Sigma-Aldrich Corporation Presents at The 30th Annual JPMorgan Chase Healthcare Conference, Jan-09-2012 04:00 PM

Sigma-Aldrich Corporation (NASDAQ:SIAL)

January 09, 2012 7:00 pm ET

Executives

Rakesh Sachdev - Chief Executive Officer, President and Director

Analysts

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

Unknown Analyst

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

Okay, we're going to go ahead and get started. I'm Tycho Peterson from The Life Science Tools and Diagnostic Team. It's my pleasure to introduce our next company this afternoon, Sigma-Aldrich. Breakout will be in the Yorkshire Room, and let me turn you over to Rakesh to tell you a little bit more about the story.

Rakesh Sachdev

Thanks, Tycho, and good afternoon. And -- or thank, again JPMorgan for having us here this afternoon, and I think we have some exciting things to share with you. We announced an acquisition this morning that I will spend a few minutes on later on in my presentation. So we have some good things to share.

Before I start, I just want to make sure that you know that we will be talking about some forward-looking statements today and these are reasonable, what I have to say, although, we are not giving any new guidance today as you would expect for 2012.

Let me just spend a few minutes, and I know several of you in the audience know Sigma-Aldrich. Some of you, I've got to assume, probably don't know us as well, so I'll tell you -- I'll just start off very quickly about our markets and our business, and really I want to spend some time on our strategy of how we intend to grow this business going forward.

If you look at the Life Science tools space, essentially there are 3 big buckets where most of our peer companies and we compete in. If you look at the top right circle, that's instruments and lab equipment, that's a space that we do not play in. But if you look at the other 2 circles, the one below, which are reagents and consumables, that's a space that we play very solidly in. It's a very important segment for us. The addressable market there is over $25 billion worldwide and we are a key player there. And if you look at the top left circle of the segment, that's really the applications, services and diagnostics space, applied markets. And again, we are a player and we're becoming a bigger player in that space. Our specialty fine chemicals business fits in there and the most recent acquisition that we announced today on biological testing also fits very nicely there.

Overall, our headroom for growth is very significant in the Life Science tool space. The addressable markets that we play are in excess of $100 billion worldwide and given that we are about $2.5 billion revenue market, we are still a fairly small player and have a lot of room for growing.

Just in terms of profile, if you look at our business, if you look at the top left corner of the pie chart, you can see about 30% or 29% of our business is fine chemicals. So this -- these are uniquely manufactured products, and I'll talk more about that, that are produced and sold for manufacturers who manufacture their products. The other 70% of the business is really providing products and services for research customers who use our products and services for conducting research. And if you look at the segment within research, you can see that about 9% of the total company sales are in analytical chemistry. So we do standards, we do separation columns, and that's the analytical business. About 31%, which a very big segment is in biology. So a lot of what we do on the research side is producing biological products, and I'll talk a little bit more about that. We have another segment that's fairly small, that's our materials science group, that's about 3% of the total company growing, again, in double digits; it's a fast-growing business for us. And then the other 25% of our research -- well, it's the total company, but 25% of the business is what's the core Sigma-Aldrich business, it's the Chemistry and Lab Essentials business. And then we have a very small piece in labware. Again, it's products that are somewhat associated and tied with the rest of our products.

If you look at by customer segments, and this is the pie chart on the right-hand side. You can see about 1/3 of our business is with pharma, and diagnostics and biotech companies. About 1/3 are with chemical and other allied industrial companies, and a little less than 1/3 is universities and academia, with a small piece, about 7%, that we do for hospitals and commercial laboratories.

And then geographically, you can see that about 60% of our business is conducted outside the U.S. and 40% is in Europe and the other, about 20% or about 22%, is what we call APLA, which is Asia-Pacific and Latin America.

So what's our story? We have a very diverse customer base. We have about 1 million customers, and what our customers see in Sigma-Aldrich is a company that speaks the language and science. We are a science-based company. We have over 187,000 products. We have all sorts of chemicals and molecules, and biomolecules that we provide researchers around the world. We also provide products for manufacturing. But as good as we are on the science side, we're also very good service and distribution company. So 95% of the time when our customers order products from us, science-based products, we have it delivered to them within 24 hours, and no matter where you are in the world. So we are clearly an undisputed leader in what we do, and in a way, you can say, we are delivering science with convenience for our customers.

