賽默飛世爾科技 (TMO) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Invitrogen Corp. third-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. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Eric Winzer, Chief Financial Officer of Invitrogen Corp.

Thank you, operator, and good morning.

Welcome to the third-quarter 2003 earnings call.

I am Eric Winzer, the Chief Financial Officer.

Also presenting with me today on the call is Greg Lucier, the President and Chief Executive Officer, and Vic Nole, President of our Cell Culture business.

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 we refer you to the risk factors listed in today's press release and in our SEC filings, including our most recent 10-K and 10-Q.

Also on today's call, as we have in the past, we will discuss our pro forma earnings performance both for the third-quarter as well as our outlook for the remainder of the year, which are non-GAAP financial measures under Regulation 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 for 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 actual and forecasted quarters of 2003.

And now I'd like to turn the call over to Greg Lucier who will comment on our third-quarter performance.

Thank you, Eric.

As you can see by side number 4, we had a terrific third-quarter.

All measurements, revenues, pro forma, EPS and EBITDA grew by over 20 percent.

We're most especially proud of our revenue growth in the light of still a challenging environment being up 21 percent for the quarter which brings our year-to-date performance in strong double-digits again across all measures.

To highlight the third-quarter, we had some particularly good things happen.

We closed early on the Molecular Probes acquisition as well as adding into our technology portfolio the Genicon Sciences acquisition.

Two important labeling and detection technology platforms that we will continue to build on in the future.

We'll be talking about the integration of Molecular Probes which is going very well, and we're very excited about the transforming acquisition.

We have several new product launches in the area of RNAi, our vector NTI informatics solution and a technology we call GeneBLAzer which we have great hopes for.

And then finally, we provided resources for future growth both in terms of acquisitions and new product launches by having a convertible debt offering in the third-quarter.

We're building for the future but we're delivering today which is really the theme that I've shared with you in past quarters so far.

So all in all a great quarter and we're particularly proud of our team.

If you go to the net page, now let me just share with you a few highlights about what we feel is going on in the marketplace, at least from our perspective.

First, bioprocessing demand remains very robust, and Vic Nole, the leader of our business there, will be talking about the trends and our performance in overall bioprocessing.

The molecular biology market continues to be difficult, but we've learned that there is really great growth to be had here when you have novel differentiated technologies, certainly when you look in our Molecular Probes performance, which is up over 20 percent year-over-year.

The lesson is clear, as you invest in more R&D and more differentiated products, you can grow very fast in this market, and we intend to prove that in the ensuring quarters.

Overall, the U.S. molecular biology market is feeling better, but I would tell you it is still too soon to call.

But we intend to be a fierce competitor and gain our share, perhaps our fair share in this market as we continue to move through the quarters.

Overall our international performance is very strong and is highlight by our Asia Pacific business up by over 20 percent with particularly strong performance in Japan.

And overall, across all product lines, our pricing remains firm and, as you'll see, our margins remain very strong.

So it's a decent market, but technology is driving the success into the future.

Let me just say a few words now about Molecular Probes.

We were able to close our transaction early on August 20th which certainly helped our quarter.

But more importantly, we made very successful progress on the integration.

We've implemented an online integration tracker so that we can track all the important items to integrate this very important business into Invitrogen.

Augie Sick, a longtime veteran of Invitrogen, has been named the General Manager and is doing very well up there with really strong support by the overall Molecular Probes staff.

We had great third-quarter performance, and we're already developing important R&D and marketing plans to leverage both the probes business and the Invitrogen business to mutual success.

While importantly, I will say, that we intend to keep and strengthen the Molecular Probes brand as an important brand going forward in new novel technologies around labeling and detection.

So in the future you're going to see integrated product plans that take some of the Invitrogen technologies and probes technologies and take us to new places.

The information systems behind both these businesses will become one, and we are doing selective important Invitrogen distribution of these Molecular Probes technology around the world as we speak.

This is a transforming acquisition.

Eric, back to you on the third-quarter.

I'll thank you for the various elements of the income statement, then touch on the balance sheet, and finally look at our outlook for the rest of the year.

Let's start out with third-quarter revenues.

You can see that our revenues were 197 million for the quarter, that's up 21 percent over the same quarter last year.

Included in that number the growth number is about a 4 percent positive effect from currency.

If you look at our two different businesses, our molecular biology business is up to $125 million, a growth of 17 percent over the comparable quarter in 2002, and cell culture was 72 million, up 28 percent.

Now the cell culture business continues to do very well, especially in the production side where revenues were up actually 47 percent with the benefit of currency and 40 percent currency comparable.

Our molecular biology business is accelerating from new products, in particular the products we've added from the acquired businesses over the past year.

