賽默飛世爾科技 (TMO) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Invitrogen Corporation second quarter earnings conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Paul Goodson, VP of Investor Relations.

Mr. Goodson, you may begin.

Good morning.

I'm Paul Goodson.

With me today on the call is Greg Lucier, President and CEO;

Eric Winzer, Chief Financial Officer;

Vic Nole, President of Cell Culture; and John Carrino, VP of Research and Development.

Before we begin today, 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 these statements be protected under the safe harbor created by the Private Securities Litigation Reform Act of 1995, and we refer you to the risk factors listed in today's press release and in our SEC filings including our most recent 10K and 10Q.

On today's call, as we have in the past, we will discuss our pro forma earnings performance both for the second quarter as well as for our outlook for the remainder of the year which are non GAAP financial measures under Reg G. We provide pro forma financial information because we believe it provides you with additional useful information concerning our ability to generate positive cash flows.

In addition, we use these measures internally to evaluate the performance of our businesses.

In today's discussion we will be consistent with the definition of pro forma that we have used previously.

Under this definition, pro forma earnings are calculated by adding back merger related amortization and business integration costs, net of income tax effects to reported earnings.

On the investor relations page of our Web site at www.Invitrogen.com we present the most directly comparable GAAP financial measures and a reconciliation of GAAP results to pro forma results for all quarters in the years 2001 and 2002, as well as for the first and second quarters of 2003.

New federal securities regulations under Reg G require us to reconcile all pro forma presentations to amounts prepared using generally accepted accounting principles.

Today's earnings press release and conference call presentation will contain pro forma information and we have included directly comparable GAAP numbers and reconciliations in the press release and on our Web site.

However, we recognize that questions may be asked in the Q&A session that call upon us to provide additional pro forma information, not anticipated in our prepared materials.

In most questions we will answer such questions if we can also provide you with reconciliation to the corresponding GAAP figures.

But where we cannot provide the reconciliation, we ask for your understanding if we decline to answer.

The agenda for our call today will begin with an overview of our performance in the second quarter followed by a more detailed review of our income statement, balance sheet and financial outlook.

Then from his perspective as Invitrogen's new CEO, Greg Lucier will provide you with his initial observations about our business and an outline of the major directions the company will be taking in coming quarters.

Following Greg's discussion we will all be available to answer questions.

And now I'd like to turn the call over to Greg Lucier who will describe our overall performance during the second quarter.

Thank you, Paul.

I am very excited to announce record second quarter results.

Back in the spring of 2003, we provided updated guidance on where our revenues would be, pro forma EPS projections and where we thought our operating margin%age would be for the second quarter.

I'm very pleased to announce that our revenues hit the high end, or even exceeded the high end of that range at $192.4m; the pro forma EPS was 4 cents above even the guidance back in spring; and that our operating margin reached 24%.

We just had a great quarter here and there are a number of key ingredients that I'd like to highlight before I turn it over to Eric Winzer.

First, our Cell Culture business continues to really perform, up 30% in the quarter, and Vic Nole will be talking later about some of the trends we see that are just very positive in that segment.

Our molecular biology business was a solid contributor to the quarter, and importantly we continued on our acquisition strategy of moving into proteomics, labeling and detection with two important acquisitions previously announced of Molecular Probes and Genicon Sciences.

R&D, which is a key measure of innovation and potential growth going forward, is now 6.5% of sales and continues to accelerate, and we'll talk more about that in the coming pages.

I'd now like to turn it over to Eric Winzer to get into more details about this terrific performance.

OK.

Let's talk about our second quarter revenues.

Our molecular biology revenues reached $119.8m, a 10% increase over the second quarter of the previous year. 6% of that came from currency.

Our Cell Culture revenues reached $72.6m, up 30% over the previous year with 8% from currency, and overall our revenues were $192.4m, up 17% over last year.

Some highlights from the revenue performance.

Outstanding Cell Culture performance, in particular in the production application and for protection applications with those sales up over 50% in the quarter.

We also note that molecular biology revenue growth is improving in the United States and we're very encouraged by that.

The United States is a very big market.

It's usually the leading market and we're encouraged to see some of the improvement there, especially on the academic side from our academic customers.

We launched our first combined Invitrogen and Pan Vera product within the first 90 days after the acquisition and we'll also note that in a survey of our customers we were ranked as having the best trained and most effective sales reps, all contributing to our sales growth.

If we look at our quarterly revenue growth as we've reported, we see a nice trend of accelerating revenue growth.

If you look at the last four quarters and the revenue growth quarter over the same quarter in the previous year, you can see several quarters ago we were single-digit growth and we've moved that up to about - into the double digits, 17% growth in this quarter.

So we're seeing a nice, accelerating performance there.

Let's talk about second quarter gross margins.

Our gross margins in the second quarter reached 62%.

That's a three point improvement over the same quarter last year and we see a nice trend over the last three quarters, a sequential increase.