We have a strong growth history, and I have a couple of charts that I'll show you, but historically, we have grown slightly organically in excess of mid-single digits. And again, the makeup of Sigma-Aldrich, we are a very broad company and we don't have any one peer or company or competitor that emulates what we do. Our end markets tend to be recession-resistant. I won't say they are recession-proof, but they tend to be recession-resistant. And the reaction to even during global turmoil is somewhat muted in our end markets for our products and services. As I said, we have a great amount of diversity in our customer base. We have no single customer that is -- makes up more than 2% of our business or any single product that makes up more than 1%, so we don't have much concentration in any one product or customer.

We have industry-leading brands. We go and deliver our products through different brands, and we are well positioned in the emerging markets. We have had the first mover advantage in the Life Science Tools sector to be in places like India and China where we have not just the ability to sell, but we are also doing manufacturing. We have our labs, we do distribution, we do packaging, and we have been expanding in these markets quite significantly over the last several years.

Let me talk a little bit about the strategic priorities. So if you think about the vision of our company, we clearly want to be the trusted and really pre-eminent global provider to the research laboratory and targeted commercial markets. So we are not just targeting research labs, we're also targeting commercial opportunities that are growing quite significantly for us. We obviously consider ourselves as a growth company. We are focused on organic growth both on the research side of our house, as well as our fine chemicals side of the house. We have a lot of emphasis over the last few years in the company around operational excellence that has been allowing us to also expand our margins as we have been growing our top line. And we are a company that generates a lot of cash. And we are in the process of leveraging that cash for growth, both organic as well as inorganic, in the last little over 12 months, with the announcement that we made today of the acquisition of BioReliance. We have made 4 acquisitions in a period of slightly over 12 months.

The research business strategy is pretty clear. We want to, again, be a leading provider in the research labs. We want to be able to offer science-based products conveniently. We have several areas, and I won't go through each one of them, but we have several areas that we have targeted. If you look at the analytical and material science spaces where we sell a lot of products, these are high-growing markets for us. They grow in double digits. They make up maybe about 15% of the research portfolio, but it's business that has a lot of promise for us. If you look at the biology segment, again, we do a lot of things in biology all the way from cell biology to functional genomix. We are in biomolecules, we're in antibodies, and we have a sort of a mixed bag. We have some businesses that are growing very rapidly, some businesses that are growing at 30%, 40% a year, and some that are growing in the mid- to low-single digits. So I would say we have some very nice businesses there. And then we have our chemistry and lab essentials businesses where we supply a lot of chemical reagents. We also do some lab essentials. These are essential products that the laboratory uses for just blocking and tackling everyday experiments, assets, basis, buffers, and that's again a mixture of businesses that drill in the low- to mid-single digits.

Overall, I would say about 40% of our business grows near double-digit or higher than double-digit and the other businesses grow in the low- to medium-single digits.

Our fine chemicals business, again, is made up of 4 businesses. What we are doing in the fine chemicals businesses are manufacturing materials and providing services that help drive the performance of our customers products in every case. So if you look at the 4 segments that we are in, industrial media is a very important part of our fine chemicals business. This is where we manufacture media for drug companies to produce large molecule of biological drugs. This business is about 30% of the fine chemicals business and it has been growing in double digits, and we foresee some very strong growth in this segment.

We are also in the business of making high-potency compounds. We are manufacturing highly toxic APIs and compounds for our pharma companies. We're also manufacturing cancer drugs. We are doing antibody conjugates and this is about 15% of our fine chemicals business, and I would say this is medium growth. But over time, with the investments we have made in the past few years, this business should also grow nicely. We are also in the business of sell -- manufacturing and selling chemical precursors. These are very hard to manufacture, a highly pyrophoric compounds for the LED industry. We are a very key supplier of providing chemicals for the manufacture of LEDs. And with the advent of the LED growth worldwide, not just for televisions, but also for general lighting and with conventional lighting being phased out, this is a huge market that's going to get even bigger over the next several years. And we are a key player, and this business has been growing also incredibly well for us.

