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Caliper Life Sciences, Inc. (NASDAQ:CALP)

Q2 2008 Earnings Call Transcript

August 6, 2008 9:00 am ET

Executives

Joe Griffith – VP, Finance

Kevin Hrusovsky – President & CEO

Peter McAree – SVP and CFO

Analysts

David Clair – Piper Jaffray

Steven Crowley – Craig-Hallum Capital

Zach Lesko – America's Growth Capital

Isaac Ro – Leerink Swann

Operator

Good day ladies and gentlemen and welcome to the Q2 2008 Caliper Life Sciences Earnings Conference Call. My name is Lequisha and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. (Operator instructions)

I will now like to turn the presentation over to your host for today's call, Joe Griffith, Vice President of Finance. Please proceed.

Joe Griffith

Good morning. And thank you for joining Caliper Life Sciences second quarter 2008 teleconference. This morning, Kevin Hrusovsky, President and CEO; and Peter McAree, CFO, will discuss Caliper's financial results for the quarter ended June 30, 2008. Following these remarks management will take questions.

Management will be making forward-looking statements during the teleconference including projections of future financial results. Reference to what we expect, believe, intend to do, plan, hope, estimate, or other statements referring to future events or results are intended to identify those as forward-looking statements.

Forward-looking statements are inherently subject to risks and uncertainties. Further information on risks faced by Caliper are included under the caption “Risks Related To Our Business” in Caliper's Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on March 14, 2008. And in our other SEC reports. These SEC filings are available on the Web site maintained by the Securities and Exchange Commission at www.sec.gov.

Caliper does not undertake any obligation to update forward-looking or other statements in this conference call. To reflect any change in Caliper's expectations with regards to such statements or any change in events, conditions or circumstances under which any such statements are based.

During this call we will be referring to certain non-GAAP measures. A reconciliation of the non-GAAP financial measures we plan to use is available as an attachment to our earnings release. To the extent we use additional non-GAAP financial measures during this call. We will provide reconciliations promptly on the investor information location of our Web site.

I will now turn the call over to Kevin.

Kevin Hrusovsky

Thanks Joe, and good morning. This morning we announced $34 million of revenue in the second quarter against our guidance of $33 million to $36 million. While this revenue is lower than last year's second quarter by $1.3 million, it was in line with expectations. If you adjust for last year's one-time contract and licensing payments overall revenue was 7% ahead of last year's second quarter and year-to-date is 10% ahead of last year.

On this adjusted basis removing last year's one-time contract and licensing payments our discovery instrument segment which represents approximately 50% of our overall revenue was 11% ahead of last year's second quarter and year-to-date is 10% ahead of last year.

Imaging which represents approximately 35% of our revenue was 5% ahead of last year's second quarter and year-to-date is 19% ahead of last year and CDAS, Calipers discovery services segment which represents approximately 15% of our total revenue was 2% behind last year's second quarter and year-to-date is 6% behind last year.

As you can see from these summary figures our discovery and imaging segments are delivering strong growth and are expected to continue delivering this growth in the second half of 2008. CDAS, on the other hand, has impaired our overall growth year-to-date, but it is expected to recover to double-digit growth in the second half.

Our primary challenge in CDAS is linked to two large contracts, one with EPA, which overall is going very well and is expected to deliver strong growth in the second half and future years, but has been slower than anticipating getting started. The second contract is with Pfizer where they have delivered to us $3 million of upfront cash payments, however, have been delayed in supplying to us the needed mice to complete the work. We are confident that this situation will correct itself in the second half.

Due to these two issues we have lost approximately $1.5 million of revenue in the first half. This lost revenue has also impacted our earnings in the first half. However, we still anticipate getting our full-year revenue and earnings projections based on strong growth outlook in the second half across all segments and our continued efforts to improve cost efficiencies and gross margins.

Let me now provide additional perspective for each of our three segments. First, discovery instruments which is comprised of our automation and microfluidics product lines. We had a strong quarter for Staccato automated work stations and Zephyr liquid handlers with a 11% combined product and service revenue growth. Year-to-date discovery, product, and services have increased 10% over 2007.

Our automation, consulting, engineering and services, we call it ACES team which we created last year is driving high quality robust product solutions to automate experimentation. In addition, our solid face extraction products continue to experience very high growth in adoption rates, particularly, government laboratories and environmental and food testing facilities.