If you look at our quarterly revenue growth trend over -- our revenue trend over the last seven quarters, you see a very nice trend upward, a sequential trend in 2003 where our growth rate has been accelerating and it's reached 21 percent in the third-quarter.

And we're very happy about that, we think it reflects the strength in our businesses.

Now we can move to gross margins.

Our gross margins using generally accepted accounting principles were 60.8 percent of sales in the third-quarter.

And I want to point out that our pro forma gross margins were 63.5 percent, and take just a moment to review the difference in these numbers.

Purchase accounting rules require us to write up the value of the PanVera and the Probes inventories that we acquired when we bought these businesses.

As a result, we will report higher cost of sales for GAAP until this acquired inventory is sold.

During this period, estimated to be two to four quarters, our GAAP gross margins on these acquired product will be around 30 percent as opposed to the 75 to 85 percent we would report without this adjustment.

The pro forma number represents the gross margin that would be reported without this adjustment and is the gross much we expect for the ongoing business.

So if we look at molecular biology gross margins, they were 69 percent for the quarter, and this is up 7 percentage points over the comparable quarter last year.

This increase has been driven by the new acquired businesses that have higher margins, also by cost improvements on our businesses that we had before the acquisitions, some price improvements, currency has helped us out.

Everything has been going our way on margins in this molecular biology business.

And our margins have reached 69 percent.

Current mix of businesses, we see our margins in high 60s and we're comfortable with that number going forward.

The cell culture gross margins are up 2 points over the third-quarter of last year and were 54 percent in the third-quarter.

And this is extremely good performance for the cell culture business.

We benefited from a number of things here, as well.

High (indiscernible) margins, specialty media margins, the introduction of AGT in some of our products.

Some of those things will carry forward.

We see that going forward there may be some compression on the FBS margins as costs work their way through inventories.

So in the near term we expect the cell culture margins maybe to be 50 to 52 percent, but we are very, very happy with that.

Now let's look at our third-quarter operating expenses and pro forma margins.

We've presented a seven quarter trend here so you can get a sense of how things are changing in the business.

Our R&D investment as a percentage of sales has increased very nicely over the last year, and we entered this year with a target of getting that to 6 to 7 percent and we're up to 7.7 now, and trending upward our goal is to get that up even higher going into next year.

But it's a very nice investment we've made there.

I also point you to pro forma gross margins, and this year our pro forma gross margins have been 24 percent plus.

They reached 24.8 percent in the third-quarter, nice trend upward.

This year it's in our range.

We've committed to deliver at least 24 percent, and we've done that while increasing our investment in R&D.

Finally, if you look at our SG&A trend, in the fourth quarter -- sorry, in the third-quarter of this year we were at 30.9 percent of sales, and this is an area of focus for us going forward, we are focused on bringing that down while we deliver pro forma operating income.

So we're investing for growth, and we're delivering a profit now.

Now if you go to the next slide, I'll just touch on some other items on the income statement that I haven't touch on yet.

Some other expense items, the amortization of purchased intangibles increased because of the acquired businesses for Probes, PanVera and InforMax.

We did take a charge this quarter for in process R&D related to the Probes acquisition.

Also in our results is a business integration charge.

We've written down the final property we have in Huntsville, Alabama.

We restructured that business about a year ago and shut down everything, sold some properties, and we're moving our last property.

We feel that we'll be able to move that in the next three to six months, hopefully here in the fourth quarter.

But the market for lab space in Huntsville has not been robust, and we'll have to write that down to move that property.

Also our interest expense is up.

This is related to the new convertible notes.

I wanted to point out that our effective tax rate has been reduced through effective tax planning and higher R&D tax credits and so forth.

And we believe there's more to come in the future in that area.

One other minor note.

We bought the rest of a business, a serum business that we had been a part owner of, and prior to this it required -- or it resulted in minority interest both on our income statement and the balance sheet.

So as we bought that business those two line items disappear as very little effect on the overall financial statements.

So if you look at the EPS for the quarter, our pro forma EPS was 57 cents, it's up 24 percent over the 46 cents we reported in the third-quarter of last year.

And our GAAP EPS was 26 cents compared with 28 cents last year.

I'll note once again that there's a full reconciliation of the GAAP and the pro forma EPS on our web site and in the press release.

I'll also note that our pro forma EPS is significantly above our guidance that we gave several months ago.

Now if we could move to the cash flow and the balance sheet.

We are particularly pleased our cash flow performance this quarter.

We had a very strong cash generation quarter where our cash flow from operations were $63 million, bringing our year-to-date total to $125 million.

In particular, we got a good benefit from managing our working capital, some from all elements, DSOs and inventories, but in particular on the liability side on the -- especially in payables.