Let's talk about the details of how we experienced or how we enjoyed that 3% gross margin improvement.

A lot of improvement on the molecular biology side.

Margins reached 68.9%, up from 62%.

I'll note that about 5.5 points of this improvement were due to cost productivity, price increases and currency benefits.

We also note in our press release that we had a royalty expense adjustment and that contributed a small part of the increase, about 1.4 points.

But the vast majority of the increase in our gross margins was due to cost improvements and price increases.

Cell Culture gross margins were relatively flat from last year but in the low 50%s.

Our target for that business is 50% or better and we're nicely above 50%.

They're down a few basis points from last year due to lower FBS gross margins which, as you know, tend to be somewhat volatile.

And overall, our consolidated gross margins are well above our 2003 target of around 60%.

So moving to the summary, we had pro forma EPS, as Greg mentioned, of 56 cents in the quarter.

That's well above our guidance of 52 cents.

I think the important point to make here is that strong business performance resulted in pro forma EPS above our original expectations.

Three key points to highlight during the quarter - the outstanding financial performance that we've just discussed; we also appointed a new CEO, Greg, who's joined us, and that's completing our CEO transition; and as Greg noted, the important growth oriented acquisitions that we announced during the quarter.

Let's move on and talk about our outlook for the rest of the year.

Our revenue outlook.

At the beginning of the year, we gave guidance at $728m for the year.

Since then we've announced several acquisitions which have increased our guidance up to $762m for the year.

And we're very comfortable with that projection right now.

Maybe even some upside, but we're guiding towards $762m as we have been every time - or we have been as a result of the acquisitions we've announced.

I will mention that this assumes that Probes closes - Molecular Probes closes on October 1st.

Looking at our pro forma EPS, at the beginning of the year we projected $2.05 for the year, and then as a result of our two accretive acquisitions, we bumped that up to $2.12.

Now, based on our outlook for the rest of the year and our strong first half performance, we're guiding toward $2.17 for pro forma EPS performance for the year.

So we had a great first half.

We're looking forward to a great second half.

And with that, I'll turn it over to Greg.

He can talk about some initial observations and future plans.

Thank you, Eric.

And I thought it would be appropriate during this conference call to give all of you at least my initial impressions of the business and to give you at least a prelude of how I see things going forward for the organization.

So let me just first start with some initial observations.

You know, one of the great things about coming into a new business is that I can honestly say nothing's broken and so it can really start to play offense and not have to do anything kind of retrospective.

This is a business that has really smart people in place globally.

It has, for a business of its size, really a nice, global footprint where we do business in over 70 countries around the world.

It has just an incredible customer reputation.

Again, when I've met with clients around the world, I've been very impressed with their positive comments about Invitrogen's innovation, it's salespeople and just its overall reputation.

I think this is a business that has unbelievable technology and intellectual property, and quite honestly I think it's something that is an asset that we can really harness to even a greater extent.

Candidly, though, this is a business that's not operationally efficient and we're going to talk about that in some subsequent charts, about how we can not only build on the performance we just shared with you, but even make it better.

And then finally, the molecular biology performance which is obviously a key chunk of our business here, has incredible unrealized potential and I'll explain a little bit about what we're going to do to really unlock the potential of that important segment of our business.

So our focus is clear.

We're going to really put our efforts into operational excellence, we're going to accelerate our organic growth and we will continue on the previous track of making smart, accretive acquisitions.

Now, on the subject of acquisitions, I just want to say a word, which is that we're constantly evaluating potential deals and financing related opportunities to determine whether certain transactions are in our best interests.

In this regard, I'd like to mention that because of the strategic importance of efficient execution in this area, I'm going to generally avoid premature speculation about potential activity.

We assume that most investors understand it to be the most appropriate standard for dealing with this matter in an evenhanded fashioned way and that all market participants will believe that we're doing this in a way that benefits all people looking at Invitrogen.

Now, with that I just want to turn to the next page and say a few words about where we see some opportunities in operations.

If you look at our working capital, this is a business that over the last few quarters has really had, quite candidly, flat to poor performance of turning our working capital to a greater extent.

Our days receivable exceeds our days payable and so we pay faster than we get paid.

And our inventory turns are turning at about three times a year and it's really due to some things that as I've come in, that I believe are very fixable and that will allow us to really find a great source of cash here to bring our working capital on an ever increasing trend.

So we see working capital as a key focus over the next 12 months to really put in place key techniques to bring this working capital in a way that turns it much faster, you know, and if you look at the global spend that this company makes, we do about $100m a year in direct spend, that is, the materials that go into our kits and our Cell Culture products that we sell to clients, and that other variable costs, all the other things that are associated with our plants around the world, is about $175m.

In the period kind of slow economic growth, unfortunately we've had no significant supplier price reduction in the last 18 months.

There's really unrealized potential here.

A global logistics organization does not exist and so we're dealing and doing isolated logistic deals around the world.