And then the last piece of the business is where we supply quality raw materials, GMP materials for -- to our customers for -- in the Life Science, as well as in the industrial markets, and those are also growing in mid-single digits. Overall, we see our fine chemicals business for the foreseeable future to grow in the high single-digits.

If you look at -- just in summary then, our organic growth goals, is we want to achieve double-digit growth in the faster growing markets of research, and I have pointed that out. Analytical chemistry, emerging biology and materials science are the 3 areas where we are growing double digits. And again, there, we are growing through innovations through product technology. We have been reporting a lot of our R&D dollars right here and through marketing leadership. The other more traditional chemistry business, we are protecting and enhancing through service and distribution around the world with -- and through operational excellence. And as I said, our SAFC business growth in high single-digit is again through our focus on unique products and unique manufacturing capabilities.

And finally, I would say that our focus in the emerging markets has never been greater in the company. We have been growing at least in the BRIC countries over 20%, and we expect that to continue. The BRIC countries make up about 7% or 8% of the company today, but as time goes on, it will become a bigger part of that. And finally our B2B capabilities on the web is a very important channels to take our products to the market. About 50% of all our sales in the research business is conducted through the web.

If you move to operational excellence, we have some very specific goals. Localization is very important. This past year, we have invested in China in a 6-acre campus over at Shanghai, which we'll be inaugurating this quarter. We have put a new facility in Bangalore, India as well. We are -- in the second quarter of this year, we will be inaugurating a new facility in Taiwan where we have invested about $25 million. So we have been investing in Asia-Pacific quite significantly. We bought a company in Brazil, in Rio, a few months ago that gives us capability of manufacturing in Brazil. This was Vetec that we did. So we're making the investments both organic, as well as inorganic in the emerging markets. We're doing more strategic sourcing, and of course, supply chain. If you've been following us, we have been quite active in improving and getting efficiencies through our supply chain optimization. And finally, the strong cash flow and the focus on acquisitions clearly has been raised in the company. We have announced this morning an acquisition of -- where we will be paying $350 million in cash to acquire BioReliance.

Let me just say a few words about the acquisition that we announced this morning. I think we are very excited about bringing BioReliance. This is a global market leader for safety testing for biological drugs, so you think about all the way from upstream to downstream of the production of biological drugs. BioReliance has played a very, very key role in evaluating, assessing contamination and providing clearance, independent testing for biopharma and biotech companies so their drugs can be registered and cleared for sale. And I would say that, today they are working with 90% of the top biotech companies. And as this business grows, as you will see, I'll show you a little graph, that in a few years, 80% of the leading drugs in the world that will be sold will be biological drugs.

This is bulk of their business, about 80% of their business is testing of biological drugs. They also have a business of doing toxicology studies, so they do both genetic toxicology, as well as mammalian toxicology studies for their clients. And frankly, with some of the technology platforms that we have, specifically, we have a license to a gene-editing technology called zinc-finger-nuclease technology that gives us the ability to make very targeted cell lines, as well as animal models, which when used in conjunction with the service capabilities that BioReliance has, it really gives us a competitive weapon in this space. So that's going to be very exciting as well for us to grow.

And we also have a small animal health services business which is really to diagnose the health of animal models that are used for studies. Again, they did about $110 million in sales in 2010. They have facilities. They're headquartered in Rockville, Maryland, outside Washington D.C. They have facilities there. They have a campus there. They also have facilities in Scotland and then they have offices in other parts of Asia as well, like in Japan and India.

So the strategic context is pretty clear. So on the biological testing, given that Sigma-Aldrich also provides products and materials to these same customers for the production of biological drugs, so we -- as I said, we provide industrial cell media, we provide other products like buffers and other chemicals right through the process. When you combine that with the ability to provide testing to these same customers, we can provide an end-to-end package, which will make us the broadest service provider for the production of biological drugs in the world. And finally -- and if you think about the next step that's going to come with biosimilars, when companies want to develop and introduce biogenerics in large molecules, they will need the same capabilities of having their products tested for safety, and we will have the ability to deliver that to them anywhere in the world.