We are also seeing increased demand within the environmental and forensic testing markets as well as nucleic acid sample prep and analysis. The recent increased awareness around pharmaceutical drugs and endocrine disrupters in the water supply as well as food safety concerns in Asia has created a growth opportunity for our RapidTrace and AutoTrace products.

The rapid ramp up of DNA, RNA, and protein testing in applied markets as well as the strength of the general research markets has also created substantial demand for our microfluidics and liquid handling product lines for sample prep and analysis. We are experiencing growth in LabChip products for protein and genomic applications.

At the beginning of July we announced the new LabChip GX and GX2 instruments which extend the LabChip 90 product offering. The LabChip GX represents a low price entry system targeted at genomic applications while the GX2 combines both genomics and protein research applications and is a complete functional replacement of the LabChip 90. It also incorporates, it can incorporate our Twister technology.

We believe this product line differentiation will enable us to further penetrate the genomics landscape while sustaining our strong foothold and high throughput protein separation markets. We expect to close at least 15 GX units in Q3, the first quarter for this product.

Our EZ Reader platform started the year slower than expected but has picked up in the past couple of months due to improved positioning and promotion. We are expanding the ProfilerPro Reagent kit offering and expect to offer over 200 kinases this quarter which we believe will stimulate both EZ Reader and Reagent kit demand.

We are progressing strategic opportunities and new application areas for microfluidic technology including NextGen sequencing, sample prep and several genetic analysis opportunities. With these advances and robust markets we expect discovery products and services will continue delivering low double-digit growth in the second half.

In our imaging segment we delivered 19% growth year-to-date and expect to deliver 15% growth for the full year. In Q2 our IVIS instrument unit placements increased 9% over the second quarter of 2007, but in mix shift for the quarter in favor of the lower priced IVIS Lumina units impaired our revenue growth to an 8% decline versus last year.

While we see a few signs of tightening of grant funding from both the DoD, Department of Defense and NIH, which can tend to direct more purchases towards the Lumina system versus the top of the line spectrum, we don't consider this mix fluctuation to be indicative of any major trend for our business. In fact Q3 is lining up to be a robust quarter for imaging with 50% plus growth versus last year where we had particularly slow quarter last year in Q3.

Another growth catalyst for imaging is the new enhanced Lumina, the Lumina 2 which includes an expandable field of view to enable our trademark high quality, high throughput results, further enhance fluorescence performance related to spectral unmixing and quantitation, and new accessories such as the optional ECG attachment for animal physiology and safety monitoring. And isolation boxes that allow multiple experiments on the same instrument without compromising the animal safety. These accessories enable efficient and effective work flows and are making an increasing contribution to our revenues.

Another important advance that is helping us with reference selling is the fact that today we count 11 public peer reviewed references describing IVIS contributions to specific compounds three of which, SUTENT for Pfizer, cancer, Tasigna from Novartis for leukemia, and Cubicin from Cubist for bacterial infections are FDA approved drugs.

This is specific and compelling testimony to the value provided by IVIS to the drug discovery process. We are aware of two other oncology drugs that have materially benefited from IVIS and are working on further quantifying their impact.

We along with our customers are putting considerable efforts towards continued expansion to the therapeutic areas we serve which we consider to be essential for driving continued growth. New application areas are a compelling opening for IVIS with a recent customer application examples including hypoxia in damaged heart muscles during cardiac infarct and optimizing delivery vehicles for gene therapy. Further, our biology group is working on expanding applications in additional therapeutic areas including inflammation, neurology, stem cells and metabolic disease.

The World Molecular Imaging conference is coming up in September. This is a major conference for the imaging business and will be the site of our second IVIS users group meeting where over 60 customers have already signed up including 12 thought leaders from eight different countries who will be presenting. The user group will also extend to discovery products where we expect another 80 customers and another 12 presentations.

Given our major advances in intellectual property over the past couple of quarters we are making strong investments into this segment in order to leverage our leadership position in this explosive market opportunity. We plan to introduce new applications, new imaging technologies and new product lines into the future.

And now finally, CDAS revenues, as I mentioned were down 2% this quarter compared to 2007 but as I also mentioned earlier, we expect to deliver double-digit revenue growth in the second half as we get Pfizer and EPA contracts back on track.

