賽默飛世爾科技 (TMO) 2002 Q3 法說會逐字稿

Hello, ladies and gentlemen and welcome to the Invitrogen third-quarter earnings conference. At this time, all parties have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation.

At this time, I would like to turn the floor overto one of your hosts, Mr. Lyle Turner. The floor is yours, sir.

Good afternoon, and welcome to Invitrogen's third-quarter conference call. I'm Lyle Turner, Chairman and CEO. With me on the call today are Eric Winzer, our Chief Financial Officer , Jim Glynn Executive Vice President and Paul Goodson Vice President of Investor Relations. We will all be available to answer your questions after our prepared remarks. Before we begin, I want to caution all of our listeners that our discussion today will include forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. It is our intent that those statements be protected under the safe harbor created by the Private Securities Litigation Reform Act of 1995 and re-refer you to the risk factors listed in today's press release and in Invitrogen's filing before the SEC including the most recent 10 K and 10-Qs. On the call today we'll review our financial results for the quarter, the status of our share buyback program and our recently announced acquisition of Informax. I'll begin by discussing our financial results which Eric will address in more detail in a few minutes.

Our third-quarter results were generally in line with our expectations and with our previous guidance, except for our assumptions about currency rates and to a lesser extent, shortfalls in patterns services. When we reported the second quarter in late July we raised our revenue forecast by $3 million for both the third and fourth quarters. Based on currency rates remaining where they were in mid-July. Since that time, the dollar has strengthened against the major currencies that affected our revenues, causing our actual revenues to be $2.4 million lower in the third quarter than were anticipated in the currency exchange rates in mid-July.

Sales of continuing molecular by lolling products increased 6% in the third quarter of 2002 compared to the same period in 2001. On a currency adjusted basis.

During the quarter, we saw strength in our molecular biology Kit and reagent products. These products which include amplification, cloning expression and separations and analysis grew in the mid-teens on a percentage basis. However, the strong growth in molecular biology kits and reagents was offset by continuing weakness in (inaudible) and services. Our (inaudible)business continues to experience price erosion resulting in revenues that were lower than last year's quarter by a mid-teens percentage. This is a small product line for us representing less than 5% of our overall sales, but its performance has reduced our overall growth rate.

Revenues in genomic services were only about half of those from last year's quarter. This is significantly weaker than earlier quarters this year and is primarily the result of transitioning operations from Huntsville to Carlsbad. We expect sequential growth from the low leveled reached in the third quarter going forward. As with our (inaudible) business it is important to remember that our services businesses will be significantly less than 5% of our revenues in 2002.

Our cell culture segment turned in another strong performance in the third quarter with revenues increasing 11%. This is consistent with its growth in the first half of 2002. Most of this growth took place in the research side of the cell culture business which grew in the low teens in the quarter and was helped by significant price increases for fetal bovine serum. Revenues in subculture bioproduction continue to grow slightly over the very large quarter we had last year. As we've said before, revenues in bioproduction are highly variable even on an annual basis and particularly quarterly. Year-to-date we've seen low teens growth in bioproduction and we expect continued double digit growth for this segment going forward. We continue to place a very high degree of emphasis on the size of our R&D investment in the revenue contribution from new products. As a result of our decision to move R&D activities from Maryland and Huntsville to Carlsbad, which allows us to collocate our R&D functions with manufacturing and marketing, our R&D spending has been reduced to levels below where we'd like it to be. However, we continue to recruit new R&D members aggressively. We had a net increase of 15 new scientists this quarter, mostly in Carlsbad, bringing our worldwide total to 175 at the end of September.

During the third quarter, we launched a total of 23 new products. Among these are products for four important product categories in amplification, gene cleaning and expression. In the amplification market we've long been the leader in [reverse transciptase] enzymes through our SuperScript 2 project which is one of our leading products. Our new SuperScript 3 product should help extend our lead in this important market through its increased [CDA] yields and higher specificity when using gene specific primers.

We've often communicated our interest in adding to our product offerings in labeling and detection. Our [luxflooragenic] primers strengthen our presence in the market [for QCPL] which is fast growing market where we have not previously offered a detection method.

Lux primers have an advantage over existing detection methods for QPCR because only one [inaudible] is needed rather than two. For our customers, this adds added performance for a lower cost than competing methods. Also in the amplification segment we launched platinum [PCR supermix] hi-fidelity which adds to our strong market-leading offering in PCR enzymes. During the third quarter we launched an [adenoviral] expression system which extends our already market-leading product offerings in gene expression. Invitrogen's [adenoviral] system uses our proprietary gateway technology to increase the accuracy and the efficiency of using [adenovirus] while saving researchers a significant amount of time. This application not only extends the gateway platform but also demonstrates the power of this technology when combined with expression systems.