So we're not getting the best operational efficiencies.

And all the purchasing of this $275m is essentially done locally by small teams, not in a coordinated global single fashion.

So this is going to be a great source of cash and profit that we see going forward.

There are a lot of other areas where we see great operational improvement and we'll be sharing that with you in subsequent months as we kind of dig a little deeper and put together our plans in a more formal way.

Now, on the subject of growth, I think this is an important thing that this company has done historically very well and we intend to make it really one of the benchmarks of our success going forward.

For us, the lesson is very clear.

When we look at the Cell Culture business, it has been incredibly strong and a great performing team.

Now, why is that?

Well, when we looked at that, it's a couple of things.

First, it's a very focused management team.

Product management is linked with R&D is linked with production.

That really creates a seamless flow of information and technology to our clients that they see in a very positive way.

In fact, Gibco, the brand that we go out under in the Cell Culture business, is number-one rated consistently by clients.

And so I think our lessons are very clear.

How do we create that focused team of people around our molecular biology business?

Just for a moment I'd like to pause and have Vic Nole say a few words about the Cell Culture business in this regard.

Thank you, Greg.

I'm very excited about the performance and the potential of the Cell Culture business.

We've enjoyed sustained double-digit growth over the past 10 quarters.

In fact our compound annual growth rate is running at 16%.

We achieved record revenue in quarter two at $72m.

We're growing very well in all regions - Europe, Asia-Pacific, and the Americas.

We're very excited about some of the new technologies that we're developing, specifically our specialty media products and our new patented, granulated technology, AGT format.

We're excited about the potential of the biologics pipeline and we're poised to take advantage of opportunities there by effectively leveraging our number-one market position and our number-one customer satisfaction position.

Great.

Thanks, Vic.

And what I'd like to do, then, is say a few words about how we intend to organize this business going forward.

And there are two important changes, then.

First, again, to learn from our Cell Culture experience, we're going to create a focused business unit around molecular biology to where that team will have a focused product management, technology development and production leadership all associated with it, just like we've done in Cell Culture, and we think that will create much more compelling, multi-generational product plans to our clients.

The second thing we're going to do, though, is take those businesses and put them through a prism that provides a single face to our clients around the world.

So we'll have two important channels going forward.

One, to the pharma and biotech community where we'll have an account manager, sometime global if we're dealing with the big pharmaceutical companies of the world that then relies on specialist teams that can go very deep in these technologies that, as you know, become ever more complicated.

We are going to do the same thing on the research side, have a single face to our clients that can represent all product lines, but supported by a detailed and deep bench of specialists in key product areas.

So again, two important changes.

Focused teams with specialists and focused product-oriented teams around Cell Culture and molecular biology to really drive innovation.

We think this can only help our performance going forward.

On the subject of innovation, this is something that I know many of you have watched over the past few quarters and I want to say a few words about how we intend to really drive innovation going forward.

You know, our second quarter performance was, I think, really terrific.

The interesting thing is that it could have been even better.

If you look at our current spend around SG&A, we're spending somewhere around 31-32% in the areas of administration, selling and costs like that.

And R&D is relegated to about 6-7%.

Our future goal of this management team is to re-jigger those numbers a little bit and really save some money in the SG&A area.

So we intend to protect the gross margins in and around 62% plus.

We then want to really reduce the SG&A in this business so that we can fund greater innovation to the tune of about 10% in R&D going forward which will allow us then to deliver expanding operating margins in and around 26%.

That's the goal of this management team and those are the things that we're going to be working on in the subsequent months to really lay the groundwork to how we get to that new type of cost structure.

So we see some very promising trends in the area of research and development investment and our goal is to get to 10% in the not-too-distant future to really drive that growth of the company.

So let me just summarize.

We had a great second quarter, and in fact this is really not my second quarter.

This is Jim Glynn's second quarter, who as you know is our departing President and CEO, and we all just want to say thanks to him for really moving this business forward in a great positive way and taking us into some new directions that we think are very positive.

He has done a great job and will to continue to serve on the board and as a consultant to me as we grow this business to new levels.

We exceeded our pro forma EPS guidance and we feel really great about the full year and where we're going with this company.

Overall, this is really a good company, but the goal of the management team is to make it into a great company and we think we're laying the right plans in place to do just that.

Paul, I'll turn it back to you.

Now, I'd like to ask the operator to explain the procedure for our audience to ask questions.

Thank you, sir.

Ladies and gentlemen, at this time we will be conducting a question-and-answer session.

To allow everyone the opportunity to ask a question, please limit your time to one question and follow up.

If you would like to ask a question, please press star one on your telephone keypad.

To remove your question from the queue, please press star two.

A confirmation tone will indicate your line is in the question queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Once again, that is star one to register your question at this time.

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

Please go ahead with your question.

Hi, this is Tim Lau sitting in for Paul.

And I have a question regarding the InforMax and the Pan Vera revenue for the second quarter.