Activity under our contract with the National Institute of Drug Abuse, NIDA, in the second quarter, has been the key driver behind CDAS in vitro drug discovery services growth both for the quarter and on a year-to-date basis. On the CDAS in vivo side, we had over 50% sequential quarter growth in imaging services based on our IVIS platform and experienced greater than 50% growth in our non-Pfizer customer work during the quarter.

We see strong long-term prospects for imaging services, compound profiling as well as the cell-based experimentation services and drug discovery collaborations. Those are our top line highlights.

Peter will provide detailed financials but a few points I feel are worth noting before turning this over to Peter. Number one adjusting for the contract and licensing one-time revenues in '07 which we talked a lot about over the last three quarters this was an expectation, we have had 10% organic growth year-to-date despite the delays at Pfizer and EPA and we expect to continue delivering this level of growth throughout the second half.

Number two, operating expenses came down 11% quarter-to-quarter and 9% sequentially as we settled litigations, improved G&A efficiencies, and consolidated and streamlined our R&D operations on the West Coast into a single site.

Number three, the long term lease payments of $900,000 a quarter that we have been paying for the past five years since merging with Caliper for idle facilities has come to an end as of June 30, of 2008.

Number four, we plan to continue to focus our resources to yield improved gross margins and operating efficiencies while transforming to higher growth and higher profit markets such as imaging, forensics, and other applied markets.

And last, and number five we are maintaining our full year positive EBITDA and revenue expectations of $142 to $148 for the full fiscal year including revenue between $33 million and $36 million in the third quarter.

Now I would like to turn the call over to our CFO, Peter McAree to discuss our financial results. Peter?

Peter McAree

Thanks, Kevin. Overall we achieved second quarter revenue of $34 million, a decrease of $1.3 million or 4% from the second quarter of '07. Again this included the $3.5 million unfavorable comparison versus the second quarter of 2007 due to the nonrecurring license and contract revenues Kevin mentioned. Nonetheless we were pleased to deliver revenues consistent with our guidance range.

Our operating loss of $6.2 million compared to $6 million in the second quarter of 2007 and primarily reflected the substantial margin effects of the license fee and contract revenue decline and higher service costs offset by a $2.2 million reduction in operating expenses. At the bottom line EPS was negative $0.14 in Q2 '08 versus negative $0.13 in Q2 '07. And adjusted earnings per share was negative $0.07 in Q2 '08 versus negative $0.03 in Q2 '07.

Moving on to the details, product revenues were $22 million, up 5% from Q2 '07. Service revenues were $9.3 million, up 4% from Q2 '07. And license and contract revenues were $2.7 million, down 49% from Q2 '07.

Discovery product growth which includes automation and microfluidics was very strong growing at 14% compared to the second quarter of 2007 on sales of work flow productivity solutions led by Staccato Automated Workstations and Zephyr Liquid Handlers.

LabChip instrument sales were also strong, driven by demand for our separation and analysis platform which as Kevin indicated is transitioning to the new LabChip GX series platform. Our EZ Reader screening platform is building momentum but year-to-date is not performing to the same level as last year. The outlook for our drug discovery product lines is very positive especially due to LabChip GX and a healthy Staccato pipeline.

Imaging product revenue decreased 8% compared to the second quarter of 2007 despite a 9% increase in unit placements featuring a greater mix of Lumina placements this quarter, essentially evening out the product mix on a year-to-date basis.

As previously mentioned we have a strong pipeline including for spectrum and commercial placements and remain confident that the product's growth will yield particularly strong double-digit growth in the third quarter and over 15% for the full year. A key driver of service growth for the quarter was increased instrument services related to the IVIS product line.

Overall CDAS revenues only modestly declined despite a substantial unfavorable quarter-on-quarter comparison of over $1 million in revenues from Pfizer including the effect of contract delays experienced in the second quarter of this year. We expect CDAS revenues to strengthen in the second half and we remain optimistic regarding the next phase of the Tox Gas project.

The Pfizer and EPA delays which totaled approximately $1.2 million for the quarter was the primary drivers impacting lower than anticipated service margins during the second quarter. Despite these particular CDAS delays growth in other in vitro government services, IVIS-based imaging studies, animal product services and non-Pfizer profiling work enabled CDAS revenues overall to only slightly decline despite the revenue delays that we have encountered.

