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Applera Corporation Teleconference April 23, 2003 Management Remarks for Third Quarter Fiscal 2003 Earnings Call

- April 23, 2003

Peter Dworkin

Good morning. I am Peter Dworkin, Vice President, Investor Relations and Corporate Communications, for Applera Corporation.

Thank you for joining Applera management to discuss the third quarter FY 2003 financial results that were issued this morning for Applera Corporation, including its Applied Biosystems Group and Celera Genomics Group, as well as Celera Diagnostics, the 50/50 joint venture between Applied Biosystems and Celera Genomics.

This morning we will discuss each of our businesses separately, starting with Applied Biosystems, then Celera Diagnostics, and concluding with Celera Genomics. We estimate that the Celera Diagnostics portion of the call will begin at about 10:45 a.m. and the Celera Genomics portion at 11 a.m., but we will move from one business to the next without interruption.

Present today are Tony White, Chief Executive Officer of Applera; Dennis Winger, Chief Financial Officer of Applera; Mike Hunkapiller, President of Applied Biosystems; and Kathy Ordoñez, President of Celera Genomics and Celera Diagnostics. Other business managers are present to assist in answering your questions.

During this call we will be making forward-looking statements about Applera's businesses. These statements are subject to the risks and uncertainties relating to our businesses and corporate structure that are referred to in the releases issued this morning and in Applera's filings with the Securities & Exchange Commission.

Please note that during this call, the text of these prepared remarks will be posted on the Investor Relations section of the Applera web site and on the separate Investor Relations sites within the Applied Biosystems and Celera Genomics web sites.

Our first speaker this morning will be Tony White.

Tony White

Good morning.

Last week marked the 50th anniversary of the discovery of the double helix structure of DNA - the seminal insight that has led to the modern life science industry - and the formal completion of the International Human Genome Project. It is dramatic to consider how the pace of discovery in the biological sciences has accelerated since Watson and Crick, and the undisputed role that innovative technology such as the DNA sequencing and PCR technologies developed by our Applied Biosystems group has played in that acceleration.

Thanks to genomics, it is virtually assured that the scientific and medical progress of the next 50 years - and perhaps of the next 10-15 years -- will dwarf that of the last 50. Consider last week's news that researchers in several countries identified and sequenced the SARS virus only five months after the infection was first noted in China. Now that the genome of the SARS virus is known, genetic probes to detect the virus easily are in development, and currently approved drugs are being screened in a search for treatments. If you contrast this swift progress with the many years and many lives spent on developing techniques to detect and treat the HIV virus, I believe you will be able to appreciate the excitement we in the life science industry feel for the future of medical care.

It is important to highlight these very meaningful advances to keep current conditions in the life science industry in perspective. While the Applera businesses face real challenges short-term, they are engaged in a vitally important enterprise and they are in a fundamentally strong position - scientifically and financially - to lead their respective industry segments as the new paradigms for doing medical research and providing medical care become more widely adopted.

Celera Genomics is making steady progress in its drug discovery and development programs as well as in building its management team. In the therapeutics business, value creation is a process that is not transparent every quarter, but I believe that Celera is pursuing activities that will deliver substantial shareholder value. I am also gratified by the continuing research and product development advances at Celera Diagnostics.

Relative to Applied Biosystems, the need for ongoing innovation in the life sciences and better health care is a certainty. What is less clear is the volume of near-term sales prospects in the wake of the unusual number of uncertainties in our markets today. And while the press release today on Applied Biosystems emphasizes the difficult market environment, I want to emphasize that the market position of Applied Biosystems remains strong. Even during a challenging year, AB has generated substantial profits and operating cash flow, and it enjoys one of the strongest balance sheets in the industry. I am very proud of this management team, which has remained focused on managing the business in a tough environment.

Now, Mike will expand on some of my comments while reviewing the recent quarter.

Mike Hunkapiller

Thank you, Tony.

