賽默飛世爾科技 (TMO) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Invitrogen Corporation second quarter 2005 earnings conference call. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to Mr. Adam Taich, Vice President of Investor Relations.

Sir, you may proceed.

Good afternoon and welcome to our second quarter conference call.

This is Adam Taich.

Joining me on the call today are Greg Lucier, our Chairman and CEO, and David Hoffmeister, our Chief Financial Officer.

Before we begin our presentation I want to caution our listeners that our discussions today include forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.

It is our intent that these statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995.

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

Also, on today's call, as we have in the past, we will be discussing concepts such as organic growth and 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 cost of our acquisition.

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

I want to focus to our definition at organic growth, our consistent definition, neutralizes revenue for any effect from currencies, positive or negative.

And we also exclude revenues from acquisitions until they have been part of Invitrogen for 12 months.

In today's discussions we will also 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 costs net of income tax effect.

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

Now let me turn the call over to Greg Lucier.

I'm pleased to report a very strong quarter, a record quarter for Invitrogen here in the second quarter of 2005.

And I would like to thank the 4000 plus dedicated employees of Invitrogen around the world for I think doing a very solid job here over the last 90 days.

As you can see on the slide our revenues exceeded $300 million for the first time, $306 million specifically, up 21% versus last quarter -- versus the second quarter of 2004 -- and well exceeding the guidance we previously provided.

In addition, our pro forma EPS at $0.87 is up 19%, which again exceeded the guidance of $0.84 to $0.85 we provided to our investors before.

And importantly, as we've continued to communicate our operating margin of 25% was in the zone between the 24 and 27% we had guided our investors to in the past.

And we're very pleased to say that we have stayed within that guidance while continuing to very strongly invest in new salespeople, more marketing, and substantially increasing the R&D investment in this Company.

So all in all I think we're able to balance the cost with our investment to deliver nice topline growth.

Now a few particulars for the quarter.

We had strong organic growth per the definition that Adam Taich just shared with you, of what we think a very conservative definition of 7% for the total Company.

And I will talk about that more in the upcoming slides.

We raised some additional money to fund additional acquisitions and investments in the Company around facilities and information technology.

And we acquired Caltag and announced the intent to acquire BioSource in the quarter.

And again we continue to deliver very strong cash flow.

As we look at the first half of the year, revenues are up 15%, pro forma EPS up 30%, and EBITDA at $173 million -- very strong.

Now if we can go into more details on the second quarter, per the two units that we report publicly.

As you can see, we continue to have strong quarterly sequential revenue growth.

And when we look at each of the units, BioDiscovery up 30% versus last -- second quarter 2004, we had solid organic growth at over 6%.

Our genomics business is coming back very nicely.

And we have a product pipeline that is really allowing us to have fresh conversations with our customers around the world.

And BioProduction was up 7% for the quarter.

And this is where our GIBCO business continues to execute 10% plus organic growth in the quarter.

And BioReliance in this quarter had a softer one, primarily due to some timing of the orders and execution of some of those orders.

And as you know, in the early days when I got here in Invitrogen, we had changed out virtually the entire management team of BioReliance.

That team continues to retool itself.

We made some major changes to the salesforce.

And I think we're just going through a period of time where that business retooled itself for the future.

We are still extremely positive about that overall space.

And that is why we're making the changes to allow us to compete in a different way going forward.

So overall GIBCO is still extremely strong.

Overall the business growing organically at 7%.

Now when we talk about organic growth, which is really the primary conversation we have inside this Company each and every day, let me put this in historical context over of where the Company is.

As you look backwards 2004 and 2003, and we exclude what we thought was a onetime phenomenon of very strong pricing allowed in our FBS business, and just look at the organic growth of everything else we had in our portfolio, you can see the Company in and of itself was growing at around 3 and 4% respectively in 2003 and 2004.

As we have guided our investors to in the past, we said this year we want to accelerate that growth rate to 6 to 8%, excluding the effect of SBS pricing.

And now in the second quarter as we deliver the 7% organic growth, with as admittedly a BioReliance having a softer quarter, we feel very confident we are going to be able to deliver to investors a 6 to 8% organic growth for the year.

And on our way to next year growing 8 to 10% organically.

Now we have some good things coming in our way that allow us to do this.

First, we have a very expanded product offering, the nucleic acid purification business for us is really doing well.

And for example, just this last month here in July, we went live with our alumina oligo (ph) partnership, which is allowing us to really bring back nice, fresh growth in our primers business.

So the overall market decline may continue to be competitive, but nothing new that we haven't done with in the previous quarters.

