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After 2006 Integration Problems, Invitrogen Will Concentrate on Fewer, Smaller Buys

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
As Invitrogen seeks to rebound from a year made difficult primarily by the large number of acquisitions it made in 2004 and 2005, a company official said this week that the firm would not shy away from acquisitions, though they would be fewer and smaller than in the past.
The remarks come after the company departed from comments officials made in early 2006 that the firm would spend roughly half a billion dollars on acquisitions that year. But those plans were derailed by a number of challenges.
Speaking at the Lehman Brothers Global Healthcare Conference in Miami, Invitrogen CFO David Hoffmeister said the firm will most likely make tuck-in acquisitions this year, though it does not see gaps in its portfolio.
He also pitched investors on the firm’s broad portfolio and focus on consumables, which provide a steady stream of reliable income.
Following 2005, during which Invitrogen spent at least $650 million acquiring eight companies, the firm made just one acquisition in 2006: the $25.9 million deal to acquire Sentigen, which was completed at the end of August (see BioCommerce Week 9/6/2006). Hoffmeister said this week that this type of smaller deal is much more likely for Invitrogen this year as well.
“We’ll continue to do acquisitions, despite our research and development spending and our active in-licensing program,” he said at the conference. “We’re never going to be able to in-license or develop ourselves all of the technologies that are going to come out of this rapidly changing industry.
“Invitrogen is a natural way to market for entrepreneurs and others who develop innovative technologies, and so we’re going to continue to do acquisitions,” said Hoffmeister. “Those acquisitions, though, are going to be fewer than we’ve done in the 2004-2005 timeframe, and smaller, more tuck-in types of deals.
“We feel very good about the portfolio as we currently [have] it. We don’t see any major holes,” he added. “So, we’re not looking at large acquisitions to fill any gaps.”
Although Invitrogen officials had insisted in early 2006 that the firm intended to spend roughly $500 million on acquisitions that year, that plan was derailed by continuing difficulties in its BioReliance business, a massive IT overhaul, and integration issues related to the purchases in 2005.
“We have been very aggressive on integrating our acquisitions,” said Invitrogen Chairman and CEO Greg Lucier during the firm’s third-quarter conference call in late October (see BioCommerce Week 11/1/2006). “And perhaps for a company of our size, maybe too aggressive.”
He said that as a result, Invitrogen had to slow the pace of its acquisitions in 2006. “We have gone back through the portfolio and reviewed it,” said Lucier. “I think we have done everything prudent to put the company on a better foundation.”
That review led to the eventual sale last month of BioReliance, which Invitrogen acquired in early 2004 for roughly $500 million, to private equity firm Avista Capital Partners for approximately $210 million (see BioCommerce Week 2/14/2007). The unit never met expectations and became a drag on earnings over the past couple of years.
“When we purchased this business in 2004, we believed there would be great synergy between Invitrogen’s cell culture media business and the testing and development capabilities within BioReliance,” said Lucier during a conference call announcing the sale. “Quite frankly, the strategic fit never materialized, as clients believed each offering had to stand on its own. I would also say we owned this business at a particularly bad period for biologics and their movement through the pipeline.”
Pitching a Diverse Portfolio
While investors welcomed the sale of the BioReliance business, Hoffmeister did not dwell on the firm’s difficulties with the unit or the other integration problems. He spent the majority of the presentation pitching investors on Invitrogen’s broad portfolio — ironically largely the result of those previous acquisitions.
He said that following the sale of BioReliance, the firm’s BioDiscovery unit accounts for 75 percent of total sales, which were $1.26 billion in 2006. Its Cell Culture Systems unit accounts for 25 percent of total revenues.
Invitrogen now derives most of its sales from high-volume consumables, and “no product in our portfolio accounts for more than 5 percent of our sales,” said Hoffmeister. He noted that the average order size for BioDiscovery products is under $400. “We ship thousands of these products each day to thousands of customers,” he said.
According to Hoffmeister, 35 percent of Invitrogen’s total sales are to industrial clients, half of which are big pharmaceutical firms and the other half are biotech customers. The other 65 percent of sales come from government and academic accounts.
In addition to its focus on consumables, however, Hoffmeister mentioned Invitrogen’s foray into the low-end instrumentation market.
“We’ve introduced a number of hand-held devices into the lab,” he said. “These devices generally cost under a thousand dollars, so they don’t require capital approval.
“In addition to making certain aspects of a particular type of experiment or analysis easier, they also lead to the use of a proprietary, reoccurring reagent stream,” he said. “So, they’re very good types of products for us. We plan on continuing to introduce [more of] those going forward.”
The firm launched the instruments — the iBlot Dry Blotting system and iPrep purification instrument — in September (see BioCommerce Week 9/27/2006). The instruments build off of reagents and chemistries Invitrogen already develops and sells out of the BioDiscovery business segment. The iBlot transfers proteins from polyacrylamide gels to nitrocellulose membranes in preparation for downstream analysis, while the iPrep automates nucleic acid purification using Invitrogen’s ChargeSwitch technology.

“We’re never going to be able to in-license or develop ourselves all of the technologies that are going to come out of this rapidly changing industry.”

Both instruments build off of reagents and chemistries that Invitrogen already sells through its BioDiscovery business segment.
Invitrogen also has since launched the Qubit fluorometer for DNA, RNA, and protein quantitation.
While these products marked a new era for the firm — it had never sold instruments in the past — Invitrogen officials have said the company was not likely to get involved in developing or selling larger, more expensive instrumentation in the near future.
“We’re concentrated on consumables and expect to remain concentrated on consumables,” said Hoffmeister.
Targeting Margin Improvement
He also told investors that Invitrogen is trying to improve its margins in 2007. He said the company plans to do this through continued organic growth, operating efficiencies, and an optimized product mix. According to Hoffmeister, one of the keys to improving revenue performance could be Invitrogen’s new sales force compensation plan.
“In the past, the sales organization got commissions based on achieving a quota that was total sales dollars,” he said. “This year, in order to better align our sales efforts with the company’s goals and margin-expansion efforts, we’ve structured the quotas and commission plans so that the sales force needs to sell a basket of our base, highest-margin products before they qualify for any commission. Once they’ve sold those products, they then qualify for commission on any additional products they sell.”
That program was rolled out in January and “was very well received by the sales force,” said Hoffmeister. He said that it provides greater direction to the sales force, which is needed given the massive portfolio of products the company has for sale.
Hoffmeister also said the firm had over the past several years invested a lot of money in expanding its sales and marketing staff and R&D efforts well beyond the rate of its sales growth. “A lot of that investment has been make-up for investments that were not made four or five years ago,” he said. “We think we’ve got that make-up investment basically behind us at this point.”
Hoffmeister said that Invitrogen would continue to return excess cash to shareholders. In 2006, Invitrogen’s board of directors authorized a $500 million share-repurchase program. At the end of the year, the firm had completed $350 million of that program, and it plans to continue forward with the program this year, he said.
In addition, Hoffmeister reiterated the firm’s guidance of revenue growth in the low- to mid-single digits for 2007.

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