Could you give us revenue for those two businesses?

Those two businesses, the InforMax revenues were just under $3m.

Pan Vera, the same level, just under $3m.

And do you keep the guidance for these two companies for the second half of the year, the previous guidance?

Do we keep the guidance?

We're keeping the guidance for the total company at $762m.

It includes all the elements of our business, these and Cell Culture and molecular biology.

And how much revenue do you expect from these two businesses in the second half?

Well, the Pan Vera acquisition was - we're expecting $18m.

We're right now a little bit behind that.

But we're not backing off of the total revenues.

We expect in the year.

And InforMax - you know, we expect increasing revenues throughout the year as well for InforMax.

Thank you.

Thank you.

Our next question is coming from Tracy Marshbanks [ph] of First Analysis.

Please go ahead with your question.

Good morning, everybody.

A very nice quarter, so congratulations to Jim, and it's nice to come into a good situation rather than having to explain something.

Very true.

First question, to you, Greg.

The implementation of operational efficiency programs, while it has - you know, can have tremendous results also carries with it, you know, some very real risks, specifically customer relationships, product availability, et cetera, where, you know, Invitrogen is traditionally strong.

How do you approach the implementation of those type of programs in this type of business?

Is it any different?

You know, I think your question is right on the money.

So as we continue now going forward to squeeze our SG&A, if you will, we've got to make sure to protect that number-one customer reputation.

I would just simply say that the team really has identified a number of key areas that we think could be better allocated towards research and development in terms of our cost structure and we feel good that we can make those adjustments in our cost structure without sacrificing that great customer reputation.

Fair enough.

My follow up would be on a different subject, so I'll get back in the queue.

Thank you.

Our next question is coming from Chris Shibutani of JP Morgan.

Please go ahead with your question.

Thank you.

Chris Shibutani.

On the guidance that you provided of the overall P&L profile, I assume that that is accounting for the overlay of the Molecular Probes acquisition, and can you give us a better sense for what Tim Laueframe you think you could achieve those kind of margin profiles?

Well, the overall guidance we gave of $2.17 pro forma EPS...

I was referring more to the - sort of the ultimate goals of margin structure that Greg has described in terms of getting towards the 10% R&D spend, et cetera.

Our goal would be to have that type of cost structure in the second half of 2004.

Thanks very much.

Thank you.

Our next question is coming from David Witzke [ph] of Morgan Stanley.

Please go ahead with your question.

Great.

Thanks for taking my call.

Can you characterize demand for pharma biotech and academic customers, I guess, in the U.S., Europe and Japan?

Sure.

When we look at, for example, on the research side of our business, we are projecting right now high single-digit overall market growth.

And so when you have that as a base plus what we think we can achieve through market share gains and pricing opportunities, we think that moves us into double-digit growth opportunity on the research side.

I would also say that the same dynamics are in place on the pharma/biotech side as well.

So we see kind of a good level of support, good broad based underlying support for our business which we can then layer on top of market share gains, pricing gains, new product development that gets us into double-digit organic growth.

And I guess on the commercial side this quarter compared to last - any changing trends?

Yes.

I can answer that.

We saw an increase on the academic side.

We actually saw improvement on both sides.

The academic growth rate in the first quarter was the low single digits and that's up to about 7% in the U.S., again, on the academic side.

The commercial was down about 8% in the first quarter and that's improved.

It's still negative but it's less so.

It's down about 5% on the year-over-year comparison.

Thanks.

And one more, if I can, on the Cell Culture side.

Your reported growth is significantly higher than the industry average.

And Vic Nole mentioned some detail earlier.

I wonder if I can get more color on where the strength is coming from in terms of share gain or changes in inventory or how the Serum Technologies acquisition plays in.

Yeah, the total gain for the quarter was about $17m.

About 60% of that was due to fetal bovine serum.

The balance was due primarily to exceptional performance in media, specifically our specialty media product line which grew at about 20%.

OK.

And how does the Serum Technologies acquisition play into that, I guess, strategically and top line?

Strategically, what it does is it protects our source of supply and it gives us opportunities for operational effectiveness.

Thank you.

Thank you.

Our next question is coming from Aaron Geist of Robert W. Baird.

Please go ahead with your question.

Good morning.

Congratulations also on out performance.

My question specifically digs a little bit deeper in the Cell Culture market.

Can you help us better understand where the out performance came from specifically?

On the - specifically, it would be on the bio-production side of the business where we grew at a rate of about 47%.

The growth was healthy on the research side of the business as well.

The rate there was 10% and our plan really was for 7-8% research.

In the bio-production area specifically, was that due to new capacity coming online?

New drugs entering late stage clinicals or new approvals?

It was on acceleration in projects.

Can you also share with us your prediction of where FBS pricing is going and if that $10m out performance on FBS was specifically due to pricing and not unit volume increases.

It was a combination of price and volume.