Again, I said the purchase price was $350 million. We expect this acquisition to be accretive in 2012. And as I mentioned earlier today, really, the exciting part of this acquisition is the ability for us to drive growth and revenues. We then justify this on the basis of cost reductions. It's really a science-based company. It's a terrific business. It has a great management team, and along with the people that we have in Sigma-Aldrich, we're going to be able to take this to the next level.

This just shows a little bit of the process for the manufacturing of biological drugs. You can see from the left, all the way from upstream processing where you take just limited cells and you start producing the protein, which is the biological drug, you put it in bioreactors and you produce the drug, then you purify the drug, and then you clear the drug. Every step of the way, there's a requirement for testing for contamination for viruses and other things, and BioReliance plays a very key role at every step of the way.

And if you look at what Sigma-Aldrich does today, again, and right through, we provide products again to the same customers. And when you couple the product offering that we have with the testing services that BioReliance provides, we can take a value proposition that truly will be very, very strong for our customers.

Just a little bit about our historical performance to give you an idea of what we have achieved over the last 5 years. If you look at the last 5 years, typically, organically, we have grown this company in excess of mid-single digits. We've grown about 6%. But what's pretty impressive is that we have grown our earnings, our earnings per share, at about twice the rate. So we continue to grow our EPS in excess of 10% every year. I think on a CAGR basis, we have grown it about 11%, and that's our strategy, is to continue to grow top line, but grow our earnings much faster than our top line.

Again, we have pretty strong cash flow. We generate typically over $400 million of free cash flow every year, which is slightly in excess of our net income. And you can see, we also -- we are one of the few companies in the Life Science tools space that also declares a cash dividend, and we typically pay back our shareholders about 20% of our net income in cash dividends, and we have grown that every year since we have been a public company for the last 36 years.

Just to give you a little bit on the most near-term performance on how the company has performed. As you can see, through the first 9 months of the year, on a reported basis, we have reported growth of about 12%. And on an organic basis, if you peel out the effect of FX and the acquisitions, we have grown about 6% for the first 9 months. The guidance we had given coming into 2011 is, expect the company to grow mid-single digits. We had some fluctuations quarter-to-quarter because of comps, but -- so we will end up posting about mid-single-digit growth for 2011 in a year that still had some volatility.

Again, our -- this is just our 2011 guidance. We will report our results in the second week, in February. But this is what's out there, we're not updating this. We said, free cash flow about $400 million, and our EPS, somewhere in the $3.73 to $3.81, which will be a nice increase compared to 1 year ago.

And finally, this is -- for me, it's a feel-good chart. It should be for our shareholders actually. If you look at how our stock has performed compared to our peers, as well as compared to the broad market indices, the red line is Sigma-Aldrich, and you can see that over the last 5 years, we have substantially outperformed any of the broad indices and even the basket of our peers.

So we think -- this company has a very bright future. Again, when you combine the scientific knowledge of the science-based products that we take and combine that with our ability to serve the customers and give them the products in a communing fashion in the time that they want the products, it makes us stand out alone in a fairly large field. We have a very diversified portfolio. So when it comes to customers and products, we don't have an enormous amount of power in any one customer. We don't have much concentration, which gives us some strength. It frankly gives us a little bit of pricing power every year that we can take advantage of. Our global footprint is becoming even more global. We have been investing much more in Asia-Pacific and Latin America over the last couple of years and it's going to start paying dividends starting in 2012. As I said, we have a history of profitable growth. We have been able to deliver. We don't just talk about it, we have executed as a company. And frankly, our financial position is very strong. We generate a lot of cash. We have the ability to invest in the business both organically, as well as inorganically, and we're going to take advantage of that and continue to grow this business.

So on behalf of the Sigma-Aldrich team around the world, I want to thank you for being here. And I know we are going to a breakout session in a few minutes, and be happy to answer questions there. Thanks.

Question-and-Answer Session

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

So I think, just to begin, first on BioReliance, how the process went for you to acquire the company, and what you've seen from BioReliance over the last few years through 2008, 2009, 2010, and '11 might be helpful just for background. Clearly, it was a part of Invitrogen prior to '07, so maybe since it's been a private company, how you’ve seen it evolving would be helpful and then the process of acquiring it.

