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Applera Corporation Teleconference - July 28, 2004
Management Remarks for Fourth Quarter and Fiscal 2004 Year-End Earnings Call

- July 28, 2004

Peter Dworkin
Good morning. Thanks for joining Applera management to discuss the fourth quarter fiscal 2004 financial results that we issued early 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.

As in previous earnings calls, 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 12 noon Eastern Time and the Celera Genomics portion at approximately 12:15 p.m. Eastern Time. 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; Cathy Burzik, Executive Vice President and Chief Operating Officer 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 SEC.

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 is Tony White.

Tony White
Good morning everyone.

Fourth quarter results for Applied Biosystems were encouraging. We were able to overcome adversity this quarter, particularly in Japan. While the environment remains somewhat unstable, we're feeling better about this quarter than we have in a while. The full fiscal year had its bright spots, too, including $289 million in operating cash flow generated by Applied Biosystems. This enabled Applera to use $325 million to repurchase Applera-Applied Biosystems shares during the fiscal year and still finish the fiscal year with more than $500 million in cash on Applied Biosystems' balance sheet.

This performance is one that many companies would be quite happy to have. But we'd like it to be better.

Most people on this call are aware of the funding and other industry-wide issues we talk about often, so I won't dwell on them here. What I do want to emphasize is that management has as a key objective to improve the growth profile of Applied Biosystems. We have a fiscal 2005 plan for a modest top line growth rate and a bottom line growth rate which is higher. We would characterize fiscal 2005 as a transitional year toward what we expect will be better performance as we implement actions resulting from our strategic and operational review.

Cathy Burzik has been leading this review and will be discussing the results to date later in this call. We are very pleased with the work completed so far. In the current phase of the review, the management team and our outside consultants are carefully evaluating acquisition opportunities as well as internal avenues for growth beyond our current business lines. The Group's strong financial condition provides flexibility to fund new initiatives.

Now, Mike Hunkapiller will take you through a review of Applied Biosystem's fourth quarter operating results, and then Cathy will give you an update on the strategic and operational review.

Mike Hunkapiller
Thank you, Tony.

During the fourth quarter, net revenues increased 6 percent, including a positive impact of approximately 1 percent from foreign currency, compared to the prior year quarter.

Once again, the Real-Time PCR/Other Applied Genomics, which we previously referred to as Sequence Detection Systems, or SDS/Other Applied Genomics, and Mass Spectrometry product categories led the Group's revenue growth.

Sales of Mass Spectrometry products increased 40 percent over the prior year quarter, driven by the strength of sales of both the 4000 Q TRAP® and the API 4000™ LC/MS/MS Systems. To remind you, the prior year quarter results were somewhat weak as we had introduced, but not yet begun to ship, the 4000 Q TRAP. Mass spec sales to each of our three major markets, pharmaceutical, proteomics, and applied markets were strong. In particular, demand for our mass spectrometry products from the food and environmental markets in Asia was significant. This year at the Annual American Society of Mass Spectrometry (ASMS) conference in May, we introduced two new products, iTRAQ™, a new multiplexed reagent for protein and biomarker quantitation, and a new mass spectrometry-based tissue imaging technology for drug metabolism studies. We have received positive initial customer response on both of these products.

Sales of Real-Time PCR/Other Applied Genomics products increased 25 percent over the prior year quarter, driven by the strength of TaqMan® assays and consumables sales and, to a lesser degree, instrument sales. Within instruments, sales of the Applied Biosystems 7300 and the Applied Biosystems 7500 Real-Time PCR Systems, both of which we launched in February, were strong. In the applied markets, sales of our products for human identification once again contributed significantly to the Real-Time PCR/Other Applied Genomics product category growth.

During the fourth quarter, we announced a major expansion of both our TaqMan® SNP Genotyping Assays and our TaqMan® Gene Expression Assays product lines. In genotyping, we now offer additional assay choices to researchers conducting candidate gene, gene-region, and disease association or mapping studies. In gene expression, we now offer assays for nearly all human, mouse, and rat genes and splice variants. We also began unrestricted commercial sales of the Applied Biosystems Mouse Genome Survey Microarray for use with our recently introduced Expression Array System.

