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Invitrogen Expects Current Spending Trend To Support Sales, Acquisition Opportunities

Invitrogen officials predict that the current spending environment, highlighted by a slowdown in US National Institutes of Health grants, will lead to consolidation that could benefit the firm's sales and acquisition strategy.

After reporting this week double-digit growth in revenues and profits for the fourth quarter of 2005, Invitrogen officials said 2006 revenue could grow by between 11 percent and 13 percent with organic growth of 6 percent to 8 percent. They also said they expect continued strong revenue growth from the biotech, academic, and government customer segments despite the NIH belt-tightening.

"We continue to see our ability to grow in the US academic and government segment in spite of soft NIH funding," Lucier said during Invitrogen's fourth-quarter conference call this week. "It seems that with the tighter funding, perhaps consolidation is happening, and that certainly benefits a large player like Invitrogen."

Sales from NIH contracts are currently about 15 percent of Invitrogen's business, Lucier noted. "If you're a recipient of NIH grants today, obviously it's been very tough to get those grants. The last thing you want to do is to waste money on unnecessary reagents, duplication — it's just the overall inertia in the supply chain and the tools that you need to do the grant. That message resonates extremely well with major universities today," he said.

"We continue to see our ability to grow in the US academic and government segment in spite of soft NIH funding. It seems that with the tighter funding, perhaps consolidation is happening, and that certainly benefits a large player like Invitrogen."

"NIH funding is down now. It won't always be down," Lucier added. "The discussion we have inside our company is if we can grow now, wait and see us in three or four years, because NIH will come back. This is a good muscle-building exercise for us right now."

Lucier said IT improvements made by Invitrogen over the past year are expected to help the firm win contracts. "We have a very high investment in IT," he said. "We're setting up extranets, [and] we're making it far more personal for our customers" to purchase products.

Invitrogen also believes the current spending environment favors the firm's acquisition strategy.

"You've already seen a lot of companies put themselves up on the block, and certainly our company and others have been very active to acquire them," Lucier said. He cited Ambion, a narrowly focused company that was recently acquired by Invitrogen rival Applied Biosystems (see BioCommerce Week 1/4/2006), as a prime example of the type of company that could be available in the current spending environment.

Invitrogen acquired eight businesses in 2005 with an eye clearly on applications closer to the patient, primarily molecular diagnostics, as well as building its cell biology and proteomics businesses.

But even after spending nearly $650 million on those acquisitions, "that still left us with nearly $750 million in cash and investments — more than ample to fund ongoing strategic acquisitions," CFO David Hoffmeister said during the call. "We've said that we would expect to continue acquisitions at the rate that we have in previous years of about $500 million a year."

According to Lucier, future acquisitions could focus on moving the firm's products closer to the patient. He cited Invitrogen's HLA business in tissue typing as an example of this strategy.

Acquisitions, Unexpected Orders
Fuel 24-Percent Rise in Q4 Revenue

Invitrogen's fourth-quarter revenue rose 24 percent to $325.3 million from $262.2 million in the prior-year period. According to the firm, acquisitions generated 17 percent of the quarterly revenue growth, while currency exchange rates had a negative impact of 4 percent, resulting in net organic growth of 11 percent for the period.

The company reported quarterly organic revenue growth of 12 percent in its BioDiscovery business unit and 8 percent organic growth in its BioProduction business.

"The discussion we have inside our company is if we can grow now, wait and see us in three or four years, because NIH will come back. This is a good muscle-building exercise for us right now."

The company had previously predicted revenue of $317 million for the fourth quarter. Lucier attributed the better-than-expected results to good timing in BioDiscovery orders — particularly a large order from an unnamed biotech customer — and Invitrogen's Dynal business delivering results that were higher than expected because of OEM orders scheduled in the fourth quarter, a phenomenon he expects to be repeated in subsequent fourth quarters.

Sales to biotech, academic, and government segments were all strong and grew at double-digit rates in the fourth quarter, Lucier said during the conference call. He said sales to big pharma grew in the high single digits.

In the BioProduction business, "Gibco had a very nice quarter, and that offset the continued rebuilding taking place in BioReliance." Lucier acknowledged during a December conference call that Invitrogen may have made some mistakes in the integration of the BioReliance business, which was acquired in February 2004 for $500 million (see BioCommerce Week 12/22/2005). A sweeping program to make the business perform more consistently led to some key employees leaving, he noted, and the firm replaced management of BioReliance during 2005.

Lucier reiterated earlier statements that he expects a recovery in the BioReliance business to come in the second half of 2006.

Invitrogen's net income for the fourth quarter grew 63 percent to $49.6 million versus $30.5 million for the same quarter in 2004. The company's pro forma net income, however, which excludes acquisition-related amortization and other related costs, and is "consistent with how management internally evaluates the performance of its operations" grew by 12 percent.

R&D spending rose 36 percent to $27.4 million in the fourth quarter of 2005 from $20 million in the year-ago period.

For full-year 2005, Invitrogen reported revenue of $1.2 billion, up 17 percent over revenue of $1 billion in 2004. The firm's net income rose 49 percent to $132 million from $88.8 million in 2004, while its earnings per share grew 43 percent to $2.33 from $1.63.

Invitrogen's R&D spending for 2005 was $99.3 million, up 36 percent from $73.1 million in 2004. Its SG&A costs rose nearly 18 percent to $343.4 million, as the firm invested heavily in its IT infrastructure.

Invitrogen had $751 million in cash and investments as of Dec. 31, 2005.

The firm expects first-quarter 2006 revenue to grow around 15.5 percent year over year to roughly $320 million, give or take "a couple million," Lucier said. Earnings per share should increase to $.88 from $.82 in the first quarter of 2005. Lucier said that guidance figures for the first quarter and full-year 2006 do not include the effects of possible acquisitions.

Revenue gains in 2006 also likely will come from pricing increases on certain products, company officials said during the call.

The firm is predicting R&D spending at 8 percent to 9 percent of total revenue in 2006, with that number reaching 10 percent in three to five years. "As SG&A goes down, R&D goes up," Lucier said, noting that the firm will be finishing off its "back-office correction" and IT investments during that time.

In response to the fourth-quarter results and guidance for 2006, investment bank Leerink Swan upgraded Invitrogen's shares to 'outperform' from 'market perform.' Investors also reacted favorably, sending Invitrogen's shares up 5 percent to $74.50 in mid-Wednesday trade.

— Edward Winnick ([email protected])

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