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Invitrogen Stumbles in Q3 as BioReliance Woes Continue; Firm Predicts Q4 Recovery

Disappointing results from its BioProduction unit, among other factors, pushed Invitrogen's net earnings lower and produced total organic revenue growth of only 1 percent for the third quarter, the firm announced last week.

Though Invitrogen posted total revenue growth of 13 percent, organic growth has become a concern for a firm that has acquired businesses at a torrid pace over the past two years. In addition, negative organic growth for its BioProduction unit, compared with organic growth of 7 percent in the previous quarter, alarmed analysts and investors.

Invitrogen CEO Greg Lucier characterized the poor results as "an anomaly." He said, "We think it's just basically a one-time event," and predicted a fourth-quarter recovery.

But analysts on the company's conference call last week were skeptical, asking repeated questions about the underperforming BioReliance business, which has struggled since Invitrogen bought the company in early 2004 for roughly $500 million.

Organic and total sales for the firm's BioProduction unit, which includes the GIBCO cell culture manufacturing business and the BioReliance contract service organization, declined 2 percent year over year to $107.7 million from $109.6 million.

During the conference call, Lucier said the BioProduction unit had expected a large order of media from a biotech customer that was affected by a US Food and Drug Administration ruling that took an undisclosed biologic off the market. However, he said he expects the biologic to come back on the market and sales to that customer to resume.

CEO Greg Lucier cautioned that softness in the BioReliance business is expected to continue for the next couple of quarters, with a recovery coming in the second half of 2006.

Lucier also cited GIBCO media orders that had "unfortunate" timing in the third quarter and noted that the firm expects those sales will happen in the fourth quarter. But he cautioned that softness in the BioReliance business — which accounts for around 10 percent of Invitrogen's total revenues — is expected to continue for the next couple of quarters, with a recovery coming in the second half of 2006.

"We have completely changed around the operations team [at BioReliance] in the last 90 days," Lucier said. "We have moved to a work-cell cluster, where we have technical people, lab people, [and] quality control people all on teams centered on particular testing areas. We think that's going to deliver … consistent quality and consistent service levels that are essential to compete in that business."

Missing Targets

Invitrogen had targeted Q3 sales of $300 million, but due to the BioProduction difficulties and other factors, the firm came up short. Overall, Invitrogen reported revenue of $289.6 million for the quarter ended Sept. 30, compared to revenue of $256.3 million for the third quarter last year.

Invitrogen's net income fell to $23.9 million for the third quarter from $28.2 million in the prior-year period. The company attributed the 15-percent decrease to a non-cash charge of around $5.2 million related to inventory adjustments associated with the recent acquisition of Dynal Biotech (see BioCommerce Week 2/10/2005).

Its third-quarter earnings per share decreased 18 percent to $.42, from $.51 in the third quarter of 2004. Excluding the acquisition-related charge and other non-operating items, Invitrogen said its net income would have been $46.7 million, or $.80 per share. Analysts polled by Thomson Financial expected earnings of $.88 per share and sales of $307.2 million.

While the BioProduction unit struggled, the firm's BioDiscovery unit posted revenue growth of 24 percent year over year to $182 million from $145.7 million. Organic growth for that segment was 4 percent, and Lucier cited strong revenue growth for the Molecular Probes and drug-discovery businesses.

Lucier speculated that overall sales volume could have been impacted by "our decision to lower marketing expenses to truly understand its ability to drive volume. We think that may have been one of the consequences that led to where we are in the third quarter of 2005."

He also said, "Our currency, which had been working for us, is now working against us," as the US dollar gained strength during the third quarter.

In addition to these factors, Lucier said the August vacation period in Europe affected "our research run rate, and that was worth about $2 million." He also said the hurricanes in the Gulf Coast area affected some pharma companies, and noted that the "Illumina partnership has not reached its full potential yet, but will now really start getting going in the fourth quarter as their new high-volume output machine is coming on line."