One of the reasons we expect continued growth in revenues and genomic services is the new products and service offerings we launched in that business segment. Under one new service offering we've sent out our first[set of pheta test forms] in a gateway format to one of our large pharmaceutical customers and we expect follow on work in coming quarters. Although this service is currently configured to appeal to large commercial customers we're working on another version that will also address the needs of our academic and government customers. Together, we believe these services will help establish the gateway system as a market-leading means for multiple cloning which will have related sell-through benefits for the rest of our product line.

We're also developing other products and services area. These include matched antigen antibody sets and on a monthly basis the development of approximately 1,000 sequence validated human open frames that are cloned into gateway expression vectors. Both of these product lines are expected to be strong sellers and carry high margins when they're introduced.

In July, our board approved a repurchase of up to $300 million of Invitrogen common stock over a three-year period. We announced that approval on our July 25th conference call would begin re-purchasing stock under that authorization in September. In September alone we've repurchased about 393,000 shares at a total cost of about $13 million. We have continued to repurchase stock during October, reaching a total of 1.3 million shares to date at a total cost of about $42 million. Now I'd like to ask Eric Winzer to review the financial results of the quarter for you. Eric?

Thank you, Lyle, and good afternoon.

We have provided details on our revenues in the press release and Lyle has added to that in his remarks, so I will comment on other aspects of our third-quarter results.

Our gross margins were 58.5% in the third quarter compared with 56.2% last year, reflecting the successful implementation of our strategy to raise gross margins by exiting low-margin businesses, increasing selling prices, and containing costs.

We noted in our press release that we have completed our planned restructuring activities associated with the life technologies merger and the Huntsville closure, except the sale of real estate in Huntsville. We expect to sell the Huntsville real estate within the next six to nine months, and will adjust the restructuring charge up or down based on the final net proceeds. Our earnings under generally accepted accounting principles were 28 cents per share this quarter, compared to a loss of 71 cents per share in last year's third quarter.

The principal reason for this swing from a loss per share to a positive earnings number was the accounting change under which goodwill is no longer amortized. We discussed this change in our previous earnings call this year, and we have included tables in our press release that explain the effect of this accounting change.

Our pro forma earnings per share, which excludes business integration and merger related amortization was 46 cents in the third quarter compared with 42 cents a year earlier.

Turning to our balance sheet, our cash and investments were just over 1.1 billion at the end of September. Days sales outstanding decreased to 54 days from 56 days at the end of the last quarter. This two-day improvement follows a similar two-day improvement last quarter.

Inventories represented 3.8 months of sales at the end of Q3, down slightly from the last quarter. We generated $40 million in cash from operating activities in the third quarter, with the above improvements in our accounts receivable and inventory statistics, making a positive contribution to the cash generated from operations.

Now I'd like to review our financial expectations for the fourth quarter.

Lyle already mentioned that we raised our Q3 and Q4 guidance in July purely due to changes in currency exchange rates. He also mentioned that the dollar strengthened after we gave our guidance, which reduced our reported sales in the third quarter by 2.4 million compared to that July forecast.

Since exchange rates have now returned to levels that existed earlier in the year, and we don't anticipate a near-term weakening of the dollar, we believe it is prudent to adjust our guidance to the previous levels. As a result, we see fourth-quarter revenues in the range of 160 to $163 million. Apart from the change in exchange rates, our other major assumptions are largely unchanged. Specifically, we see molecular biology kits and reagents and our cell culture products continuing to grow at rates similar to their growth rates from earlier this year.

Our oglionucleotide and services businesses are expected to show a year-over-year revenue decline but less so than the decline these businesses posted in the third quarter. We are also adjusting our pro forma EPS guidance range to our former quarterly guidance of 44 to 46 cents per share for the fourth quarter, consistent with the change in revenues that is being driven by currency exchange rate changes. We have not included the effect of the Informax acquisition in these numbers as those effects will depend on the timing of the closing of that acquisition and the completion of the integration plans that are currently being developed.

We expect to provide additional guidance on the effect of this transaction in December at our conference. Please remember that our pro forma EPS numbers exclude business integration and merger related amortization costs, consistent with the approach we have used in the past when reporting pro forma EPS. I should also caution that our new expectations are dependent upon currency rates. The currency markets have been volatile this year and rates could quite possibly move either way. Needless to say a weakening of the dollar could increase our dollar denominated results while a significant strengthening of the dollar would make our guidance more difficult to attain.

