Applera Corporation Q4 2008 Earnings Call Transcript

Applera Corporation (CRA)

Q4 2008 Earnings Call Transcript

July 23, 2008 4:30 pm ET

Executives

David Speechly – VP of Corporate Affairs, Celera

Kathy Ordoñez – CEO

Joel Jung – CFO

Tom White – Chief Scientific Officer

Chris Hall – Chief Marketing and Clinical Operations Officer, Berkeley HeartLab

Analysts:

Sarah Michelmore – Cowen & Co.

Charles Duncan − J&P Securities

Bruce Cranna – Leerink Swann

Bill Quirk – Piper Jaffray

Derik De Bruin – UBS

Eric Criscuolo − Thomas Weisel Partners

Balaji Gandhi – Oppenheimer & Co.

Presentation

Operator

Good afternoon, my name is Naquita and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Celera fourth quarter fiscal 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. During the speakers' presentations there will be multiple question-and-answer session. (Operator instructions)

I would now like to introduce Dr. David Speechly, Vice President of Corporate Affairs at Celera. Dr. Speechly, you may begin your conference.

David Speechly

Thank you, operator. Good afternoon everyone and thank you for joining Celera Management to discuss the fourth quarter fiscal 2008 financial results that we issued earlier this afternoon. Present today are Kathy Ordoñez, our Chief Executive Officer, and Joel Jung, our Chief Financial Officer, as well as, other executives from Celera and Berkeley HeartLab.

During this call, we will be making forward-looking statements about Celera's businesses. These statements are subject to the risks and uncertainties relating to our businesses and are referred to in our released issue today and in our filings with the SEC. We will also be discussing historical and forward-looking non-GAAP financial measures.

These non-GAAP financial measures are not in accordance with or an alternative for GAAP and may be different from non-GAAP financial measures used by other companies. A reconciliation of GAAP and non-GAAP financials can be found in today's press release and on the financial reports page of the investor relations section of our website at www.celera.com.

Please note that after this call the text of these prepared remarks will be posted on the Investor Relations section of the Celera website.

First, Kathy Ordoñez and Joel Jung will comment on the performance of Celera during the quarter and they will open up the calls for question. Kathy?

Kathy Ordoñez

Thanks David and good afternoon everyone. Before I start on this quarter's performance, I'd like to extend a warm welcome to each of you to the first earnings call for Celera as an independent company.

We are highly energized about our new status and committed to providing the investment community with transparency and access, as well as, an open and constructive atmosphere for communication.

We are also very pleased with the new board of directors established as part of our separation from Applera. This includes two members who were previously part of Applera's board whom I invited to join our new board, Jean-Luc Bélingard and Richard Rick Ayers. Other Celera Board members include Bill Green, former General Counsel of Chiron; Dr Gail Naughton, Dean of the Business School at San Diego State University; and Dr. Ben Shapiro, former Head of Research and Business Development at Merck.

I will serve as the only management member of the Celera Board. The board has elected Bill Green as non-executive Chairman. Our new Celera Board of Directors has already demonstrated a high level of engagement and the Celera management team is looking forward to working closely with them in the future.

We are pleased with the operational performance across all parts of the company in this last quarter. The businesses we acquired last year, Berkeley HeartLab or BHL and Atria Genetics, continued to contribute both financially and strategically while sales in our alliance with Abbott grew. We also made substantial progress in the commercialization of our KIF6 test, which is being fully launched this week at BHL. We have high expectations for the contribution from this new task to the future our businesses, and I'll expand on this in the few minutes.

From an operational and financial perspective, there were some noteworthy anomalies that affected us both favorably and unfavorably in the quarter compared to the prior year quarter.

Following the separation from Applera on July 1, the first, and most significant consideration, is the $91.2 million valuation allowance for tax assets resulting from the separation from Applera. This is a reserve against Celera's R&D tax credits and other tax assets from previous acquisitions by Celera. These tax assets are now fully reserved on our balance sheet and represent potential future offsets to taxable income. Joel Jung will describe this in more detail in a few minutes

Other items that affected us unfavorably included higher SG&A expenses at BHL as we continued to expand our geographic reach, as well as continued integration activities. Additionally, transition work related to our recent separation from Applera and declining interest rates also had a negative impact during the quarter. Items that had a positive effect on the quarter's performance included higher royalty revenues and favorable manufacturing variances in our Products business, leading to a higher gross margin

So, in balance, the fourth quarter closed generally as we had anticipated. The fundamentals of our business remain strong, and we're pleased that we achieved our key financial goals for the year for revenues and profitability on a non-GAAP basis.

I will now focus on a review of our Service revenues, which are derived primarily today from testing services at BHL, and which contributed $26.1 million during the fourth quarter of fiscal 2008. This reflects a 15% increase over the third quarter of fiscal 2008 and was driven by increased samples processed by the lab. During the recent quarter, we continued to add resources in the field at BHL and expanded our presence and focus on selected market areas, as we identified new physicians interested in having their patients participate in the Berkeley program.

