency and royalty revenue. Approximately 100 basis points of this decline were onetime or year-end-specific items.

Fourth quarter non-GAAP operating expenses were $328 million, a decrease of 8% from prior year levels. As a percent of revenue, operating expenses decreased over 440 basis points. Sequentially, operating expenses decreased by $12 million, driven by cost savings initiatives and controls on discretionary spending, which were partially offset by our increased investment in Ion and Greater China.

In the second half of 2011, we made solid progress in reducing our expenses, delivering a total of $17 million in incremental cost savings compared to Q2, within the range of $10 million to $20 million we guided to in July.

Full year non-GAAP operating expenses were $1.4 billion, a decrease of 1% over prior year levels. The decrease was due to various cost savings initiatives, partially offset by increased investments in Ion and emerging markets.

Our non-GAAP operating profit for the fourth quarter totaled $301 million, an increase of 23% over prior year. Fourth quarter operating margin was a record high 31%, representing an increase of 470 basis points. The increase over the prior year was a result of our continued focus on realizing operational efficiencies throughout the company. For the full year, operating margins improved 40 basis points to 29.1%. Excluding currency, our operating margins improved 110 basis points.

In terms of non-GAAP other income line items, we had $1 million of interest income, a loss of $3 million from foreign exchange gains and losses and other items and interest expense of $32 million. Our non-GAAP tax rate for the quarter was 26.8%. Compared to the same quarter of last year, the rate was up as expected due to recognition in the prior year quarter of the full year effect of the R&D tax credit and other tax provisions which had expired at the end of 2009 and were not renewed until the fourth quarter of 2010. The full year tax rate is 27.3%.

Our diluted share count for the quarter was 184.5 million shares, a decrease of 7 million shares year-over-year. Dilution from our employee equity plan was more than offset by our ongoing share repurchase program. For the full year, our diluted share count was 185.6 million. Since our last earnings release, we have purchased approximately 2.5 million shares for $100 million. With this purchase, we will have about $300 million remaining on our share repurchase authorization and as Greg said, we intend to continue to execute against it.

Our GAAP diluted earnings per share for the fourth quarter was $0.69. On a non-GAAP basis, diluted earnings per share were $1.06. Our non-GAAP earnings per share exclude noncash interest expense, business integration and other charges and acquisition-related amortization expense.

In addition, during the fourth quarter of 2011, we settled a licensing dispute which resulted in an increase in GAAP net income. However, since the settlement was associated with prior periods, we've not included this income in our non-GAAP results. For the full year, non-GAAP diluted earnings per share were $3.73.

Moving on to the balance sheet and cash flow statements, our ending cash and short-term investments were $882 million. This compares to last quarter's balance of $636 million. Cash from operating activities was $316 million, capital expenditures were $34 million and free cash flow was $282 million. Free cash flow for the same year came in higher than expected and totaled $710 million, driven by lower restructuring costs and lower capital expenditures. Return on invested capital was 8.9%, and we remain committed to achieving our goal of 10% return on invested capital by the end of 2012.

Our ending debt as of December 31 was approximately $2.7 billion. This balance is made up of our convertible debt of $450 million and senior notes of $2.3 billion. In January, we announced our intention to redeem the convertible notes on February 15.

Before I move on to guidance, I have an additional topic to cover. As we announced in our earnings release, we're planning to make changes in our revenue reporting to better align with some recent modifications we've made in our internal organization as well as the end markets we serve. These changes have no impact on our results of operations, financial condition or cash flows.

We currently report revenue under 3 divisions: Molecular Biology Systems, Genetic Systems and Cell Systems. We are reorganizing our business into 3 new business groups: Research Consumables, Genetic Analysis and Applied Sciences. We plan to start reporting revenue under these 3 business groups when we report out on our first quarter of 2012. We understand that everyone will need to update their financial models with the new business groups, and so we will provide revised historical financial data for 2010 and 2011 on our website in April prior to reporting the first quarter results.

And I'll now move on to our expectations for 2012. We expect organic revenue growth to range between 2% and 4% for the year. The middle of this range is in line with the growth we had in our business at the end of the year and in the second half of 2011. Our revenue growth is again expected to be weighted to the back half of the year with revenue growth in the first half of the year expected to be slightly below the lower end of the guidance range.