We plan to continue to supplement our regular reporting with currency adjusted results so it is easier to see our underlying performance without the effects of currency.

That concludes my comments. Lyle ?

Before we open the call for questions, I'd like to make a few comments about our acquisition of Informax. Even though our announcement of this deal was not made during the quarter third quarter.

We expect several important benefits from the Informax acquisition. First we believe Informax's product line is particularly well positioned to meet the experimental design needs of our customers. More importantly, the strategic essence of this acquisition is that both Invitrogen and Informax can drive the sales of each other's product lines. Invitrogen's global marketing sales and distribution system already targets 95% of the world's scientists who are likely to use Informax software and we're confident that we can be successful at increasing the penetration of Informax's products among this customer base.

In going the other direction, Informax's software can be configured to simplify the design of experiments around Invitrogen's consumable products. This is because Informax's software provides answers to biological questions and those answers can be given in the form of Invitrogen products. Once directed to which Invitrogen product a scientist needs, it will make the ordering process as easy as possible for our customers by providing a direct link on their computer screens to our web-based catalog or order entry system. So our customers can order Invitrogen products at every stage of their experiment.

We are currently working on our integration plan and expect to announce its key features at our December analyst conference. Looking at Invitrogen overall, our business continues to be strong. Our gross margins are continuing to grow. Our R&D investment is increasing and should continue to accelerate. Our in-licensing and grant program activity is also increasing. We're continuing to extend our leadership and marketing through e-commerce and other web-based initiatives. We believe we've seen the bottom of our genomic services business and we're expecting growth in 2003.

In addition to this organic strength, we have the financial resources to make the right acquisitions to strengthen our market leadership and help accelerate our growth. This is why all of us at Invitrogen continue to be very enthusiastic about our future, and believe that we are the company's best position to benefit from the growth and profitability potential in our industry.

Now I'd like to open up the call for questions. Operator, would you please explain the procedure for our listeners to ask questions?

Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question or a comment, please dial the numbers 1, followed by 4, on your touch-tone telephones at this time. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

Questions will be taken in the order they're received. Once again, that's numbers 1, followed by 4, to bring yourself in the queue.

Our first question of the day is coming from Paul Knight of Thomas Weisel Partners.

Hi, Eric. The other income line of 400,000, what was that in the quarter?

That's primarily the net periodic pension costs or benefit we get from the over funded Dexter pension plan.

Okay. And what's the -- what's the -- is that a continual flow from that?

That's -- yeah, under pension accounting we'll get a similar amount in the fourth quarter but then the actuarial assumptions will be adjusted each year as happens with all pension plans. So going in the next year, the amount could -- could very well change.

And you -- Lyle, you mentioned the bovine serum business was strong in terms of pricing. How about the media?

We continue to see changes in product mix in the media business that also helps improve our margins.

I've heard there's a shortage of serum. Is that true, worldwide?

There was a -- there has been -- I don't know if it's a shortage. There has been a contraction of the supplies in that business, and it has had a big impact on the pricing, especially the high value-added New Zealand serum.

Did you see the typical European season altogether lightness in the third quarter?

In the serum business?

In your molecular biology business?

Oh. Normally August is always slower, and -- but it's pretty predictable, so it fit in with our estimate.

Okay. Thanks.

Thank you. Our next question is coming from Cheri Walker of Deutsche Banc.

Hi. You said in the call that your core products grew in the mid-teen level, and I believe in the past you said that was growing at a 18 to 19 percent rate. Did I understand that correctly?

You understood both relatively correctly. Go ahead, Eric.

Sherry, I think we mentioned in the first quarter that these core molecular biology products grew about 16% and then in the second quarter, they grew 19%.

Okay. And so this would be 15 or 16%?

Yes, that's right. 16.

And could you give us an update on the macro environment, what you're seeing out there by customer group ? Meaning pharma, biotech, academic.

The academic results seem fairly consistent, I believe, over about the last seven quarters, in terms of growth rates. Pharma in the United States is fairly consistent. There have been a couple of lumpy quarters. And biotech is -- has had some spotty surprises. Not major trends, but biotech has only run about 10% of our business overall, and so it's -- we can't tell you whether it's a temporary weakness or whether it's a trend.

Was that just this quarter, or sort of throughout the year?

The spottiness is just this quarter.

Great. Thank you.

Thank you. Our next question is coming from Meirav Chovav of UBS Warburg.

