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Invitrogen Evaluates Portfolio as Acquisition Integrations, Limp Sera Sales Weigh on Q2 Revs

Following a quarter in which sales of its sera products declined sharply, Invitrogen officials said last week that they are reviewing the firm’s entire portfolio with a particular focus on the sera business.
Additionally, though the officials declined to say whether a divestment of that business was possible, Chairman and CEO Greg Lucier said the firm is currently reviewing whether “we need to be broadly in the sera business” and hopes to know more in six months.
Invitrogen last week said that second-quarter revenue grew 2 percent to $314 million, and company officials acknowledged during a conference call that sales from products that the firm has acquired over the past year have not been as robust as expected. They also said the company still intends to pursue acquisitions, even though Invitrogen hasn’t made any moves in the M&A market yet this year.
Though Invitrogen officials did not break out specific sales for the sera business, CFO David Hoffmeister said during the call that “sera production continued to have a significant decline of 40 percent year-over-year.” He also noted that “the sera animal origin business for production is going to go down perhaps as much as another 50 percent in 2007.”
The sera business brings in more than $100 million in annual sales, or around 12 percent of the company’s total revenue last year, according to Lucier, so it is not an insignificant piece of Invitrogen’s overall business.
“What we've seen in the last year is a cycling down of the animal origin products as customers move more to chemically defined media,” he said. “In the research business, it's one where both raw material prices and perhaps competitive moves by others have moved to commoditize the overall pricing in that market.
“I would say overall that we've basically held our ground in this business, but we have seen a substantial deflation in profitability in the last eight months,” said Lucier. “Historically, it has served us well. We're just now on the opposite side of its cycle, [and] it's obviously impacting our overall results.”
He said the firm is currently reviewing the sera business and whether “we need to be broadly in the sera business in all facets and all aspects, or can we just be in certain parts of it in order to be that single source that customers are looking for?” he said.
“We hope to have the answers here over the next six months in terms of our actions,” Lucier added.
He declined to say if Invitrogen was considering selling off the whole sera business, which the firm gained through its acquisition of Life Technologies several years ago. “Our whole goal is to have product lines differentiated by science [that are] stable, high margin, and that is really what I'm going to say at this point,” said Lucier.

“I would say overall that we've basically held our ground in this business, but we have seen a substantial deflation in profitability in the last eight months. Historically, it has served us well. We're just now on the opposite side of its cycle, [and] it's obviously impacting our overall results.”

Time to Evaluate the Entire Portfolio

But it’s not just the sera business that is under review, according to company officials. Following a year in which Invitrogen spent nearly $650 million acquiring eight companies, the firm has yet to make a single buy this year. Though company officials insist the firm’s acquisition strategy is on track, digesting those earlier purchases has come with the usual challenges, they said.
“This company has greatly expanded its footprint over the last couple of years,” said Lucier. “We have moved into a number of new business segments, and we are now at this point taking a step back, looking at our entire portfolio and conducting a strategic review on each and every one of the businesses in which we operate with a focus in particular on our sera business.”
He said Invitrogen is in the midst of integrating facilities and processes from its acquisitions of Zymed, CalTag and Biosource — all of which were acquired in 2005. Part of the integration includes shutting down its South San Francisco, Calif., operations and moving people and products to its facilities in Camarillo, Calif., or Eugene, Ore.
“As anyone who has been involved in these types of efforts knows, full-scale integrations are time- and resource-intensive and can impact revenue streams,” said Lucier.
However, he noted that Invitrogen’s acquisition strategy has not changed in light of the difficulties encountered in the second quarter. “I would just simply say … that we're not signaling any change in our overall growth stance. We're still pursuing many acquisitions, and we'll continue to invest in acquisitions,” said Lucier.
The firm also announced last week that its board of directors had authorized a $500-million share-buyback program. “At our low share price, we think the best acquisition with our available cash is our own stock, and we intend to execute on this share buyback,” said Lucier.
“We have a significant amount of funds currently available to do this buyback as well as acquisitions,” said Hoffmeister. “With our cash balance of over $700 million plus the current revolver and the addition of the second-half free cash flow, we have plenty of funds at our disposal to execute a significant portion of the buyback immediately as well as move quickly on acquisitions as opportunities arise.”