An important aspect of our strategic rationale for the acquisition of BHL and for its continued growth relies on the introduction of new molecular tests to its menu, many of which are expected to be based on original Celera discoveries. In March, we initiated a pilot program for a new KIF6 blood test at BHL. KIF6 is a proprietary gene variant that conveys up to 55% increased risk for coronary events in untreated people who carry the risk form of the gene. This incremental genetic risk has been shown to be substantially mitigated by statin therapy. The KIF6 pilot program addressed approximately 35 geographically dispersed physician group practices where we detailed the new test and used the experience to refine pricing, positioning and reimbursement. I'm pleased to say that the trial market for KIF6 has been a resounding success, with nearly 15,000 tests ordered during the trial period and we have been receiving – on average – over $100 in reimbursement revenue per test, consistent with what we had anticipated when we entered the trial market. We are providing this information as additional color on the KIF6 trial market. In general, we do not intend to provide regular specific updates on the performance of individual tests within our products or services businesses.

Last week, we completed the training of our entire field force and are now initiating the full commercial launch for the KIF6 test this week. We expect this KIF6 testing to grow rapidly and become one of the top revenue generators for BHL and Celera.

In addition to this, we are also working on a second version of the KIF6 test at BHL that uses a buccal swab, which is a non-invasive cheek swab sample. We expect to initiate a pilot market for this test in the fall and then to commercialize it broadly during calendar 2009.

I will now turn to the Product business revenues that include Celera's portion of sales of Atria HLA products, shipments of Celera-manufactured products to Abbott, at cost, and equalization payments from Abbott. Product revenues grew by 48% in this last quarter to $9 million from $6.1 million in the prior year quarter.

Total end-user alliance sales were $35.9 million this quarter compared to $27 million in the prior year quarter and increase of 33%. Increased sales of HIV, HCV and HBV RealTime viral load assays used on the m2000 system, HLA products, ViroSeq for HIV-1 genotyping, and the Fragile X and thrombosis analyte specific reagents, all contributed to the year-over-year quarterly growth. These increased sales were partially offset by lower sales of cystic fibrosis reagents. Following Abbott's settlement of its litigation with Innogenetics in the third quarter of fiscal 2008, the HCV genotyping reagents were reintroduced onto the menu of tests offered through the alliance. In this last quarter, Abbott received a CE Mark for an HCV genotyping assay, further expanding the infectious disease menu on the m2000 outside the United States.

We were pleased with the sustained penetration of the m2000 system in its existing markets during this last quarter, as the system continues to contribute substantially to the growth in alliance end-user sales.

Last week, Abbott reported that it had received 510(k) clearance from the FDA for the Chlamydia and Gonorrhea assays that run on the m2000 system. Abbott also reported that there are ongoing clinical trials for hepatitis C and B viral load assays, and that the alliance plans to launch an HPV test for the m2000 outside the United States approximately by the end of the calendar year.

Last week we received marketing clearance from the FDA for our 510(k) submission of the ViroSeq HIV-1 Genotyping System software v2.8. This software is used in conjunction with the ViroSeq HIV-1 Genotyping System, which is designed to detect mutations in the HIV-1 viral genome that confer drug resistance, and as such, is used as an aid in monitoring and treating HIV-1 infections. Features of the updated software include the addition in the resistance algorithm of two new drugs, as well as an update of the resistance algorithm for all currently available protease and reverse transcriptase inhibitors.

In addition to this, we're preparing for a meeting with the FDA to discuss the pathway for registration and the clinical trial design for a KIF6 diagnostic product in the United States as well as preparing to make the test available outside the United States.

Royalties, licensing and milestone revenues were $8.3 million in the fourth quarter of fiscal 2008, compared to $4.1 million in the prior year quarter, with the increase due primarily to higher revenues from Siemens and Cepheid.

Other highlights of the quarter included the publication of two papers on rheumatoid arthritis from our autoimmune disease program. We're also in the final stages of publishing results on our aspirin benefit studies linked to a variant in the LPA gene. We currently expect that this will be the next laboratory developed test based on Celera's discoveries to be commercialized through BHL. Two other papers on our discoveries of genetic variants that predict risk for stroke are also in press.

In closing, we're pleased that Celera achieved substantial revenue growth and profitability on a non-GAAP basis for fiscal 2008, despite challenges associated with the separation from Applera and the integration of two acquisitions. Celera now stands as an independent company with a growing portfolio of product, service, and other revenues as well as with the potential for new partnerships and future M&A activities.

Now, Joel Jung will make a few comments regarding the financial results for Celera and our financial outlook for the remaining 6 months of calendar 2008.

Joel Jung

Thanks, Kathy. Reported revenues for the fourth quarter of fiscal 2008 were $43.4 million, compared to $10.2 million for the fourth quarter of fiscal 2007. Excluding revenues that were derived from services and products from the BHL and Atria acquisitions, Celera's reported revenues for the fourth quarter of fiscal 2008 increased 47% to $15.0 million compared with the prior year quarter. The increase was primarily related to higher licensing and royalty revenues.

In the fourth quarter of fiscal 2008, Celera reported a net loss of $96.8 million, or $1.21 per share, compared to a net loss of $8.0 million, or $0.10 per share, for the prior year quarter. Excluding special items, fourth quarter fiscal 2008 loss per share on a non-GAAP basis, was $0.01, compared to a loss of $0.07 per share for the prior year quarter.