Hi. It's Meirav Chovav and Derek here and we just wondered are you impacted at all by what's going on in Japan, where we've heard from several companies that budgets are being rolled over for the next fiscal year and there might be delay or elimination of supplemental budgets? So are you seeing any impact of that on your business?

We've seen a slight impact of that. It hasn't affected our overall growth rates significantly, but it does seem like there's some slowing in Japan due to release of the budgets.

And do you expect that to be more of an impact in the first quarter of next year?

I don't think we have enough data about the Japanese budgets to be able to predict that right now.

All right. In terms of the cell culture market, are you seeing a lot of strength in Europe? I know some of the -- on some of the other companies that sell these supplies, some of them have been gaining market share in the European markets. I'm just wondering if that's what you're seeing there, if your strength there has continued.

I've got Dave Katie here. He's the head of that business unit and I think I'll let Dave give you that kind of detail.

Our cell culture business performance in Europe is tracking quite similarly to our business in the U.S. The research business remains strong fueled by some strong growth for our specialty products, so driving unit demand there well combined with our strong price position, it continues to, again, parallel their experience in the U.S. We believe that some of the price activity that we've done there, of course, has a love for some of the low-priced business to go to competitors but we anticipate that that's smoothing out now and will continue to show strong growth for our core accounts for our core product lines.

This is Meirav Chovav again. Some of your competitors in the tissue [culture] area, such as (inaudible) and other had very strong results in that business segment. I was wondering, are you concerned, are you losing market share, or is this growth in areas in which you are not a player in?

Once again, I'll ask Dave to answer that.

Some of our competitors have product lines that are not similar to our existing product lines. We're not surprised by the reports of strong growth as well as we're in a strong growth market as our research customers continue to use cells for a variety of their research applications. We believe that [Cambrack's] product line includes some specific products that were not primary and are not planning that into our portfolio and we believe that some of those growth around those product lines are contributing well to their results.

So there -- the issues you have is manufacturers are over and done with and everything is up to full capacity?

Yeah. The -- if you're referring to the IVD issue, that is 100% behind us.

Okay. Thanks a lot.

Thank you. Our next question is coming from Thomas Flatten of RBC Capital Markets.

Thanks. Good afternoon. A couple quick questions. I was wondering if you guys could provide some color on the sequential drop-off in the core molecular biology growth rate from, you know, 19 to call it 15 to 16.

This is Lyle, and my impression is that the 19 was in the second quarter and was kind of within statistical variations in that area. What we've seen is this mid-teens for several quarters now, so that one quarter blip didn't look like a drop-off to us.

Did you have any other comments on that?

That's right, Thomas. It's within the statistical variations. Actually, the third quarter of this year reported higher revenues than the second quarter, so I guess we had an easier comparison last year in that business in the second quarter, and that's why the 19% was so high. The second quarter of 2001 was the lowest quarter in 2001.

So we should be targeting at least for our modeling purposes something closer to the 15 to 16 rather than the 19?

That's -- that's prudent, yes.

And then a question on the -- on the [oglio] and services businesses, I think earlier we had talked about these getting back to basically being flat growers probably by the fourth quarter. Could you just give us an update on what it is that is contributing to those being more [laggedardly] than we thought before.

This is Lyle. The -- this is, I think, in general, a very competitive, difficult business environment. We've seen major changes in large genomic projects which consume large numbers of [oligos]. We've seen people exiting the array businesses which consumes large numbers of oligos. We -- it's also highly price driven which means that the -- the prices continue to fall, and the combination of those factors makes it a very difficult business environment.

And on the services side?

On the services side, a big part of the issues that we've seen there have been caused by us . Not a market problem as much as it's a problem of us trying to consolidate activities and eliminate services which were -- which we identified as unprofitable, or restructure the contracts and the pricing on those to make them more profitable. A big part of what you've seen in the last quarter had to do with the closing of the Huntsville facilities to try to add better costing and service levels, and to consolidate all the services into one site.

Great. Thanks.

Thank you. Our next question is coming from John Ajay of Oppenheimer Capital.

Yes, hi. A couple of questions. First of all, the gross margins on the cell culture side looked really good. If I read it right, 52%. Can you talk about how much of that strong margin came from the fetal bovine serum pricing and where we can expect that margin to go, you know, one or two quarters from now? Should we model, you know, something closer to 52 or something back at 48 where you were, you know, before you started getting that benefit?

