賽默飛世爾科技 (TMO) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Invitrogen third-quarter 2004 earnings results conference call. (OPERATOR INSTRUCTIONS).

Now I would like to hand the call over to your conference host, Adam Taich.

Thank you so much.

Good afternoon and welcome to Invitrogen's third-quarter conference call.

I am Adam Taich, Invitrogen's Vice President of Investor Relations.

Joining me on the call today are Greg Lucier, our Chairman and CEO;

David Hoffmeister, our Chief Financial Officer, and Eric Winzer, our former Chief Financial Officer who transitioned into a new role leading our ERP project.

Before we begin our business presentation, I want to caution our listeners that our discussion today includes 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.

We refer you to the risks listed today in today's press release and our SEC filings, including our most recent 10-K and our 10-Qs.

On today's call, as we have in the past, we will discuss our pro forma financial performance, which includes non-GAAP financial measures as that term is defined in Regulation G. We provide pro forma financial information as it provides an indication of the profitability and cash flows of our business, apart from the initial sum costs of our acquisition.

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

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

Under this definition, pro forma financial figures are calculated by adding back acquisition-related amortization and other similar costs net of income tax effects.

On the Investor Relations page of our Web site, we present the most directly comparable GAAP financial measures and a reconciliation of GAAP results to pro forma results.

Now I will turn the call over to Greg Lucier who will comment on our third-quarter performance.

Thanks, Adam, and great to talk to you today about a terrific performance by the Invitrogen team in the third quarter.

Our revenues exceeded $256 million, up 30 percent quarter-over-quarter -- third quarter last year to third quarter this year.

And when you look at year-to-date results, we are growing at about 34 percent year-to-date.

So we feel really terrific about the performance of the team.

More importantly, the earnings that we are producing are first are getting good leverage off of those revenues.

As you can see, pro forma EPS is up in excess of 30 percent at 35 percent, and our EBITDA was 76 million, up 32 percent.

We feel also very strong and confident about the quality of these earnings.

If you look at our free cash flow, it was $70 million, which is a record for this company, and over $150 million year-to-date.

So we continue to produce great cash flow, and we feel really good about the performance the team did in the third quarter.

If I take you to the next page, let me talk a little bit about the revenue breakdown.

First, we continue to have sequential quarter-over-quarter revenue growth reaching over 256 in the third quarter of this year.

Now when we look at our two reported segments, BioDiscovery and BioProduction, they both enjoyed good growth, good revenue growth in the quarter.

Let me just plunge down now and just talk a little bit more in detail.

In the BioDiscovery side as you know we have been challenged to return to organic growth in this segment.

And we are very pleased to report that we actually got results sooner than we actually thought internally this quarter where we had organic growth of 5 percent for our BioDiscovery segment.

In fact, when you remove the probes business, which continues to grow in excess of 20 percent, the balance of that segment was still growing roughly around 3 percent, which again we are pleased with the positive momentum that we had and we think we will see more growth in the ensuing quarters.

It is really driven by strong U.S. performance, and we will talk about how the U.S. team has modified its sales approach and we think is gaining good traction now.

And in fact we think we will see future growth driven by this type of sales performance in all regions around the world.

On the BioProduction side, we saw organic growth at 7 percent.

Now this is really a lumpy business as we continued to advise investors in the past, and we're still quite on track for the 11 percent organic growth guidance that we gave at the start of the year.

I should report that our BioReliance business had a really terrific quarter.

Revenues exceeded $30 million at BioReliance, which is a record for them, and the team there is doing an excellent job executing and building a terrific biotesting business.

What I would like to do now is give you a summary of what is going on around the world and how we see things, and perhaps this can provide further color on the markets in which we serve.

In the U.S., our Biotech business continues to provide solid increases.

We feel that we're a vendor of choice in supplying biotech companies given our common heritage, and we are making good double-digit gains in biotech.

What I would really point your eyes to is just the changes and the gains we have seen from those changes and how we sell.

If you look at Invitrogen over the past few years, it was always very much of a deep scientific sell and one-off transaction.

What we started to do is leverage the breadth of our product line to be much more of a full line supplier and sell in that way -- sell in a way that we can provide all the products and services that an organization needs.

And we are starting to see the effects of that change over this quarter where we started to in the U.S. really employ that strategy.