Growth for the year includes overcoming approximately $130 million in headwinds made up of the following components: we're estimating a $30 million reduction in qPCR royalties, a $40 million reduction in U.S. stimulus-related sales as those grants end and a $60 million reduction of sales of 5500 instruments as we continue to ramp up sales of Ion Torrent semiconductor sequencing products.

On the other hand, we no longer have the currency hedge, which was a $64 million drag on revenue in 2011, although currency at December month-end rates is more than offsetting the positive benefit on revenue. The net impact to revenue of the hedge roll-off and the changes in the exchange rate is a negative $26 million or 0.7%, but is actually a positive $0.02 impact to our non-GAAP EPS.

Operating margin is expected to improve approximately 50 to 100 basis points compared to 2011. We continue to be on track to achieve 31% operating margin by the end of 2013.

We expect non-GAAP earnings per share in the range of $3.90 to $4.05 with an implied increase of 5% to 9% over 2011 results.

We plan to update our currency expectations quarterly based on month-end rates at the end of each quarter. While we cannot predict how rates will move throughout 2012, if all currencies moved against the dollar by 5% and our mix of foreign currencies stay the same, the impact on earnings per share would be about $0.24.

We expect free cash flow to be in the range of $650 million to $675 million. The decline from 2011 is the result of approximately $130 million in onetime cash costs we will have in 2012 that we did not have in 2011, primarily related to a tax recapture payment due on the convertible notes, a payment associated with the Ion Torrent milestone -- excuse me, and the increased capital expenditures, which are expected to be in the range of $120 million to $140 million in 2012.

Our free cash flow forecast also includes approximately $40 million of onetime expenses related to restructuring, down from approximately $80 million in 2011.

I want to take a minute now to provide some additional details related to the guidance that I believe will help you update your financial models for 2012.

First, we expect our revenue and earnings to be weighted to the second half of the year, with the split between the first half and the second half of 2012 being very similar to the first half-second half split we had in 2011. We expect our results for the first quarter to be the lowest of the year, results in the fourth quarter to be the highest and for our results in the second and third quarters to be generally in line with each other.

Second, while we do not normally provide quarterly guidance, nor do we plan to provide it moving forward, we do believe that giving greater detail than normal around the first 2 quarters would be helpful. Our expectation is that for the first quarter, revenue will be in the range of $915 million to $925 million, and non-GAAP EPS will be $0.91 to $0.95.

For the second quarter, we're expecting revenue to be slightly down compared to the second quarter of 2011, which benefited from over $30 million in SOLiD instrument sales, and for EPS to be up slightly from the range we are guiding to for the first quarter of 2012.

We're estimating our non-GAAP tax rate to be approximately 28%. Our guidance assumes that the R&D tax credit will be reinstated and that the impact of this benefit is approximately 0.6%. The overall tax rate is about 0.5% higher than 2011 due to lower anticipated sales of instruments manufactured overseas.

We expect the first quarter tax rate will be about 28.6%. Our rate in the second and third quarters will also likely be 28.6%. We do not expect that the R&D tax credit will be extended prior to the fourth quarter.

Full year interest expense, net of interest income, is expected to be approximately $120 million. Other income and expense, which includes foreign exchange gains and losses, is expected to total approximately $10 million in expense. Assuming an average share price of $49, we would expect the weighted average diluted share count for the year to be in the range of 184 million to 186 million shares. And this does not include the impact of any additional share repurchases which we may do during the rest of the year.

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

Carol Cox

Great. Thanks, David. Mary, we'll open the call now to question and answers. I would just ask everyone, if you could limit your questions to 1 question and 1 follow-up, we will greatly appreciate it so we can get as many calls in as possible. Mary, if you could open it up, please?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Quintin Lai from Robert W. Baird.

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

Greg, so with respect to -- you've given a lot of color on some of the headwinds you've got, but you talked about some of the offsets being the traction you're seeing in Ion Torrent. Can you maybe give us a little color on how you ended the year in Q4 with Ion Torrent sales? And then kind of what you expect the contribution to be in 2012?