Also, as we look at capital expenditures and depreciation, our CAPEX for the quarter was 6.6 million compared with a depreciation of 7.6 million.

On a year-to-date basis both CAPEX and depreciation have been about $20 million, and we are focused on keeping that to the 1-1 ratio and we're happy to be able to deliver that.

So wrapping up on the balance sheet, our cash now stands at over $1.1 billion.

We were able to generate over $100 million in the third-quarter as a result of a number of transactions in our strong cash flow.

I'll remind you that we've generated $100 million in a quarter where we spent over $300 million for the Probes acquisition and we had also raised $350 million from convertible notes.

On the accounts receivable side, we've had an increase on our balance sheet.

A lot of that has come from acquisitions.

Our DSOs are at 55 days, and they're trending downward.

Our inventories, again there's an increase on our balance sheet, but almost all of that is from our acquired businesses, and our turns are staying currently at about three.

This is an area we're very focused on.

We're going to need to make a lot of progress next year, we think there are some very good opportunities for working capital in 2004.

So this quarter we had a great cash performance, and we're looking forward to continuing that in the future.

Now if I can talk briefly about our outlook for the year.

I'll say that if you look at the revenues and you look at our trend during the year, in December of last year we were originally projecting $768 million, and we've raised that projection throughout the year -- I'm sorry, $728 million at the beginning of this year.

We have continuously raised that during the year, and we're looking to end this year right now at about $770 million, up 19 percent over 2002.

Our fourth quarter guidance is very consistent with what we've previously said, we're looking for around $200 million on the top line which will be 23 percent growth over the fourth quarter of last year.

When you look at pro forma EPS, we've shown a similar projection or a similar trend of increasing our guidance throughout the year.

We're now up to $2.21, which will be 22 percent growth over 2002, and our fourth quarter performance, very consistent with our recent guidance, expecting 56 cents and it will be up 44 percent over the comparable quarter last year.

So very, very good performance, and we're excited about the outlook for the fourth quarter.

Eric, thank you very much.

What I'd like to do now is just provide some color commentary of what's going on inside the business in and around our marketing, our sales strategy and our products.

The next chart you can see on chart number 13 is talking about our new gateway strategy.

For those of you more familiar with the research products business, gateway is one of our premier products that is the standard in cloning DNA sequences and then moving them to multiple downstream systems.

As I've come into the business I've noticed that a lot of our great technologies, though, have been if you will complicate it by some of our licensing strategies that have been used in the past where we would try to sell the gateway product as an example and both get product revenues and then also potentially hold onto downstream licensing opportunities if new novel therapeutics were developed using the gateway technology.

Consequently, people were very low (ph) to use gateway in a very broad use across the industry.

And so what you're going to see over the next several quarters, our new approach to really free up the use of gateway and many other of our standard setting systems to make sure that they are used everywhere in every way possible and really become what we think will be higher sales from that.

So we think it's going to be very well-received by our customers, and we're going to have more on that as we go in terms of announcing this new licensing strategy.

Open architecture has to be what we're all about.

I also want to give you an update on something that I've shared with you before about our move to become more of a specialized end solution selling company.

We're making very good progress here.

We've already set up a specialist team in informatics, bioproduction, drug discovery and instrumentation now, and coming soon between now and the end of the year will be protein technologies and functional genomics.

We intend to have a great combination of both generalists or account managers and specialized teams supporting them to be greatly successful with a focused channel on academic and government and nonprofit customers and then a second focused channel on industrial customers or pharmaceutical and biotech clients.

All of these people and the process behind them will feel integrated and more towards the solution that we think our clients are going to see a noticeable difference in 2004.

As we've directed our teams, we've said that our relationships across the board with clients have to be based on both scientific expertise, commercial expertise in terms of constantly driving the best value, and then building broad sets of relationships to understand how we can best provide value across our various clients around the world.

So we're making good progress here.

As you can see, it's not disrupted any of our results and, in fact, is adding to our momentum.

Let me also say a few words about eCommerce.

Invitrogen.com is the number one rated site is the life sciences industry, but we think we can make it a heck of a lot better.

As you see by this chart, we intend to have incredible progress over the next six to eight months to really make Invitrogen.com the place where people go to really do both decision support, and also start bringing about what we think could be a wet lab/dry lab experimentation possibility.

So our informatics capability is going to move online.

We intend to have the ability for researchers to answer vital important questions both online and then lead them to the reagents they need to actually do that experiment in the physical world.

We think this is a new novel way of doing things, and we're very excited about moving traffic to Invitrogen.com, not just to sell products, if you will, to catalogs, but make it a place where people can go to get important answers for any questions that they have.

So we think this is going to become the best of the best eCommerce site and we are really putting a lot of effort and resources into Invitrogen.com.