It was actually more volume than it was price.

Price increased in total about 5% for fetal bovine serum.

Volume was up about 15%.

Congratulations.

Thanks.

Thank you.

Our next question is coming from Cheri Walker of Deutsche bank.

Please go ahead with your question.

Good morning.

Congratulations on the quarter.

Thanks, Cheri.

Can you just go a little bit more into gross margin in both divisions?

It was such a big quarter.

What can we expect going forward?

In molecular biology the reversed royalties - is that something we should think is a one time thing or should continue?

Well, Cheri, let's start out where we think the margins will be.

You know, the margins in molecular biology were about 65% in the first quarter and they have improved taking out the royalty to about 67% or so.

And right now we're looking at that as probably a pretty good level.

The royalty reversal was a one-time pop - largely a one-time pop in the quarter, but taking that royalty burden out in future quarters should be helping our gross margins going forward.

And that's one of the ways we'll get to 67%, we believe, on the molecular biology gross margins.

Great.

And Cell Culture?

Cell Culture gross margins continue to outperform.

They're at 52.

We're cautious not to bump those up too much, but, you know, we expect them at 52, you know, right in that range.

We may be able to drive them up next year.

I'm sure your question is where they're going to be this year.

So I would keep them, you know, in the 50-52% range.

Great, thank you.

Thank you.

Our next question is coming from Meirav Chovav of UBS.

Please go ahead with your question.

Hi, it's both Meirav and Derik DeBruin.

A question - we would like to dive a little bit more into the manufacturing.

Obviously another - a company - when you talk about manufacturing, we're talking about commercial quantities or research - you know, or research-based product.

The second question is Millipore reported a big ramp up of potential orders for the second half, especially the third quarter of the year and we have done a pretty extensive survey of what we think manufacturing capacity and demand is going to be in the next two years.

So the question is are you seeing the same kind of pick up that Millipore is seeing?

You seem to be seeing it slightly earlier than they do.

And, B, would you have the capacity to handle the pick up if our projections for '04 or '05 come true?

I'm going to let Vic Nole handle that question because it sounds like it's more on the bio-production side.

Vic, maybe you can talk about our capacity.

Yeah, in bio-production we are seeing an acceleration of projects.

That certainly helped our performance in the second quarter.

There were quite a few shipments that we, for example, expected to go in quarters three and four that were called up into two and we think that it is a true ramping within our customer base.

As far as our capacity is concerned, we still have adequate capacity to keep pace with our customers for the foreseeable future.

We're leveraging some of our new technologies, specifically AGT and some of our concentrates, and we're not really at full capacity in either our Grand Island or our Scout facilities.

So for the time being, we think we're in very good shape.

Yeah.

A question.

In terms of looking at the gross margins for the Cell Culture business, I mean how do the margins change with - you know, assuming that the level of specialty media keeps increasing in the overall product mix, how does that affect the overall gross margin in the business?

That is contributing to the increase as well.

If we go back about a year, the Cell Culture gross margins were actually in the mid 40 range, 45-46%.

So over the past three or four quarters, you've seen the increase due primarily to the change in mix replacing some of the classical media products with specialty media products and the impact of higher fetal bovine serum prices.

OK.

And then just one final question.

Could you just discuss a bit of what your plans are for Genicon?

We're going to have John Carrino, our head of Research and Development - he'll be able to answer that question.

So with Genicon and with our Molecular Probes acquisition, we have accessed labeling and detection technologies that we can broadly apply across many different areas.

So I'm sure, as you know, Genicon has launched products into the nucleic acid area.

We see a lot of additional applications, both in nucleic acids and in proteomics, as Greg mentioned.

There's a very important area for us moving forward.

And, you know, I have another question.

What do you think of expanding into the S-RNA business?

Obviously it's a natural extension of your [inaudible] business and it seems to be a rapidly growing business right now.

Yes, we have very aggressive plans for how we're going to address this emerging business.

There's not only the synthetic RNA portion of that business but also vector-based systems and delivery systems.

In fact, we already sell the premier reagent for delivering those two systems.

So we have a very organized plan for how we're going to address that, that we're aggressively moving forward on.

Well, thanks, and congratulations on a great quarter.

Thank you.

Thank you.

Our next question is coming from Karen Mursbremer of Shaker Investments.

Please go ahead with your question.

Hi.

Yes, congratulations on a great quarter.

Just some housekeeping stuff.

Can you talk about CAPEX for the quarter and your projections going forward, and then the $2.17 - that did not include any additional share buy back?

Is that correct?

OK.

The CAPEX for the quarter was $7.3m.

Our expectations for the year - we are looking to institute a program or a policy, a philosophy of keeping CAPEX to about a 1 to 1 ratio with depreciation.

Earlier in the year we had guided cap ex to about $35m to $45m.

We think we'll come in under that this year and we're going to work toward that 1 to 1 ratio.

Hopefully get it this year.

If not, get it next year.