Yeah. You should model lower going forward. We're still benefiting from the higher prices that we're charging, and as the higher cost inventory -- the higher cost product moves through inventory, we're getting a gross margin benefit. I would say going forward, they will dip down to 50 or in the high 40s.

Okay. Great. And another question. This one is probably for Lyle a little bit more of a strategic question. But on the last conference call, on the -- in the Informax acquisition call, you talked about the need for R&D to go to -- to stand at 10 to 15% of revenues to do to continually evolve your product line, or one's product line. I was wondering, you know, where -- how are you thinking in terms of getting to that range, in terms of the time frame? Is this something that you plan to get to over, you know, two years and where do you plan to fall in that range?

And if we're talking about going from, you know, the current 5% level that you're at to 10, does that mean that your operating margins have to go down by 500 basis points, or do you have some offsets that will allow the decline in the operating margin to not be as much as the amount that you're boosting R&D?

The 10 to 15 percent number that we've been using for years as a guideline for our research and development is something that would -- is virtually impossible to do through organic growth in a short period of time, so you shouldn't have any plan to see that kind of change in the near term and I don't think we've -- certainly haven't given any guidance in that direction. What we've tried to share with shareholders over the years is that we thought there was an opportunity to continue to improve these margins towards the 65 percent range, and our success at doing that gives us room to increase our investment in research and development without impacting our -- our operating margins too much. But we have also communicated over the long term that we're targeting a 20% operating margin, so there -- over some period of time, I would expect some adjustments in that.

So I guess as you -- I guess you'd manage that range so that if you, you know, had the gross margin improvement, you might take it up to 15 but you'd only go up to 15 as long as you were getting the improvement to keep your operating margins above --

Yeah, 15's at the outside edge of my expectation. That would be at the high end of what we see in the industry, so that's why I kind of used 10 to 15 as a rough --

And the leverage that you plan to get, to be able to offset some of this, is it all gross margin or where do you think your SG&A has to go as a percentage of sales over the multi-year period? Are we going to hold in at this level or can we get improvement or ...

I don't expect any improvements in the G&A expenses in the short term because in the process of consolidating all of these activities from the four different companies into Carlsbad, we still have some infrastructure issues. But over the long term, I think there's some ability to see cost savings on the G&A side, yes.

Yeah. And on the marketing side, the selling expenses? Should that hold as a percentage of revenues over a multi-year period over this kind of two-year window that I'm looking out at?

Two-year window? We've been holding the sales force steady for the last couple of years , and I haven't -- I don't see that increasing even at the level of top-line revenues. Marketing is a slightly different story, but it's kind of mixed in with the G&A issue because there's a big part of our marketing strategy has to do with electronic marketing as a more cost-effective means. So I think we have to wait for our budget planning in 2003 guidance before I could give you better answers on that.

Okay. And what role does acquisitions play? Like the Informax acquisition, in terms of getting you to this targeted range? Would additional acquisitions along those lines be incremental to your 10% target or are they part of getting you to that target?

No, they're part of getting to it. I mean one of the things that we've stated in the past is that we're looking for emerging technologies or technologies where we can supply a significant boost because of our marketing, sales, and distribution network, and Informax has -- has some R&D capability that we think lends itself to improving some of our current product lines, so it would be part of that 10% goal. But once again, even with Informax, I don't see us getting there in the short term.

One last question, if I may. Will this higher level of R&D that you ultimately get to allow you to -- is this about being able to sustain your 15, 16 percent core growth, or once you get to that level, will we then be looking at you having more in the 20 percent plus range? Is this about getting you -- driving your growth back up to the 20% range?

It's about increasing our growth rate.

Okay. Great. Thanks a lot.

Thank you. Our next question is coming from Arron Geist of Robert W. Baird.

Good afternoon, everyone. A few questions. First, if you couldn't let us know where they lux primers and the fluorogenic primers are included. Is that is that in the [Oligonucleotide] area?

Yes, it is.

And when you mentioned that that business was down 15%, comparing or normalizing ex-the floor ongenic primers, where would you say that business would have come in in the quarter?

Fluoroongenic primers were a very -- they just got launched at the tail end of the quarter, so I -- I don't think they're -- I mean they're an insignificant part of that right now.

Okay. How long do you see the time frame in terms of when those floor ongenic primers can help offset the dilution that you're experiencing in the oligo business?

Sometime in the first half of next year it should become a more relevant piece of the -- that business.

Okay. The molecular biology business had a -- carried a 62% gross margin. Ex-oligo, sort of normalizing or using your core molecular biology business, what would you say that gross margin level was in the quarter ?