During the third quarter, revenues of $409 million were approximately equal to the prior year quarter. Excluding the net effect of currency, total revenues declined approximately 3 percent from the prior year quarter. On a year-over-year basis, instrument revenues declined 1 percent, consumables sales declined 4 percent, and revenues from 'Other Sources' increased 14 percent. This 'Other Sources' category includes service contracts, royalties, licenses, and contract research.

Approximately one-half of Applied Biosystems revenues are earned from research funded by governments or private non-profit research organizations, and, as stated in our press release, fiscal and economic problems faced by governments in Japan, the United States and Europe negatively impacted our business during the third quarter. Historically, the third quarter has represented our strongest quarter of sales for Japan. This year, third quarter revenues in Japan declined 21 percent from the prior year due, in large part, to the Japanese government's delay in the release of appropriated funds from the fiscal 2002 Supplemental Budget. In the United States, capital spending on life science tools by government labs and by academic researchers was hurt by the late passage of the fiscal 2003 NIH budget, which was approved by Congress in February. Finally, in Europe's Economic Union, weak economic conditions and negotiated ceilings on deficit spending as a percentage of gross domestic product put pressure on appropriations for life science research.

In the commercial sector, spending patterns by our pharmaceutical and biotechnology customers remained cautious as well. While pharmaceutical customers continued to purchase products such as the API 4000™ LC/MS/MS System for use in drug development, spending on early research tools remained constrained.

Despite this quarter's lack of overall revenue growth, a number of our products showed strength. Demand for the Applied Biosystems 3730 DNA Analyzer product line remained robust, although at a lower level than we experienced during the second quarter. All of the large U.S. genome centers have begun converting their sequencing labs from 3700s to 3730xl systems. In addition, demand for both our 48-capillary 3730 DNA Analyzer and our 96-capillary 3730xl DNA Analyzer outside of our large genome customers has been strong; in fact, many customers who previously had been sequencing using only early generation slab-gel technology have upgraded to these mid- to high-throughput sequencers. While year-over-year sales of sequencing consumables continued to decline during the third quarter, the rate of decline has moderated substantially from the rates of year-over-year declines experienced during the first and second quarters.

The performance of mass spectrometry was once again solid during the third quarter, with sales of these products increasing 21 percent as compared to the prior year quarter. In addition to the strength of the API 4000 system, both the Q TRAP™ system, AB's linear ion trap, and the QSTAR® XL LC/MS/MS system that serves the high-end discovery proteomics market contributed to revenue growth.

Within our SDS and Other Applied Genomics product category, revenue from our TaqMan® chemistry-based consumable products, which are used for both gene expression and genotyping, increased. However, weakness in SDS instrument revenues offset this growth. In the future, we anticipate that sales of both the Applied Biosystems 7900HT Micro Fluidic Card for gene expression and the SNPlex™ system for genotyping will contribute to consumables revenue growth, and expect that the micro fluidic card may spur sales of the 7900HT instruments as well.

From a geographic perspective, revenues in the United States, which accounted for approximately 46 percent of total third quarter revenues, increased 2 percent from the prior year quarter. Revenues in Europe, which accounted for approximately 28 percent of total revenues, increased 6 percent over the prior year quarter. And finally, revenues in Asia Pacific, which accounted for 23 percent of total revenues, declined 11 percent from the prior year quarter, as weakness in Japan offset revenue growth in the rest of Asia. Excluding the net effects of foreign currency, fiscal 2003 third quarter revenues decreased approximately 3% in Europe and decreased approximately 15% in Asia Pacific compared to the prior year.

Next, Dennis Winger will cover the financial performance and financial outlook for Applied Biosystems.

Dennis Winger

Thank you, Mike.

Operating income in the quarter was $52.6 million versus $66.8 million in the prior year quarter. Earnings for the Group were 19 cents per diluted share, versus 23 cents in the third quarter of fiscal 2002.

Despite the difficult business environment, we are very pleased with our strong cash flow performance. During the third quarter of fiscal 2003, cash flow from operations was $58.9 million, and capital expenditures were $44.3 million. This cash flow generation allowed us to use $12.9 million to repurchase approximately 760,000 shares of Applied Biosystems stock during the quarter and still increase our cash and cash equivalents by $1.5 million to $521.3 million at the end of the quarter.