Finally, on revenues we had a substantial decrease in microfluidics license and contract revenue which was offset by an increase in IVIS imaging license revenue of approximately $800,000 of which $300,000 was favorable purchase accounting effects.

On a geographic basis our revenue performance during the second quarter was strongest in Europe, Middle East and Asia-Pacific. NonUS sales on a constant currency basis were about 34% of total revenues in Q2 '08 versus 27% in Q2 '07. Foreign currency translation effects had a favorable 3% impact on our revenue line but had minimal impact on our bottom-line in the second quarter.

Moving on to gross margins, product margins were about equal with the second quarter of 2007. The benefit of volume leverage on higher product revenues was negated by higher materials, freight and other miscellaneous costs. This is a key issue we are intending to address.

Manufacturing spending within product costs was down approximately $700,000 quarter-on-quarter. We have implemented a 3% price increase on select products to combat the effect of rising costs and we are targeting improvements in certain key insource components such as imaging cameras to drive additional savings.

Service margins were approximately 31% in the second quarter compared to 39% in the second quarter of 2007, about 4 points of this difference was due to higher cost of service contracts. The balance of the difference was primarily the result of higher CDAS in vitro service costs including approximately 2 points from higher facility costs and 2 points from a mix shift toward government services.

Operating expenses which includes R&D and SG&A incurred in Q2 were $17.8 million which was $2.2 million below operating cost in the second quarter of 2007, and $1.7 million lower on a sequential quarter basis versus Q1 reflecting recent actions to streamline G&A and consolidated our West Coast operations to achieve more effective R&D spending.

Going forward we expect run rate at R&D and SG&A spending to remain about level with Q2, although higher in Q4 based on anticipated higher revenues normally associated with the fourth quarter. This outlook is independent of further cost reduction measures that might be achieved in the second half.

Amortization of intangibles was relatively unchanged versus the second quarter of 2007 at about $2.5 million. Stock compensation expense which is included among all P&L expense line items was approximately $1 million versus $1.4 million in Q2 '07 reflecting our intent to closely manage the cost of stock-based compensation programs.

Interest expense net was $203,000 reflecting higher interest cost on our credit facility and lower invested cash balances. Other expenses net reflected primarily currency transaction effect and were relatively unchanged from the second quarter of 2007.

Lastly, we provided for income taxes mainly related to foreign jurisdiction taxable income in the quarter. Altogether, net loss was minus $6.7 million or negative $0.14 per share on a GAAP basis compare to minus $6.3 million or negative $0.13 per share on a GAAP basis in Q2 '07 considering all the factors I just mentioned.

Related to the balance sheet I'll comment on our cash position and outlook. Our ending cash position was in line with where we were expecting to finish the quarter. We consumed approximately $7.6 million of cash in the quarter ending the quarter with $10.6 million of cash on $2 million of increased borrowings.

Compared to last Q2 our cash usage improved by $1.7 million including a $1.4 million litigation payment to settle the Young litigation matter at the outset of the current quarter, so overall by $3.1 million including that matter.

We expect our cash needs to decline over the remainder of 2008 for the following reasons. Two Mountain View leases as Kevin mentioned came to an end on June 30, resulting in a savings of 900K per quarter. Under our Alameda and Mountain View consolidation plan we negotiated a rent holiday that will defer about $900,000 of rent payments for another 10 months.

We entered into an extended lease arrangement for our Cranbury, New Jersey facility that will reduce our annual rent cost by approximately $300,000. We implemented improved planning processes around inventory planning to tighten the alignment of supply chain purchasing with dynamic demand forecasting. We will begin to realize the benefits of other key one consolidation actions which will generate an estimated $1.2 million of annual cash savings. These are just some of the cash preservation actions we have taken to-date and more actions will be defined in the months ahead. We are expecting that existing cash balances and availability under our credit facility will be the primary cash resources over the next six to nine months. Those are the financial highlights. Back to you, Kevin.

Kevin Hrusovsky

Thanks Peter. Before opening it up for questions I just wanted to comment once again that we do have a major molecular imaging conference coming up in September. That is going to be a major opportunity to interact with customers from the marketplace as well as see all the different technologies.

In addition, we have this user group meeting where we are expecting to attract as many as 160 people to this. These would be directors of all of the various customers as well as academia and it's a great opportunity to interact with our customers firsthand on the discovery products as well as the imaging products so that you can really get a firsthand view. Last year, we had about I think 10 investors attend. So we would invite anyone that wants to attend. This is a European conference unfortunately so it might be harder for travel, but if you want information on it, it is on our Web site.