Oh, it would be a couple of -- it would be a point higher or so, excluding primers.

Uh-huh. And then another point or so for the genomic services business, would that be fair?

That would be fair, yes.

Lyle, did you mention that your long-term operating margins is 20%? Did I hear that correctly?

Yeah, that's what we've been communicating.

Okay. In terms of top-line growth of 11% in the cell culture area, can you talk a little bit about unit growth versus revenue growth?

Have we -- we've communicated that in the past. I think that in 2002, we were looking at about 5.9% increase in --

Pricing?

Pricing, thank you.

And unit growth in the 2 to 4% range, I think, is what we have.

We should point out this does not include primers and services. I just want to make sure that we have the right category there.

That 2 to 4% unit growth, was that -- is that it for the consolidated molecular biology and cell culture business or is that specific to either business segment ?

That's molecular biology. I would say that the cell culture didn't have quite as high of price. Yeah, maybe a little higher volume.

I think it goes across all of them. Is it Arron?

Yes.

Yeah, I think it goes across all of them, because of the -- I mean if you look at our growth this year at rough Thee 10%, and you see approximately 6% as price increase and another percent-and-a-half to percent and three-quarters as new products, what's left over is around 4 -- 3-and-a-half percent, which falls in that -- overall, which falls in that 2 to 4 percent range.

Okay. Perfect. Thank you very much. That was very helpful.

Thank you. Our next question is coming from Carissa Marino of Goldman Sachs.

Thanks a lot. Could you provide some color on the relative strengths within core molecular biology for cloning and gene expressions, separations and analysis and amplifications?

No, we don't -- we're trying not to share product line-specific information. The whole of them, the reagents business, has been consistent in the mid-teens.

Okay. And as you move forward to planning for 2003, at this point what sort of price increases are you looking for and, you know, should we be expecting gross margin expansion from those?

We haven't given any guidance for 2003 yet, and we're finalizing our plans to do that at the conference call in December, which will be a part of my closing comments, so I'll give you dates and times on that when we close.

Okay. I'll try for one more. For the oligos market and concerning price competition, we had heard that there was perhaps some stabilization in pricing there. Could you comment as to whether you're seeing that or whether prices are still coming down?

Did you have a response, Eric?

Yeah, I would say that, you know, there's some continued pressure. It's not as great as it has been. We have seen some move toward, you know, recently toward stabilization in prices.

This is Paul Goodson. Some of the prices in the 200 animal sites have actually been going up but on balance over the whole portfolio, there's been some price declines.

Okay. Thanks a lot.

Thank you. Our next question is coming from Karen Brimner of Shaker Investments.

Yeah. I just had a couple of questions.

First, on the molecular biology gross margins, I was wondering if -- how we might be seeing improvements in that going forward.

I think we'll see improvements going forward. We've closed down the -- the Huntsville operations and in the third quarter, we had some transition and some close-down costs that will not repeat going forward. Beyond that, though, we will have normal price increases going forward, but they won't be to the extent that you've seen -- that you saw this year, and we still should be able to work on some cost efficiencies. But other than mix related to the improvements due to, say, the mix change between the kits and reagents and the primers and services, we probably won't see improving gross margins to the extent -- going forward to the extent we have in the last year or so.

Okay. Well, because year over year, from my calculations has gross margins in molecular biology are flat. We're not seeing increases.

Yes, I -- you'll primarily see increases going forward probably into the fourth quarter. You're right there. The increases that we saw in the third quarter, that we saw internally, were masked by some of the transition costs in Huntsville, and that's one of the reasons why we shut that business down, to help take out costs and improve costs going forward.

Okay. So we should expect to see improvement? Because I'm -- I'm looking sequentially and, you know, not seeing much improvement and -- that you had talked about at the beginning of the year.

Right.

Okay. Additionally, can you comment on the profitability of the oligos and services businesses currently? Are you losing money there?

No, we're not losing money in those businesses. They are not as profitable as our other businesses, clearly.

Right. And can you remind me what the restricted cash on the balance sheet is related to?

Yes. We set up a -- when we acquired Dexter corporation, there was a [rabbi} trust set up as a part of the exit of that business so that money was just set aside in a [rabbi] Arab by trust to cover some wind-down expenses related to the Dexter merger.

Okay. Thank you very much.

Thank you. Our next question is coming from Tom Tyranny of American Century.

Hi. Could you remind us what the numbers were for cell culture and molecular bio sales?

Total sales for the quarter?

Total sales for cell culture and molecular bio, the components of the total sales.