As of the end of the third quarter, accounts receivable was $365.1 million, representing 73 days sales outstanding, versus $370.0 million, or 63 days, as of the end of the second quarter of fiscal 2003, which represented an unusually low level for the business. Inventory was $144.8 million, representing 3.4 months of inventory on hand, versus $154.6 million, or 3.5 months, as of the end of the second quarter.

Tony and Mike have reiterated many uncertainties referenced in our press release that affect our business and make forecasting extremely difficult at this time. Due to these uncertainties, management is unable to provide guidance on revenues or diluted earnings per share with the degree of accuracy investors would like. Let me elaborate on this important topic.

It would be possible for management to forecast ranges for fiscal fourth quarter revenues and earnings per share. These ranges would probably turn out to be accurate within $10 million or $15 million of the midpoint of the range for revenue and within a few cents of the range for EPS. The problem is that prior experience tells us that many in the financial community would quickly reduce these numerical ranges into single-point estimates. Then, when we report the next quarter, the financial community would interpret any variance around those single-point estimates as a miss, even if we were within our stated ranges. With visibility currently low and the penalties for missing the street consensus high, we conclude that shareholder interests are not best served byproviding financial guidance that may have a high rate of variance. We will continue to publish our views about significant developments in our markets as appropriate, enabling analysts to fold such information with publicly available macroeconomic information into their own analyses. We will revisit this topic in July, when we report year-end fiscal 2003 results.

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

Thank you, we'll now take your questions about Applied Biosystems.

Peter Dworkin

We will now turn to Celera Diagnostics, a 50/50 joint venture between Applied Biosystems and Celera Genomics. The next speaker will be Kathy Ordoñez.

Kathy Ordoñez (CDx)

Thank you, Peter.

The recently completed quarter included several important accomplishments at Celera Diagnostics. First, we showed continued strong growth in end-user sales. Our ViroSeq HIV genotyping system received an additional FDA clearance and customer evaluations of our hepatitis C analyte specific reagents for both genotyping and viral load progressed. Lastly, we advanced several disease association studies that should form the basis for new diagnostic tests.

For the quarter, reported revenue was lower on a sequential basis because the prior quarter included a sizable equalization payment from Abbott Laboratories. Under our profit sharing arrangement, these payments "equalize" differences in relative expenses between the two parties.

A key measure of our performance is end-user sales of products manufactured by Celera Diagnostics, including products sold through the Abbott alliance. During the recent quarter, end-user sales of Celera Diagnostics' products increased to $5.8 million, a 19 percent sequential gain compared to second fiscal quarter 2003. Year to date fiscal 2003 end user sales of $14.7 million represent a gain of over 80 percent compared to the prior year period. We now expect fiscal 2003 end-user sales to be near the top end of the previously projected range of $18 to $22 million. The primary growth driver continues to be adoption of our version three cystic fibrosis analyte specific reagents.

During the recent quarter, we also advanced our nearest term new product programs. In February, we received an additional clearance from the U.S. Food and Drug Administration to market our ViroSeq™ HIV-1 Genotyping System on the ABI 3100 sequencing instrument. This instrument is widely used by clinical laboratories and hospitals around the world. Our partner, Abbott, is actively promoting ViroSeq, and we are prepared to meet anticipated customer demand during the fiscal fourth quarter.

Through our partnership with Abbott, we expect to establish our first customers for both genotyping and viral load analyte specific reagents for the hepatitis C virus. Our HCV genotyping test speeds the delivery of information to physicians and reduces hands-on time in the laboratory; it can provide results in about six hours, compared to other tests that typically take two days.

Each of our ongoing disease association studies moved forward over the last three months. Our Alzheimer's disease study and our cardiovascular studies have advanced to replication, and we commenced the discovery phase of our rheumatoid arthritis study. We remain on track to meet our goal of completing four disease association studies by the end of June and a total of six by the end of the calendar year.