Rakesh Sachdev

Sure. So the question is about BioReliance and how we got to get to know BioReliance and what is the process to acquire it and where we are probably are going to take it. I'm repeating it because it's a webcast.

As part of our strategic learning process, we obviously look at the path forward for the company, and we had our -- I said on the services business. Especially, that was related to what we do on the faster growing markets of large molecule drugs. We've been a very significant player on the small molecule side as a company, but clearly, saw the benefits of being on the large molecule side through our BioScience industrial media business and felt that a company like BioReliance would add significantly to giving us a much bigger seat on the table with the customers and putting end-to-end solutions with customers. So the company has been owned now for a while by Avista Partners as a private equity company, and then it just happened that this also suited their time frame to divest the business. They have done a terrific job. The management team that's now been in place at BioReliance is second to none. I'll tell you, I've spent a lot of time with the management team in Rockwell outside Washington D.C. and they have just done a superb job, of -- both on the science side of building the protocols and the assays and the test that they do with their customers, but also winning the trust and the confidence, because this is a service business. It is a people's business and you have to have that trust working with biotech and pharma companies. And they work with almost every leading biotech and biopharma company around the world and provide this service. The process was a little bit of a competitive process as you would expect for any private equity company divesting a business. They went through a very limited process. It was a fairly quick process. It was a very efficient process. And I think we feel good and I trust that Avista Partners feels good about the way the process was conducted. And we got this deal signed in fairly short order.

Unknown Analyst

Can you talk about maybe how concentrated their customer base is within biologicals testing? Which is a large percentage…

Rakesh Sachdev

So the nice thing about BioReliance is very much like Sigma-Aldrich. They have a very diversified customer base. They don't have any single customer that makes up more than 5% of their business, and they do work with many, many clients, both small and large biotech and biopharma companies around the world. And I suspect that as more companies get into the fray, especially around biosimilars, they'll just add to their client list as we go forward. So they have a lot of diversity in what they do and with whom they work with.

Unknown Analyst

Your global footprints, how do you think about the FX headwind? What do you do to protect yourselves against weaker currencies outside diluting your earnings?

Rakesh Sachdev

Yes, so the question is about FX and FX movements and what it does to our earnings. I mean, clearly, first of all, I would say that we worked with many currencies around the world because we are a global company. And if you look at the different cross currency pairs that come into play into our earnings picture, it's not just the euro. Now most people think about the euro, it is an important currency for us, but we do a lot of business, for example, in Japan where the yen is very important and the yen has been very friendly. The yen has been strong and it's been helping us. We do a lot of business in the U.K. and the pound sterling hasn't behaved exactly the same way as the euro. We do a lot of business in Switzerland and the Swiss franc has been reasonably strong. So I think we've had some pluses and minuses, but it's fair to say that when the euro does get weak, it creates some headwind on us. We've been doing some minimal hedging. We've done that, because we believe that the best hedge for us, long term, is to build a natural hedge, which is what we've been doing. And what that means is building operations and labs, and plans, and distribution centers close to the customers, which is why we have been investing in Asia, which is why we are doing more and even in Europe. And I think over time, that will mitigate a lot of these issues, but until then, we are going to have some tailwinds and some headwinds. But frankly, we don't worry too much about it because it doesn't fundamentally change the way we do business. It doesn't change the competitiveness of the business. And yes, there's an accounting adjustment that has a translation impact on the margins, but if you go back and look at what's happened over the last 5 years, I can tell you that the pluses and minuses on the tailwinds and headwinds pretty much offset each other. So yes, in 2011, we were helped by a stronger euro, and we picked up an impact, which we have shared with everybody on our earnings. And if the euro stays where it is in 2012, it will be a headwind, so we may have to give up some of that. But we also, over the years, done other things to offset the impact on the currency. But all I would say is that it hasn't that -- fundamentally permanent to affect the way we do business. And overtime, we expect that this will become less of an issue.

Unknown Analyst

API is a big business for some companies, particularly small business for you, it has special requirements, regulatory requirements that create a burden on it. You got it as moderate growth small business. Is there synergies or some other reason why it continues to be a part of the portfolio?