With that, I'd like to turn it over to Vic Nole and have him say a few words about our bioproduction business because we feel just great about the momentum taking place there.

We're very happy with the progress of our bioproduction business in 2003.

It's very satisfying that we're experiencing breakthrough performance for our specialty media products which are driving most of our growth.

Specifically we're very proud of our chemically defined media, our non animal origin reagents in our AGT products.

It's very satisfying to see that investments that we've made in technology over the last few years are beginning to pay significant dividends for us, and our plan is to continue to drive this growth by accelerating our investment and extending our technology leadership.

And specifically, we're going to be focusing on adding new products and technologies that are regulatory and that are focused on improving the productivity of our customers.

I'd like to also mention that we've recently completed a 70,000 square foot expansion in Grand Island, New York and we plan to continue to evolve this site into a world-class bioproduction facility that both the employees and our customers can be proud of.

Back to you, Greg.

Thank you very much, Vic.

And so let me wrap it up.

We think we had a great quarter -- revenues up 21 percent; pro forma EPS up 24 percent; and importantly, just terrific cash flow performance from operations, $63 million generated in the quarter, and that is going to be an important metric we continue to drive going forward is really extracting cash flow out of this vehicle.

In the fourth quarter we feel very good about what we see.

We expect revenues to be up 23 percent, pro forma EPS up 44 percent, and again we feel good signs of improvement taking place in our customer base and we hope the results will demonstrate that again in the fourth quarter.

So 2003 overall we think will be a good year for Invitrogen, and I think the team is doing just a nice job making that happen.

With that, I'd like to turn it back to Donna for questions that we can certainly answer for you.

(OPERATOR INSTRUCTIONS) Aaron Geist of Robert W. Baird.

If you can help us better understand organic growth in the quarter for the molecular biology business, that would be helpful.

And then if you could tell us what the favorable impact of closing the molecular Probes acquisition was early, that would be even better.

Let me take a shot at that, Aaron.

The molecular biology business I think was up in the single 1 to 2 percent overall organically.

So we continue to see a challenging environment on the base products business that Invitrogen had coming into the quarter.

Now having said that, that's mostly a U.S. phenomena because the international aspect of it kind of in Invitrogen's core business was increased by double-digits.

So that's the straight answer to your question.

In terms of -- would it be fair to say that the U.S. molecular biology business was then down?

Organically?

Organically, down very slightly.

I think the better way is to just say it's kind of flat which we've continued to see.

In terms of the Probes question, Eric, I'll let you answer that.

The Probes brought us on the top line about $7 million, just under that.

Is that for the quarter or that's the incremental revenue picked up by closing it early?

That's for the quarter.

Moving on to the bioproduction area as my follow-up question.

Bioproduction has been up very, very strongly.

I think Vic's done an excellent job in pointing out the fact that there's been a movement towards a chemically defined media and nonanimal origin medias.

Can you talk about the sustainability of that trends into 2004?

And can you talk about the customer base, particularly who are consuming these products?

I think that it's not only sustainable, but we're well positioned to actually grow in that space.

As I mentioned, we've spent a lot of time, a lot of money, a lot of effort in developing some of these chemically defined medias and then putting them into a patented format which is our AGT format.

And the acceptance in the marketplace has really exceeded our expectations.

We're finding that customers more and more, as they're racing to get approval on their products, are looking for raw materials that will actually help them to be more productive.

And we believe that these formulations, these products, these technologies that we're offering help them to do that and they're really starting to realize the value that they bring.

So as they move their products through process development into production at a faster rate, and as the acceptance for these products continue to accelerate, I think that it's going to grow.

As far as the people who are specifically using them, I would rather not say at this time.

And, Aaron, I want to add something on sustainable.

This year we've reported 50 percent growth in that segment, and we certainly expect very solid growth going forward.

We've reminded people numerous times that that business can be lumpy, it can be -- quarter by quarter it can come down.

Going into next year we see very solid growth there, probably not in the 40 to 50 percent range, but certainly a very positive contributor to our growth rate.

One last follow-up question, if I may.

You talked about the modular biology business being organically stronger outside of the U.S., which in my mind would point to European strength, which is very different than what many other companies have recently talked about because of difficulties with budgetary delays, particularly within the European Union.

Can you talk a little bit about that and then sort of bring it back to talk about the NIH budget within the U.S. and your expectations for 2004?

Again, I can only report what we did, which is that European growth was strong and we continue to see good performance out of our European business.

One of the things that we're doing more analysis on as we continue to build up this company is understanding what marketshare that we may be gaining in Europe.

With respect to the NIH budget and the like in 2004, I think we've talked about this many times in terms of NIH.

We expect the overall market to be an underlying growth rate of single digits, mid single digits for molecular biology.