The cost of those shares is significantly lower than it would have been a year ago, as the firm’s stock slumped to a 52-week low of $55.85 the day following the release of the second-quarter results (see graph). The shares rebounded slightly to close at $57.94 on Tuesday, after Banc of America analyst Frank Pinkerton upgraded the stock to “Buy” from “Neutral,” citing its cheap valuation.
BioProduction Declines Offset BioDiscovery Growth
Invitrogen last week reported second-quarter revenue growth of 2 percent to $314 from $306 million year over year. The firm missed analysts’ consensus estimate of $320 million for the quarter.
“These results have really been masked in the first half by three challenging items,” said Lucier. “The first [is] the timing of our BioProduction orders in the first and second quarter; second, our overall sera business and cycling through a commodity pricing phase; and then third, the normal disturbances associated with integrations, facility closures, and the implementation of a global ERP (enterprise resource planning) system,” said Lucier.
“The acquisitions that we completed last year and are in the process of integrating now — we expect to see the sales of those products accelerate as they are integrated over the course of the year, and that is just moving slower than we originally anticipated,” he said.
Hoffmeister said, “The overall revenue growth for the company is really a tale of two cities — solid growth in BioDiscovery, offset by a decline in our Cell Culture Systems,” the new name for Invitrogen’s BioProduction unit.
He said the BioDiscovery business segment brought in second-quarter revenue of $205 million, up 11 percent year-over-year, with growth driven mostly by acquisitions but also by 3-percent organic growth.
Revenue for the Cell Culture Systems segment declined 8 percent organically to $109 million for the second quarter, said Hoffmeister. Cell Culture Systems comprises Invitrogen’s cell culture research business, its biomanufacturing business, the sera business, and the BioReliance business unit, which has struggled over the past year.
Hoffmeister said that demand for cell culture research media products continues to be strong, growing 10 percent in sequential quarters and 6 percent year to date. The BioReliance unit “remains a challenge, although we are seeing modest improvements in the business each quarter,” he said.
According to Lucier, some of the sales problems in the Cell Culture Systems unit were due to a delay in orders of certain products. “We have little control over the timing of the orders,” he said. “The timing of those orders were pushed into the second half of the year and beyond.”
Overall, Lucier said spending by the firm’s end users is good. “We're growing double-digits now in big pharma overall, which we are feeling very good about,” he said. “Our academic business in North America is very solid. Our European business in the second quarter was difficult ... [but] we're seeing great growth already in the third quarter in Europe.
“Really, everywhere around the world is good, except for Japan, and we think actually Japan is going to be cycling back in 2007 into a normal good growth phase,” Lucier said.
Invitrogen reported that its net income increased 46 percent to $19.7 million, or $.36 per share, from $14.9 million, or $.27 per share, during the comparable period last year.
The firm’s R&D costs increased almost 10 percent to $26.6 million from $24 million in the comparable quarter a year ago.
Invitrogen lowered its revenue guidance for the year to $1.26 billion to $1.3 billion from previous expectations of $1.3 billion to $1.35 billion. Hoffmeister cited two primary reasons for the change: lower than expected growth from some of the firm’s acquisitions, mainly due to site consolidations, and “greater visibility … into the second half of the year for cell culture production and the timing of those orders.”
The new revenue range assumes continued organic growth of 6 percent to 8 percent for the BioDiscovery segment. “BioReliance is expected to return to modest growth in the second half of the year starting in the third quarter, [and] Cell Culture production will increase sequentially each quarter,” said Hoffmeister. “The unknown for us is how sera will perform.”
Invitrogen finished the second quarter with $733.2 million in cash and investments.

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