Let's see.

Karen Mursbremer, I answered your CAPEX question.

The $2.17 was before any share buy back?

The $2.17 was without any stock buy backs.

OK, great.

Thank you.

Thank you.

Our next question is coming from William Baker of Garp Research.

Please go ahead with your question.

Yeah, just a little bit of color on the financials.

Two aspects.

On one, just - you had mentioned that in molecular bio that academic market growth was something like 7% but commercial was down 5%.

And even if I strip out the $6m from the two acquisitions, it looks like your performance was better than that.

So if you could just reconcile that.

And I'm also curious about - year over year, your sales and marketing and G&A expense grew as a percentage of sales, and I know you're working on that going forward, but if you could just give a little color on the current quarter.

OK.

It's a good point about the financial side and the reconciliation of the market growth rates.

I probably understated the growth rates I gave early because I was thinking about just molecular biology.

But when you throw in our Cell Culture performance, you know, certainly those two aspects are growing much stronger.

I thought the original question earlier was how things were doing on the molecular biology side.

When you bring in, again, Cell Culture, commercial customers, I'm sure, are up, well up.

SG&A...

Greg?

You know, I think when we look at SG&A and what happened in the second quarter, it was a continuation of previously laid plans from 2002 of adding into our marketing organization, and what we can tell you going forward is that we intend to change those plans and redirect the money towards, you know, scientific development.

And we're going to get on that in the third and fourth quarter.

OK.

The question was about molecular bio and - because, you know, $120m versus $109m - even if you pull out $6m of it, it's a, you know, a fair increase, whereas if the two components - one is up higher single digit and the other is down mid-single digit, it doesn't blend together to that same increase.

That's - really I was just talking about molecular biology.

Did you adjust for currency?

Oh, OK.

That's - sorry, that was kind of stupid of me.

Yeah, currency.

That's it.

OK, thanks for answering the two questions.

OK.

Thank you.

Our next question is a follow up coming from Tracy Marshbanks of First Analysis.

Please go ahead with your question.

Thank you.

A question on acquisitions, but not what are you looking at.

A different perspective than that.

And maybe an insight.

And, Greg, you'll have a little bit looking from the outside perspective.

But, you know, our view - acquisitions, like you've been doing, are key in this area and it seems, for whatever reason, be it your structure, business model, culture, organization - you're being more successful than others at landing the company or the acquisition.

And based on our conversations, others are seeing them but they're not executing and getting them.

Would you care to comment on, you know, Invitrogen as a platform for continued acquisitions, particularly, if you will, from a competitive or a preferred acquirer...

Sure.

I think the Molecular Probes acquisition provides the best explanation to your question.

When you look at why that owner wanted to sell to Invitrogen, I think that Invitrogen represented several positive things that he wanted to have in the transfer of his company.

First is that we saw, or he saw Invitrogen as the best way to really accelerate the extensions and implementations of his technology around the world.

He was a very proud and a very smart owner, and very interested in its technologies and thought Invitrogen could really take the technologies and get them out there, if you will.

And that's because we have probably the broadest sales and marketing anywhere in this life sciences industry.

That was one reason we were a preferred buyer, as he had to make his decision.

Second, I think it's because of our high regard going forward of really making this an R&D powerhouse, and that we have a real commitment going forward to high levels of R&D investment to drive innovation.

And when you look at these smaller companies, that's really their hallmark to success as well.

And so that they see really a level of simpatico thinking, if you will, of how they've been running their business and how we intend to run our business going forward that seemed, again, to make Invitrogen the likely place and the best place to sell their company.

Lastly is that I think there's this novel idea that the summation of one plus one can equal three with Invitrogen, is that the bigger we get, the faster we grow.

And so the more we can bring in these technologies, combine them with other things, the more true discovery that can take place.

And so again, it makes us a little bit more of a preferred buyer, if you will.

Again, these are just my own opinions.

I can't say it's for sure, But again, I look to Molecular Probes as at least one lesson of learning of why maybe we've been a little bit more successful.

Yeah, and most of those relate to the seller's perspective on you.

It also seemed that there may be some internal capabilities that can see more potential and then access that potential in acquisitions than other companies looking at it.

Well, as I've walked into Invitrogen, if you know a little bit about my background, I've made a lot of acquisitions in my career with General Electric.

This is a world class business development organization.

And I think that's the other reason that Invitrogen has been able to be very successful.

Thanks a lot, and good luck in the future.

Thank you.

Thank you.

Our next question is coming from Tico Peterson [ph] of JP Morgan.

Please go ahead with your question.

Thank you.

Following up on the acquisition talk, I'm just wondering if you'd be willing to comment on the Pro bio (ph) business.

I assume you couldn't go after that because of antitrust, but just what your thoughts are on that business overall.

We really have no comment on the pro bio (ph) transaction at this point.

OK.

And then can you give us a little color on InforMax, what you're doing with that business and how that sort of is fitting in with your overall portfolio?