DNA Sequencing revenues declined 15 percent compared to the prior year quarter. Sales of DNA Sequencing instruments declined, primarily as a result of reduced sales of both the Applied Biosystems 3730xl DNA Analyzer and DNA Sequencing consumables to large-scale genome centers. After a major upgrade cycle, the genome centers have now substantially replaced their older 3700 DNA Analyzers with the 3730xl model, although some limited additional shipments to these centers are expected in fiscal 2005. For the year as a whole, DNA Sequencing consumables sales were down slightly.

From a geographic perspective, revenues in the United States, which accounted for approximately 46 percent of total fourth quarter revenues, declined 3 percent from the prior year quarter. This decline resulted from lower DNA Sequencing sales to the large genome centers, most of which are located in the U.S. Revenues in Europe accounted for approximately 33 percent of total revenues, and increased 23 percent from the prior year quarter. This increase was driven by significant sales of the 4000 Q TRAP and the growth of both consumables and instruments in the Real-Time PCR/Other Applied Genomics product category. Revenues in Asia Pacific, which accounted for approximately 17 percent of total revenues and which include revenues from Japan, declined 1 percent from the prior year quarter. Revenues from Japan declined 7 percent compared to the prior year. Once again, this decline resulted primarily from the transition of universities to Independent Administrative Agency status, which has altered the universities' traditional purchasing patterns. The net effect of foreign currency increased revenues by approximately 4 percent in Europe, approximately 2 percent in Asia Pacific, and approximately 2 percent in Japan during the fourth quarter of fiscal 2004.

Today, there are two important trends shaping the direction of life science research. The first is the trend towards Systems Biology, or Integrated Science, and the second is the trend towards targeted medicine. At Applied Biosystems, we need to ensure that we continue to introduce products that support these research trends. One of the important aspects of the operational and strategic review that we began in February is the alignment of our R&D investments with present and future market demands. At this time, I would like to ask Cathy to update you on the status of our ongoing review.

Cathy Burzik
Thank you, Mike.

During the first phase of our strategic and operational review, we analyzed our existing product line portfolio in terms of product line profitability and growth profile as well as strategic fit. We also examined our current R&D investment commitments to assess alignment with market opportunities. This was a rigorous analysis and we are currently executing actions resulting from this phase. These actions include strengthening our R&D investments in those product areas where we see the opportunity to increase our organic growth.

Additionally, we have initiated product portfolio actions as a result of the review. We made the decision to transfer the 8500 Affinity Chip Analyzer product line back to HTS Biosystems, Inc. and the decision not to pursue the commercialization of the products that we had originally envisioned when we purchased Boston Probes, resulting in a charge for impairment of patents and technology during the fourth quarter.

The second phase of our review focused on organizational effectiveness. We believe that the organizational restructuring we are currently implementing should improve our ability to execute, as well as enhance business alignment and customer focus in the organization. This new structure should also enable increased management focus on future business strategy. The organization redesign moves AB into a divisionalized structure with four divisions led by Division Presidents. Our intention is to create integrated and fully functioning divisions with the resources necessary to execute their business plans, including strategic planning, R&D, marketing, and sales professionals. The four new business divisions are Molecular Biology, Proteomics and Small Molecule, Applied Markets, and finally, Services.

We believe that these, and further changes, should enable us to move, after fiscal 2005, towards achieving higher single digit organic revenue growth.

As Tony indicated, we are presently conducting the next phase of our strategic and operational review. During this phase, we will be seeking to identify and analyze additional internal and external growth opportunities, including potential acquisitions, aimed at further increasing Applied Biosystems' revenue growth rate.

I'd like to conclude by reiterating that we are extremely pleased with the progress to date of the ongoing operational and strategic review, and we are on track to complete this review by the end of calendar 2004. However, we expect to implement changes that result from the review over a longer-term horizon. I'm sure you appreciate that for competitive reasons we cannot share certain of our plans before they are executed. Our intent remains to update you as we implement actions resulting from the review.

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

Dennis Winger
Thank you, Cathy.