Gregory T. Lucier

Well, in terms of Ion Torrent in the fourth quarter, we had substantial sequential growth over the third quarter. And as I said in the prepared remarks, we had well over 700 PGM systems sold over the course of 2011. So it was a real gangbuster year for Ion Torrent. We expect, as I also said in the prepared comments, substantial growth over that level again in 2012. And that will be made up of more PGM instruments, which just continues to gain traction because it's proven, it's low cost, easy to use, and then increasingly in the second half of the year, the Proton instrument.

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

And then as you're -- you've announced Proton. But what's the customer response been? I mean, do you see that customers that liked PGM continue to buy PGM? Or do you think that some of the customers that will maybe look at PGM might have -- might hold back and wait until the Proton gets released?

Gregory T. Lucier

Yes, we are not seeing cannibalization of the Proton on to the PGM. PGM is for genes and panels and small genomes. Proton is for exomes and genomes. And I would be -- want to point out very importantly that we've created a bridge strategy that rewards customer loyalty. And so you can buy a PGM, and essentially it goes towards full credit if you also then want to secure a Proton. So there is no penalty, if you will, of having to make a choice between PGM or Proton. It's really about what application do you need, and we have a semiconductor sequencing instrument to solve it.

Operator

Our next question comes from Jon Groberg from Macquarie.

Jonathan P. Groberg - Macquarie Research

I just had my question and a follow-up. My first question is maybe a little bit more detail on PCR. I know you gave the detail on the royalties, but if you just think about kind of the base kind of instrument business versus the assay and more consumable business on -- in your PCR franchise, all included. Maybe you can just give us a little bit of detail as to how that was trending in '11 and what you anticipate that doing in 2012.

Gregory T. Lucier

You bet. And I will jointly answer this question with Mark, who's on the phone. But the first is an overlay that -- we've had to overcome pretty substantial PCR royalties expiring over the last few years. In 2012, as David mentioned, it's really the last big year of the drop-off. And so what we face in 2013 is very manageable, much smaller. And so I think that removes a substantial headwind as we move through 2012. Now in terms of the underlying instruments versus assays, Mark, maybe you could answer Jon his question.

Mark P. Stevenson

Yes, Jon. I would say that we continue to see good strength in our assays business and the consumables pulling through just a large install base. And as we go into this year, we will see a refreshment to the higher end of our qPCRs. We launched the QuantStudio and start shipments in this first quarter. So we're optimistic about that getting traction in the high throughput range.

Jonathan P. Groberg - Macquarie Research

Okay, great. And then just kind of a follow-up on the -- on some of the things you've laid out for the year as well. You mentioned SOLiD being -- the revenues on the instruments side, and obviously you're going to lose those. What are you seeing so far on the reagent side? I mean, should we be thinking about SOLiD revenues basically being really 0 in 2012 as people shift to the Ion platforms? Or I guess how should we think about the consumable flow on top of the existing instruments?

Gregory T. Lucier

Yes, it's a good question. First, we're expecting SOLiD consumables to be in the tens of millions for 2012. And importantly, we're very focused on having those customers that own the 5500 to get ever more productivity. And one of the things that we are introducing to them is an upgrade program called Wildfire that eliminates EPCR completely and makes the 5500 instrument incredibly easy to use. And therefore, hopefully, more experiments get conducted on that installed base.

Operator

Our next question comes from Tycho Peterson from JPMorgan.

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

Maybe just following up on the last one on SOLiD. I mean, as we think about the Proton system and the Ion Torrent road map, can you just talk a little bit about will you be going after SOLiD customers, trying to get them to swap out? And also, how we think about CE. Are there incentives in place to try to get some of them to convert over to either PGM or the Proton system when that's out later this year?

Gregory T. Lucier

Yes. Mark, why don't you grab that one?