You bet.

When we look forward with informatics, with think it's going to be an important glue, if you will, for this company.

Clearly, there's a data explosion taking place in drug discovery and development, and bioinformatics is going to be an important element of that overall process.

So we're very pleased with our first step into bioinformatics and our goal, candidly, is to make it into a solid contributor to this company.

But even beyond that, we see it as an important key element of our expertise that we have to have.

So, you know, InforMax is going to be a good, solid contributor to this company, but even more than that, it's going to be a good, solid contributor to the technology of this company going forward.

So it's a first step.

We're going to continue to get smarter in the area of bioinformatics before we take step two.

But we're pleased with our first step.

OK, thanks.

Thank you.

Our next question is coming from Matt McFerrin [ph] of Brookside Capital.

Please go ahead with your question.

Hi, great.

Great quarter.

Just a couple of questions.

On your comments about long-term spend in SG&A and R&D, did I hear you correctly that the 350 basis points of increased spend in R&D will be funded directly out of SG&A?

So SG&A should fall by the same amount?

That's our goal right now.

OK.

And then the second question is just in the molecular biology area.

You know, we've seen some slower growth in several companies in this area and I was just wondering - could you talk a little bit about what's driving that in that particular area?

What's driving the slower growth?

Is there a mix shift going on within your customers that's driving that?

And just maybe comment a little bit on the growth in that market in general.

This is Greg Lucier.

I'll give you at least my cut at that, and I'll have my colleagues also try to contribute.

I think there are two pieces that play into at least a lull, if you will, in the growth of molecular biology.

One is that there has been some pressure on the young biotechnology start ups and so they all have had to conserve cash to a greater extent and so they're not spending as much as they were in the past.

And so I think that's one element.

I think the other element is a little bit of a slowdown happening in the historical fast growth rates of the NIH spending that has also caused this market to come down a little bit in terms of its growth factor.

So those are the two things that I look at when we're looking at our molecular biology business that explain a little bit of the temporal period we're in right now.

And is there anything just in terms of the internal mix in terms of what activities they're focusing on more versus less that you have been able to detect?

Well, there's been a shift from genomics to proteomics, as you know.

And then also clearly a shift on the pharma side from discovery to development.

And we see that.

We believe we're laying the right plans for that transition and shift.

And it explains a large reason of why we've done the Pan Vera acquisition, the Probes acquisition and other things to come to become the premier drug development company in this area.

Great.

And then one last question for Vic.

Just on the cell culture side of the business.

Can you remind us how much of that is fetal bovine versus other portions of the business, bio-production?

The gain, you mean?

For the quarter?

No, just the general mix in the business.

Fetal bovine serum currently represents about 30% of the cell culture business.

OK.

OK, and do you segment it out any more than that?

In terms of bio-production and research?

Yeah, so you're saying the other is...

About a 50-50 split between those two sub segments.

Of the remaining 70, you're saying, or...

The 30% fetal bovine serum is split equally between research and production.

Gotcha.

OK, and the production piece - how much of that is large scale production versus pilot production?

We really don't have it broken down.

Only because it's very difficult for us to make that definition.

OK.

OK.

And then just lastly there, can you just talk a little bit about your competitive position in each of those areas?

The strength of the competitive position and then any competitive dynamics that you see, you know, as you look out over the next year that may be relevant?

You know, either competitors or yourself adding capacity.

Maybe just talk generally about the competitive environment.

I think the biggest advantage that we have going forward is in our platform, specialty media platforms and we basically have it broken into formulations and formats.

We've got the broadest offering of specialty media products.

The ones that are hottest right now are chemically defined Medias.

We're having wonderful success with our AGT format.

It's being sampled and qualified in at least 45 to 50 bio firm process development groups right now and we've actually begun to ship AGT format for commercial use.

We're the only ones in the industry that offer such a novel product format and it provides great productivity for our customers.

And more than anything else, I think that's probably the biggest advantage that we have over the next 12 to 24 months.

Gotcha.

And competitors - can they copy it?

How long does it take to come out with a competitor...

AGT format is patented, and the formulations themselves are proprietary formulas.

It's probably easier for competitors to make serum free and chemically defined Medias than it is to put it in that patented format that we have.

Gotcha.

Thanks...

[inaudible] about the combination.

That's really powerful.

And is that a significant part of your mix today?

Or I guess it's not really at all today.

I'm sorry?

The AGT format is pretty - it's brand new?

It is brand new.

OK, gotcha.

Thanks a lot.

Thank you.

Ladies and gentlemen, as a reminder, if you do have a question, please press star one on your telephone keypad.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Our next question is coming from Adam Chasm [ph] of Pacific Growth Equities.

Please go ahead with your question.

Hey, guys.

A quick question about the cell culture business related to FBS.

Vic, how long do you think the pricing is going to increase there?

What's going to balance out the supply/demand equation?