Fourth quarter and fiscal 2004 annual financial results and the fiscal 2005 financial outlook for Applied Biosystems are detailed in the press release, so I am going to focus on providing additional color on a few of these details.

Earnings per share from continuing operations were $0.20 for the fourth quarter of fiscal 2004 as compared to $0.46 in the prior year quarter. As detailed in our press release, fiscal 2004 fourth quarter results included special items that reduced EPS by $0.07, and the prior year quarter results included a special item that increased EPS by $0.23.

During the fourth quarter of fiscal 2004, cash flow from operations was $82.9 million, and capital expenditures were $14.2 million. Strong cash flow generation, as well as Applied Biosystems' substantial cash position, allowed us to use $125.0 million to repurchase 6.5 million shares of Applied Biosystems stock during the quarter. For fiscal 2004 year as a whole, cash flow from operations was $289.3 million, and capital expenditures were $60.4 million. During the fiscal year, we used $325 million to repurchase 15.4 million shares of Applied Biosystems stock. At the end of the quarter, cash and cash equivalents were $504.9 million, and Applied Biosystems has no debt.

As of the end of the fourth quarter, accounts receivable was $383.0 million, representing 61 days sales outstanding, versus $364.1 million, or 66 days outstanding, as of the end of the third quarter of fiscal 2004. Inventory was $129.3 million, representing 2.8 months of inventory on hand, versus $140.4 million, or 3.1 months, as of the end of the third quarter of fiscal 2004.

Applied Biosystems has the following expectations regarding its financial performance for fiscal 2005:

  • Fiscal 2005 Revenue Growth Rate: The Group anticipates low- to mid-single digit revenue growth for the Group as a whole. In terms of product categories, Real-Time PCR/Other Applied Genomics revenues should increase, driven by increased use of Applied Biosystems products in the expanding field of functional genomics, and Mass Spectrometry revenues should increase, driven by increased use of Applied Biosystems products for proteomics research, drug metabolism and pharmacokinetics studies, and applied markets applications. Revenues from DNA Sequencing overall should decline, although revenues from customers who are not affiliated with the large genome centers should increase modestly. Core DNA Synthesis and PCR and Other Product Lines revenues should approximately equal fiscal 2004 revenues.
  • Fiscal 2005 Margins and Expenses: The gross margin should equal, or slightly exceed, the fiscal 2004 gross margin. Selling, general and administrative expense as a percent of total revenues should approximate, and R&D expense as a percent of total revenues should decline from, the fiscal 2004 levels. The operating margin should increase from the fiscal 2004 level, excluding special items in both fiscal years.
  • Fiscal 2005 Effective Tax Rate: The effective tax rate should be 28 percent. However, the effective tax rate may be impacted by pending tax legislation to replace the existing U.S. export tax regime, possible extension of the research tax credit, and the possibility that the Group may be able to resolve several outstanding tax issues in multiple taxing jurisdictions.
  • Fiscal 2005 Earnings Per Share from Continuing Operations Growth: Earnings per share from continuing operations should increase at a rate exceeding that of the annual revenue growth rate, excluding special items in both fiscal years.
  • Fiscal 2005 Capital Spending: Capital spending should be in the range of $55-65 million.
  • Fiscal 2005 First Quarter Earnings Per Share: First quarter earnings per share, excluding severance related charges resulting from the previously disclosed reduction in staff, should be equal to, or slightly above or below, the prior year quarter results. First quarter fiscal 2005 SG&A expense should significantly exceed prior year quarter, primarily as a result of increased litigation expenses, the cost of an enterprise system software upgrade, and the negative effect of foreign currency.

Beyond fiscal 2005, the Group believes organic revenue growth should attain high-single digits due to changes implemented to the Group's existing business. These changes include rebalancing R&D investments and implementing a new divisional organizational structure, as well as related business process changes. The Group is seeking to identify and analyze additional internal and external growth opportunities aimed at further increasing this revenue growth rate.

The Group believes that this outlook and its fiscal year 2005 financial performance will be affected by, among other things: the introduction and adoption of new products; the level of commercial investments in life science R&D; and the level of government funding for life science research. While the Group anticipates growth in U.S. sales, the Group believes that customer concern about the timing and level of future NIH funding in the U.S. could impact purchase behavior by laboratories operated or funded by the NIH. In Europe, the Group expects government funding for life science research to remain stable. Finally, the Group expects the transition of universities in Japan to Independent Administrative Agency status will continue to negatively impact financial results.