Well, if I understand your question correctly, the revenues for molecular biology were a hundred and -- almost 107 minimum. 106.8 million. And cell culture were 55 -- 55.8 million.

Thank you.

Thank you. Our next question is a follow-up question coming from Thomas Flatten of RBC Capital Markets.

Yeah, just a silly question for you, Eric. On the -- on the long-term operating margin, is that on a GAAP or a pro forma basis, the 20% target?

That would be on a pro forma basis.

Okay. Great. Thanks.

Thank you. Our next question is coming from Paul Bonnie of Symmetry Capital.

Thanks. A question on hedging. Are there any items below the revenue line which partly offset any currency effects you're seeing?

No. We hedge only existing known transactions, so we don't pick up any gains or losses on -- on hedging transactions, but by their nature, they just offset underlying gains and losses.

Okay. And could you talk a little bit about your cost structure in terms of currency exposure? Do you have costs that are offshore that might also account for some of the currency changes?

Well, we have significant operations outside the United States and all those operations are denominated in foreign currencies. About 40% of our revenues come from currencies, so we have a lot of exposure there, and we have associated costs related to those operations. Most of our production costs are -- but not all -- are in the United States. I don't know if that gets at the nature of your question or not.

Yeah, it's a good start. So I guess you have some sales costs that are ex-U.S. I don't know if you could try to put a percentage on your offshore costs that we could compare to your offshore revenues.

Let's see. Well, all of our R -- let me take these bits and pieces at a time. Almost all of our R&D is in the United States. Our sales and marketing, we have order entry sales force, some marketing internationally, which is probably a little bit more weighted toward the United States because we have some -- some corporate type functions in marketing in the U.S. So the percentage of our sales and marketing expenses internationally would be less than their proportionate share of sales. And most of our costs, especially in molecular biology, are in the U.S.

G&A cost is about half overseas what it is here.

Right. As a percentage, right.

Yeah.

I'm sorry. Half of the total G&A is offshore?

No. The G&A as a rate of revenues is about half in offshore.

Okay. Great. Thank you very much.

Thank you. Our next question is coming from Michael Martarelli of Investec.

Lyle, in -- earlier in your discussions, you talked about some up a little bit low teens year-to-date growth in the bio processing and we all know that is lumpy. Can you tell us about -- not naming specific products because I know you don't want to do that, but have you won new contracts for that that will make that be a continuing strong piece of the business in '03 and beyond?

I'm watching Dave. I'll -- if he's got some specific information, I'll let him jump in here, but what I like about what we've accomplished in that bioproduction business in the last 18 months since we've been a part of it is that we have a lot of new contracts that are for the clinical/preclinical development stage, and in fact we have a lot of smaller contracts, we think, portends a lot smoother performance in that business in the future and also is a good important tent of an opportunity to increase revenues as some of those things move out into the production phase.

Dave, are you going to add something?

Well, I think I'd just reflect Lyle's statements in that our bioproduction business is growing nicely because we've broadened our customer portfolio substantially and we're participating in a lot more of the preclinical activities within these companies. So we -- I agree with Lyle, we expect that while we'll still see a little bit of fluctuation compared to our research business, that we expect that to smooth a

little bit going forward.

Okay. Thanks.

Thank you. Our next question is coming from Sanjay Patel of SAM.

Hi. A couple quick questions. Were there any net operating loss carry forwards with Informax, one? Two, do you intend to do further dilutive deals in the future? And three, can you comment a little bit on some of the competition in molecular biology and what sort of barriers to price increases you're experiencing? Thank you.

I guess the NOL I can take force and there are some NOLs with Informax, I believe, in -- you know, we'll have to work out and see whether we can get a benefit of those or not . Lyle, I don't know if you want to handle the other two.

The question -- I was just writing down so I didn't forget. The second question was any more dilutive transactions and third question was comments on the competitive atmosphere vis-à-vis pricing?

Uh-huh.

The second question, dilutive deals, we haven't been a big fan of those in the past and -- but one can't say what -- you really can't comment too much on future acquisition opportunities because it is opportunistic, so I can't talk about that. I mean, I just couldn't give you any help on -- couldn't give you a solid answer on that.

On the competitive environment, we did a very extensive analysis of the competitive environment using some outside consultants in 2001 and the price adjustments that we made in 2002 were the result of that. We think we did a pretty good job of identifying the competitive environment on specific products and the result was average price increase that was two or three times what the CPI was.

There's obviously a lot less price sensitivity in products that you have a very high level of proprietary protection, but I don't see that -- that strategy -- I mean, I see price increases tapering off and turning into a CPI price increase over time. We do have some room left, but we didn't want to do everything in the first year.