Now in Europe, it is a little bit of a different story.

The market there, as I think many of our peer group has reported, was weaker in the quarter, particularly in Germany and France, and for us it's really about scale and scope and continuing to gain market share in our European business.

But I would report that the BioReliance business did terrific in Europe.

But again I think Europe tends to lag the U.S. in terms of the growth at this point.

Moving over to Asia-Pacific.

As we reported in the past, our Japanese business was challenged by some changes in the university purchasing system.

That volume is now returning.

They reported 18 percent revenue growth in Japan in the quarter, and we expect to see even faster gains coming in the fourth quarter.

We continue to expand our presence in China, adding another 10 salespeople on top of the numerous people that we have throughout that country right now, and we are launching a new R&D center in India to commence operations in 2005 to continue our globalization.

So overall it's a very healthy region, growing in excess of 20 percent in 2004.

And you can see from the bottom we continue to release a ton of new exciting products, and I point your eye to our stem-cell media products that we think are going to be very important in this emerging area of blood science research.

What I would like to do is give you a little bit more input on our BioProduction business as we've had many questions just about how does this business grow and what does the future prospects look like.

As we have reported in the past to you, when you look at the number of biologics in the pipeline, whether it's in preclinical all the way to launch this is a segment that we think is growing at around 15 percent year-over-year.

And more than that, when we've done at least our own intelligence on the number of biologics in production and market and then also in clinical trials, I think the Invitrogen business, our GIBCO technology, stacks up quite well.

For the 200 biologics that are in production today, we are in the supply position of more than half of them.

We have over 50 percent of the market position.

But even more telling and more importantly, of the 370 biologics that at least we track that are in clinical trials today, you can see some important evidence of how our technical excellence strategy is working.

In the proteins and monoclonal antibodies where we see there is about 115 clinical trials, we're in over 65 percent of (inaudible) for those opportunities.

In vaccines, 130.

GIBCO was in at about 40 percent, and in biomedical applications, cell type of applications, tissue therapy, GIBCO is in over 55 percent.

So I think it is again an example of where we have been working very intimately with clients early on, working with our technologies and the market share is showing.

Now let me just say a few words about growth.

If you look at the quarter and it is split between research and production, the research business was at about 6 percent and somewhat affected by the European growth that we saw in the third quarter that was not up to the normal growth that we have seen in the European business.

So year-to-date good growth 10 percent and 11 percent from both of these areas of research and production cell culture and totally on track to achieve this 11 percent guidance that we gave in the beginning of the year.

As we look forward, we actually think 2005 will be similar to 2004 in terms of the volume growth.

Somewhere between 10 and 15 percent as we finalize our projections.

But actually we think the growth will accelerate in 2006 due to the things I said earlier about the number of these biologics in the pipeline and we think some of them will see the market come 2006.

So an accelerating growth curve, but still well within the range of what we said really consistently to our investors of growth in our cell culture business of between 10 and 20 percent on an annual basis.

With that, I am going to turn it over to Eric Winzer and he can give you some our commentary on the financial performance.

Thanks, Greg.

I will get into some detail behind the numbers so you get a good sense of what is driving our financial performance.

Let's start with gross margins.

Our GAAP gross margins improved by about half a percentage point in the third quarter this year compared with the third quarter of last year.

Last year's GAAP gross margins included a charge to step up the probes inventory at the acquisition of that business.

As you know, we focused on pro forma gross margins which exclude these short-term acquisition-related charges.

You can see that our pro forma gross margins fell about 2 percentage points from a year ago, but that is entirely due to the inclusion of the BioReliance services business.

On the current slide, you see a presentation that excludes the BioReliance business just so you can make a more apples-to-apples comparison.

On this basis, you can see that pro forma gross margins have increased from a year ago.

Looking at the gross margin performance by segment, BioDiscovery is up 1 percent from last year to 70 percent due to favorable mix and productivity improvements.

BioProduction gross margins were 50 percent, which is actually slightly above our high 40s expectation for this business.

The year-over-year change in BioProduction gross margins is principally due to the addition of the BioReliance business, but down a little for lower SDS gross margins offset by productivity gains.

So now let's look at the other elements of our operating income and see how our strategy defined SG&A efficiencies and invest in R&D is playing out.