These comments reflect management's current outlook. Applera 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. Tony White will make some introductory remarks, followed by Kathy Ordoñez.

Tony White
Thanks Peter.

Celera Diagnostics and Celera Genomics have a shared mission: to transform medicine and to create value for society and for our shareholders. These businesses have made steady progress against their independent goals, including the completion of important strategic collaborations and new discoveries. We established new relationships with General Electric, Abbott and Seattle Genetics to apply Celera Genomics' targets for cancer in the development of new therapeutics and in vivo diagnostic imaging agents. Celera Genomics' proteomics research is leading to the discovery of additional cell surface protein targets for these collaborations, while its scientists continue to advance our unpartnered small molecule programs. Celera Diagnostics established a new relationship with Merck that is primarily focused on Alzheimer's disease. It creates product opportunities for Celera Diagnostics and supports Merck's therapeutic discovery programs. In addition, Celera Diagnostics and Applied Biosystems announced a licensing arrangement with Cepheid. Celera Diagnostics has also initiated medical utility studies related to risk of heart attack and risk of rheumatoid arthritis. These studies are the next step to optimize constellations of markers that can be converted into diagnostic products by Celera Diagnostics and the reference labs.

The complementary skill set and technology platforms of Celera Diagnostics and Celera Genomics directly support our Targeted Medicine strategy. These businesses are working toward common goals, and have established a solid foundation for differentiated products and long-term success. The scientific efforts of these businesses are aligned for programs such as the broad research collaboration with GE and the expanded proteomics research that Kathy will describe shortly. Separately, Celera Diagnostics is making progress towards completing two association studies that should provide Celera Genomics insight into the genetic and biological basis for selected inflammatory conditions. We believe that earlier disease detection, coupled with targeted therapies and companion diagnostics, can play a major role in addressing unmet medical needs.

Now I will turn it over to Kathy who will discuss Celera Diagnostics.

Kathy Ordoñez (CDx)
Thank you Tony and good morning everyone.

Celera Diagnostics is focused on the discovery, development and commercialization of novel molecular and protein diagnostics, and associated technologies that enable physicians to better diagnose, monitor and treat disease. Over the last few months, we have formed new strategic relationships, reduced our losses and cash use, discovered and reported new associations between genetic variation and disease and advanced our new product programs.

As we announced today, we are going to work with Merck to identify novel targets for drug discovery and diagnostic markers related to Alzheimer's disease and certain other neurodegenerative diseases. Merck will fund disease association research at Celera Diagnostics and for any genetic associations that we validate, through research supporting this collaboration, Merck will have exclusive rights for therapeutic applications and Celera Diagnostics will retain exclusive rights for diagnostic applications. Alzheimer's disease is a common, complex disease that is poorly understood. Our joint research could lead to sub-classifications of Alzheimer's, and to new diagnostic markers for the evaluation of disease risk, rate of disease progression and therapy selection.

Under our patent license agreement with Cepheid, Celera Diagnostics will receive a majority of the $11.5 million license fee over a two-year period, as well as royalties on sales of products incorporating the licensed IP, primarily for diagnostic applications outside of Celera Diagnostics' strategic focus. Both the Merck and Cepheid agreements will provide technology-related revenue during fiscal 2005.

Celera Diagnostics and Celera Genomics are collaborating to identify protein biomarkers in serum and tumor samples for early detection of disease and therapy selection. Celera Diagnostics will fund additional discovery work at Celera Genomics, and together these businesses intend to exploit the diagnostic and therapeutic potential of our discoveries. During fiscal 2005, we will begin to consider partnering options for these opportunities.