Mark P. Stevenson

Yes, sure. So we take on the 5500 customers, we certainly will see those customers and we'll target them, not only continue with 5500 but introduce Ion and Proton to them. And the rapid turnaround, I think, will be attractive to them. And as we get to the whole genome, that will be important. We see -- we really still see a set group of applications that -- particularly in the validated area, we continue to see in diagnostics. So that will remain stable. But certainly, some of our CE customers we'll also introduce Ion Torrent to, and there'll be additional users that we'll target as part of our loyalty program to upgrade CE as well to Ion Torrent.

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

Okay. And then this one -- next one may be a little bit of a moot point now that you're restructuring the divisions. But as we think about the underlying growth for your businesses, should we think about Molecular Biology getting back to a -- kind of call it a low- to mid-single-digit growth profile if you back out the PCR royalty roll-off?

Gregory T. Lucier

Tycho, that's clearly our expectation is to get in 2012 to probably this year, low single digits and then building off that.

Operator

Our next question comes from Amit Bhalla from Citi.

Amit Bhalla - Citigroup Inc, Research Division

I wanted to just get your thoughts on the other 2 business segments and the outlook. You just said Molecular Biology, low-single digits. So can you talk about Cell Systems and Genetic Systems outlook for 2012 and just overlay what your view is on academic and government spending in the various parts of your guidance range?

Gregory T. Lucier

So I'll take that one. Cell Systems grew this year in the mid-single digits. It was less impacted by the slowdown in government spending than some of the other divisions. We expect it'll continue to grow in about the mid-single digits next year. Genetic Systems overall grew in the teens powered by the Ion Torrent, and we expect it to continue to grow in about that range next year.

Amit Bhalla - Citigroup Inc, Research Division

And my second question, a follow-up, is on the acquisition strategy. I think, Greg, you mentioned acquisitions of various sizes. That was the words you used in your prepared comments. Can you go into a little bit more detail on timing and how you think about -- and what are the criteria for the different sizes?

Gregory T. Lucier

Yes. I think it would be a mistake to say that we're targeting any particular size because we don't. We're really incredibly focused on return on invested capital when we deploy the money towards an acquisition. And quite frankly, you haven't seen us do a lot over the last 18 months because we feel that we would not be able to get good return on that money. We've done smaller, little tuck-in things that, quite frankly, we've barely even announced because they're not that significant. So I would just convey back to you is that size doesn't matter to us, but really deployment of capital and getting a return on it is really what guides us today.

Operator

Our next question comes from Ross Muken from Deutsche Bank.

Ross Muken - Deutsche Bank AG, Research Division

Greg, you talked about sort of the sequestration here in the U.S. where we'll get an outcome at some point this year. And obviously, we've seen some different budgetary changes x U.S. I mean, how are you guys thinking about the way customers are going to respond to these sort of in-flux budgets as the year goes on vis-à-vis sort of -- compare it to what we saw in 3Q? And how are you sort of prepared for that from an instrument base versus a consumable base? And do you expect sort of the reactions to be different in either of those 2 subgroups?

Gregory T. Lucier

Well, let me give you some thoughts on your broad-ranging question here. First, as I've said publicly, we believe that sequestration will not happen and that the NIH budget will be relatively secure, flat, up a little in 2013. That's our opinion, and we'll see what happens towards the end of the year. We think, no matter what, though, that these customers in academic and government entities around the world will remain focused on getting ever better deals. It's just a new realm of affordability that I think guides their choices. And to that end, we believe that we have a very compelling, winning strategy to grow nicely in that environment. It's a little bit, as I've said also publicly, the BMW strategy. We're the only brand or set of brands that can scale from the very high end to the lower-standard end with, I think, a secure source and great quality. So we're going to do well, and we're very focused on doing well on that environment. Lastly, I think it's irrefutable that as grants are made here or in Europe or in China, there's ever more money focused on genetic analysis. And I think you can see by our fourth quarter results that we are building a very strong, broad product line and set of solutions there that range from Ion to qPCR and this new QuantStudio that does digital PCR to the broadest range of assays that you can order online. And that's the message going out, and we're seeing real traction as being the place and the provider that people want to partner with.