Using the gross margin presentation as a model, we have included a similar presentation for the other elements of operating income.

Our SG&A expenses have come down 2.5 percentage points from last year's third quarter.

Now some of this is from changing the mix for the BioReliance business, but you can see that we have reduced SG&A by over a percentage point on a like-for-like basis.

This is a result of our programs to drive efficiency in the backoffice.

We found leverage and efficiencies in many areas which have offset some higher expenses such as for Sarbanes-Oxley 404 compliance.

Our R&D investment was 7.7 percent of sales last year and has fallen slightly, which you can see again is due to the addition of BioReliance business.

Again adjusting for BioReliance, our R&D investment was 8.2 percent as we have increased spending in numerous areas, most notably for labeling and protection technologies and for protein arrays.

I will add that our BioDiscovery R&D investment is currently 11 percent of sales.

So this brings us to operating margin, which improved almost a percentage point from last year and stands at over 25 percent of sales, up from last year and nicely in our target range of 24 to 27 percent.

Next slide, please.

So in summary, our revenues increased 30 percent as we discussed earlier.

Our operating margins expanded and our effective tax rate improved allowing us to grow pro forma EPS by 35 percent.

And a note on the tax rate.

Our goal this year was to reduce the pro forma tax rate to 33.5 percent by year-end.

We have done that and actually expect a further reduction of 3/10 or 4/10 of a point in the annual rate by year-end.

On the GAAP side of things, amortization expenses were up this year due to the BioReliance and Probes acquisitions.

Also last year GAAP items included several short-term charges such as the inventory step-up I mentioned earlier and an IPR&D charge for the Probes acquisition.

Including the GAAP items above, our third-quarter 2004 GAAP EPS was 52 cents, double the previous year's number.

We have included a reconciliation of these GAAP and pro forma results on our Web site, and I encourage you to review these reconciliations.

So now let's take a look at our cash flows and our balance sheet.

Our cash flow was especially good this quarter.

Cash flow from operations was $79 million.

Our capital expenditures were $9 million and right on our target of one-to-one with depreciation.

As a result, we had a very strong $70 million in free cash flow for the quarter.

Let's also take a brief look at our year-to-date cash generation.

We generated $170 million in cash from operating activity in the first nine months of 2004.

This is due to our strong cash based earnings, but also from our ability to harvest cash from working capital and other non-cash items.

We set a goal to generate $18 million in cash this year from these items and have exceeded that.

After nine months, we have generated $22 million.

As a result, our year-to-date free cash flow is $150 million.

Let me also take a moment to update you on our stock buyback program.

We bought back 1.6 million shares during the quarter at a cost of just below $50 per share.

So we have spent $81 million buying back stock since our recent announcement.

I will note that these purchases largely offset shares issued this year under stock option and employee purchase programs.

Netting the cash we received from these employee programs, our buyback actually used only a net of $33 million in cash, which was less than 25 percent of our year-to-date free cash flow.

So you can see we're not using a great deal of our cash for the buyback and still have over 1 billion in cash on the balance sheet.

Greg, back to you.

Thank you.

I want to talk about an acquisition that we made this morning and that we announced publicly.

When I first got this job and traveled around to meet many of our customers, one of the questions they asked was, when where we going to perhaps enter into the nucleic acid purification market?

And so as you look at the nucleic purification segment, this is a very fast-growing application for molecular biology.

Both in research applications and molecular diagnostics, you see a strong blended overall growth rate well into the double-digits.

And, in fact, what the customers were saying to me was we would like to have a choice because when you looked at the choices they had today in terms of nucleic acid purification, it is dominated by one company, QIAGEN, and really fragmented with everyone else.

And you can see Invitrogen virtually has no footprint in this very important growing segment.

So this is a business that we think has long-term possibly both in research application and as we move towards a world of personalized medicine.

What we announced today was the acquisition of a very important company, DRI, that has some exciting new technology called ChargeSwitch.

The combination of these products and technologies with what we had already been developing over the last several months internally will allow us to provide a product line that will cover about 100 percent of the nucleic acid purification segment within the next 12 months.

For us, when we look at this market, it is very attractive, very fast-growing and more important, serves our customers because they wanted to have a choice and they wanted to be able to potentially use Invitrogen technologies in the beginning, but they could then move into future Invitrogen products downstream in their experimentation.

