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Invitrogen Posts 13 Percent Q2 Revenue Gain As New Approach to Sera Sales Pays Off

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Invitrogen surprised the market with double-digit revenue growth for both of its operating segments, but company officials cautioned last week that they do not expect the second half of 2007 to be as strong as the first half of the year.
 
The firm believes initiatives begun last year, led by a revised sales force compensation scheme, had a positive effect on its second-quarter results. Invitrogen also is sticking with its plan to buy back shares of its stock rather than using cash to fund any large acquisitions.
 
The company posted second-quarter revenue of $321.7 million, up 13 percent from revenue of $285.4 million in last year’s second quarter. Sales for its BioDiscovery segment rose 10 percent to $223 million, while its Cell Culture Systems segment had revenue growth of 20 percent to $99 million.
 
The strong quarter resulted in a 10 percent gain in the firm’s stock price the day after the results were announced.
 
“The results we achieved this quarter were a combination of thorough action plans, solid execution, and positive market dynamics,” Invitrogen Chairman and CEO Greg Lucier said during the firm’s conference call last week. “That’s not to say we don’t still have work ahead of us, but we are encouraged by what we’ve been able to accomplish in such a short period of time.”
 
The firm, however, said it expects full-year revenue growth for 2007 to be in the mid-single digits. “I think we’re just being prudent in our guidance to say that the second half may not be quite as strong as the first half simply because the first half had been so strong,” said Lucier.
 
Sera Surprises
 
Invitrogen has now posted solid revenue growth in its past two quarters. In May, the firm reported first-quarter revenue growth of 10 percent, due largely to rebounding sales for the Cell Culture Systems segment (see BioCommerce Week 5/2/2007).
 
That segment has benefited this year from the sale of the BioReliance unit to private-equity firm Avista Capital Partners for approximately $210 million (see BioCommerce Week 2/14/2007). The unit, which Invitrogen acquired for around $500 million in 2004, never met expectations and became a drag on earnings over the past couple of years.
 
In addition, Invitrogen officials have cited surprising growth from the firm’s sera business, which had struggled in late 2006, but has since provided modest revenue growth.
 
“In order to reinvigorate growth from our sera research product line we reorganized and implemented a new approach to managing this commodity product,” said Lucier. “The key to this product line is to optimize the margins while maintaining competitiveness and customer flexibility.”
 
He said that one of the initiatives undertaken by the firm to boost sera sales has been the creation of a “centralized pro-active pricing management team. This has allowed us to respond more rapidly and dynamically to win more deals,” said Lucier.
 
He noted that the sera sales force now has its compensation “tied directly to gross-margin dollars,” which provides an incentive to sales people to “optimize mix, while still fulfilling customer need.”
 
Invitrogen CFO David Hoffmeister said the firm no longer expects the sera business to decline by 10 percent for the year, as previously forecasted, but rather will be flat to slightly down.
 
Excluding currency benefits, sales for the Cell Culture Systems segment grew 11 percent for the second quarter, while BioDiscovery grew 8 percent.
 
The May settlement of a decade-old patent suit with Clontech provided Invitrogen with $5.4 million in additional revenue, company officials said during the call. As part of that settlement, Clontech agreed that Invitrogen’s patents at the center of the case are “valid and enforceable,” and discontinued selling its RNase H minus reverse transcriptase products, including its PowerScript products (see BioCommerce Week 5/30/2007).
 
Invitrogen recently completed implementation of its new ERP system in North America, which had a negative impact of roughly $2 million to $3 million due to sales disruptions, according to Hoffmeister. But the IT overhaul is expected to pay long-term benefits as an increasing number of Invitrogen’s sales are made online.
 
“We are seeing increased [sales] volume coming from the web, and we believe that more and more business and growth will come from the web,” said Lucier. “We are seeing increased conversion from other order modes, whether its phone or fax, to the web. We’ve put a lot of effort and money into the IT infrastructure. We don’t see any stop to that trend,” he said.
 
Invitrogen said that its net income grew to $40.9 million, or $.62 per share, from $19.7 million, or $.35 per share, in the year-ago period. This year's profit includes $11.5 million in income from discontinued operations compared with $678,000 for the same item in last year's second quarter.
 
The firm’s R&D spending increased to $28.6 million from $25.8 million year over year.
 
Invitrogen said it had around $570.1 million in cash, cash equivalents, and short-term investments as of June 30, 2006.
 
Buyback versus M&A
 
In addition to its financial results, Invitrogen said last week that it had completed its 2006 $500 million share repurchase program through the purchase of 700,000 shares for $50 million during the second quarter.
 
The company's board of directors also approved another, three-year $500 million share repurchase program, which had analysts on the conference call questioning what effect the new buyback plan would have on the firm’s merger and acquisition activity for the near-term.
 

“That’s virtually where we’ve made all of our acquisitions over the last four years, because we had a particular viewpoint that the world would move from molecular-based to cellular-based … research and we wanted to be well-positioned there.”

“In terms of what we do with our cash, first let me just say that we wanted to make sure that if we have excess cash that the buyback is a method by which we can return that excess cash to our shareholders,” said Lucier.
 
“In terms of acquisitions, in 2007 … we’re very much focused on doing the basics, but when we do find potential either technologies or platform companies that can add to what we’re doing and they are very complementary to our core focus on tools and technologies then we will make an acquisition,” he said. “At this stage, we’ve only completed one acquisition in 2007, Cascade Biologics, and our goal is to really continue to do tuck-in acquisitions between now and the balance of the year.”
 
Cascade is a cell-culture technologies firm that was purchased for an undisclosed amount. Lucier had said during the firm’s first-quarter conference call that the acquisition was immaterial to Invitrogen’s financial results, but set up some “very exciting opportunities in the future.”
 
If Invitrogen does acquire more businesses this year it would not be surprising if it was another focused on cell-culture or cell-research technologies.
 
“Cell-based technologies, especially in BioDiscovery, are growing much faster than the molecular-based technologies,” said Lucier during the call last week. “That’s virtually where we’ve made all of our acquisitions over the last four years, because we had a particular viewpoint that the world would move from molecular-based to cellular-based … research and we wanted to be well-positioned there.”
 
He said that roughly 40 percent of Invitrogen’s tools portfolio is cell-based and those technologies are growing much faster than the molecular-based tools.
 
Lucier also was asked about the firm’s RNAi tools business, given the seemingly increasing number of RNAi-based therapeutics entering development. While he would not disclose how much revenue Invitrogen’s RNAi tools bring in, he said, “It’s certainly one of our most vital tool areas. It does grow in double digits, and we have seen a marked pick up in the last couple of quarters in RNAi tools.”
 
Investors reacted positively to the firm’s results, sending its shares up 10 percent on Aug. 2, the first day of trading after the results were released. Invitrogen’s stock has been one of the best performers in the BCW Index since the beginning of the year, up 39 percent so far, and hitting a 52-week high of $79.49 on Friday.

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