Rakesh Sachdev

Yes. I mean, so our custom pharma business, again, it's working with a lot of the same clients. And again, our API business, we -- you can think about -- we do some generic APIs, which is a fairly competitive business because you have the Asians who have successfully done lot of work on APIs and are very competitive. But really, our focus on APIs and custom pharma products has been on very unique products. So we have been working on high-potency compounds, which are very hard to manufacture. There are very few people who can do that successfully. We do that out of our facilities in Wisconsin. We are also now doing more specialized manufacturing of, as I said, of cancer drugs. We do conjugate antibodies where we take a small molecule and conjugate it to a large molecule, and so as a cancer treatment, instead of just doing chemo, which just kills all cells, these products are targeted toward certain tumors. So they are guided missiles that go through, get to the tumor and blast. And we have been doing that for many companies. So we are working on things that has a growth prospect, has a good margin prospect, and we believe that we'll make a difference.

Unknown Analyst

What percentage of custom pharma is now HP API and then these other areas that are may be not...

Rakesh Sachdev

Again, our total custom pharma business isn't that large. It's less than 5% of the total company sales. But a greater percent of that will become highly specialized offerings. So...

Unknown Analyst

You are very strong in reagent, but now you've [indiscernible] in terms of what you don't [indiscernible] technology, the devices [indiscernible] Is that something that’s part of your strategy not to [indiscernible]...

Rakesh Sachdev

So the question is, we are in consumables and reagents and we're also in the services. Do we have any thoughts about getting into devices, which I think you mean instruments? As I've said, the instruments space is a different space. It is highly capital intensive. It's highly technology intensive and so there has to be a good reason for a consumables company to get into that space, and probably, the strongest reason would be a technical reason, is if the instruments and the consumables come together in a closed-loop fashion, which means they work hand-in-hand. Now that hasn't happened. It's happening only for highly specialized pieces of instruments. And so we don't think we are at the point where we feel, either for defensive reasons or for offensive reasons, that we have to take that step. So it's stuff that we monitor, just like every Life Science company, but there is so much other headroom for growth that fits nicely with us, that's why we keep taking those steps. Now obviously, we're going to always observe where instruments are going and how that technical connection with consumables is likely to be over the future. We don't think it's there today.

Unknown Analyst

Just talk about your expected margin over the next few years and whether or not you guys spent the $10 million or so this year [indiscernible] if you guys [indiscernible] or restructurings for the next year. Is that added into your normal [indiscernible] margins?

Rakesh Sachdev

So the question is about margin and margin expansion. I think it was a couple of years ago when we gave some guidance that -- we thought that where the company was and the ability for us to get more efficient and do some things that we would be able to expand margins. At that time, the company's margins, operating margins, are about 24%. And we said, we can easily see a way forward to getting another to 200 to 300 basis points expansion to about 26% to 27%. And frankly, we have done that faster than we thought. We are -- we got the first 200 basis points fairly quickly as we work through our supply chain initiatives and a few other things. As I said, we also don't have a lot of concentration with customers and products that always gives us the ability to do some pricing. So you put all that together and we are there. Now we are not trying to run this business on quarterly margins. I can tell you that. So we -- it's not important for us that next quarter's margin has to be up because what we are running this business is for long-term, solid sustainable growth. And so we took the opportunity this year. We had some tailwinds from FX and we were making good progress on margin improvements. We said, we are going to proactively start investing even more in the business to feel growth. And what that meant was putting more feet on the ground in Asia. We have been investing in people there. What it meant was we have been investing quite significantly on certain channels, our eBusiness platform. All that I know is going to pay dividends. And so can we grow margins even further? We probably can. But again, our first and foremost is to drive top line growth, is to drive growth and drive overall profits in the company. And if that comes while we can expand margins, great. We'll continue to do that. The other thing is, we also have a mix. We have been growing a part of our fine chemicals business that carries a slightly lower margin than our research business. Now that doesn't mean just because we put handcuffs around or put a stake around margin that we're not going to grow our fine chemicals business, which is a great business. So I'm always a little careful about not putting such constraints on margin. All I can tell you is that we have the opportunity to continue to grow margins. But at what pace we’ll grow it will be dictated by a number of things of where we are in the investment cycle for our future growth, where we are on the mix of businesses that are growing between our CFC and research. But I'm pretty confident we still have a lot of opportunities to continue to grow profitability in the business.