We plan to publicly describe findings from the disease association studies in the fall, which would allow us time to review any findings with collaborators, file patents for any discoveries and allow Celera Genomics the opportunity to assess the potential therapeutic utility of any markers and associations we identify.

In summary, we have maintained the strong momentum both in sales and in the discovery programs that are driving our new product efforts. Now we will take your questions regarding Celera Diagnostics.

Peter Dworkin

In the third and final portion of our call today, Kathy Ordoñez will cover Celera Genomics.

For those who may have just joined us this morning, please note that during this call we will be making forward-looking statements about the Company's businesses. These statements are subject to the risks and uncertainties relating to our businesses and corporate structure that are referred to in the releases issued this morning and in Applera's filings with the Securities & Exchange Commission.

Kathy Ordoñez (CRA)

Thank you.

At Celera Genomics, we are executing the business and scientific plan we communicated in December. Celera Genomics and Celera Diagnostics are implementing our Targeted Medicine approach by jointly advancing several research programs based on disease associations. In addition, we have made progress in our discovery programs, and in expanding our preclinical and clinical development organization.

In December, we focused our proteomics effort exclusively on the identification of candidate targets for antibodies and differentially expressed cell surface proteins. We have stated that our goal is to create value by developing antibodies in partnership, rather than building an independent antibody program. Our focus on cell surface proteins is already paying off. We have demonstrated the effectiveness of our scientific platform for the identification of differentially expressed proteins and accelerated our oncology studies in lung and colon cancer. This puts us several months ahead of our original schedule for colon cancer, and we are regularly receiving both lung and colon tissue samples.

We recently presented findings from the pancreatic cancer pilot study at a scientific conference. The differentially expressed proteins identified in that study were confirmed across a number of tumor-derived cell lines. The proteins identified include three that are currently in development as antibody targets by other companies. This provides some validation of our approach to associating proteins with disease.

We selected 38 proteins from the pancreatic cancer study for further validation, after evaluating their biological profiles and any intellectual property issues. These proteins were consistently over or under expressed by a factor of two times or more. This set includes novel proteins with characteristics similar to known therapeutic targets. We have undertaken expression validation-the evaluation of protein and RNA expression profiles-in additional normal and diseased tissue samples. Functional validation is also planned to confirm the suitability of selected proteins as antibody targets.

Our Targeted Medicine strategy will integrate findings from the Applera Genomics Initiative and from ongoing disease association studies to identify potential diagnostic markers and therapeutic targets. These findings should be valuable for Celera as we plan clinical trials related to certain complex diseases. As we conclude the research phase of the AGI, we have identified over 40,000 functional single nucleotide polymorphisms-or SNPs-more than doubling the number of known functional SNPs. Functional SNPs can alter the structure, stability and quantity of proteins, and some have associations with genetic diseases.

We are continuing to move various preclinical small molecule programs forward, including our Factor VIIa program. Our approach is to evaluate several compounds in parallel during the earliest program phases, since many compounds will fail to meet our criteria for advancement. In January, we indicated that we were planning to start additional safety and toxicology studies for the lead tryptase compound that we acquired from Bayer, and that we were also looking at back-up compounds to increase our chances of success. Since then, we have stopped work on the original lead compound because of its metabolic profile. This is a common reason for stopping compounds which are at this early stage of development. It is our goal to identify the deficiencies associated with flawed compounds and to move on to alternatives sooner rather than later. We are continuing to dedicate resources to the tryptase program with the goal to move a suitable compound toward clinical trials.

Effectively planning for future clinical trials depends in part on the successful expansion of our development organization. We plan to grow the development group from twelve at the end of calendar 2002 to about 30 by the end of summer. We've recently added senior directors of toxicology and of pharmaceutical sciences. These and other new hires are already making a positive contribution by increasing both the capacity and the quality of our compound screening for our Factor VIIa anticoagulation program.

Now, Dennis Winger will make a few comments on financial results for Celera Genomics.

Dennis Winger

Thank you, Kathy.

I will briefly discuss some of the trends behind the results for the third quarter, and provide some additional comments regarding changes in our outlook.

