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As Organic Q1 Revenues Miss Target, Invitrogen to Add Sales Staff in China

Organic first-quarter revenue growth at Invitrogen missed the company's internal targets by as much as half, though total receipts increased 10 percent to $277 million year over year, Invitrogen reported late last week.

Soft spots in Japan, especially for the BioDiscovery segment, and "timing issues" in the Asia-Pacific market contributed to the slow growth. However, this dynamic was offset by strong sales of certain products in the United States, even though rough patches exist in the form of limp NIH funding.

In order to increase revenues in China - an important market for many of the BioCommerce Week Index companies - and help integrate its Dynal and Bio Asia acquisitions, Invitrogen said it will hire around 20 additional sales people in that country. An Invitrogen spokesperson said the company has not decided when these individuals would be hired.

Lastly, in a conference call last week, Invitrogen CEO Greg Lucier described as "a challenge" the overall big pharma market. Still, the company remains on track to meet its 2005 organic revenue growth rate of 6-8 percent, Invitrogen said in a statement last week.

The integration of Zymed, Dynal, and Bio Asia is "ahead of time," Lucier said during the call. He said Invitrogen plans to "double" the Zymed pathology sales force by the end of June because he said Invitrogen "has a vision of 'theranostics,' so a clear aspect of that is clearly what happens in the pathology space." The link between pathology and theranostics, or co-developed diagnostic and therapeutic companion products, was not immediately clear. Nor was it clear how many sales people were employed at Zymed.

In the conference call, Lucier said Invitrogen is "focused on driving organic growth," but that progress in the first quarter fell below the company's internal expectations. Total receipts for the three months ended March 31 increased 10 percent, though 2 percent of that growth was the result of favorable currency exchanges and 4 percent was from acquisitions. The resulting 4 percent organic increase fell short of the company's target of 6-8 percent organic growth.

Receipts from the company's BioDiscovery unit grew 3 percent organically, missing Invitrogen's target of 4-5 percent organic growth for the segment. The business sells the ChargeSwitch nucleic acid-purification technology, qPCR reagents, and Invitrogen's protein arrays. The unit grew 6 percent overall as 2 percent was from favorable foreign currency rates and 1 percent was from acquisitions.

Lucier blamed the weak organic growth on "very tough comps [year over year] due to the Japanese business," which cost the company 5 percent of organic growth, he said.

However, the "very encouraging aspect" of the segment is the USmarket, which grew 6 percent year over year organically.

Revenue for the BioProduction segment, meantime, grew 5 percent organically, missing Invitrogen's internal goals of 11-12 percent. Lucier blamed this shortfall on "timing issues of the larger BioProduction orders" in the Asia-Pacific markets, but said he is "confident that this gets corrected as we move into the second quarter." The BioProduction unit sells the PD Direct and One Shot technology. The unit grew 16 percent year over year, though favorable currency exchange rates contributed 2 percent and acquisitions, especially the purchase of BioReliance, contributed 9 percent.

Geographically, sales were a mixed bag for Invitrogen. In Europe, the Easter holiday cost the company around $2 million in lost revenue in the current period because it is a "vacation time" for the company's customer base. It wasn't immediately clear whether the company plans to make up this loss in the second quarter of 2005, which is when the Easter holiday fell last year. Representatives for Invitrogen did not return a telephone call seeking comment.

Similarly, Japan"didn't have the best quarter due to, first, comp issues and, second, timing issues," Lucier said in the call. "But we're very confident that this thing comes right back to where we want it to be."

Invitrogen also has its eye on China. To broaden its footprint in the communist country - whose revenue for Invitrogen "continues to grow strongly" - and help integrate its recently closed Bio Asia and Dynal acquisitions, Invitrogen said it plans to hire around 20 additional sales people.

Invitrogen will consolidate its Bio Asia operations into Dynal's facilities in Beijing, said Lucier. The company will have manufacturing in Beijingand in Shanghai.

Diversify and Standardize - or Disappear?

In the United States, however, organic growth across both business segments was the strongest it has been in about two years, Lucier said. Yet as academic sales in the first quarter grew in the "high single digits" year over year, revenues from the NIH, which Invitrogen described as a "challenging funding environment" and said was "off to a slow start," represented a soft spot in the quarter. Downplaying this, Lucier said NIH funding "is not a huge chunk of our business anymore."

"If you leave out the NIH ... the only other segment of our business that is ... a challenge is big pharma, like it is for many," Lucier said during the call. "And, in fact, the more time we spend at big pharma, the more that plays to our advantage. They have way too many suppliers, they have not enough standards in reagents," Lucier said.

"The era of one-off little reagent suppliers here and there - I think we're in the twilight of that," he said. "I think we're in the new zone of, 'You've got to professionalize how you do your experiments and standardize on reagents wherever you can.'"

Lucier also said that Invitrogen, as a reagent shop, is insulated against the cyclical lumpiness of large-scale instrumentation markets. With this statement, Lucier took a shot at companies such as ABI, which recently conceded that the evolving life-sciences market has forced it to look for additional customers of consumables and software to serve its installed base.

Lucier said for "those that supply instrumentation in this environment, this is a tough game. Capital expenditures are going to be tight. But we're not in that budget cycle; we're just operating expenses."

Like several of the BCW Index companies, Invitrogen believes that diversification is a critical factor in helping to drive steady - and consistent - revenue growth. Asked during the call what Invitrogen "has playing in [its] favor" to help it nab a greater chunk of the pharma market, Lucier said the company "has geographical and product line diversity, [which] does balance out the portfolio to a far greater extent than perhaps other companies in this space."

Asked how Invitrogen has been integrating the products and R&D programs from its newly acquired companies such as Bio Asia, Zymed, and Dynal into marketable components - a hefty challenge for all acquisitive BCW Index companies - Lucier was upbeat. He said "more than half" of all new products are "combinations" of different "strategic business units" within Invitrogen. "Probes and Carlsbadcombining their technologies, etcetera," he said. "Cross-fertilization is very powerful inside the business."

Elsewhere in the first-quarter earnings, net income swelled by 350 percent year over year to $47 million, R&D spending grew 31 percent to $21 million, and selling and marketing expenses increased 6 percent to $48.5 million.

Invitrogen said it had around $1 billion in cash and investments as of March 31.

Asked about future acquisition targets, Lucier declined to comment, saying only that he believes Invitrogen has what it needs at the moment, and that any additional acquisitions would be "opportunistic" rather than strategic.

- Kirell Lakhman ([email protected])

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