So we think this is just a logical step to follow our customers and provide them with a choice in what is a very fast-growing segment.

David, over to you to talk about our convertible debt.

Thank you.

As I am sure you are all aware, the accounting rules for contingent convertible debt recently changed, and there will be no more accounting benefit for a contingent conversion come the end of the year.

The impact on Invitrogen is potentially dilutive to the rate of about 9 percent.

So we've been looking at the situation very carefully, and what we plan to do at this point is we will exchange our present CoCo to convertible debt for similar notes with the net share settlement feature.

And basically with this does is minimizes to eliminate the impact of dilution on our earnings per share.

As an example, the dilutive impact varies as the share price rises.

But at a share price of $90, it would only have a 2 percent dilution on earnings per share.

And we are able to do this at a minimal cost to the Corporation.

So we plan to do that over the next 30 to 60 days.

Next slide.

Just to summarize full-year guidance, we're going to raise our guidance for pro forma earnings per share from 288 to a range of 289 plus.

We're very bullish on the outlook for the fourth quarter.

We believe we will have increasing demand in the U.S. biotech and pharma segments and industry, continued organic growth in BioDiscovery, and as Greg mentioned earlier, we anticipate that BioProduction will stay on target for 11 percent growth for the year.

So we look to 2005 we continue to modify our sales approach to be about the breadth of our product line, as well as the depth of our technology.

We have got a lot of new products that we will talk about in our December guidance.

We're continuing to make great improvements in operational excellence, and in fact we have launched a major new ERP investment that will allow us to do merchandising in a new very sophisticated way, and Eric Winzer is going to be leading that very large-scale project across the Company.

And we have many more exciting business development opportunities besides the ones we announced today in the pipeline.

So all in all if we go to the next chart, I would just say many calls and many questions have come in about how we think about 2005, and we will have our guidance conference on December 9th in New York City and we look forward to talking about the growth that we anticipate for the upcoming 12 months.

But I think our growth in next year really is reflected on the attitude and really the mindset of the management of this business that has a great tradition of driving growth and being totally insanely focused on meeting customer needs, and we think that's going to serve us well into 2005.

So with that, Adam, I am going to turn it over to you.

Thanks.

Operator, we're ready for questions and answers.

(OPERATOR INSTRUCTIONS).

Derik De Bruin.

UBS.

A couple of questions.

I guess just talk about the salesforce in terms of what they were doing differently this quarter, and just I guess tell us what you did to them to make them get a little bit more effective between the last quarter.

I guess also were there any order delays or anything pushed off to any of the business segments this quarter?

I know you had some issues last quarter in BioProduction.

Thanks for the question.

First in terms of the salesforce, this has been a process that has been ongoing over the last nine months to where we have continued to refine our sales approach from being again one-on-one and very just technically oriented to now still continuing to do that, but also ask for a broader range of the business given the breadth of our product line.

And we have had to make many transitions in terms of people, lots of training of people, and what I would say to you is that we saw the full effect and the positive effect of those changes in the third quarter.

And I suppose it just takes time for human beings to change and for strategies to ultimately catch, and we feel good about what happened in the third quarter.

In terms of BioProduction lumpiness, there may be some order shifting quarter to quarter.

It certainly continues to be the case.

We think that there is still much more BioProduction business that we will gain.

When you look at one of our large clients, Abbott, they continue to come back from their consent decree, and we think that will represent more volume for us as their business comes back online.

So yes, there is still lumpiness and there is still some particular issues that we have had to deal with given our particular clientele on the BioProduction side.

And I guess looking at there has been talk lately about resuming cattle exports to Asia and what is that going to do to the price of (inaudible) pricing?

You know we look at this thing in terms of not only the pricing to end customers but what we pay, and I would just simply say we're bringing into register those two sides of the equation in a much better degree than we ever had in the past.

But we don't see SDS pricing really changing that much over the next several quarters.

I know there have been some reports of it perhaps declining.

We see just only slightly modification going on over the next couple of quarters.

Okay.

I did not quite catch the tax rate guidance.

Could you go over that for one moment?

Yes, on a pro forma basis year-to-date we were at 33.5, and we don't have the exact numbers for the end of the year.

We have some things moving around, but we expect that to come down 3/10, maybe 4/10 of a point on an annual basis.