Results for both periods were affected by the specified items that are described in the reconciliation table in today's release and available on our website. For the fourth quarter of fiscal 2008, Celera recorded items that increased the net loss by $96.3 million, which included a $91.2 million non-cash, tax charge to establish a valuation allowance against Celera's deferred tax assets as a result of the split-off from Applera Corporation. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude us from using our deferred tax assets in the future. As described in our S-1 Registration Statement, this non-cash reserve is required under U.S. GAAP accounting, and reflects Celera's history of losses and the recognition that Celera may, or may not be able to use all these assets prior to their expiration. Certain of these deferred tax assets are expected to expire in three to twelve years, if not used before then. These assets are primarily capitalized R&D expenses, R&D tax credits, and net operating losses associated with prior acquisitions, and are now fully reserved on our balance sheet, and represent potential future offsets to taxable income available to Celera.

For fiscal year 2008, Celera reported net revenues of $139.4 million compared to $43.4 million in the prior year. Fiscal 2008 results included net revenues from BHL and Atria Genetics for three fiscal quarters. Excluding revenues from these two acquisitions, Celera's net revenues in fiscal 2008 were $62.5 million, an increase of 44%.

For fiscal year 2008, Celera reported a net loss of $103.2 million, or $1.30 per share, compared to a net loss of $20.6 million, or $0.26 per share, for fiscal 2007. Fiscal 2008 earnings per share on a non-GAAP basis were $0.01, excluding the non-cash tax charge and other specified items described in the reconciliation table in today's release. This compares to a loss of $0.24 per share for the prior year. For fiscal 2008, the specified items increased the net loss by $104.1 million, which included the $91.2 million non-cash tax reserve expense. For fiscal 2007, items affecting component comparability increased the net loss by $2.1 million.

In the recent quarter, R&D expenses decreased by $4.1 million to $9.4 million compared to the same quarter last year primarily due to a reduction in spending in discovery research in alliance-related projects. SG&A expenses in the quarter increased to $25.1 million dollars from $8.3 million in the prior year quarter due primarily to activities related to BHL, which was acquired in the second quarter of fiscal 2008.

Celera ended the recent quarter with cash and short-term investments of approximately $335 million dollars.

Celera's Board of Directors intends to align the company's fiscal year with the calendar year. As part of this process, Celera is issuing its outlook for the remaining six months of calendar 2008. The guidance that we can provide for Celera for the remaining six months of calendar 2008 is as follows.

Total reported revenues are anticipated to be between $88 million and $93 million, reported R&D expenses are anticipated to be between $18 million and $21 million and SG&A expenses are anticipated to be between $45 and $50 million. Celera anticipates low, single digit earnings per share on a non-GAAP basis for the second half of calendar 2008. Although the non-GAAP earnings for the period ending September 27, 2008 may be near breakeven.

Amortization of intangibles related to acquisitions which are excluded in the determination of non-GAAP earnings per share are expected to be approximately $5 million dollars with an EPS impact of approximately $0.04. The total pre-tax impact of FAS 123R is expected to be between $3 million and $4 million with an EPS impact of approximately $0.03.

We believe this outlook could be affected by a number of factors and other risks and uncertainties outlined in today's press release and in our filings with the Securities and Exchange Commission.

These comments reflect management's current outlook. Celera does not have any current intentions to update this outlook and plans to revisit the outlook for its businesses only once each quarter when financial results are announced.

We'll now take your questions regarding Celera.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line Sarah Michelmore of Cowen & Co. Please proceed.

Sarah Michelmore – Cowen & Co.

Yes, thank you. Good evening. You mentioned that the calendar Q3 quarter – you may have less earnings there. You just talked about the seasonality of some of the expenses there and may be Joel, you can just talk us through what are the duplicate expenses that you are bearing in the P&L right now with some of the transition agreements coming out of the Applera spin, that would be helpful.

Joel Jung

Sure, Sarah. So we are still in the process of transitioning from Applera and as such, we are incurring some costs back to Applera as well as building our own infrastructure, areas like tax, treasury and other HR services, IT, so we have a number of services where we're continuing to build in transition at the same time we're obligated to pay for those services back to Applera as independent companies. So we do have some charges there. So those costs are baked into our expectations and we would expect that those costs will continue to decline over the next six months which is why there is probably a bigger doubling up of those in the September quarter than it would be going into December. I think also on the December quarter, the December quarter tends to be a stronger quarter for Berkeley HeartLab from a revenue perspective and so we would expect those revenues to build as we enter into the end of the year.

Sarah Michelmore – Cowen & Co.

Okay, and a question on gross margin and maybe if you could talk about it excluding the gross margin contributions from things like licensing collaboration revenues, so what is the underlying kind of gross margin trends for the BHL business and the alliance part of the portfolio, if you could separate them that would be great, however, it's helpful to discuss that.