At this point I would like to open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of David Clair from Piper Jaffray. Please proceed.

David Clair – Piper Jaffray

Hey, guys, can you hear me?

Kevin Hrusovsky

Hi David. We can.

Peter McAree

Hi, David.

David Clair – Piper Jaffray

Good. First of all, you talked about kind of 3Q '08 is going pretty well for imaging so far. I think you mentioned up 50%.

Kevin Hrusovsky

Yes. David, what's going on there I want to make sure we are clear, is that last year we had a very off quarter in Q3, and there was a lot of – we think systems that were put into Q2 and into Q4. So it made Q2 and Q4 last year a little bit elevated. So this quarter this year for us we are going to have phenomenal comps compared to last year's quarter because of some of that artifact. At a total year level we are projecting that we will have 15% plus growth for our imaging product. Year-to-date we are at 19% growth. This coming quarter you are right it is going to be greater than 50% year-on-year comp growth.

David Clair – Piper Jaffray

Okay. Great. And is that – are you seeing strength in kind of the higher end there, or is it – what's the mix like so far in the third quarter?

Kevin Hrusovsky

It's actually attractive. That was a challenge point we had in Q2 was we had a very strong mix towards Lumina, and we do see right now a nice pipeline of spectrums as well. We don't have a significant gradient in gross margin between the two units. We are continuing to try to balance that to kind of make the gross margin impact similar. So right now our revenue of a larger spectrum unit goes around 330, I believe. The revenue for the Lumina is more like around 110.

David Clair – Piper Jaffray

And then just if you can talk about the cash that you guys have. I think you said $10.6 million is kind of where you ended the quarter and it looks like the burn rate was about $7 million. Is that right? $7.6 million, I think.

Kevin Hrusovsky

Yes. I'll start to describe my views on that and turn it over to Peter if he wants to add anything. I do think that Q2 was somewhat extraordinary relative to the cash usage due to – things like the Peter Young settlement. Also as we've been pointing out we've been paying like $1 million a quarter for lease payments for idle facilities and there were some other extraordinary things in there. Moving forward, we are actually feeling quite confident regarding our ability to manage our cash. With that said, we have spoken in the past that cash is an area that we are going to continue to focus on and continue to make sure that we preserve. We really don't want to do a raise. That's our objective and we've stated that objective really for the last year, and we still feel confident that based on what we see in the future we are going to be able to avoid that. There is no guarantee of that but that's clearly our intention and we've held to that for at least the last four or five quarters.

David Clair – Piper Jaffray

How much borrowing power do you have right now?

Kevin Hrusovsky

At the end of Q2 it was I believe around $6 million. Peter?

Peter McAree

That's correct.

David Clair – Piper Jaffray

Thanks a lot guys.

Kevin Hrusovsky

Yep. You're welcome.

Operator

Our next question comes from the line of Steven Crowley from Craig-Hallum Capital Group. Please proceed.

Steven Crowley – Craig-Hallum Capital

Good morning, gentlemen.

Peter McAree

Hi, Steve.

Steven Crowley – Craig-Hallum Capital

A couple of questions for you. If I heard you correctly and read your release correctly it looks like you maintained your guidance for the year in revenue and you talked about some EBITDA objectives and maintaining those. Can you just walk me through what that objective is on the EBITDA line and where you are year-to-date?

Kevin Hrusovsky

Yes, I'm going to turn that over to Peter, but in general what we said is that we would achieve for the full year breakeven EBITDA performance and we are holding to that. For the revenue, $142 million to $148 million I believe is what we had communicated. We are holding to that as well. So maybe, Peter, if you want to talk about year-to-date numbers?

Peter McAree

Right. So, Steve, EBITDA the number or the breakeven number that Kevin provided I want to point out that in the third quarter, we talked to you about the restructuring charge that will be forthcoming on the Mountain View consolidation, so that's an add back. We are excluding that as a nonrecurring item from EBITDA. So I just wanted to point that out. And then related to year-to-date EBITDA is roughly about $6.8 million, $6.9 million.

Steven Crowley – Craig-Hallum Capital

I wanted to make sure I understood that because you are telegraphing a dramatic improvement in second half EBITDA and I trust that, will take the shape of noticeable improvement here in Q3 or at least some improvement and then rather significant positive EBITDA in the fourth quarter. That's the only way the math works.