Our collaboration with GE and Celera Genomics has an initial focus on the development of in vivo cancer imaging agents that target cell surface proteins linked to cancer. We are very excited about the possibilities created by the GE and Merck programs, which should accelerate the discovery and development of new products for Targeted Medicine. We believe that demand for new molecular diagnostics for disease risk may be accelerated by the availability of protein diagnostics and imaging-based diagnostics from GE, which can be used to monitor "at risk" individuals to detect disease earlier and to evaluate disease severity and progression and aid in treatment selection. The GE arrangement further complements collaborations that Celera Genomics has recently established to develop small molecule and antibody based therapies against cell surface proteins expressed in cancer.

In recent months, we have made significant progress in our disease association studies and related new product programs. We presented disease associations from five of our studies at various scientific conferences, including markers associated with risk of myocardial infarction or heart attack and an important new association with risk of rheumatoid arthritis. We have advanced both of these programs to clinical utility studies. For example, our scientists are working with Quest Diagnostics and other collaborators to identify the most informative constellation of markers associated with MI. Presentation of additional MI results is expected this fall. Other recent presentations described risk of stroke, associations with Alzheimer's disease, and interferon responsiveness in hepatitis C infected patients. We are also working with LabCorp to select markers predictive of metastasis in breast cancer.

For the fiscal fourth quarter 2004, our pre-tax loss decreased to $8.7 million, while our net cash use dropped to $5.4 million. In the prior year period, our loss was $15.4 million, and cash use was $16.1 million. Higher demand for products sold through the alliance with Abbott Laboratories, license fees from Cepheid, higher gross margins and lower R&D expenses were the principal drivers behind these improvements. For the recent quarter, total end-user sales for the alliance with Abbott increased to $12.2 million compared to $9.1 million in the fiscal fourth quarter of 2003. End-user sales of products manufactured by Celera Diagnostics were unchanged from last year's quarter, due primarily to inventory adjustments by a large customer. The variability in order patterns has made the quarterly sales trend line irregular, but we have seen good growth in demand, and we expect solid double-digit growth in fiscal 2005. For fiscal 2004, our pre-tax loss dropped by over $9 million, while end-user alliance sales increased to $45.9 million, compared to $20.5 million during fiscal 2003.

Our team is focused on growing our business through sales of existing and new products as well as leveraging our intellectual property and discovery power. During fiscal 2005, we plan to reduce our pre-tax losses to be in a range of $28 to $35 million, and net cash use to be in a range of $30 to $40 million. Total end-user sales for the alliance between Celera Diagnostics and Abbott Laboratories are anticipated to grow to a range of $60 to $70 million. Reported revenues are expected to include technology-related revenues from licensing and other agreements, including payments from Cepheid, Merck and potential new sources.

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, Peter.

We are optimistic about the prospects for Celera Genomics and proud of the progress we have made this past year. The team at Celera Genomics has met its primary goals for fiscal 2004, including the formation of strategic relationships, the receipt of a clinical milestone payment from Merck, advancement of proteomic and small molecule programs and the continued strategic focus on Targeted Medicine and the collaboration with Celera Diagnostics.

We have entered into three strategic and complementary agreements with technology and market leaders: General Electric, Abbott Laboratories and Seattle Genetics. All three leverage our proteomics discoveries and provide broader opportunities for new targeted therapies and diagnostic imaging products. They also validate the quality of discoveries from Celera Genomics' proteomics platform. We structured these agreements to ensure that Celera has significant potential downstream value. Abbott and Seattle Genetics provide different technological approaches to therapeutic discovery and development. The Abbott relationship encompasses monoclonal antibodies and small molecule drugs. Abbott brings a full range of capabilities, from target validation through clinical development, manufacturing and global distribution. Seattle Genetics possesses proprietary antibody drug conjugate technology and has established an excellent track record through its own clinical programs and through licensing arrangements with other industry leaders. We expect to have enough targets to keep both collaborations active.

The broad Targeted Medicine relationship with General Electric is unique based on our shared commitment to the earlier detection and treatment of disease, and the complementary capabilities we bring together: proteomics, genomics, bioinformatics, medicinal chemistry, disease association capabilities and molecular diagnostics from Celera Genomics and Celera Diagnostics; and imaging equipment and chemistry from GE. The first project under the agreement supports GE's development of novel imaging agents for cancer. Such products would selectively target cell surface proteins that Celera Genomics has already associated with cancer, possibly the same proteins relevant to our new therapeutic collaborations. It is likely that we will add other projects to the GE collaboration that leverage the skills of both Celera Genomics and Celera Diagnostics.