Ross Muken - Deutsche Bank AG, Research Division

That was great. Maybe just one quick follow-up to a question that was asked before. So you added some pretty serious management talent to the business in the last couple of months. Obviously some pretty diverse experience but certainly giving some sort of medical and sort of nontraditional for you sort of a backbone with a few of the folks. I mean, as you look at the business longer term in terms of moving towards the clinic, obviously it's going to be a mix of an organic and inorganic strategy, and some of the inorganic might skew this. But how much of your business do you think you can eventually have that's sort of outside sort of the traditional research markets, whether it's clinical, clinical and applied, et cetera? Is there sort of a stated long-term goal? Do you think that clinical could be as big as the applied markets are for you today? What kind of color can you give us there on a long-term basis?

Gregory T. Lucier

It's a good question. At the board level, we talk about this a lot and we're committed over the next several years to get about 30% of our portfolio out of life science research directly, whether that's in forensics, food testing or, as you described, in the medical realm. In the medical realm, we're being pulled in that direction, in following the Ion Torrent technology, because it's really creating a compelling solution set now for hospitals, diagnostic companies and the like. And I think the beauty of where we stand today is that we will partner and we will out-license that technology to partners that can really make the most of it. And we did that strategy with great success with qPCR in the research realm, and we'll do that strategy with great success in the clinical realm with Ion Torrent. And so I think we tell people we have an open door. We're ready for open dialogue, and we're seeing lots of people wanting to come and knock on that door and do business with us.

Operator

Our next question comes from Bill Bonello from RBC Capital.

Bill Bonello - RBC Capital Markets, LLC, Research Division

I have a question on the change in the business units. If you can just tell us a little bit more about the thinking behind that. Does it imply any kind of a change in the way that you're evaluating the markets? Any kind of a change in how you're approaching the markets? And any kind of change in the leadership of the business units? And then I do have a follow-up.

Gregory T. Lucier

Well, let me take that the one and then Mark can jump in. These are business groups that we think better match how the business has evolved internally, and I think it also is a better match with our markets. And one way that that's a better match is in the Applied Sciences, which Greg spoke about. We're going to more clearly group the businesses, forensics, BioProduction, those businesses that are not research focused, so that investors can see the results better tied to the end use markets. The other change that we're making is in Genetic Analysis where we're grouping all of the instruments in the applied consume -- and the associated consumables into that. And so I think the internal organization has evolved to those kind of groupings and that this just better matches up the way we're looking at the business internally and from a market perspective with the way we're talking about it to investors.

Bill Bonello - RBC Capital Markets, LLC, Research Division

Okay. So just -- that was sort of, I think, that I might follow up. So actually, in terms of sort of how you're structured from a management and reporting and organizational standpoint, that really is not changing? It's really just how you're reporting the results to all of us that's changing?

Gregory T. Lucier

Well, there's been some changes that have taken place in -- over the course of the last couple of years, and we've just not reflected that in our external reporting. I think what we're doing now is catching up the external reporting with really the evolution that's taken place with the internal structure.

Operator

Our next question comes from Jon Wood from Jefferies.

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

So Greg, appreciate the color on the return criteria. Can you comment at this point on how you're tracking kind of towards that 10% hurdle rate by year 5 on Ion Torrent? Are you ahead, in line or behind where you thought it should be at this point? And then will you be open to disclosing kind of empirical figures around this whenever the appropriate time may be, from your perspective?

Gregory T. Lucier

Just so I understand that last part, the empirical figures for the overall calculation or Ion Torrent results?

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

No, for Ion Torrents. So just whenever that -- the appropriate time may be, whether it's in year 3, year 4, are you open to disclosing more detail around how you're tracking to that metric?

Gregory T. Lucier

Sure. So on the first part, the first year of Ion Torrent exceeded our expectations. And we're on -- we're in -- a month or so into 2012 and we're on track again for the second year of our expectations. The second half of your question is would we divulge how big did Ion Torrent sequencing become 3, 4 years down the road, and I think the answer is yes. But -- and I'd also say to you that when it gets to that, you will also see, because it will be powering the top line of the company significantly. So we'll be happy to talk about that in a couple of years' time.