For the quarter, Celera Genomics reported a net loss of $26.7 million, or 37 cents per share, compared to $49.5 million, or 72 cents per share, in the same period last year. One of the assets acquired with the purchase of Axys Pharmaceuticals was an ownership position in Discovery Partners International common stock equal to about 30 percent of the current shares outstanding. In February, DPI announced a $51 million impairment charge. Celera's expenses for the recent quarter included a $15.1 million non-cash charge associated with the equity method investment in DPI that increased Celera's net loss per share by 13 cents for the quarter.

Third quarter fiscal 2003 R&D expenses of $27.0 million were approximately $6 million less than in the second fiscal quarter, and $10.6 million less than in the same quarter in fiscal 2002. Spending for target identification and validation programs and for our therapeutic programs continues to increase. The wind-down of the research phase of the Applera Genomics Initiative and a payment to Bayer for the tryptase compounds were the primary reasons that second quarter fiscal 2003 R&D expenses were higher compared to the recent quarter. We have reduced our outlook for fiscal 2003 R&D expenses to the range of $118 to $123 million to reflect lower than expected expenses and modest delays in hiring and spending within some programs.

Our cash and short-term investments balance decreased by $16 million during the quarter, and by $65 million since the beginning of the fiscal year. This includes the conversion of $17 million of short-term investments to long-term investments. Excluding this conversion, the year to date change in Celera Genomics' cash balance is $48 million. We now expect, excluding the $17 million conversion, that the change in cash balance to be in the range of $66 to 72 million for fiscal year 2003. This is primarily the result of lower than previously anticipated R&D spending. This expectation includes Celera Genomics' portion of the funding for the Celera Diagnostics joint venture.

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

We will now take your questions regarding Celera Genomics.

Peter Dworkin

Thank you for participating in this call today. Management's remarks should now be posted on our websites. The audio replay will be available later today using the phone numbers listed in today's press releases.

Certain statements made during management's prepared remarks for this conference call are forward-looking. These may be identified by the use of forward-looking words or phrases such as "believe," "expect," "intend," "anticipate," "should," "planned," and "potential," among others. These forward-looking statements are based on Applera Corporation's current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. In order to comply with the terms of the safe harbor, Applera Corporation notes that a variety of factors could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements.

The risks and uncertainties that may affect the operations, performance, development, and results of Applied Biosystems include but are not limited to: (1) rapidly changing technology could adversely affect demand for Applied Biosystems' products, and its business is dependent on development of new products; (2) uncertainty of successful integration of the Celera Discovery System™ into the Applied Biosystems Knowledge Business and market acceptance and adoption of Knowledge Business product offerings; (3) Applied Biosystems' sales are dependent on customers' capital spending policies and government-sponsored research; (4) Applied Biosystems' significant overseas operations, with attendant exposure to fluctuations in the value of foreign currencies; (5) risks associated with Applied Biosystems' growth strategy, including difficulties in integrating acquired operations or technologies; (6) the risk of earthquakes, which could interrupt Applied Biosystems' or Celera Diagnostics' operations; (7) potential disruptions to Applied Biosystems' business due to the outbreak of severe acute respiratory syndrome (SARS); (8) uncertainty of the availability to Applied Biosystems or Celera Diagnostics of intellectual property protection, limitations on the ability of Celera Diagnostics to protect trade secrets, and the risk to Applied Biosystems and Celera Diagnostics of infringement claims; (9) the Applied Biosystems Knowledge Business' dependence on the operation of computer hardware, software, and Internet applications and related technology; (10) Celera Diagnostics' reliance on existing and future collaborations, including its strategic alliance with Abbott Laboratories, which may not be successful; (11) Celera Diagnostics' unproven ability to discover, develop, or commercialize proprietary diagnostic products; (12) the risk that clinical trials of products that Celera Diagnostics does discover and develop will not proceed as anticipated or may not be successful, or that such products will not receive required regulatory clearances or approvals; (13) the uncertainty that Celera Diagnostics' products will be accepted and adopted by the market, including the risks that these products will not be competitive with products offered by other companies, or that users will not be entitled to receive adequate reimbursement for these products from third party payors such as private insurance companies and government insurance plans; (14) Celera Diagnostics' reliance on access to biological materials and related clinical and other information, which may be in limited supply or access to which may be limited; (15) legal, ethical, and social issues which could affect demand for Celera Diagnostics' products; (16) Celera Diagnostics' limited commercial manufacturing experience and capabilities and its reliance on a single principal manufacturing facility; (17) Celera Diagnostics' reliance on a single supplier or a limited number of suppliers for key components of certain of its products; (18) potential product liability or other claims against Celera Diagnostics as a result of the testing or use of its products; (19) intense competition in the industry in which Celera Diagnostics operates; and (20) other factors that might be described from time to time in Applera Corporation's filings with the Securities and Exchange Commission.

