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With Portfolio Review Nearing End, Integration Issues Take a Toll on Invitrogen's Q3 Results

Despite reporting 7-percent revenue growth for the third quarter last week, Invitrogen failed to match its own — and Wall Street’s — expectations, and management acknowledged that challenges integrating the many acquisitions made over the previous two years have played a role in its recent struggles.
 
Invitrogen is trying to cope with a wide array of corporate challenges, including overhauling its IT infrastructure; digesting its two-year acquisition binge; and readjusting its sales strategy. The firm also conceded that competition in consumables sales affected third-quarter growth, and said that it would fine-tune its salesforce compensation in an effort to regain an edge in the market.
 
Invitrogen is nearing the end of a portfolio review launched this past summer that will likely result in the firm divesting small pieces of its business (see BioCommerce Week 8/9/2006). In the meantime, company officials said last week that the firm needs to adjust its “go-to-market approach in certain markets” to boost its sales growth — and it plans to take some lessons from its European sales efforts, which have led to consistent revenue growth.
 
“At the end of the second quarter we told you we would be conducting a full review of our portfolio to see which product or service lines made sense to remain within our ownership, and which might be better optimized by being owned by someone else,” said Invitrogen Chairman and CEO Greg Lucier during the firm’s third-quarter conference call last week.
 
“That portfolio review is now largely complete. We have addressed our businesses and now need to make a couple of key decisions,” he said. “I would expect some divestitures may occur, but we have not made any definitive decisions at this point.”
 
However, Lucier offered strong hints and definitive plans about certain of Invitrogen’s businesses. For instance, the sera business, which helped dampen revenue growth last quarter, appears to be safe. Lucier said the firm could “optimize the sales of [the sera research products] business in a different way, and so we’re going to keep that business. It is about $60 million to $70 million a year and quite profitable.”
 
He said the firm would also hold onto its sera production business. “But you'll see us deploy a lot less capital into it for inventory.”
 
Invitrogen’s BioReliance business, however, may not escape the review unscathed. Lucier said he was “not prepared to talk about BioReliance,” but added that “BioReliance had a pretty good quarter in the third quarter. And as we make the final decisions, I will certainly communicate them publicly.”
 
BioReliance, which is part of the firm’s Cell Culture Systems unit (formerly called BioProduction), has struggled since Invitrogen purchased the firm in early 2004 for roughly $500 million. Earlier this year, company officials said that they believed the BioReliance business would recover and return to positive sales growth this year (see BioCommerce Week 5/3/2006).
 
“There could be some slight changes in BioDiscovery,” said Lucier, “but again, I would give you the early sign that there's not going to be a lot of change in BioDiscovery.”
 
Q3 Growth Fails to Impress
 
Invitrogen reported third quarter revenue of $311 million, up 7 percent from revenue of $289.6 million in the third quarter of 2005, but organic growth accounted for only 3 percent of that increase.
 
The firm’s BioDiscovery unit brought in revenue of $201 million for the quarter, up 10 percent year over year. However, that growth was driven primarily by acquisitions, with organic growth accounting for only 2 percent of the gain. Cell Culture Systems brought in revenue of $110 million, a 4-percent gain over last year and all of it organic. Company officials said during the call that results for the Cell Culture Systems unit were better than expected.
 
According to CFO David Hoffmeister, the sera production business continued to decline year over year, but still performed better than the firm had anticipated. He said the BioReliance business returned to modest growth during the quarter.
 
Invitrogen reported a net loss of $129.8 million, or $2.53 per share, which includes a $150 million non-cash charge associated with a goodwill impairment in its Cell Culture Systems unit. The firm reported net income of $23.9 million, or $.42 per share, for its third quarter last year.
 
Lucier said during the call this week that he was “not prepared to provide any more details about” the asset impairment charge.
 
Invitrogen spent $26.8 million on R&D in the quarter, slightly more than the $26.4 million it spent a year ago, and closed the quarter with $512.5 million in cash and short-term investments.
 
What Went Wrong?
 
“I think we're just not seeing the … same sales growth [as] in the first half of the year, much less the acceleration that we had anticipated in some of our businesses … including the BioDiscovery segment that we thought that we would see,” Hoffmeister said during the call.
 
According to Lucier, the firm is facing three major issues that have contributed to its recent struggles. The first is a large-scale IT infrastructure overhaul, which he said is “incredibly disruptive.”
 
The second is integration issues tied to the many acquisitions it made during 2004 and 2005. The firm spent nearly $650 million on eight acquisitions last year alone.
 
“We have been very aggressive on integrating our acquisitions,” said Lucier. “And perhaps for a company of our size, maybe too aggressive. But the bottom line is we didn't want to have [an] endless number of facilities, [and] excess cost, and so we made some very tough decisions to shut down a number of facilities this year.”
 
Invitrogen recently laid off 94 employees at its facilities in South San Francisco, Calif., and Burlingame, Calif., which contained the operations of Zymed Laboratories and Caltag Laboratories — both of which were acquired in 2005 (see BioCommerce Week 11/11/2006).
 

“We have addressed our businesses and now need to make a couple of key decisions. I would expect some divestitures may occur, but we have not made any definitive decisions at this point.”

“We have slowed down the acquisitions this year,” Lucier said during the call. “We have gone back through the portfolio and reviewed it. I think we have done everything prudent to put the company on a better foundation. That is the painful work we're going through in 2006.”
 
The final issue that Lucier highlighted was the firm’s marketing strategy as it took on an ever-expanding portfolio through the acquisitions. “I think we were learning how to balance all of the 30,000 products we have and get the optimum mix and selling going on,” he said.
 
“As part of that review and our results in the third quarter, it is clear we need to adjust our go-to-market approach in certain markets,” said Lucier. “We have the right formula in Europe, where we're growing at consistently high single-digit rates. Our work now is to bring that same discipline and playbook everywhere else in the world, and that is going to begin here in the fourth quarter.”
 
Lucier also acknowledged that some competitors have likely taken share from Invitrogen. “I would humbly say to you that in certain regions I think there was share shift in the quarter,” he said. But “the good news about our business is that because we are a consumable business, it is not like you lose share forever. We can be back in the business here in terms of gaining and growing at market or faster once we make these changes to how we're deploying ourselves into the market.”
 
He also said the firm is taking measures related to salesforce compensation that could help sales growth next year.
 
“We inherited a lot of salesforces, and we obviously still had the salesforce that was Invitrogen,” said Lucier. “Putting together a comprehensive compensation plan was the first time we had ever done it across all those different salesforces. We got it pretty right, but we didn't get it all the way right. I think that the compensation plan going forward into '07 will be really good.”
 
Despite the firm’s plans to turn the slump around, Citigroup analyst Elise Wang and Deutsche Bank analyst Ross Muken downgraded Invitrogen’s stock to “Hold” from “Buy” following the conference call. Both analysts said there was a lack of clarity for when the firm’s results would improve.
 
On Friday, the day after its results were announced, Invitrogen’s shares dropped 12.2 percent to close at $58.01. At one point during that day, the shares fell to $55.94, near its 52-week low of $55.81. Invitrogen closed at $58.01 on Tuesday.

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