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

Thank you, Mary. Good afternoon, everyone. Welcome to Life Technologies' Fourth Quarter and Full Year 2011 Earnings Conference Call. A press release was issued today at 1 p.m. Pacific Time or 4 p.m. Eastern Time today and posted on our website at lifetechnologies.com, as well as filed in Form 8-K with the Securities and Exchange Commission. We also posted a deck of slides to accompany today's webcast which may be found in the Events and Presentations section of the Life Technologies Investor Relations website with our other earnings materials. And joining me on today's call are Greg Lucier, our Chairman and CEO; David Hoffmeister, our Chief Financial Officer. Additionally, Mark Stevenson, our Chief Operating Officer, will be available during the Q&A portion of the call. If you have not received a copy of today's press release, you may obtain one from our website at lifetechnologies.com. I want to remind our listeners that our discussion today will include forward-looking statements, including, but not limited to, statements about future expectations, plans and prospects for the company. We believe these statements are based on reasonable assumptions, but actual results may differ materially from those indicated. Important factors which could cause actual results to differ materially from those in forward-looking statements are detailed in filings made by Life Technologies with the SEC. It's our intent that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995. Additionally, we will be discussing GAAP and non-GAAP measures. A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our website. I will now hand the call over to Greg Lucier.

Thanks, Carol, and thanks, everyone, for joining us on today's call. It's fair to say that 2011 was a challenging year for the company as we faced macroeconomic headwinds and constrained spending by some of our customers. At that time, we evaluated what actions we needed to undertake in an uncertain environment and started executing against them. I'm pleased to announce that even in the face of these obstacles, we were able to deliver top line growth and increased our bottom line for the 12th consecutive year since the IPO of Invitrogen. For the year, we grew our revenue 4% and took prudent efforts to reduce our costs, helping drive a 40-basis-point increase in operating margins and 5% increase in our non-GAAP earnings per share for the year. If we exclude the impact of currency, our operating margins actually expanded an impressive 110 basis points for the year. We continue to expect to grow our operating margins at a rate of about 50 basis points per year and ultimately believe we can achieve operating margins in the mid-30% range. Our free cash flow for the year totaled $710 million, a new record high. These results are a testament to the strength of our core businesses, our market expansion strategies and our ability to quickly take actions to reduce operating expenses and optimize our investment spend. We finished the year strong, growing our revenue in the fourth quarter 4%, increasing our operating margins 470 basis points and increasing our non-GAAP EPS by 18%. This growth was driven by solid performance in our consumables products, a record number of Ion Torrent PGM shipments, which I'll talk more about later, and continued strength in our BioProduction business even as we faced hard comps from last year's fourth quarter. During 2011, we made solid…

Thanks, Greg, and good afternoon, everyone. In my remarks today, I will provide an overview of our results for the fourth quarter and the year, as well as provide greater details on our 2012 guidance. We ended 2011 with a solid quarter, growing our revenue and earnings and coming in slightly better than we expected for the year. We expanded our margin, lowered our expenses as a percentage of revenue and leveraged these results to grow our non-GAAP EPS by 5% for the year. At a more detailed level, revenue increased 4% to $970 million and increased 3% excluding currency. Organic revenue growth by region in the quarter was as follows: the Americas was flat versus a strong fourth quarter in 2010, Europe grew 4%, Asia Pacific grew 10% and Japan grew 4%. For the full year, the Americas grew 2%, Europe grew 3%, Asia Pacific grew 9% and Japan declined by 3%. Taking a closer look at our divisional results for the quarter. The Genetic Systems division increased 13% to $278 million over the same period last year. Excluding the impact from currency, revenue increased 11%. For the full year, Genetic Systems grew 8%, and excluding the impact of currency, it grew 7%. For both the quarter and the full year, Ion Torrent continued to contribute to the growth in this division, driven by strong sequential sales of the PGM and associated products which were partially offset by reduced sales of SOLiD products. We also continued to see good growth in our forensics business and low single-digit growth in our CE business overall. The Molecular Biology Systems division revenue decreased 1% to $441 million for the quarter compared to prior year. Excluding the impact from currency, revenue for the division decreased 2%. For the full year, Molecular Biology Systems…

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

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

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

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

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

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

Our next question comes from Jon Groberg from Macquarie.

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

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

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

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

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

Our next question comes from Tycho Peterson from JPMorgan.

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

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

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

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

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

Our next question comes from Amit Bhalla from Citi.

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

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

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

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

Our next question comes from Ross Muken from Deutsche Bank.

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

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

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

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

Our next question comes from Bill Bonello from RBC Capital.

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

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

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

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

Our next question comes from Jon Wood from Jefferies.

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

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

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

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

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

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

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

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

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

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

Dave will answer that.

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

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

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

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

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

Yes.

Okay, just making sure I can do the math.

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

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

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

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

Yes.

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

Substantial growth in the fourth quarter over the third quarter.

Our next question comes from Isaac Ro from Goldman Sachs.

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

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

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

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

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

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