Peter McAree

That's the trend, Steven.

Steven Crowley – Craig-Hallum Capital

And the restructuring charge in Q3, with that dialed in a roughly $2.7 million. Does that still look like a good ballpark?

Peter McAree

Yes, there might be some refinement to that number. We are about a month behind on the actual move itself so there would be some tweaking of that number but roughly 2.6 I think is probably closer to where we are expected.

Kevin Hrusovsky

Steve, I guess a couple more points I'll make here. One is, we have at least indicated that we are going to continue looking for cost reduction opportunities in the way we run our process, the way we organize ourselves. So we don't ever see that ending. That's an ongoing process and we are going to continue that focus, and we also think we are going to keep bringing more focus to these three business segments which we think have a lot of potential in the way we kind of hone our organizations around those three segments.

The second point I want to make is that we stated last year that we were given basically – we had a one-time revenue collection of $10 million probably close to $9 million of EBITDA in 2007 that came from that that was going away. And so what you are seeing here is a lot of work and a lot of effort to reconstruct ourselves opposite that issue which we knew we had going into the year. So this is a – we knew we had a very challenging comp year, but we think we are making great progress opposite those very challenging goals.

Steven Crowley – Craig-Hallum Capital

Agree. Now, on the service business, obviously you were challenged by meaningfully lower volumes than you expected in the first half of the year and it has a pretty dramatic impact on gross profitability. In terms of the kind of progress you think we can see in the second half of the year, can you move that service gross margin back to high 30s, 40% even if you get the kind of pop in business from Pfizer and EPA especially in the fourth quarter? I guess embedded in this question is can you find yourself back in for the year in the $42 million in service revenue or does that look pretty aggressive and it's closer to 40 in light of the shortfall year-to-date?

Peter McAree

So, Steve, with the service revenues at CDAS, one important thing to point out that you had noted is it is very leverageable, profitable contribution because our cost base there is relatively fixed. You are talking about facility cost and personnel are the key components of the expense base, neither of which flex materially in either direction with either a gain or a loss of revenues in a particular quarter. So with that increased revenue to come over second half of the year, for certain, you'll see a rebound in the service margin line closer to where we've been in past quarters.

And then your second question was just overall in terms of the range of service revenues. We haven't dialed in specifically the mix or breakouts between product and service overall year-on-year and there are opportunities that could swing the pendulum either direction, either more in favorable product or more in favored service. But I think you had stated an overall range of 40 to 42?

Steven Crowley – Craig-Hallum Capital

Yes.

Peter McAree

Is that right? That I would say is a pretty consistent range, with I guess where our current views would be.

Steven Crowley – Craig-Hallum Capital

One final question then I'll hop back in the queue. You gave us some granularity as to what's going on with IVIS in terms of mix and how that looks relatively encouraging going forward. Can you give us an update on the competitive landscape for your molecular imaging business, how that's continued to evolve?

Kevin Hrusovsky

Absolutely. I think that there are a couple dimensions to that competitive landscape. I think that one dimension deals just with the quality and the content – competence of our instrumentation, and I think we continue to evolve our instrumentation – we make major investments by the way, in our instrumentation group this is we think one of the best instrumentation groups in the world for small animal imaging and they are very experienced, very capable group. So we continue to hone in our technologies as well as our biology and cytabise [ph] technologies for various models. And I think you heard in this call there is a lot of expansion outside of oncology into these other areas. And we think this is very important, and I think our ability to do these models both using Fluorescents and Luminescence and do that with freedom to operate without any concerns around freedom to operate because of the IP landscape gives us a major advantage and opportunity and we are continuing to think of new ways to look at the combination of Luminescence and Fluorescents. We think they both bring some very interesting content to the scientist. To continue evolving those models using both.