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

Okay, very good. My follow-up is for David. Are you willing to comment on gross margins in 2012? And I'm particularly interested in how you're kind of viewing mix as an overall effect. I know there was a lot of noise related to SOLiD upgrades in '11, Ion Torrent growth in '12. So anything you can offer us on kind of gross margin mix effect in '12 would be great.

David F. Hoffmeister

Yes. So let me comment a little. I'd -- first, I'd start off by saying we really want to focus people on the operating margin. We've said that's going to be up to 50 to 100 basis points, and we'll do what we need to do, as Greg said, in order to ensure that we get there. In terms of gross margin, you're right, there are a lot of moving parts there. We think the gross margin's been up slightly in 2012. We do have some headwinds there, principally the fall in royalties and also the increased growth in Ion Torrent, both of which are a drag on our gross margins. But we have productivity programs and other things underway that we think will offset that.

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

All right, that was great. One last one. R&D as a percent of sales.

Gregory T. Lucier

R&D as a percent of sales will be a little bit over 9%. And as we've said publicly, we're good at that level. I think investors should see somewhere between high 8s, 10% is a range that we can flex in. And so we're hovering around 9% in 2012.

Operator

Our next question comes from Derik De Bruin from Bank of America.

Derik De Bruin - BofA Merrill Lynch, Research Division

So I have a technology geek question. So given that...

Gregory T. Lucier

Dave will answer that.

Derik De Bruin - BofA Merrill Lynch, Research Division

So given -- I mean, just a kind of question on the benchtop sequencing market. So given that your competitor's box that can do 4 to 7 gigabases per run, admittedly for much longer run time, and your Proton 1 Chip is basically going to be doing about 10 megs, albeit in a shorter time. Really, given the path -- technological pathway -- I mean, I would argue that as in the run time, cost per boxes are roughly basically equivalent. So to me, the big question when I look at this is what does the Proton II Chip really do? And I guess, how soon are we going to be able to see results from that? Are we going to see something in AGBT?

Gregory T. Lucier

So let me answer that first, then Mark can fill in any gaps. But in AGBT next week, we will be showing some data that I think will provide more clarity of just how compelling this instrument is. I think there's a few other points just to amplify, though. First, you shouldn't dismiss the speed aspect. We're talking about substantial differences in speed, between well over a day, maybe 2 days, versus hours. And I can assure you as we speak with customers, especially in a clinical setting, that makes all the world of difference, and you don't have to have much of a discussion after that. However, there are substantial other advantages. For example, the read length. The read length of this instrument continues to increase, and that allows us to have ever more set of applications that I think open up an lot of new horizons. I'll give you an example. HLA. And so we're working with customers in HLA now that this instrument could be a compelling new platform for that field. The last thing I would say to you, again I think you shouldn't just compare the Proton instrument directly to that other instrument, because with the change of a simple chip, which is a consumable, you go from an exome to entire genome in 2012. And so there is a lot of versatility, a lot of growth. And again, just the economics, bottom line, are far better on this Proton instrument. That's not just me talking. That's what the customers are saying. And we'll have to prove that out in our results, and we'll -- we intend to do that.

Derik De Bruin - BofA Merrill Lynch, Research Division

Great. Speaking of the PGM, what are you looking at -- what was the average consumable pull-through kind of exiting 2011? And what are you looking for, for 2012?

Gregory T. Lucier

Derik, the average consumable pull-through for the PGM for the year at the end of the year was about $50,000, and we're targeting around $60,000 for next year. And we still believe we're on track for the $80,000 that we originally projected.

Derik De Bruin - BofA Merrill Lynch, Research Division

Great. And just one quick, if I could squeeze it in. You're talking about seeing Molecular Biology Systems go back to a low-single-digit growth rate. Obviously, that's going to be a very back-end loaded for this just given what your implied guidance and the fact that your PCR royalties are going to have to come off a lot in Q1 and Q2, if I remember correctly on how this works.

Gregory T. Lucier

Yes.

Derik De Bruin - BofA Merrill Lynch, Research Division

Okay, just making sure I can do the math.

Operator

Our next question comes from Doug Schenkel from Cowen and Company.