Great.

Thank you.

Adam Chazan.

Pacific Growth Equities.

Another kind of sales-related question.

I was hoping you could talk a little bit about efforts to drive volumes through the Internet and also how you are hoping to lever the supply centers?

And then lastly, there was an item that popped up on the tape not too long ago about one of your distributors.

I was just curious as to how you are planning on employing distributors going forward?

Thanks for the question.

I am not offhand familiar with the distributor thing that was on the tape, so I'm not sure I can answer that one.

But I can answer the broader question about our approach to distributors.

First on the Web, we set a goal at the beginning of the year to have 30 percent of our orders, not necessarily the dollar volume but the actual orders themselves, onto the Web by the end of the year, and actually I think we're going to exceed that goal.

We put together and mobilized over the last 15 months a terrific team, a pretty large team, to really go global with our Web, and we're very pleased to report that we have been able to go global with our Web site.

You can now place orders in Australia exactly how you place them in the United States and exactly how you place them in Paris, and I think that is quite unique in a life science community.

Second is that when we have done surveys and also look at independent surveys, the Invitrogen Web site continues to get number one marks, number one, number two, but certainly at the very top of all life science websites in terms of ease of ordering, ease of finding information that you want.

So I think we are on track from a customer perspective.

Our goal is to continue to drive those volumes across the Internet ever higher.

Now we think the supply centers are actually just a direct extension of the Web site and of the Internet strategy.

And in fact we're employing a new approach where our supply centers will have a direct link into the Internet, and we will be able to have online access at the supply center itself.

So we see all of these things coming together into a really nice tight way to give customers easier access, faster tracking, and just generally again easier to grab what they need in order to do their experiment.

Let me just say a few words about distributors.

Clearly our business is direct sales.

We have again the largest salesforce, one of the largest salesforces in Life Sciences around the world.

We pride ourselves on training these people.

Most of them are PhDs.

So wherever we can we are going to go direct and continue to build the Invitrogen franchise if you will.

However, having said that, I think we're also taking a little bit more of an enlightened approach to where we can use distributors where they may have particular customer relationships that help.

Thirdly, in our Probes business, which has just an incredible breadth of products, some distributors in Europe, for example, make a lot of sense to have.

And so we are going to be smart where we use distributors and perhaps use them a little bit more than we would have done in the past for selective different technologies and selective geographies.

I hope that answers your question.

It does.

Thanks.

Tycho Peterson.

J.P.

Morgan Chase.

Thank you.

I was wondering if you can talk a little bit about the contribution from some of the acquisitions, and if you don't want to give numbers, that is fine.

But were revenues from Probes, were they down sequentially?

No, not at all.

In fact, Probes continues to grow, like I said, well in excess of 20 percent.

Our BioDiscovery business just in the spirit of full disclosure, if you exclude Probes completely, it still was growing in excess of 3 percent, and so Probes contributed an extra 2 percent of the organic growth of that overall business.

So Probes in and of themselves are growing in excess of 20 percent.

BioReliance had a great quarter.

It had a record quarter of 30 million, and so we feel good about the performance of that business as well.

And then in BioProduction on the margins, it looks like you actually had a nice sequential step-up.

What was driving that?

On the BioProduction a sequential?

On the margins, yes.

Oh, yeah, from the second quarter.

The improvement in BioReliance actually.

They had a very good quarter, and they got us some lower margin businesses.

They were in the second quarter.

So that was really the big driver there.

Okay.

In terms of the academic market, I know there has been talk about the intellectual property and enforcing that more.

Can you comment on how your discussions are going?

Do you talk to universities at a higher level now and trying to get more bundled sales?

Well, we are certainly doing more package sales if you will and certainly talking to higher levels with universities, because we supply so many different labs so many different things, and we think we can provide them the economies they are looking for as the full line supplier that we are.

But in terms if you're referring to --

Yes, the Supreme Court.

Yes, we had really gone hog wild on that yet.

We are aware of it, we are thinking about it, but we have not taken any action on it just yet.

Finally on proposition 71, the cell culture -- the stem-cell -- what is the status of that for you guys?

Well, we support that initiative.

We would like to see it passed.

We think it funds important research that not only benefits the biotech industry perhaps, but more importantly it benefits I think patients around the world with the research that would come out of it.