So I think that, that combination of having both, having the freedom to operate has impaired some of our competition. It's very difficult for them to compete against us when they may not have freedom to operate depend obviously on the types of applications that they are doing, the types of modalities that they are using, but it's a very treacherous landscape now for our competition to be able to do what we can do. So we actually have this business unit being managed now as a business unit. We've got the various players from all functions sitting around a table being led by some of the most talented players we have in our company, and just last week they had one of their meetings and they brought several customers in. These are formidable customers, big names, these guys gave a lot of insights and perspectives that tell us that we are on the right path from a competitive landscape standpoint. There are some companies that had been selling instrumentation, it seemed to have pulled away some at this point and whether they pulled away because we are being effective with our strategies or whether they've got their own internal reasons for pulling away, it's hard to describe, or define for sure. But this year's SMI conference in my mind will be very telling because we've created a major momentum of new models, new applications and a belief system of testimonials that's unprecedented. I think we're truly leveraging now all of these assets that Xenogen brought to bear on this IVIS franchise which is very significant.

Steven Crowley – Craig-Hallum Capital

Thanks for taking my questions.

Kevin Hrusovsky

You're welcome, Steve.

Operator

Our next question comes from the line of Zach Lesko from America's Growth Capital. Please proceed.

Zach Lesko – America's Growth Capital

Hi, guys. Good morning.

Kevin Hrusovsky

Hey Zach.

Peter McAree

Hey, Zach.

Zach Lesko – America's Growth Capital

Just a couple of questions here. Maybe a little more detail on the LabChip GX and GX2. Could you disclose the pricing versus the LabChip 90?

Kevin Hrusovsky

So I believe the LabChip 90 was around $80,000, and the GXs price point is going to range–?

Peter McAree

It's two series so it depends. The GX series 1 is roughly 40 and 45 in that range and then the GX2 is about the same price point as the LabChip 90.

Zach Lesko – America's Growth Capital

Okay. Great. Would these be – you talked about general price increases across the board. Would these be subject to that too? Could you characterize kind of the magnitude of those?

Peter McAree

These were newly introduced in the –?

Kevin Hrusovsky

Did you describe general price increase?

Peter McAree

Relative to 3% on selected product on across the board (inaudible).

Kevin Hrusovsky

Okay.

Peter McAree

So these were just newly introduced. It's new pricing altogether.

Zach Lesko – America's Growth Capital

Right.

Kevin Hrusovsky

Your question there, Zach, around pricing though would be what's the ability for us to get price increases?

Zach Lesko – America's Growth Capital

Right. Essentially.

Kevin Hrusovsky

I think that the markets have obviously – there's been a lot of competition. It has been moving prices and so I think it's the most favorable environment that we have seen for price movement probably in the last five years. So how much we'll be able to get and how it will stick is still a question. But it's clearly the most favorable market due to inflationary issues relative to raw materials as well.

Zach Lesko – America's Growth Capital

Okay. Great. I don't know if you disclosed this. If you could, the number of total IVISs in the quarter and then the number of those that were the higher price spectrum?

Kevin Hrusovsky

We didn't actually disclose the specific mix, but I believe we can get to the rough number of IVISs. About 35 was the number of IVISs which I do think represented about 9% year-on-year growth over last year.

Zach Lesko – America's Growth Capital

Yes. Okay. That looks about right. And proportionally how many were spectrums if you could–?

Kevin Hrusovsky

It was pretty low. I'm not sure of the exact number.

Zach Lesko – America's Growth Capital

Okay. And then maybe a housekeeping question. If you could break out stock comp across–?

Kevin Hrusovsky

Zach, it appears like it was a little over 10. So it's probably about 30, about a third, 33%.

Zach Lesko – America's Growth Capital

Okay. Great. That's helpful. And the stock comp if you could just break that out across cost of goods, R&D, and SG&A that would be helpful for me?

Peter McAree

Stock comp overall within COGS I'm going to give you nearest hundred thousand rounded. So in COGS is about $100,000, Zach, for the quarter. R&D about the same. And then SG&A is roughly $800,000.

Zach Lesko – America's Growth Capital

Okay. Great.

Peter McAree

That percentage generally carries throughout the course of the year, that allocation or proportion.

Zach Lesko – America's Growth Capital

Okay. That's helpful. Those are my questions. Thank you.

Peter McAree

Thank you.

Kevin Hrusovsky

Thank you.

Operator

Our next question comes from the line of Isaac Ro from Leerink Swann. Please proceed.

Isaac Ro – Leerink Swann

Hey guys. Thanks for taking the question.

Kevin Hrusovsky

Hi.

Isaac Ro – Leerink Swann

So first of all, just broadly speaking on the food testing market which I think you mentioned in your prepared comments, that's an area that has been called out by some of your peers as being especially strong in Asia not only this quarter but in recent quarters. How do you guys feel about your reach into that market and your ability to tap into that opportunity?