Having said that, I think the lesson learned for us is that Molecular Probes grows at very strong double-digits, and this is a business driven by R&D and novel differentiated technologies.

Quite frankly, the Invitrogen business over the last let's say year and a half got stuck in a little bit of a melees, and we are fixing that as we speak.

And we believe that we will be able to roll out great new technologies that should stimulate the growth in our molecular biology business.

That's something we'll prove to you, but that's something that we're working on very hard right now.

I'm anxiously awaiting that.

Meirav Chovav of UBS.

It's Meirav and Derik and I'll let Derik start.

Just looking at the cell culture business for a bit, I don't know if you want to break out the -- give the amount that Serum-free media contributes to your overall revenues there that would be very helpful.

And just looking at that -- looking at the overall serum market, it's my understanding that you have long-term contracts with respect to Caliber (ph) as opposed to some of the other companies that buy it on the open market so you're not as hit by some of the supply constraints as say some of the other companies reported recently?

That is true.

We do have -- I believe that we've got a much better control over supply chain than some of our competitors do.

Long-term contracts, I think the longest contracts that we would have in place are in the 12 to 18 month range.

But we do business planning in the serum area looking out five quarters and we think that that's adequate.

We've got great supply.

We think we're in much better shape right now than many of our competitors are.

As far as your question on the specialty media products, the portfolio in total represents maybe 15 percent of the total cell culture media business, and it is growing in the 25 percent range.

One question for me.

How is the response to the new siRNA probe business?

I think if you take a look at some of the recent product offerings, you'd see that keeping in line with the strategy here, we offer the broadest range of different systems for people to apply to siRNA applications.

So we'll continue to add to those.

We've got some key technologies.

We are combining key technologies, such as Gateway and Directional TOPO systems.

So a lot of those products have launched recently, we have a lot of ideas on other systems and delivery systems as well.

So we'll continue to launch this broad portfolio in the whole area (indiscernible).

And I just have one follow-up question.

You talked about the addition -- what Molecular Probes added to the quarter.

Could you talk about what InforMax, the software sales added and PanVera contribution?

(indiscernible) We saw that the InforMax business contributed about -- close to what they did last time, about $3 million.

And the Molecular Probes -- I'm sorry, the PanVera business, we saw some growth there.

I think they were just under 5 million for the quarter.

Steve Unger of Bear Stearns.

Good morning.

How quickly could we start to see some combined products of PanVera and Molecular Probes and some of your other products?

This is John Carrino.

We're already launching products that are combinations between technologies that have come together with some of the recent acquisitions.

So one of the ones that Greg mentioned, GeneBLAzer technology is actually a combination of some of the key Invitrogen systems like TOPO and Gateway with the beta-lactamase reporter system which was part of the PanVera acquisition.

We also see significant opportunity in the short-term in combining a lot of the Molecular Probes labeling and detection product offerings with both existing in process and then newly designed offerings coming out of the Carlsbad site.

In addition, the newest version -- again, Greg mentioned this -- of Vector MPI combines, and starts to get us towards this idea of wet lab/dry lab experimentation capabilities coming together.

There are some hyperlinks in the newest version which enable customers to take the sequence information that they generate using Vector MPI as the newest version and then link to key Invitrogen technologies and products such as Gateway, so there's a Gateway design module in there.

There are links to key vectors and expression systems.

So we'll continue to execute in the eCommerce strategy that Greg has talked about in terms of being able to tie all of these things together across the different capabilities that we have.

And then the Gateway strategy, the change in the license, when do you expect to have that available for customers?

We are rolling that out in the early November time frame, and at a number of different shows.

We'll have a number of different marketing events to signal our new, more open architecture approach to key technologies.

And then are you expecting that to be a strong contributor to growth in 2004, or is that somewhat upside to your expectations?

We haven't provided you 2004 yet, so overall we'll be doing that in December.

And as I think we've kind of highlighted before, we feel very good about 2004 and we'll talk more about that in December.

And just one housekeeping question.

What was the impact of foreign currency on the molecular biology revenue line this quarter?

We haven't broken out for the results here.

But you will do that in the Q, right?

Yes, we typically do that in the Q, and it follows pretty much our other business as well, and it was 4 percent of et al.

About 4 percent.

Okay, thank you.

Tyco Petersen (ph) of J.P. Morgan.

In the cell culture side, would you be willing to give a breakdown on research verses bioproduction and whether you're seeing any additional step up from Fischer per bio?

You mean in growth rates?

Yes.

We mentioned earlier that the cell culture production growth rates were about 47 percent, that includes currency.

On research side we've seen in the teens.

On a currency adjusted basis I have it.

It's 40 percent in bioproduction, 14 percent in research.