There are provisions in that initiative for California companies, but we really don't have any feel for what it would do financially to us.

One last question on pricing.

Can you comment generally on pricing trends?

Pricing remains responsible in the industry, and we continue to be responsible, too.

Aaron Geist.

Robert W. Baird.

Congratulations on a nice quarter, and thanks a lot of providing a lot more color in the spirit of share disclosure.

It is appreciated on our end.

Can you talk a little bit about the organic growth step-up that you saw in the quarter?

In terms of new products, you have long talked about some of the older products being long in the tooth.

Maybe you started to see some traction for the newer products that you have been introducing?

Is it a bundling issue where I know that you have been bundling some of your products to try to cross-sell?

A little bit more color would be appreciated.

I think most of our gains are attributable to more packaging of more of our products together.

And it is just something literally we never did before, and we could be faulted perhaps why we did not, but it was not our sales approach in the past and it is now.

In terms of benefits from new product introductions, we got some benefits for sure, but I think the management teams feel that there is even so much more potential to become an effective seller of some of the newer technologies we have coming out.

So I would say it was of lesser impact on NPI, new product introduction, but we think that is great because it just means there's more opportunity to go.

The next question on the cell culture business.

I understand that there was productivity gains offset by SDS and BioReliance was a positive dynamic in the quarter.

You also provided a little bit of guidance for 2006 in terms of your expectation of 50 and to 20 percent growth.

What I would like to know is, do you anticipate in the 2006 period that more of your growth will come from chemically defined media than from SDS, and we should anticipate gross margins to continue to improve as you get productivity gains and switch to higher margin products?

That is totally right on.

I mean that is clearly the strategy.

When you look at those 370 biologics in clinical trials and what we're doing with our portion of them, it is all basically chemically defined media, and the technical strategy is like I said, the strategy was chemically defined media and investing in that, and I think that's why we feel great about our share position there.

So yes, it is less SDS in the future and higher margins in the future as these drugs hopefully get successful and come online.

Is it reasonable to assume that the margin improvement that you saw in the quarter is sustainable and should continue going forward?

I think that is reasonable yes.

Next question.

SG&A was a little bit higher than what we're looking for.

Can you talk about was there some one-time in nature SG&A costs, maybe promotional costs that hit in the quarter, and what should we anticipate in terms of SG&A for the remainder of the year given you had some recent additions to the management team hit in the quarter as well, end of the quarter?

You know, we are always trying to manage that on a long-term basis.

It did click up a little if there was 404 expenditures as a lot of the companies come through close to the end of the year trying to finish that off, and by the way we are in good shape there.

Some little increase in the -- some promotional activities, and just a tick here and there, but overall the trend we are looking for down.

Thank you.

Last question on DNA research innovation of the acquisition you made today.

I understand the rationale that you have said given that your customers want you to be able to compete with QIAGEN want a choice in the market.

But given the difficulties that Invitrogen and LifeTech have had in the past in competing with QIAGEN, what gives you the conviction that this technology and this product will allow you to compete effectively with QIAGEN?

A and B, does this mean that you now are more likely to move into the instrument market so that you will be able to compete with QIAGEN on a more level playing field?

Great question.

Look, QIAGEN is a great company.

I think they do a wonderful job in the market.

And the way we look at things is that if we can provide customers a choice and humbly if we can get even just 5, 6 percent market share, this is a terrific accretive business proposition for us.

So that is how we look at it.

Secondly, in terms of instruments, our near-term goal is, and we have already been doing this and you can double-check on us, is working closely with Tecan and Beckman and some others on their instruments to really expand their footprint in this area.

Where they cannot, we will, and you'll be hearing future announcements about instrumentation.

You gave guidance of about 3 to 5 million in revenues from this product line next year.

Can you give us idea of what this product line is anticipated to do sort of on a run rate or for 2004?

2004 is just getting going right now.

So I think it is negligible in the fourth quarter.

I think we have given you kind of modest guidance for 2005, but clearly this thing ramps up much much faster beyond that.

And again our goal is never to displace QIAGEN.

It is a great company.

It is to provide customers a choice, and again I think our market share expectations are reasonable, but yet if you take 5 percent of a $1 billion business, that is pretty significant from where we stand right now.

I was actually more referencing and asking would you be able to supply what DRI did in the past 12 months in terms of revenues?