Joel Jung

Yes. We probably not going to identify the gross margins in the two businesses specifically our segment reports will obviously break out the operating income from those two segments when we get to that and with the filing of the K. I think in general, the gross margins are probably a little bit higher this quarter than we would expect on a long term go-forward basis but we do have those both going forward. I think that the gross margins that we're seeing right now maybe net of the – now the royalties and license revenues are pretty consistent with what we would expect going forward and as we add additional tests into the menu at Berkeley HeartLab we would've expected the Berkeley HeartLab margins would continue to increase.

Sara Michelmore − Cowen & Co.

Okay. And last question, I will get back in the cue [ph]. Is there any way to give us some sense of what's the pro forma revenue growth for Berkeley HeartLab was in the quarter?

Joel Jung

The information on Berkeley Heart that we have put out there is in the S1 and so I would say that it is going to be a little difficult to tease it out for the next couple of quarters just because obviously we acquired them last October and so the information prior to that is – makes very difficult comparisons.

Sara Michelmore − Cowen & Co.

Okay. But is there any indication to give us just about what the organic growth trends are there to the double digit growth trend I think you – coming into that acquisition that you had described it as a double-digit growth business. Can you just talk about it in terms of even maybe what your expectations were when you bought it?

Joel Jung

Yes. I think in general the business is performing as we would hope.

Kathy Ordoñez

Hi Sarah, this is Kathy. I think that the way we are expecting Berkeley to grow is really around two strategic objectives. First of all, to continue the – to increase the geographic penetration and that would be consistent with the type of growth that we have seen and then to layer on these new test KIF6 and that may not be helpful to you but it's very difficult for us to compare prior growth because the results at Berkeley were not audited to the standard that we obviously have to have; and secondly, the ending period – the accounting periods were inconsistent so with that caveat, I will say that as of September 9 analyst meeting, we do intend to give a deep dive into the Berkeley HeartLab business and you will get a sense of the trends at that point in time.

Sara Michelmore − Cowen & Co.

Okay, thank you.

Operator

Your next question comes from the line of Charles Duncan of J&P Securities. Please proceed.

Charles Duncan − J&P Securities

Good afternoon and thank you for taking my question. Congratulations on a very eventful quarter. My question was around the KIF6 gene base test and specifically if there had been any additional clinical information that may modulate your intent or excitement for that test specifically information note of the Jupiter study.

Kathy Ordoñez

Tom White, our Chief Scientific Officer will answer that question.

Tom White

Well, we do expect to publish additional results on KIF6 both with respect to its prediction of risk for coronary artery disease and the statin response over the next three to twelve months. What I can say today is that as you know the KIF6 statin benefit has been shown for two statins, hydrophobic and -- sorry, hydrophilic and the lipophilic one. And we expect this will hold for other statins and our goal really is to test why other statins like potentially the one from the Jupiter study as well as other cardiovascular drugs such as niacin or fenofibrates or acetamides [ph]. So we would be interested in genotyping unit, Jupiter improvement field and other studies. And that's one of our main objectives to move over the next few months to a year.

Kathy Ordoñez

We are seeking access to the Jupiter samples, right Tom?

Tom White

Yes, that's correct.

Charles Duncan − J&P Securities

And but specifically, I think there maybe some confusion as to the real medical utility of that test. Is it meant to help in – investigate or physician's increased potential statin use in patients that may benefit from that or decrease potential statin use in patients that may benefit from that? What's the medical utility?

Tom White

Well, I think you could think of the clinical significance of KIF6 testing in a couple of different ways for people who are not currently taking a statin, people who are carriers about 60% of the population would have an additional risk factor which could increase the number of patients eligible for statins who previously only had been candidates for lifestyle or dietary changes.

Charles Duncan − J&P Securities

Sure.

Tom White

At the same time for the non-carriers, the other 45%, they may still have standard risk factors to justify statin therapy. But other therapies such as niacin or fenofibrates which have already have been shown to reduce events in patients with standard risk factors are also likely to benefit non-carriers. And finally I think for people who are currently taking a statin, the KIF6 carriers would have an additional rationale for increased compliance because as we demonstrated in several statin studies they have a benefit and a reduced number of cardiovascular events regardless of whether or not their LDL or CRP levels go down. It's a strong motivator for continuing to adhere to statin therapy if you're a carrier.

Charles Duncan − J&P Securities

That's very helpful. I appreciate that, Tom. Can you offer any additional color on some of your early experience with – if you will on the beta testing of the test?

Kathy Ordoñez

Yes, perhaps Chris Hall who's in charge of clinical operations at BHL can provide some feedback on the test market.

Chris Hall

And so far we've – I guess Kathy mentioned we've left the test market phase this weekend. We've gone in the commercial launch. We did that based on the feedback that we received from the clinicians that we worked with that they were indeed finding clinical utility in the test and they were doing that both to help think about statin therapy for patients that they were considering putting it on, putting patients on but secondarily looking at other alternatives and lifestyle in the right mix and doing that for patients that test KIF6 negative.

The really exciting thing that we've really have come to like in this last several months through this test was helping to reinforce patient compliance because one of the problems with statin therapy has been the long term usage of it by patients and this has really helped undermine that because people understand that genetically they're going to respond well to that. So, we're seeing clinical utility both from the patient side interestingly but physicians have given us the same feedback which is why we've moved it out to launch – moved it into launch this week.