And could you provide us some color on the oligos business?

The oligos business is the oligos business.

I think everybody -- that business for the whole industry just sort of continues to clunk along and not show much trend up or down -- sort of consistent price erosion and that's about all we can say about primers.

But the primers are not the business of Invitrogen's future, so that will continue to be something we outgrow, and we don't think it impacts our results dramatically.

The only thing we can say also, though, is that we -- we're not giving up on it, we think it's an important, in some ways, element of the overall offering, and we think there will be some new technologies we can talk to you about in the fourth quarter around RNAi and our primers business.

And then finally, any thoughts on share buyback?

I noticed you didn't do any in the quarter.

And we will not do any in the next quarter either.

So, we are keeping our program in place, but at the current time we're preserving our resources for growth because we believe this is a growth company and a terrific growth industry.

Thank you.

Paul Knight of Thomas Weisel Partners.

This is Tim Lau (ph) here.

I have a question for gross margins, should we expect a 63.5 percent gross margin to continue into near future?

I would say that's not too far off.

We'd say that the molecular biology was 69 or so, that's pretty comfortable, we see a little bit of downward movement on the cell culture side, but that won't bring the overall margins down significantly.

But I'd say 62 to 64 would be a nice range.

62 to 64?

Correct.

Diana Zhou of First Analysis.

This is actually Alan Cohen now asking a question.

With GE's proposed purchase of Amersham, when you look at the GE Medical strategy and some of the statements there's at least the possibility to assume their strong interest is in the diagnostic side, and that instrument and molecular biology side of the business, if they could get a decent price they might be willing to part with it to a company interested in focusing in that area.

If it was available, how might you look at that? (indiscernible) have interest in the molecular biology area, would you perceive any governmental restraints?

This is Greg Lucier.

Let me just say a few words about Amersham and the GE deal.

Amersham was a tangential competitor to Invitrogen, so they weren't directly in our space.

And quite frankly, if you look at the biosciences piece of Amersham, and excluding the protein separations business, in really just about virtually every product category Amersham was a second-tier player.

And so it's a bit of a suspect property on the biosciences side.

Having said that, we've stated all along that we intend to be a consolidator in this industry.

We believe we have the resources to do it.

We believe we have the management team to do it.

And whenever something becomes available we hopefully always get to take a look.

And I think that's what we can say about the Amersham question you asked.

This is Diana Zhou.

I have a follow-up question on InforMax.

As far as I recall, last quarter's revenue from that sector was slightly below your expectation, and this quarter's revenues are still around 3 million.

Going forward, do you see any revenue pickup trend or is it still going to stay around the 3 million range?

Let me explain our strategy going forward with InforMax.

What happened over the last few years, as many of you know, is that the pharmaceutical companies hired in a lot of informatics capability just as core employees.

And so they've built up a nice capability on their own.

This part of the molecular biology business is one that I think any independent company struggles to really make headway in.

And having said that, I still firmly believe that InforMax was a very important acquisition for this company for two reasons.

One is that there is a growing phenomenon of the wet lab/dry lab process, and we fully intend to really move into that space strongly, using the InforMax technology to create this comparative between wet lab and dry lab.

Secondly, we're going to move the tools and become more integrated with our Invitrogen.com website to then really point our customers towards the reagents that allow them to do the experiment in the physical world.

So for us, InforMax is going to be an important technology augmentation to the business.

And on its own will continue to be a business that generates a couple million dollars a year on independent sales.

But we think that the sales it can actually generate through reagents is going to be far more substantial, and that's where we're really gearing our efforts now.

Thank you very much, Greg, and congratulations on your quarter.

Karen Mursbremer (ph) of Shaker Investments.

I'm just wondering if you can comment at all on how PanVera is doing and whether or not it's now sort of getting back up to your expectations?

Great question.

I've mentioned in previous calls that the acquisition of PanVera was, we think, a great technology adder, but perhaps early on in the year we didn't get it going on the integration side as well as we would've liked.

We're pretty pleased actually in the third quarter with the performance of PanVera.

We have a new leader in that business, Nick Ecos (ph), who most recently was at up state and prior to that had spent his career at Life Technologies.

So we know Nick and he's doing a terrific job really getting that business going.

We continue to see over the next several quarters growing revenue out of that business, and so we think we're getting it back onto the pro forma deals line that we had when we made the initial acquisition.

So PanVera is coming back and coming back, we think, very nicely.

Thanks and great quarter.

(OPERATOR INSTRUCTIONS) Winton Gibbons of William Blair.

Thank you.

First on the cell culture media side of things and kind of recurring revenue here, as I understand it in that business they still typically are multiple suppliers validated in the process, and it's my understanding that you might be considering finding ways to kind of closedown the use as is often done on the separation side.