Doug Schenkel - Cowen and Company, LLC, Research Division

Appreciate all your comments earlier in your prepared remarks on capital deployment. Clearly, there's a lot of focus in the investment community on the Roche tender for Illumina. Clearly, expanding into the clinical environment is an ongoing focus for Life Technologies. Does a major diagnostic company becoming so aggressive in its pursuit of a next-gen sequencing platform at all affect how you think about how quickly and how much you should be spending on advancing into the clinic? And how important could M&A be in accelerating your initiatives in this area?

Gregory T. Lucier

Look, I would say that the Roche-Illumina transaction really doesn't affect our plans. We're not anxious. We're deliberate and we're executing a road map that Ronnie Andrews is going to do a masterful job doing. And one of the things that we'll do, and just to be very clear since I maybe wasn't clear in the earlier question-and-answer was, we are able to partner with other diagnostic companies in a very compelling way, and Ronnie will lead that effort. There are other areas and new ideas we have of business models that we're also carrying out, and Ronnie will lead that, too. And so I would just tell you that we're executing on a plan. A person of the caliber of Ronnie Andrews would not have joined us unless he came in, saw what [ph] the plans shared with him, and he felt they were really a winning set of ideas. So, you'll see them unfold. You'll start to see them unfold. And we feel good about our hand.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And then maybe if I could just ask 2 quick clean-up questions. I think you said there was $300 million remaining in the repurchase program. Is that exclusive of the amount that you set aside to buy back shares related to the Ion Torrent milestone?

Gregory T. Lucier

Yes.

Doug Schenkel - Cowen and Company, LLC, Research Division

Okay. And then could you guys give out anything that will allow us to get at a placement number for PGM in Q4? I'm just curious if you continued the sequential growth that we've seen over the last few quarters, the first full quarter you're competing with Misic [ph]?

Gregory T. Lucier

Substantial growth in the fourth quarter over the third quarter.

Operator

Our next question comes from Isaac Ro from Goldman Sachs.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Just wanted to try another question on the Ion Torrent piece from a different angle. If we look back the last couple of quarters, you've broken out acquisition contributions that would imply that the business there for PGM is growing, a pretty nice clip, I think about 45% sequential. So just trying to get a sense of how that trend continued in the fourth quarter. Obviously, the product has a lot of momentum. But just trying to square up what the contribution of PGM was this quarter. And then as we look into this coming year, what kind of trajectory is implied? When you kind of think of the midpoint of your guidance is 3% organic, how much of that is Ion Torrent?

David F. Hoffmeister

Well, what we've done this time, Isaac, and I appreciate the questions that people are asking, is that since we've now lapped one year, we're not breaking out Ion Torrent for competitive reasons in the detail that we've done in the past. We provided the number of units. As Greg said, we had been growing sequentially at a rate of about 50% or so, and that continued in the fourth quarter.

Isaac Ro - Goldman Sachs Group Inc., Research Division

Okay, that's fair. And just if we look more broadly on the economic spending environment, maybe if you could kind of look back on the quarter and give us a sense qualitatively of what we've learned about how customer purchasing behavior may be taking place relative to your initial expectations. Has there been any sort of trend in the behavior line with the uncertain funding environment that you've found notable or maybe different than you initially expected?

David F. Hoffmeister

Look, I think we said that it didn't get better, it didn't get the worse. It's really has stabilized. But this is a difficult environment. You've got to be really committed to do well in this environment. And given that this is the bulk of what we do, we've gotten pretty damn good at what we do in this market. And you saw that by the leverage and the results we got in the fourth quarter. I think going forward, this will -- this environment continues, and as you heard our guidance, we expect it to continue and not get worse but not get better. There will be companies that probably can't continue to invest at the rate they need to, to remain relevant. And we feel great about that as potentially a consequence because we're very committed to being there at the bench for biologically active products all over the world. And I think we're going to come through this period pretty strong.

Carol Cox

All right, great. Well thank you, everyone. This concludes our fourth quarter 2011 conference call. And obviously, if you will have any additional questions, please feel free to contact us here at the offices. The webcast will be available via replay on our website for about 3 weeks. And thank you, once again, for joining us. Thanks, Mary.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.

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