Charles Duncan − J&P Securities

Perfect. Thanks for the added color.

Operator

Your next question comes from the line of Bruce Cranna of Leerink Swann. Please proceed.

Bruce Cranna – Leerink Swann

Good afternoon. I guess, firstly, on the back after the year or the – I guess the next six months the guidance, Joel or Kathy, should we be thinking of the revenue split as being somewhat similar as to what we've seen here to date in terms of product sales, royalties, etc.?

Kathy Ordoñez

Well, one of the issues that we've had to grapple with in the business and those of you who have followed us have seen it, is that our revenues tend to be a little lumpy form quarter to quarter and that has to do in the product side where we get large tender orders or we have several laboratories – large laboratories here in the United States that order product quantities that can fall into one quarter or another quarter and that can make a difference in terms of how sales actually perform quarter to quarter. And there is, as Joel mentioned, some seasonality in the – the Berkeley HeartLab business where we typically expected or typically seen a stronger quarter ending in December as people use up their healthcare account – spending account. With that being said though, so if you're not looking at it on a quarterly basis but looking at it in the aggregate, the general trend should be pretty consistent with what we've seen this quarter.

Bruce Cranna – Leerink Swann

Actually that's where I was going Kathy. So, I heard that seasonality comment. It wasn't quite clear to me. I mean, you mentioned 4Q but I guess just talking about calendar periods, so September could be or would be expectedly slightly more sluggish at BHL than the December quarter?

Kathy Ordoñez

Celera has not yet on its own experienced a quarter that ended in September but based on historical information we've seen and anecdotal information, the testing volume in the lab tends to be a little bit lower during the summer although that hasn't been totally consistent for the historical data that we've looked at. Chris, I don't know if you want to comment on that.

Chris Hall

That's accurate.

Bruce Cranna – Leerink Swann

Okay and just –

Chris Hall

We tend to see physicians adopting the Berkeley making more decisions in the second quarter and the fourth quarter and then there's the fourth quarter seasonality where folks tend to consume healthcare services at the end of year so deductibles are filled up. So we see that dynamic.

Bruce Cranna – Leerink Swann

Yes. Can you see any signs of weak economy in that respect? Change in consumer spending if you will?

Chris Hall

Yes. A couple of things – we talked about this on the last call. We think that in general, because of the focus on secondary patient – secondary prevention patients, that these folks tend to be sicker and tend to be more motivated, so they tend to – we don't think that we'll see as much seasonality with this or, excuse me, much economic effect of this. The second piece of it is that the out-of-pocket is very little or nothing for most patients. So we don't expect to get hit dramatically from that angle; and third, I think if you look at what – at the growth that we've seen this quarter, we're – we haven't seen that happen to this day.

Bruce Cranna – Leerink Swann

Okay, and then you mentioned I think that the trial market was 35, I think you used the term physician practices. Was that accurate? I'm just trying to figure out if it wasn't in fact –

Kathy Ordoñez

What we said was 35 group practices and that can be anything from a small group practice to quite a large group practice and we actually tried to track back to the number of physicians to whom the tests had been detailed and we really can't because of the way in which this was done in the field. But it does represent a pretty small fraction of the potential that Berkeley could actually derive from this test. And as we mentioned in the prepared remarks, behind the current blood tests for KIF6, we're planning to introduce a second version of the test using a buccal swab. So, overall, we think the potential for this test could be pretty substantial and that's another area that we'll have more experience with and expect to detail in greater detail during the September panelist meeting.

Bruce Cranna – Leerink Swann

Okay and just one last quick one for me. I just want to understand the accounting on the trial tests. Are you guys – are you booking revenues as those that performed as those that performed or is that dropping in the expense fees dropping in R&D, how does accounting working on that? That 15,000 passed through them.

Chris Hall

Yes. So we did – we have received reimbursement on some of those tests. There is obviously a lag between the performance of the tests and when we actually collect cash so we're watching that pretty closely. But, yes, there is – there will be a growing revenue component to the KIF6 testing.

Bruce Cranna – Leerink Swann

Alright, thank you.

Operator

Your next question comes from the line of Bill Quirk of Piper Jaffray. Please proceed.

Bill Quirk – Piper Jaffray

Thanks, good afternoon.

Chris Hall

Hi, Bill.

Bill Quirk – Piper Jaffray

First off, Kathy, thanks so much for the color on both the KIF6 trial launch and also on the reimbursement commentary. Based on the feedback, you mentioned that you are adjusting pricing. Well, I seem to recall. I think it was last quarter you mentioned $400 to $500 list price. Where should we be thinking about that now that the launch is ongoing?

Kathy Ordoñez

For the time being, we are leaving the list price where it was and we are collecting reimbursement of just somewhat over $100 per test on average which is a bright spot on what we have projected it would be and we're thinking of other aspects in which the tests could be commercialized and so those numbers may change over time but we essentially reconfirmed during the trial market that our pricing strategy and reimbursement expectations were met.

Bill Quirk – Piper Jaffray

And so it's safe to assume Kathy you're not sending the patients the bill for the $300 to $400 difference, you're just writing that off?