And I was wondering if you have any plans there if you could comment on that approach, be it in the specifications of performance or some other process you might use to make these more closed rather than open sales?

Vic, let me take a crack at that one and then you can add to any comments I would say.

Winton, as you say, the protein separation side of this business tends to be a bit more sole sourced than the cell culture side.

The way we're playing out that part of our business, though, is in two respects.

One, the reason that many of our clients want to have dual sources is just for merely insurance, if you will.

The one way we can mitigate that is by having dual sources where we produce the same thing, and we're lucky enough to have a great operation in Scotland as well as a great operation in New York, and so we can provide two sources independent of one another that can survive (ph) that insurance.

The second way that we can perhaps become more of a sole sourced supplier is through our continued investment in technology, for things around AGT as an example.

So we're continuing to see dual sourcing taking place, but we feel also very good that we're getting a disproportionate share of that sharing that is taking place, and we think maybe in the future this can continue to move our way.

Greg, I think you said it very well.

And then just another follow-up on what sounds like an ASP application for the vector products.

Can you talk a little bit about what percentage of your revenue currently comes through Invitrogen.com?

And then also talk about any charges you might provide -- or might charge, any price you might have for the use of this in Invitrogen.com, or is it your intention of essentially making certain tools readily available to drive reagent revenue or do you think that there can be still at least a small subscription model involved in its use?

Let me answer the last part first.

We still feel that we're going to be able to generate several million dollars a quarter through the sale of an informatics tool standalone.

So the revenue you've seen will be the revenue you see going forward.

Now in terms of charging people access to Invitrogen.com, we are not intending to do that.

We want to make this the best place to come to and do the research and experimentation for what you're trying to do.

So there will not be a charge to come in to Invitrogen.com.

In terms of the amount of sales going through it, it's about 20 percent today.

Our goal is by the end of the second quarter, and this is basically due to some IT issues behind the scenes, we'll be at 50 percent by the end of the second quarter next year.

That's our goal right now.

And so again, just making sure I understand this.

So there will be a certain let's say limited or maybe not full use set of vector products online for the wet lab/dry lab combination driving online reagent revenues but with no charge, and then there will still be a standalone product which presumably would have a little bit more functionality?

That's exactly right.

Lavina Tallgutha (ph) of State Street Global Advisors.

Greg, I was just going to focus on a comment that you made a little bit earlier in terms of being a consolidator in the life sciences industry.

But can you give us a little bit more color on the strategy behind that?

Is it more focused in -- like in molecular biology or cell culture, or does it matter?

Or are you just being opportunistic depending on what's going on in the private markets and how those companies are either -- what their outlook looks like going forward?

Let me answer the question.

First, we're not just a financial buyer, so we'll make acquisitions that we think make strategic sense.

We think that many acquisitions, at least for Invitrogen, make strategic sense in this space, and there are several reasons why that is.

The first is that we have the broadest distribution channel in the industry today, by the end of next year we intend to really create separation between us and everyone else.

And so as we acquire let's say smaller reagent companies like the Probes, we can greatly increase their exposure to clients by virtue of our distribution channel.

That is a key strategic asset that we think only us present.

Second is in terms of R&D.

Now we have over 1000 patents under our control, we intend to substantially increase, as you can see, our R&D investment.

And so time will tell, but we believe that there is some great new tools and technologies we can bring to market by the novel combination of Probes, PanVera, Invitrogen and the next company we acquire.

So that's really our core strategy is to leverage our distribution channel, our R&D capability, and then like every other company that does consolidation, we create a single back office that can reduce the G&A expenses substantially as we go.

So that's the thinking behind our business right now.

And then I have a follow-up on the cell culture business.

I know that you didn't want to tell us who exactly your customers are, but if you can characterize for us if we're seeing more of the biotechs in the earlier phases now buying the cell culture products or possibly the contract manufacturing companies that are the larger buyers?

We're seeing a combination of both.

We're seeing a fair amount of process development work in the biotechs, and we're seeing a fair amount of final production work in the large CMOs.

And I hope you understand that I'm not at liberty to (multiple speakers) name some customers.

I absolutely understand.

Okay, thank you.

John Sullivan of Stephens Inc.

Guys, you talked about in your presentation several sales specialist teams in that part of the model.

One of the sale specialist teams was in instrumentation.

Are you heading in that direction meaningfully from an acquisition standpoint in your own mind?

The instrumentation team that we've created is for our Genicon business that was acquired.

So we now have specialists selling the Genicon system, and that's kind of the first foothold, if you will, into instrumentation.

We have not made any public proclamations of moving into instrumentation as one of the core components of our strategy.

Having said that, I will tell you that when we look to the future we do see some real opportunities for differentiated instrumentation and reagent combinations.