Does that help?

Yes. Thank you.

Thank you. Our next question is coming from David Cohen of Firemont.

A bit of a strategic question. The company trades at quite a big discount, it seems, to its competitors, especially if you take into account some of the cash and I just wondered how you were thinking about it. Is the plan for that just to continue to deliver on the business plan to deepen the management team, or to increase the share repurchases or how are you thinking about that?

The -- the question about the share repurchases, we have a -- an authorization from the board that goes forward three years, and we think it's adequately approved right now, although the board has suggested that it's flexible.

The -- the discount issue, I think, is just the -- some of the insecurity around some of the businesses that we've seen contraction in in the last year. It's left us with an overall growth rate of in the 10 percent, 11 percent range, and I think because of all the integration issues that we face, it leaves people with a -- what do you call it -- a lot of concerns. Risk. An increased risk profile. And I think that the answer to that is just to deliver consistently and keep -- keep growing the business and improving the strength of our product line.

Thank you.

Thank you. Our next question is a follow-up coming from John Ajay of Oppenheimer Capital.

Yeah. Actually, I was going to follow up on buyback, which I guess you just talked about, but could you -- you know, it looked like it happened in a very accelerated rate in this quarter, so any more, you know, specific -- did you lay out a specific kind of time line? Was it a hundred million a year or was there no specific time line and do you plan to accelerate that?

No. We had an authorization for a hundred million a year and it was based on profiling of industrial -- I'm sorry, industrial -- stock indices in our industry.

Okay. Great. Thanks.

Thank you. Our next question is coming from Visah Conna of Argus Partners.

I just had a question. Do you have a target for the number -- for the contribution that you would -- you think is appropriate from new products in a given year? On the revenue line?

Yeah. We do have a -- kind of a profile of where we'd like to be. We've been running about 1-and-a-half to 2 percent the last couple of years through all the integration issues, and we'd like to see that up in the 4 to 6 percent range.

Great. Thank you.

Once again, ladies and gentlemen, that's 1 followed by 4 to bring yourself into the question queue. Our next question is a follow-up coming from Arron Geist of Robert W. Baird.

Good afternoon once again. Would you mind breaking down your revenues by end market and broad-brush strokes, academic, pharmaceutical, and biotech would be fine and if you wouldn't mind, could you do that for the molecular by allege and cell culture separately, that would be exceptionally helpful.

I can -- I believe that we've communicated these in the past, so I don't have a problem with that. Our business looks pretty much globally, in both cell culture and -- cell culture research and Mo electric you already biology research looks like two-thirds academic and one-third commercial research. And inside the one-third commercial research, it's about two-thirds pharma and one-third biotech and -- ag biotech, the smaller companies. The profile in bioproduction looks a little bit differently because it's almost all commercial research, either in the preclinical stages or in large scale, and I'm not sure if -- if we break out the numbers any differently than that. Essentially all commercial research in different stages of development.

Is that for the entire business or that was the cell culture business?

No. The cell culture and the molecular biology research look very much the same.

I understand. Could you remind us what impact the delay in approving and releasing NIH funds had last year.

I think it's very difficult to say because it was mixed in with the September 11th phenomena and all of the turmoil that that caused, so I -- I think it's pretty difficult to go back and see that. In the past, we have estimated that it was somewhere in the neighborhood of 1 to 2% because of the way -- I mean NIH funding in the United States accounts for about 30% of our revenues globally. Roughly 35%. Might be high-20s. And then the way that NIH grants work, which some of them are multi-year and many of them are -- have start dates that are later than the fiscal year end. I think our estimate in the past has been somewhere like 1 to 2 percent of revenues can be impacted by slow start dates.

Okay. Thank you very much.

Thank you. There are no further questions at this time. Do the speakers have any closing comments?

I want to thank everybody for participating in today's call. If you missed any portion of the call today, a replay will be available until October 31st. Details for accessing the replay were presented in our earnings release today which is available on our website. I'd also like to invite everyone to participate in Invitrogen's analyst conference which will be held from 2:00 to 4:00 p.m. on the afternoon of Tuesday, December 10th, at the millennium Broadway hotel in New York City. During that conference, we'll give detailed guidance concerning our expectations for '03, and our integration plans for Informax. If you cannot attend in person, the conference will be webcast and archive will also be available. We will issue a press release within the next few days with all of the details of that conference and webcast. Thanks again for joining us today.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thanks for participating. Have a good evening.