Kevin Hrusovsky

We are still not probably as productive on the Asian market as we can be. We see that that's probably over the next year, year and a half going to have incremental growth versus the rest of our business. So we are not positioned there anywhere near as well as we will be over the next 18 months. So that's why I think our growth year-to-date there has been pretty staggering. It's probably greater than 60% or so. So we've had a very strong year-to-date growth out of Asia. We got a lot of work to do there and we are looking at some head count additions in later '08 and '09 in that region.

Isaac Ro – Leerink Swann

And then in addition to that head count, is there a scenario that you envision where maybe you look to a partner to help you get broader reach at a lower expense maybe?

Kevin Hrusovsky

We actually do have partners and what we've done there is we've consolidated and put them through different tests to ensure we get the most productive partners. So we have made some changes on the partner front over the last I would say six to nine months. We have a very capable couple players that are managing the Asian markets for us. So we've done very well with that and it is primarily a partner, the direct head count is minimal. It's mostly through partners.

Isaac Ro – Leerink Swann

Got it. And then just on, in the past I notice sort of (inaudible) has been out there for a while, but I'm wondering when investors ask you how you handle sort of the Affymetrix, sort of, they are having obviously a tough time this year doing business, how are you guys managing that partnership? Has anything changed there regarding your strategy?

Kevin Hrusovsky

Yes, I'm glad you brought it up just because I think there is still a lot of people that think we are tightly linked to Affymetrix relative to our revenues, et cetera. We really don't have – I don't think we've had any revenue from them in the last 12 months. They are continuing to refine what they do. They still have interest in doing automation with us, but we don't have any expectations in any of our models in the short-term with Affymetrix. Even though I do think that there's a chance that there is going to be pick up again of these automated systems. It's just that they have gone through a lot of internal reconfiguration and their focus is still somewhat dilutive.

Isaac Ro – Leerink Swann

I understand that. I'll stop picking on those guys, they've had a tough year. Looking at seasonality, I know it was asked earlier, but I know you guys always have a good hockey stick in the fourth quarter, kind of a good acceleration there, given what we see in the pharma industry and the drug industry, seeing a couple of pending mergers in the fourth quarter or in the back half of the year, I know that's just one constituency, but it certainly paints a picture negative to spending, how comfortable do you guys feel about your visibility into the fourth quarter this year versus last year?

Kevin Hrusovsky

I would say that our visibility has continued to improve. We've implemented a lot of processes for forecasting, et cetera. You might have heard Peter commenting, a primary driver for a lot of that actually has been around managing our cash and our working capital, et cetera. But the benefit of that is we've created better visibility around pipelines as well as probability of closure. So our processes we think have improved fairly significantly, really over the last 18 months. So I think that the pipeline is strong. We see a lot of excitement around genetic and genomic analyses and even sample prep from that which I know will be a focus of your conference later this week. That seems to be a very robust area. We are well-positioned in that and continue to work – particularly this GX launch. I think GX right now has a really formal pipeline, it's probably one of the strongest product launches we have ever seen relative to the pipeline that's been created and the speed which we think we're going to be able to bring that pipeline into closure.

So right now I think that we are feeling pretty good about the momentum we see. I think the risk profile that we talk about with the services CDAS is still somewhat in play relative to the EPA. I think relative to Pfizer they have given us all their cash. There is very good evidence that all those orders are coming through now. So I think we feel pretty certain that the Pfizer risk has been eliminated in the second half. We've also received very positive reports from the EPA even though it is a government institution and sometimes it's a little bit lethargic and a little bit harder to get granularity and clarity. I think we see task orders and comments around task orders coming that we think given us much better confidence that that's in hand. Some of the ways that we've described EPA is it's slower than we thought, but we think it's going to be bigger than we thought. So it's still very encouraging for us.

Isaac Ro – Leerink Swann

Great. Thanks so much. I'll see you tomorrow.

Kevin Hrusovsky

Sounds good.

Operator

(Operator instructions) At this time, there are no more questions.

Kevin Hrusovsky

Thank you very much. We look forward to seeing you all over the next few weeks. Thanks a lot. Bye-bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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Source: Caliper Life Sciences, Inc. Q2 2008 Earnings Call Transcript

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