Unknown Analyst

So [indiscernible] spending almost a year of free cash flow. What is your view in terms of the timeline to achieve a reasonable return [indiscernible]?

Rakesh Sachdev

On the acquisition we announced today? Yes, so I -- obviously, we look at both earnings accretion as -- so the question is, when do we get a return on the acquisition we announced today. We look at both earnings accretion, as well as value accretion. Earnings accretion is simple these days because the cost of money is so low. You buy a company that is very profitable and you look at the cost of financing the acquisition and you can come up with a map and says it's accretive. So that's -- it's what it's going to be in 2012, the business is going to be accretive. The real other question is, is it going to be value accretive? Is it going to add to your return on invested capital? Are you going to return bigger than that? And all the things that we look at the parameters when we made this acquisition, and we expect that we would get into the positive territory in about 3 years in this business. And that's what we hold ourselves to. There was a question at the back, yes? Sorry, go ahead.

Unknown Analyst

Can you expand on your opportunities in LEDs products [indiscernible]

Rakesh Sachdev

So the question is, can I expand on the opportunities in LEDs. So first of all, we make -- we manufacture precursors for LEDs. Basically, what they are, they are nasty, gaseous chemicals. So it's like things like trimethylgallium, trimethylindium that's used in a vapor-deposition process on the substrate or the surfaces to give the brightness and the characteristics for LEDs. There are not many companies who either want to be in the business or can be in that business. There are only a few handful, 3 or 4 companies that do that. That's one. This business is a very small piece of lighting today. So if you look at the overall lighting requirements around the world, and you say, "How much of that is really occupied by LEDs?" It's a very, very small piece. So any growth from here is a giant step. And I think most of us sort of think about LEDs because we are tuned to thinking about LED televisions, but it's a lot more than that because lighting is going in that direction. As many of you know, come -- I think, as of the first of this month, the U.S. will not allow manufacture of 100-watt bulbs. So conventional lighting bulbs that you and I buy to replace in the house over time, over the next few years, will all be phased out. And the U.S. is slower than many other countries. And so what's going to take the place of conventional lighting, it's going to be things like LED, and so there's a huge growth that's coming. And we can see that because we monitor the acquisition of equipment that's used for the manufacture of LEDs, and we see the order book on that. And every time there's greater volumes, it just means more business for us. Now we have been somewhat capacity constraint, and we've been trying to expand our capacity. We are in the process of putting a new plant in Taiwan that goes -- will hopefully be up and running in a couple of months. We're going to add 30% of capacity. Are we going to stop there? Probably not, because I think this business for the next several years is likely to continue to grow. Now there will be some quarters where like last quarter, there was -- always talking of LED televisions, which is still right now a bigger piece of that, but as general lighting becomes a bigger piece, that will become less of an issue. So again, thinking long term, which is what we do, thinking long term, I think this -- the end markets are going to be very solid.

Unknown Analyst

On the SAFC high-tech business how concentrated is your customer base and if -- are those customers typically sourcing those multiple providers -- the competitors that you’re mentioning [indiscernible]?

Rakesh Sachdev

So our customers tend to be -- they tend to be more Asia-based because that's where more of the manufacturing of LEDs takes place. And I would say that we have developed strategic partnerships with a number of these companies and there will be new companies that come into -- come into the market to manufacture LEDs. It's going to draw more players in. There's going to be some -- I can foresee down the road there will be some pricing pressure. But again, the beauty of our business is the chemicals we provide is so small compared to the total cost of either the final application or even the LED, that the pricing pressure on our business is far muted. And it's a fixed cost business once you put the investment in place, even if you have to give some pricing, it's still a very good business.

Unknown Analyst

[indiscernible] chip manufacturing, you also -- you get other segments like [indiscernible] other things.

Rakesh Sachdev

Yes, so far, we are also in chips, because we go through the same deposition process. It's slightly different, but we also do different kind of gases for semiconductors. We are also doing that for solar panels. It's a small piece of the business, but -- and we could probably take it to other applications too. But right now, because we don't have a tremendous amount of capacity, we are trying not to open up markets that we can't serve. But that is something that our teams in this business are clearly working on in developing new business plans.