The risks and uncertainties that may affect the operations, performance, development, and results of Celera Genomics' businesses include but are not limited to: (1) Celera Genomics expects operating losses for the foreseeable future; (2) Celera Genomics' reliance on Applied Biosystems' emerging Knowledge Business for incremental revenues to Celera Genomics from the Celera Discovery System and Celera Genomics' related information assets; (3) Celera Genomics' and Celera Diagnostics' unproven ability to discover, develop, or commercialize proprietary therapeutic or diagnostic products, (4) the risk that clinical trials of products that Celera Genomics or Celera Diagnostics do discover and develop will not proceed as anticipated or may not be successful, or that such products will not receive required regulatory clearances or approvals; (5) the uncertainty that Celera Genomics' or Celera Diagnostics' products will be accepted and adopted by the market, including the risk that that these products will not be competitive with products offered by other companies, or that users will not be entitled to receive adequate reimbursement for these products from third party payors such as private insurance companies and government insurance plans; (6) reliance on existing and future collaborations, including, in the case of Celera Diagnostics, its strategic alliance with Abbott Laboratories, which may not be successful; (7) Celera Genomics' and Celera Diagnostics' reliance on access to biological materials and related clinical and other information, which may be in limited supply or access to which may be limited; (8) intense competition in the industries in which Celera Genomics and Celera Diagnostics operate; (9) potential product liability or other claims against Celera Genomics or Celera Diagnostics as a result of the testing or use of their products; (10) Celera Genomics' reliance on scientific and management personnel having the training and technical backgrounds necessary for Celera Genomics' business; (11) potential liabilities of Celera Genomics related to use of hazardous materials; (12) uncertainty of the availability to Celera Genomics and Celera Diagnostics of intellectual property protection, limitations on their ability to protect trade secrets, and the risk to them of infringement claims; (13) Celera Genomics' dependence on the operation of computer hardware, software, and Internet applications and related technology; (14) legal, ethical, and social issues which could affect demand for Celera Genomics' or Celera Diagnostics' products; (15) risks associated with future acquisitions by Celera Genomics, including that they may be unsuccessful; (16) uncertainty of the outcome of existing stockholder litigation; (17) Celera Diagnostics' limited commercial manufacturing experience and capabilities and its reliance on a single principal manufacturing facility; (18) Celera Diagnostics' reliance on a single supplier or a limited number of suppliers for key components of certain of its products; (19) the risk of earthquakes, which could interrupt Celera Diagnostics' and/or Celera Genomics' operations; and (20) other factors that might be described from time to time in Applera Corporation's filings with the Securities and Exchange Commission.

All information in this conference call is as of the date of the call, and Applera does not undertake any duty to update this information, including any forward-looking statements, unless required by law.

Copyright 2003. Applera Corporation. All Rights Reserved. AB (Design), API 4000, Applera, Celera, Celera Diagnostics, Celera Discovery System, Celera Genomics, SNPlex, and ViroSeq are trademarks and ABI PRISM, Applied Biosystems, QSTAR are registered trademarks of Applera Corporation or its subsidiaries in the United States and/or certain other countries. Q TRAP is a trademark of Applied Biosystems/MDS SCIEX Instruments, a joint venture between Applera Corporation and MDS Inc. TaqMan is a registered trademark of Roche Molecular Systems, Inc.


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