Celera Diagnostics is funding additional proteomics research at Celera Genomics to identify protein biomarkers in serum and tumor samples. Celera Genomics and Celera Diagnostics intend to exploit the therapeutic and diagnostic potential of any serum or tissue protein marker discoveries from this effort. Celera Genomics also benefits from Celera Diagnostics' new Alzheimer's disease collaboration with Merck. Under this agreement, Merck will pay clinical milestone payments and royalties for any new Merck therapeutic product resulting from disease associations discovered through the collaboration. Finally, Celera Diagnostics is completing two disease association studies related to autoimmune diseases on behalf of Celera Genomics. These are all examples of how we are implementing Targeted Medicine to create future therapeutic and diagnostic opportunities.

In recent weeks, we reported several updates from our small molecule programs, including a payment from Merck recognizing its advancement of a Cathepsin K inhibitor into a Phase I clinical trial as a potential treatment for osteoporosis. This compound was selected from a variety of candidate compounds developed by Celera and Merck during the term of our Cat K inhibitor collaboration. We have the potential to receive additional value in the form of milestones and royalties if the compound is advanced through development and commercialized. We also published an x-ray crystal structure of histone deacetylase that has contributed to the design of HDAC inhibitors with good potency in xenograft models of cancer.

In our proteomics studies, we are continuing to discover and validate potential targets in our work in pancreatic, lung, colon and breast cancer and in cell lines representing ten additional types of cancer.

We are focused on advancing our most promising unpartnered small molecule programs toward IND filings and clinical trials. Look for us to identify and validate additional targets within our ongoing proteomic oncology programs, and to initiate at least one new proteomics study, including a program to identify serum and tissue-based protein markers associated with cancer.

Now, Dennis Winger will make a few comments regarding the financial results for Celera Genomics and our financial outlook for fiscal 2005.

Dennis Winger
Thank you, Kathy.

Celera Genomics ended the recent quarter with $746 million in cash and short-term investments, an increase of approximately $7 million from the end of the prior quarter and a decrease of approximately $57 million during fiscal 2004. Celera Genomics received approximately $32 million in cash proceeds from the sale of its investment in Discovery Partners International. Cash use for the quarter also benefited from lower cash requirements for the Celera Diagnostics joint venture.

For the fourth quarter of fiscal 2004, Celera Genomics reported a net loss of $5.8 million, or eight cents per share, compared to $19.4 million, or 27 cents per share, in the same quarter last year. The gain associated with the sale of our investment in DPI, coupled with the non-cash charge related to the Rockville facility resulted in a six cent reduction in the loss per share. The pre-tax charge of $18.1 million represents the estimated loss on the planned sale of the Rockville facility. After a thorough analysis, we decided that selling the facility and leasing back a portion of this space is our preferred option.

In the recent quarter, R&D expenses increased modestly compared to last year's quarter, but the mix of R&D spending has changed. Higher expenses attributable to increased preclinical development activities and the hiring of therapeutics R&D personnel were offset by lower Online/Information Business R&D expenses. The ongoing expiration of Online/Information Business customer agreements is the primary factor behind the $9.1 million year-over-year decrease in revenues. These expirations were expected, and are consistent with Celera Genomics' strategic decision to focus on therapeutic discovery and development.

For fiscal 2004, Celera Genomics reported a net loss of $57.5 million, or 79 cents per share, compared to $81.9 million, or $1.15 per share, in fiscal 2003. Reduced R&D expenses offset about half of the impact of lower revenues and interest income. Our R&D expenses for the year decreased to $104.6 million, compared to $120.9 million in fiscal 2003. Lower expenses related to the wind-down of the Applera Genomics Initiative and cost reductions in the Online/Information Business more than offset increased therapeutic R&D expenditures. The fiscal 2004 results included the investment gain and impairment charge I mentioned, while fiscal 2003 included a $15.1 million non-cash charge associated with the equity method investment in DPI.