Mostly, they just got started in terms of marketing their product.

So it's less than $1 million right now.

But literally they were just launching as we did this acquisition.

So I don't think that is really what we're looking at in terms of why to buy the company.

It should be noted we have been developing nucleic acid purification technologies on our own.

We have been looking around the world at other technologies to continue to fill in our gaps, and we think ChargeSwitch -- we will explain it more to our investors perhaps in December -- is an unbelievable technology.

It is incredibly simple, and we think it's really the game changer in the overall nucleic acid purification business.

Last question, I promise.

Do you anticipate now moving more into the molecular diagnostics market?

You put up on your slide that that market is growing about 20 percent.

You have talked in the past that that is an appealing market.

Is this the beginning of more a movement towards that marketplace?

I think this is the first of others that you will see.

But clearly our first-term goal is to create a great tools business, continue to deepen our technology in the tools business, and then I think you'll hear more about how we continue to move in to these other faster growing segments.

Thank you very much for providing so much color.

Winton Gibbons.

William Blair.

Thank you for taking my question.

The first question relates to pricing but more on price management.

Can you comment on how it is going rationalizing pricing versus volume and contracting and the efforts you're making there?

Yes.

As we reported before, I think Invitrogen's pricing was perhaps a little out of whack with the market place, and what we have been able I think very quiet -- you know with dexterity do is be able to be more competitive in certain products and yet manage our overall mix so that you can see our gross margins are hanging in where we have historically had them.

So it is all about really smart pricing to be more competitive, yet managing our mix so that we can maintain the margins I think investors want.

Now the way we have done that is we have built some very strong information technology tools.

We have hired a number of very strong pricing experts, and we have built a team that manages the daily flow of business in this company and allows us to make these real-time decisions that manage our mix and volume and margins to the extent that you are seeing it now.

Great.

On this aspect as well as on the procurement side, could you come first of all on how your procurement efforts are going and what kind of timeframe and magnitude we should continue to expect on efficiencies there?

And then if you could provide any case studies as they come to mind on either the pricing management and contracting side, as well as the procurement side?

Sure.

Let me talk a little bit about source economies, that is buying stuff cheaper now that we did before.

Perhaps in previous calls I have explained that this was an opportunity for Invitrogen.

We had more site-oriented sourcing, so each plant would have their own sourcing team.

We then globalized it this year so that we had the ability to aggregate our demand.

And we have been able to achieve really terrific economies.

I am not going to tell you exactly how many there are, what they are, but they are substantial.

But more I think in an exciting way, we've only scratched the surface, and as we share with you our game plan for next year, we see lots and lots more opportunities for sourcing, economies, as well as just overall productivity in our operations.

So lots more to come and it is really just a core discipline that we have been building over the last year or so in the company. (multiple speakers).

Go ahead, please.

I was going to say on the R&D front -- this is going to be my kind of last question here -- but on the R&D front, can you comment a little bit for 2005 on either the disciplines where you're going to be focusing on new hires and/or the sites where you think you'll be adding people?

Well, in Eugene, Oregon, our Probes business we are building a new chemistry facility, a $20 million chemistry facility.

So we will be filling that up with scores of new hires.

We think that is the business that has just incredible runway.

So we will be seeing a lot of growth there.

We are also going to be announcing an expansion in Buffalo, New York at our Grand Island facility for R&D, and it has a heavy focus on stem-cell technology that will be emerging out of that.

More on that to come.

And then we will just continue the hiring pace we have had here in San Diego at our campus here around molecular biology technology.

So, look, R&D is ramping up.

We continue to put good profits in place and good people in place, and I think you'll see a lot more coming in 2005.

Karen Mosbrenner (ph).

Shaker Investments.

First, just following up on the R&D, you said you were putting a new R&D facility in India, and I was wondering what that would be focusing on?

Yes, we will be in Bangalore India.

It's going to be run by one of our long-time employees who is of Indian descent, and they are going to be focusing on some of the kit development that is very labor-intensive.

And it makes no sense anymore to do that here in California.

That is very expensive.

So we are going to start doing some of that work in India in conjunction with our teams here in San Diego.

So it's not really about taking away work from California because we've got so much more work to do.

It's really about changing the mix of what is going to be done here versus what is done in India, and that will allow the California team to focus more on future technologies that we have in mind.