"It's important to note that Q4 is off to a great start, and we think we'll have record revenues in the fourth quarter and for the total year," Lucier said.

Invitrogen officials targeted fourth-quarter revenue of $317 million — a 21-percent increase over Q4 2004 revenue of $262.2 million — and organic revenue growth of 9 percent. Despite expectations that the BioReliance business will struggle, the BioProduction unit as a whole is expected to return to positive sales growth in the fourth quarter. Lucier said that prediction is based on expected stronger sales in Europe and the addition of roughly $10 million in revenue from recently acquired BioSource to the company's top line.

For the full year, Invitrogen officials predicted 6-percent organic revenue growth and total sales of $1.19 billion to $1.195 billion, an 8.2-percent to 8.6-percent increase over 2004 total revenues of $1.1 billion. They added that 8-percent organic revenue growth in fiscal 2006 is possible, with the higher-growth businesses of Dynal and Zymed, which also was purchased earlier this year (see BioCommerce Week 1/13/2005), being part of the organic revenue figure in 2006.

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Investors appeared unconvinced by management's assurances of a rebound. Invitrogen's shares, which had been sliding since mid-summer (see graph), closed down 12.7 percent at $61.76 on Friday, the first full day of trading after the firm's Q3 results were released. The shares regained some ground to close at $63.47 on Tuesday, but are far off a 52-week high of $88.50 reached at the end of July.

Lay-offs at Quantum Dot

In addition to discussing the financials, Invitrogen executives said during the call that the firm has closed the Hayward, Calif.-based headquarters of recently acquired Quantum Dot and will lay off or possibly relocate the majority of employees there.

In response to a question by an analyst regarding the status of the Quantum Dot integration, Lucier said, "We are closing down the Hayward facility where they were located. We've had to do a substantial termination of employees and potential relocation of people to Eugene, Oregon, to the Molecular Probes campus."

"We have completely changed around the operations team [at BioReliance] in the last 90 days. We have moved to a work-cell cluster, where we have technical people, lab people, [and] quality control people all on teams centered on particular testing areas. We think that's going to deliver … consistent quality and consistent service levels that are essential to compete in that business.".

Invitrogen didn't provide any further details about the lay-offs during the call. However, an Invitrogen representative later told BioCommerce Week sister publication Cell-Based Assay News that "it's in the process of some people being transferred from the site in Hayward to Eugene, both people and equipment, and that process is supposed to be completed by the end of the year." (see CBAN 10/31/2005)

"I think a lot of [this] is still kind of in process," the representative added. "The integration team is looking at what they can do that we can't do. It's just a matter of identifying best practices and going from there."

The Invitrogen representative estimated that Quantum Dot employed approximately 55 workers at the time of the acquisition (see BioCommerce Week 10/13/2005). It was unclear as of press time exactly how many employees will be relocated to Invitrogen and how many have been terminated.

Bringing Quantum Dot into the fold gives Invitrogen access to the company's QDot semiconductor nanocrystal technology. QDots are believed to offer several advantages over traditional fluorescent dyes — most importantly brighter and narrower emission spectra, which allows for highly multiplexed assays without emission overlap and generally much simpler and inexpensive imaging equipment. However, the dots also have several disadvantages, in particular their large size, which makes them difficult to adapt to live-cell applications.

Quantum Dot was attempting to market the technology for a wide range of biological applications, such as in vitro diagnostics, fixed-cell and live-cell drug screening, and gene expression. The latter was through a collaboration with Japanese firm Matsushita Electronics, known in the US as Panasonic.

Last year, Quantum Dot representatives said that the two companies were putting the final touches on an instrument called the Mosaic Optical Scanner, which would be used with the QDots to conduct highly multiplexed gene-expression studies in fixed cells without the need for PCR. The platform was set to launch in Q1 of 2005, Quantum Dot said at the time; however, the platform is not yet available.

— Edward Winnick ([email protected])

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