During fiscal 2005 we expect Celera Genomics' net cash use to be between $135 and $150 million, including an anticipated $16 to $20 million for its portion of Celera Diagnostics funding. The impact of lower Online/Information Business revenues and operating profit and higher R&D expenses should be partially offset by lower losses and cash demands related to Celera Diagnostics. This outlook includes cash required to retire the remaining $6 million in convertible notes that will mature on October 1, 2004, but excludes any proceeds from the sale of the Rockville facility. The difference between the cash use for fiscal 2004 and this outlook is not as great as it appears. During fiscal 2004, we received cash from the sale of our DPI investment, converted approximately $16 million of long-term treasury securities to short-term investments, and repurchased $10 million in convertible notes. In addition, we received early payment from certain Online/Information Business customers exceeding $7 million during the recent quarter. The total favorable impact of these items on the cash balance for fiscal 2004 was approximately $45 million. Absent these unanticipated changes, cash use for 2004 would have been close to $100 million.

During fiscal 2005, R&D expenses are anticipated to be in the range of $110 to $125 million, and SG&A expenses to be lower than last year and in the range of $25 to $30 million. Actual R&D expenses will depend on the rate of progress in discovery and development programs. Pre-tax losses related to the Celera Diagnostics joint venture are expected to be in the range of $28 to $35 million. Celera Genomics anticipates revenues will continue to trend downward to a range of $25 to $30 million as Online/Information Business customer agreements continue to expire.

These comments reflect management's current outlook. Applera 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 in this press release, including the Outlook sections, 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) Applied Biosystems' sales are dependent on customers' capital spending policies and government-sponsored research; (3) Applied Biosystems' significant overseas operations, with attendant exposure to fluctuations in the value of foreign currencies; (4) risks associated with Applied Biosystems' growth strategy, including difficulties in integrating acquired operations or technologies; (5) the risk of earthquakes, which could interrupt Applied Biosystems' or Celera Diagnostics' operations; (6) 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; (7) Applied Biosystems' dependence on the operation of computer hardware, software, and Internet applications and related technology for its businesses, particularly those focused on the development and marketing of information-based products and services; (8) a pending upgrade of our global enterprise system software could interfere with business operations if any difficulties are encountered when the upgrade is implemented; (9) Celera Diagnostics' reliance on existing and future collaborations, including its strategic alliance with Abbott Laboratories, which may not be successful; (10) Celera Diagnostics' unproven ability to discover, develop, or commercialize proprietary diagnostic products; (11) 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; (12) 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 fourth party payors such as private insurance companies and government insurance plans; (13) 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; (14) legal, ethical, and social issues which could affect demand for Celera Diagnostics' products; (15) Celera Diagnostics' limited commercial manufacturing experience and capabilities and its reliance on a single principal manufacturing facility; (16) Applied Biosystems' and Celera Diagnostics' reliance on a single supplier or a limited number of suppliers for key components of some of their products; (17) potential product liability or other claims against Celera Diagnostics as a result of the testing or use of its products; (18) intense competition in the industry in which Celera Diagnostics operates; and (19) 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 press release is as of the date of the release, and Applera does not undertake any duty to update this information, including any forward-looking statements, unless required by law.

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 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) uncertain outcome of Merck's clinical program related or of future regulatory submissions related to the Cathepsin K inhibitor; (18) Celera Diagnostics' limited commercial manufacturing experience and capabilities and its reliance on a single principal manufacturing facility; (19) Celera Diagnostics' reliance on a single supplier or a limited number of suppliers for key components of certain of its products; (20) the risk of earthquakes, which could interrupt Celera Diagnostics' and/or Celera Genomics' operations; and (21) 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 press release is as of the date of the release, and Applera does not undertake any duty to update this information, including any forward-looking statements, unless required by law.

Copyright 2004. Applera Corporation. All Rights Reserved. Applied Biosystems, Celera and AB (Design) are registered trademarks and Applera, API 4000, Celera Diagnostics, and Celera Genomics are trademarks of Applera Corporation or its subsidiaries in the U. S. and/or certain other countries. Q TRAP is a registered trademark of Applied Biosystems/MDS SCIEX, which is a joint venture between Applera Corporation and MDS Inc.


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