So it will be modest to start.

We will be ramping up to about 50 scientists, and we're pretty excited about what we're going to do there.

Great.

And the BioProduction, if I'm doing my math correctly, you are saying that we are looking at about 11 percent organic growth in that business.

That looks to me like Q4 you're only projecting like 3 or 4 percent year-over-year growth?

No, that is not correct.

The year-to-date organic has been around 11 percent for that business, and it is coming in 11 percent for the year (inaudible) look for maybe it is peck higher than 11.

Okay.

Great.

Thanks.

I will go back and look at my numbers.

Tracy Marshbanks.

First Analysis.

One interesting observation.

You have seen some of the same things our various competitors have around the world that you mentioned in the various markets.

In your case, it was interesting to see that you did a little bit better than you expected in spite of those versus their excuse why you came up short, so it's interesting and a positive.

Well, thank you.

As far as a couple of questions, on BioReliance you talked about the strong quarter.

That business is also a lumpy business as you have mentioned.

What is the visibility on continued performance there?

And have you been able to modify things in any way or pick up different types of businesses that maybe smooth it out a bit?

You know that is a business that is a backlog business, and it's not long backlog in terms of visibility quarters ahead.

But we have very good visibility in the fourth quarter and a little less than in the first.

So that gives you a flavor of it.

And right now I would say the fourth quarter is very very strong.

So we usually have one quarter of visibility, maybe two at the most of what is going to be filling up the laboratories at BioReliance.

Now in terms of what they have been doing, as you know we installed a new CEO of that business, a gentlemen named Ted Maker who had a long career with Life Technologies.

Just take terrific leader.

He has brought in some great folks from Invitrogen to help him, and I think you are seeing this combination starting to develop of deep science that we have and great service that they had, and I think it presents a very compelling alternative in the marketplace right now.

And we have not clouded them with doing further deals or anything like that.

They have been very focused on execution, and I think it has allowed them to gain real momentum in this marketplace.

Okay, quick question on the SDS market.

I think a little bit of a question maybe where prices are coming down questions came from.

I think we just sort of got through the collection season.

Were there any temporary blips in the market as maybe people were trying to move some inventory as they were coming into collection?

Was there anything like that that sort of rocked the market a little bit and maybe raised the questions?

You know I am just thinking here to try to answer your question.

These prices are generally up from where they were over the last two years.

That is the cost that we pay.

There has been -- this is a business that has only a couple of competitors in it.

We have seen some behavior by one of them that I don't think is long-term sustainable in terms of what they pay.

So we managed through all of that.

But overall I'm just going to characterize it as no big shift, no big change, and I would like to just have a handholding session with everybody on that.

This is the most stable business that we probably have.

So not any big changes going on in SDS.

Edward Tenthoff.

Piper Jaffray.

Congratulations on the quarter.

Just a quick question with respect to some of the efforts that you have been making in the BioDefense area.

Could you give us an update there on what the cycle looks like, as well as what the outlook is?

Sure.

We won a couple of million dollar award to take our protein chip technology and apply it into BioDefense.

We won a couple of million dollar award to take our Genicon nanotechnology into BioDefense.

As I have said publicly in the past, we're pursuing a couple of big opportunities that like most things in government are always just one week ahead of you or so.

So we are anxious, but have not heard word on any of those bigger opportunities at this point.

But we continue to invest.

We think it's an important area for us.

We're doing a lot of work to help these regional centers of research get up to speed in their labs.

They need Invitrogen technology to do their work, and we think it's a good source of growth for us going forward.

Great.

Thank you.

Paul Knight.

Thomas Weisel.

Could you give me the share buyback expenditures total year-to-date?

Yes, we spent $81 million.

Year-to-date?

Year-to-date.

That is correct.

It was all in the third quarter.

And then foreign exchange total was 4 percent for the year.

Is that about the same in each division?

Yes, it is essentially the same. 4 percent for the quarter.

And what was pricing growth?

Did you say earlier?

We did not break that out.

That was our last question.

I will hand the call back over to management for closing statements.

Well, we just want to thank you all for joining us.

We're excited about the third quarter that we had.

We are currently excited about the fourth quarter and 2005 as well.

So we look forward to chatting with you again soon.

Thank you.