Kathy Ordoñez

We don't really look at it as writing it off. It's kind of an anomaly of the laboratory service business that list pricing is substantially different from what reimbursement could be. So, we want to establish essentially the market value of this testing consistent with other generic tests like Factor V or ApoE et cetera in that ballpark, and then the reimbursement that we're getting right now primarily by stacking CPT Codes is on the order of an average of $100, and then that of course gives us the flexibility at a later time to get a dedicated CPT Code, once we have more experience with this and more medical economics work completed to get a CPT code that would give us values somewhere between those two numbers.

Bill Quirk – Piper Jaffray

Okay, very good. Sounds good solid strategy. Just switching gears to touch here, I don't – I think – I don't think you may have mentioned it, but can you tell us what equalization payment was for the quarter?

Kathy Ordoñez

Yes. I am not surprised you would ask that question.

Bill Quirk – Piper Jaffray

I just changed the order a bit on you on, Kathy.

Kathy Ordoñez

Yes, well I am not – I am going to explain why we did not put it in the script and you know maybe this is something we should be going forward. Again, it is just something that can be confusing so the equalization payment for the fourth quarter of fiscal 2008 was $4 million which compares with a comparable value of $3.9 million for the same quarter and fiscal 2007. And in answering that, that focusing on the equalization payment can be misleading because it reflects the relative ratio of sending up Celera and Abbott which has changed pretty dramatically as the alliance has matured. We are – actually the alliance is spending more now at Abbott as we moved the M200 through clinical trials and invest in sales and marketing expenses there. So, and another piece of useful information and again we'd expect to provide more color on this during our analyst meeting but both the alliance and the product business showed improved contribution for the quarter versus the prior years despite the relatively flat equalization payment. Although neither the alliance nor the products' business are profitable at this point in time but they are getting much closer and the trend is very favorable.

Bill Quirk – Piper Jaffray

And exactly what you're saying is that – thank you very much for this additional color. I assumed that Abbott still probably does not want to talk too much about the share of the 50% of the operating loss from the alliance. If they are willing to talk about that and you are willing to give it to us by all means and we will have it. But perhaps the different way of asking the question is you would yield to the fact that the flare share of the overall operating expenses is declining, would you characterize that as a relatively stable decline over the past year?

Kathy Ordoñez

A relatively stable decline, yes. It's gone down and I am looking at the financial people to see if they can just look at the trans so we do not say anything wrong. Strategically, the important thing to understand here is the alliance represented a way for us to commercialize products like cystic fibrosis and ViroSeq, etc. And then collectively, the alliance made a huge investment in the M2000 and the investment in that program is gradually coming to an end from an R&D perspective. We talked about declining R&D investment in alliance project and the strategic focus here at Celera has now moved on as we are thinking about the future to our new genetic test, most of which are outside the alliance so we see the M2000 as kind of like an annuity that just would continue placements every quarter and money that will be coming to Celera as a result of that where we are investing for the future is around activities in our product business here that will commercialize the genetic test and works that we are doing to support new discoveries to go to Berkeley HeartLab and add to the menu there. Not to say that we are not excited about the alliance but that was a strategic focus for our diagnostic business when it was young and now that we're mature, we are really focused on our own discoveries going forward to the products and service business. I hope that is helpful and I do not know if the financial people want to say anything (inaudible).

Joel Jung

Yes, I think we can say that relatively speaking, most of the operating expense alliance have been relatively flat on our side and what you are seeing is the expenses in sales and marketing, in particular at Abbott are going up to support the commercial launch of the M2000 so relatively speaking, our expenses are declining as a percent of end-user sales in the alliance while theirs are kind of maintaining. We had mentioned earlier that we had been spending a little bit less in R&D, and again that is representing and reflecting the fact that the products have largely gotten the approval or through the clinical trial process and a lot of those expenses are behind us now, so hopefully that provides you a little more color around that.

Bill Quirk – Piper Jaffray

I know, that's wonderful color, thank you so much. If I can squeak in just one last one, I apologize for by running over on my allotted time – and that is just – and since we are talking about the alliance can you give us any type of – even rough idea kind of what the split is, US versus WUS [ph] in terms of finance or sales.

Kathy Ordoñez

I don't – I would be uncomfortable doing that off the cuff without really looking at it carefully. We know that certain products like virus (inaudible) etc had been very successful outside the United States for a long time and we've often said multiple times that the m2000 has done extremely well in Europe and the XUS market and has not done so well in the US. And while we have done well with cystic fibrosis testing outside the US, the market is much larger here in the US, so overall the sales are greater here, but in the aggregate I'd actually have to sit down and look at the numbers to not misrepresent that.

Bill Quirk – Piper Jaffray

Oh that, that's fine. That answer has been very helpful, thanks very much.

Tony White

Thanks Bill.

Operator

Your next question comes from the line of Derik De Bruin of UBS. Please proceed.

Derik De Bruin – UBS

Thank you and speaking of the genetic test outside the alliance, Kathy, can you give us just an update on what other things we can look forward to in the near term?