However, those we think have yet to be developed, they're on our product development roadmap.

You will not see us move into generic liquid handlers or things like that.

That's not the game of Invitrogen going forward.

Thanks.

Aaron Geist of Robert W. Baird.

Vic, if you could help us better understand the gross margin dynamics in the cell culture business that would be exceptionally helpful.

I understand that the serum-based products have much, much us lower margins but the dynamic at play now is with pricing increases you're working through lower-cost inventories so that adds a favorable dynamic to gross margins.

If you could help us understand what the dynamic is in terms of the declining gross margins associated with the falloff from FBS (ph) offset by increasing gross margins from the higher margin serum free products, that would be very, very helpful.

And if you can give us a stab of where you think gross margins for cell culture would be in '04 that would be very helpful.

Let me jump in there and add something and then I'll let Vic take it from there.

We have a number of dynamics going on in that business and we've sort of tried to guide the expectations to around 50 to 52 percent for that business going forward.

We have a number of things that will be driving the margins up, some new high-value products such as AGT or our specialty medias.

We have the FBS dynamic that we've talked about, and that'll put pressure on margins going forward.

We also have a mix change where the production business growing faster than the research side will also have a tendency to bring down margins.

So when you put all those elements together, we have been looking at margins in around the 50 to 52 percent range.

Vic, I don't know what you'd like to add to that, but I'm trying to sort of frame the discussion.

And I was just going to start with the overall business side.

We talked about a growth in margin quarter on quarter in the cell culture business of 2 to 2.5 points, roughly 40 percent of that is due to price and shift in mixes, as Eric indicated.

And the other 60 percent is cost efficiencies.

And if we think about serum specifically, our strategy in managing the serum business through this supply and demand dynamic really has been to try to stay margin neutral.

Costs have been increasing significantly.

The market has borne most of those, but we really want to be sensitive to prices that our customers are willing to pay and making sure that their systems are cost-effective as well.

So we've done a really good job of making sure that the serum margins have been neutral over the last three or four quarters.

That's very encouraging.

One more question if I could.

You talked about the Gateway product, open sourcing, Greg, in making this more accessible to molecular biologists and researchers around the world through a licensing program.

Can you talk about the revenue impact that's going to have in terms of people potentially buying less of those Gateway products and taking a license instead or that dynamic?

We actually think that revenue is going to go up with Gateway.

So that's why we're doing it.

When we went out and talked to a number of key researchers around the world, they said look we love your Gateway technology, but we're just still a little unclear about what our rights are to use it going forward if we develop something in downstream systems.

So, it was clear to me that we had to clear up this confusion because, in fact, Gateway pulls through a number of products downstream like Clonase and our transfection reagents.

So, by virtue of making our technologies more open, we think we can drive adoption to a far greater extent.

So that's really the strategy going forward.

I'm kind of confused about how it would create a problem in terms of your customers being able to use that product downstream with licensing issues, can you be a little bit more specific?

We'll have John Carrino give you an example of one of their concerns.

I think there has been some confusion around using Gateway as a research technology and then the output of -- or what happens to products that need to be developed that come out of that research effort.

And some I'd say misperceptions about what the Invitrogen policy would be about use of Gateway in those kinds of situations, and those are the kinds of issues that we really think that we're going to be able to clarify in coming out with this new policy for customers that will really help to overcome some of those concerns.

Okay, great.

Thank you very much.

Meirav Chovav of UBS.

This is Derek DeBruin again.

Could you just talk a little bit about -- you said you're focusing on SG&A and just give us a little bit more about where you see that as a percentage of revenues headed over the next couple of quarters?

And just want to know about what your plans are in the general area of here (ph).

What we've stated before is that our goal is to keep operating margins Summer between 23 and 26 percent, drive towards an R&D investment of 10 percent, and then manage everything else to fit in that box that remains.

So that's really the focus at hand in this business is SG&A will be something we back into and then manage to as what we want to spend.

So I think you can do the math on that in terms of where that number will be going.

Okay, thank you.

Operator, we'd like to take no more than two more calls.

Paul Knight of Thomas Weisel Partners.

I was curious, has source of serum supply been an issue or a concern for you at times?

It has not.

How do you lock in supply?

Well, we own collection facilities in New Zealand and Eric mentioned earlier that we just completed an acquisition of shares outstanding in serum technologies in the Americas earlier this year.

And so through contracts and partnerships that we have with various slaughterhouses that's the way that we actually control supply there.

Okay, thanks.

Gentlemen, we're showing no further questions in queue at this time.

I would like to turn the floor back over for any additional or closing comments.

We'd like to thank everybody for attending our call, and if there are no further questions, thank you very much.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.