Is there anything in particular we should be looking for that might reverse the price increases we've been seeing, both on the product and cost side?

Yes, Adam.

I think the last two quarters have represented the most stability that we've seen probably in the last six, to be quite honest with you.

Even though we are getting a little bit more price from fetal bovine serum, it really is in line with what we're getting from the rest of the product portfolio.

As far as supply is concerned, supply has been pretty good.

The supply/demand dynamic in the market has been pretty stable.

Going forward, I expect that there would be no significant changes for the next quarter or two.

Great, thank you.

Thank you.

Our next question is coming from John Sullivan of Stephens, Incorporated.

Please go ahead with your question.

Hey, guys.

In the past in molecular biology, you folks have been nice to break out the growth associated with the four major kit product lines and then talk a little bit about genomic services and custom olio (ph) nucleotides as well.

Would you do that for us today?

Eric, I'll let you handle that one.

OK.

We actually have gotten away from breaking out the details on the kits and reagents business over the last few quarters.

But we've generally seen that they tend to move in a fairly tight band.

So there's not a whole lot of difference in growth between our amplification or separations and analysis.

And our other businesses, our primers and services - we've worked to sort of get away from breaking out that level of detail.

They are relatively small components of our business at this point and they're performing largely as we've been expecting.

You had talked in kind of recent quarters about those businesses showing sequentially positive revenue growth.

Are you willing to comment on that?

Yeah, I would say that - I guess we can say our services business is performing nicely.

We're seeing some sequential growth there.

Our primers business, as many primer businesses, continues to struggle along.

We're bouncing around between some sequential growth, ups and downs.

We actually did not see sequential growth this quarter, but it's not the declines we've seen in the past year.

The primers market, we think, is pretty much stabilized where it is.

We've got some interesting new primer technologies coming out and, you know, primers for us, going forward, is not the primary driver of our business but it's an important calling card, if you will, and we'll make it into and really is at this point a decent contributor to the business.

Thanks very much.

Thank you.

Our next question is a follow up coming from Karen Mursbremer of Shaker Investments.

Please go ahead with your question.

Yes, I was wondering if you could break out the commercial molecular biology revenues a little bit more, what you're seeing from pharma versus - how much of that decline was from pharma versus the small biotech’s.

Karen Mursbremer, you're talking about the relative ratio?

Well, I'm just trying to get a little more color on that negative 5% decline, where it's coming from and where you expect it - how you expect that to come back and when we should see growth.

Yeah Karen, I don't have in front of me much more granularity on the 5% down.

You know, it's split between the biotech’s and the pharmas.

We do expect that those biotech’s going forward, especially internationally - a little tight right now.

It may take them a few more quarters to work themselves out of their financial issues.

But over time, you know, long term, we certainly see that that's a growth area.

You know, biotech’s are going to be successful and that's a key way to get venture money into this area of the industry.

OK, thank you.

Thank you.

Our next question is a follow up coming from William Baker of Garp Research.

Please go ahead with your question, sir.

Yeah.

I'm just curious about, you know, what this kind of lull in the marketplace for molecular biology.

Do you see your being able to push lever on the top line through new products - if that continues for the next 12 months, and do you see the new Pan Vera products influencing that very much?

Maybe you could give us some picture about - you said there was one new Pan Vera product, but, you know, what do you see there?

And secondly, is the R&D increase - how quickly does it pay back and is a lot of the increase for Pan Vera at this point?

This is Greg Lucier.

The Pan Vera integration is just now really accelerating and we see a lot of interesting products coming out of our sessions right now of how we can take their technologies combined with core Invitrogen technologies and now Probe technologies and do some novel things.

The great thing about this business is that the product development cycle time is relatively short.

You know, we're not developing a new car here or something.

And so the development cycle time range between six and eight months.

And so you can see real positive results from your investment relatively quickly.

In terms of the receptivity of new products into this industry, I think - again, this is just my own personal opinion, is that as we rev up the introduction of new products, it will stimulate demand and we will see good results from our investments.

And so I feel very comfortable and confident that as we increase R&D it's going to be a good investment for this company going forward.

I'm not too concerned over the long term, over several quarters, about what's happening in biotech or NIH spending and that type of thing as there are just so many unanswered questions in this area of industry.

And so Invitrogen is very well positioned to develop the technologies to answer these essential questions.

So I think we're very well positioned.

OK.

Can I just follow up with one other question?

The - have you seen any movement in the major clone collection libraries adopting Gateway?

I'll have John Carrino answer that one.

We continue to work with people, both our internal project around Gateway and human open reading frame collection and with groups on the outside to drive the adoption of the Gateway platform for a lot of these cloning projects because it's, you know, easily seen internally and externally that there's a lot of advantage in the flexibility that a Gateway cloned resource brings.

So we're very interested both in driving as hard as we can on our internal build and working with groups on the outside that are interested in the Gateway format for their builds as well.

OK, thanks.

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