Kathy Ordoñez

Sure. I think I mentioned in the prepared remarks that at least from the information we have now, we're expecting that the next genetic test that we'll launch and we'll probably launch through Berkeley HeartLab will be the LPA genetic variant that is associated with aspirin benefit, identifies people who most benefit from taking aspirin and then we have other tests in development that we've alluded to for stroke and also some – actually some very interesting results in thrombosis. And I'm not exactly sure of the status of what's in the public domain there but I'm going to ask Tom to comment about some of the thrombosis results because they've looked very exciting to me personally.

Tom White

Well yes, we had a paper in the “Journal of the American Medical Association” in the spring in conjunction with our collaborators in the Netherlands that describe some of the (inaudible) findings but we're extending those to other aspects of thrombosis such as pulmonary embolisms or thrombosis associated with cancer therapy and we're also looking at their role in, were called adverse pregnancy outcomes, such as predicting risks for preeclampsia or fetal loss during pregnancy and we have very large studies that's been under way there for quite some time so I think also we're again the next – launch to the year, you'll see additional studies coming out of Celera's work in that whole field with regard to other end points. Now our collaborator, of course, in the Netherlands is Frits Rosendaal at the University of Leiden who was the discoverer of Factor V Leiden in the prothrombin mutations and he's been extremely helpful to us with regards to this studies, as well as very large study in the net in Denmark having to do with genetic risk for adverse pregnancy.

Kathy Ordoñez

So conceptually the way we've been thinking about this, as you know, we already provide certain thrombosis markers like Factor V and Factor II as ASRs and we're hoping that our new genetic markers can come together with these known markers, Factor V and Factor II into a risk score and that would be useful in making medical decisions and perhaps even be associated with therapeutic decisions.

Tom White

And I think the other potential for our thrombosis risk markers is that with all the new anticoagulants moving through phase 3 drug trials may, if we're fortunate be able to find markets and predict risk for thrombosis or recurrent thrombosis which we could actually use to potentially select among the different new anticoagulants. It will ultimately be replacing Warfarin.

Derik De Bruin – UBS

When you look at the – when you look at the R&D expendage after the first guidance given for the next six months or so. Can we start looking forward is – roughly that's $9 to $11 million range per quarter or something that we can look at going forward? You expecting (inaudible) of new R&D?

Kathy Ordoñez

We did provide guidance for the remaining six months of calendar 2008 for R&D and I think we said that we're expecting it to be in the order of $18 million to $21 million.

Derik De Bruin – UBS

But I was looking beyond that. Just – is that – a potential for really massive acceleration, the R&D spent?

Kathy Ordoñez

So, we're not, of course, providing outlook beyond the six months that we've provided in the guidance. As we've said in the past, the huge Discovery phase that Celera initiated both from the proteomics and genetics perspective back in 2001 is coming to a close and we're using the findings from there to move those into validation studies and then into product development and service development both at Berkeley, and to our products' business. So – not to say that we won't continue to do Discovery but the very large scale, the very expensive Discovery that we've done in the past, is not something that we intend to do right now.

Derik De Bruin – UBS

Okay. When you look at the royalty and milestone line, clearly people using RealTime PCR assays and are certainly picking up on the royalties. I guess – how do you see that line, I guess, progressing over the next year or so as you start – since some of those patents – some of those royalties – some of the patents are to come off, is there a big risk that that number take a dramatic nosedive?

Kathy Ordoñez

Well, the information in terms of patent life on the basic RealTime patents is in the public domain. They're beyond the basic RealTime patents which, Stacey [ph], correct me or Victor, correct me if I'm wrong, I believe they begin to expire in 2011 and 2012.

Unidentified Participant

Correct.

Kathy Ordoñez

There are other ancillary patents with strong – longer life to them and so, we don't see a shift in the value coming from that in a negative way until that timeframe unless something that – something unforeseen happens, and we do believe there's the potential for additional licensees. The whole – in a RealTime area is beginning to get even greater focus and so, that's an opportunity. And so, we don't see that as a near-term concern.

Derik De Bruin – UBS

Okay, and, could you just give us some qualitative assay and data on how m2000 has done in the U.S.?

Kathy Ordoñez

I don't think we're in a position that we can actually say specifics. We need to, again, work through that with Abbott and we would hope to provide additional color at the Analysts Meeting. As we said at the last Earnings Call, Derik, we have not been successful with Abbott in penetrating the large accounts here in the United States. And we have, however, gotten nice placement in the more moderate-sized accounts and that has to do, primarily with, I would have to say, Roche doing a very effective job in transitioning from the Amplicor product line to the TaqMan product line here in the United States.

Derik De Bruin – UBS

Great. Thank you very much.

Operator

Your next question comes from the line of Peter Lawson of Thomas Weisel Partners. Please proceed.

Eric Criscuolo − Thomas Weisel Partners

Hi, this is actually Eric Criscuolo filling in for Peter. Just in light of the valuation allowance that you're taking against your deferred tax assets, do you have any insight into when you – when you'll start to pay taxes on a regular basis going forward?

Chris Hall

That's a fairly complicated question and one that I think, we're not prepared to go into today, in terms of the specific timing. But I think, given the magnitude of these assets and the fact that they are available to us for a number of years, I think it is safe to say that our tax bill should be relatively small going forward as we turn profitable. So, again the size of the assets and the fact that the expiration dates are out there quite always, we would expect to use those assets over the coming years.