Unknown Analyst

You are now looking at -- based on deposition, chemicals [indiscernible]

Rakesh Sachdev

No. We are looking at -- see, what's interesting is we also have a materials science business and research. What we have been talking about here is in our specialty fine chemicals business for manufacturing. But we have a pretty strong materials science business that's growing. And what comes out of that is because we work with so many different industries, what comes out of that are applications that's so far haven't been commercialized. And as soon as there's an opportunity to commercialize an application coming out of our materials science business, it becomes a candidate to be reviewed and assessed by our SAFC business.

Unknown Analyst

[indiscernible] can you talk about different kinds of density for biology manufacturing and I guess, talk maybe opportunities geographically, where the business has stayed predominantly [indiscernible] pharma and where you see it expanding?

Rakesh Sachdev

So yes, I mean, the compared dynamics -- again, this is a science-based business. There are a couple of large CROs that also participate in this. Although, I would say that BioReliance is clearly the market leader, it has about 30% of the market in biological testing. And as long as the biopharma and biotech companies continue to outsource, which is what they choose to do in this case, many companies don't want to build the capability in-house. It is a very specialized. And also they don't want to necessarily test for viruses and contaminants in-house because if you heard about the horror stories that if a certain type of virus were to get into a facility outside of the bioreactors, you basically have to shut the whole plant down for a couple of years. You can't produce drugs anymore in that facility. So it's too big an issue for these companies to do it themselves. In most cases, there are a few companies that would do it themselves.

Unknown Analyst

Can you talk about what you're seeing from the academic end market and how that case is throughout last year [indiscernible]?

Rakesh Sachdev

So the academic end markets. That's probably the one that -- coming into 2011 has been probably the most stable end market. I think in 2011, especially in the back end of 2011, it probably was more of the volatile end markets, especially in the U.S., given what is happening on in NIH and Congress trying to get their recommendation around budgets for NIH. Frankly, November 18, I believe, was the date where -- NIH would've been told whether they have huge budget cuts and all. It frankly paralyzed not just the institution, but also unjustifiably paralyzed some of the recipients of the NIH funds. So I think in Q4, we saw some softness and volatility in the academic markets in the U.S. I think what's happened now though is there's clarity about -- at least for 2012 for NIH. There's still, I guess a debate of what 2013 is going to look like, but I would say things are becoming a little better on the academic side in the U.S. but Q4 had some volatility. In Europe, we haven't seen, Europe has been pretty steady on the academic side. In some countries, actually, the academic funding continues to grow. But Europe has other macro issues as most of us in this room know. So there are a lot of balls up in the air for Europe in 2012, and I think people are just going to be cautious to see what happens. I don't suspect that research budgets in Europe are going to be slashed. I think it's still an area that most countries want to try and protect.

Unknown Analyst

Can you just elaborate on BioReliance? It seems like the more you talk about it, the more it does seem a bit of a diversion from your historic focus predominantly on reagents and chemicals that are used like SAFC by your customers, but it seems to fundamentally be a service business.

Rakesh Sachdev

It is a service business.

Unknown Analyst

And you could argue that there are others services that you’ve got but seems like this is moving you more in that direction [indiscernible] so taking on risks like what you've just described of majority [indiscernible] shutting your operation down. How do you think about managing this kind of service business relative to the core businesses?

Rakesh Sachdev

So clearly, you're right. This is a service business. This is not a business where you're just selling chemicals in a bottle. But it is a business that's very entirely tied to the whole manufacturing process of biological drugs, which we are already in. It opens up some, I think, fantastic end markets. It opens up new avenues for Sigma-Aldrich to grow. Right now, it's testing of biological drugs. Frankly, down the road, we'll be at crossroads as should we think about testing of other things, whether it's food safety, at least gives us the choice which we haven't had. And I think at the end of the day, we believe, it's not very far from our core. We understand exactly what this is, and just gives us new avenues to grow and create value for the same customers that we do business with.

Okay. Okay, well thank you.

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