Kathy Ordoñez

It's definitely something that we have our eye on and we've had in the business, in the Celera business as a whole, a really substantial evolution and improvement in the losses over the last several years, and so, we're hopefully prepared to generate profits so we can use those tax assets.

Eric Criscuolo – Thomas Weisel Partners

Okay, thank you for that insight. I guess, now just transitioning over to some of your products, your new products. As far as the chlamydia and gonorrhea assay is concerned, do you have any insight as to the strategies or how you're going to position that test in the market against the competition?

Kathy Ordoñez

Of course, that is Abbott's role in our alliance with them. We work with them, we have a lot of experience in the molecular market and we talk about these things but actually, it's their decision. Based on our experience, a lot of the chlamydia and gonorrhea testing is done at the very large accounts, like LabCorp and Quest. And to our knowledge here at Celera, those customers are partners with other vendors right now. We know, for example, that LabCorp's using the Tigris system and typically changing those customers' choice of a product like this, takes quite awhile. On the other hand, that next tier down of customers that is doing their molecular testing and they may do it all in one lab. They may be able to use the same m2000 for viral load testing, as well as chlamydia and gonorrhea. Those would be a very nice target for the m2000. So, we would expect that Abbott would go after the current phase initially and then, try to identify customers where chlamydia and gonorrhea could potentially be a lead product.

Eric Criscuolo – Thomas Weisel Partners

Okay, thank you for that. Lastly, similarly with the HPV test, any hints as far as timelines data presentations or anything like that?

Kathy Ordoñez

I'm not aware of any specific information in the public domain about that. Are you Mike or Tom, or Stacey? No. The way – it's a self-certified test, if you know what that means, from a CE perspective and so, to our understanding, Abbott is entering into clinical studies now to show how the test performs in Europe, and that information would be publicly available as part of the launch for sure. And typically, they would begin to give posters and papers at European Conferences around that. So, I can't tell you exactly when that would happen but towards the end of the year, one would expect.

Eric Criscuolo – Thomas Weisel Partners

Okay, I appreciate the color. Thank you very much.

Operator

Your next question comes from the line of Balaji Gandhi of Oppenheimer. Please proceed.

Balaji Gandhi – Oppenheimer & Co.

Good afternoon.

Celera Group

Hi, Balaji.

Balaji Gandhi – Oppenheimer & Co.

Most of my questions are answered. Just may be a little bit of color on BHO. I know it's hard to talk about it on a year over year basis but the 15 percent of so growth sequentially, how can we think about the contribution for may be, more sales and marketing efforts, new tests, and pricing?

Kathy Ordoñez

So, is your question about revenue expectation or –

Balaji Gandhi – Oppenheimer & Co.

No, in this quarter, in this most recent quarter. Just the growth that you got, how much of it was really a result of just beefing up sales and marketing efforts versus adding new tests, or raising prices on existing tests?

Kathy Ordoñez

It was, as we've tried to implied in the prepared remarks, it was volume driven. So, what we've seen at Berkley, as we went through the transition and acquisition, as it happens in any company that goes through an acquisition, they lost some sales people and there were just some gaps and changes there. As we made the acquisition, we lost the National Sales Manager for Berkeley HeartLab and since then, we've beefed up the sales force, filled the empty territories, added new territories, added additional support within existing strong territories, and that has resulted in additional testing volume which translated in the increase quarter-over-quarter that you referenced.

Balaji Gandhi – Oppenheimer & Co.

Got it. Okay. That's helpful. And then the other thing was, as we can see the language in the release about sales on the product side, lower sales from cystic fibrosis reagent?

Kathy Ordoñez

That's correct.

Balaji Gandhi – Oppenheimer & Co.

Could you provide at least more color or anything going on in the marketplace?

Kathy Ordoñez

Well, we have historically tried to show where increase in sales came from and decrease in sales, and the cystic fibrosis sales have trended down over the last year or so. I think we've talked about this in an earlier conference call. A major customer of ours has used the reagents in a manner that's been more cost effective for them. They actually made smaller reactions and so on a year-over-year basis, that's made a difference. And then, as with any product that we sell to the large commercial laboratories here in the United States, we have this problem of lumpy sales because depending on whether we get a large order that they want delivered at the end of the current quarter or the first of the next quarter, that can make a difference. So, I would say, those two factors are impacting the CF product sales line right now. I think the use by this customer of a smaller reaction volume has been ongoing for several quarters now. So on a year-over-year basis should begin to wash out of the comparison.

Balaji Gandhi – Oppenheimer & Co.

Okay. Great, that's helpful. Thank you.

Operator

This concludes today's Question and Answer Session. I would now turn the call back to Dr. Speechly for closing remarks.

David Speechly

Thank you operator and thank you all for participating in the call today. As a reminder that management's remarks will be posted within the hour on our website and the audio replay will be available later today using the phone numbers listed in today's press release. Thank you all. Goodbye.

Operator

This concludes today's presentation. Please disconnect at this time. Have a great day.

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