So 10% growth, 8 to 10% growth in 2006 remains on track.

Now just to give you kind of a go around the world of how our business is doing.

In the U.S. we continue to have a team that executes quite nicely.

Strong organic growth rates in our BioProduction and in our BioDiscovery business.

The bio manufacturing business with GIBCO is very strong with a great pipeline in the future.

And we still feel really good about where bio tech is and the NIH.

In Europe we had a tougher comp with our bio manufacturing business versus the second quarter of last year.

However, we were positively impacted by just the timing of Easter, which is the nature of the run rate company like our.

That helped us by about $2 million.

But over wall that business has grown nicely in the higher single digits organically.

And in Asia-Pacific we continue to execute nicely.

In Japan where they had some softness over the past few quarters, we have seen that market now return.

And we have seen the performance of our business do quite nicely in the second quarter.

And we feel very confident about the third and the fourth quarter in Japan specifically.

And then in the bottom of this chart, number 7, you can see where we continue to launch new product to allow those fresh conversations with our clients around the world.

And as you know, one of the core tenet of our strategy has been to have these combination products, where one plus one equals three, with a combination of Molecular Probes, with the Invitrogen business leads us to new technologies that make a difference for our clients.

Let me just give you one example of where this Company has been over the last 90 days in terms of trying to continue to provide ever more value to our clientele.

This is something we call iPath, which is trying to bring more sense and semblance to the thousands of products that we provide to our clients.

And so the question our clients often say to us is how do we best navigate to buy the things that we need from Invitrogen?

And so one of the way that we are doing that now is to create a very powerful website, something that we have shared with you in the past, but now tuning it so that it is more around e-science.

And this is an example where we now have created 225 expert validated biological pathways that can then lead you to the various Invitrogen products that work, or in conjunction with experimentation, along the pathways.

We have already seen a nice pick up.

And it is a nice way to bring a new way to navigate for our clients on our website.

So we're very positive about that.

With that I would like to turn it over to Dave Hoffmeister.

And he will share with you some more particulars about our performance in the quarter.

Pro forma gross margins for the quarter, I'm happy to report were up significantly, nearly 1.5 points Q2 2005 versus the second quarter of 2004.

That was driven by a nearly 1 point improvement in BioDiscovery margins to 71% versus the prior year.

And the result -- those improvements were the result of both productivity gains and higher sales of proprietary products.

In BioProduction the margins held steady at 48%.

And we continue to drive productivity improvements in BioProduction and throughout Invitrogen.

We expect that we will maintain margins in that range.

Just to quickly summarize the overall income statement the impact, as Greg said, revenues increased 21% in the quarter versus prior year.

Our pro forma operating income was actually up 17% versus the prior year.

Margins declined slightly due to investments to increase organic growth.

And in particular, we continue to invest in R&D expenses and sales and marketing.

If we take a look Adam Taich: earnings per share, as Greg mentioned as well, pro forma earnings per share for the quarter of $0.87 were 19% above second quarter of the prior year.

Our GAAP earnings per share for the quarter are actually down 25%.

But that is because we have a $13 million charge in in-purchased process R&D as a result of the Dynal acquisition.

That is a onetime charge.

If you look at year-to-date earnings per share for the first half we had an EPS of $1.76.

That is up 30% over the 2004.

And our GAAP earnings per share were actually up 96%.

If We talk about the cash flow and the balance sheet for a minute.

We continue to generate strong free cash flow.

For the first half we generated 103 million versus 80 million this time last year.

And that of course includes, or is after capital expenditures of 33 million thus far this year versus 11 million last year.

As we have said in our previous calls, we are investing heavily in IT projects and facilities, and these account for greater than 60% of our total capital expenditures.

Year-to-date our cash flow is up 29%.

If we take a look at the balance sheet.

We mentioned earlier in the call we issued some new convertible bonds for 350 million.

That brought our cash and investment balance to 900 million.

We continue to address working capital opportunities.

So overall we have a very strong balance sheet, a large amount of cash, which we intend to continue to use for investments and acquisitions.

The 350 million of convertible notes that we issued earlier in the quarter, you know are going to be used, as I said, for acquisitions and repayment of debt.

We have had questions about what is the dilutive effect of these notes.

So I just wanted to take a minute and put it into perspective.

At our current share price they basically have essentially no dilutive impact.

As an example, the amount of dilution increases as the share price rises.

At 130 these 350 million of notes would have a dilutive impact of only about $0.05 cents per share.

And I'll turn it back to Greg.

One of the questions we get asked a lot is how are some of the acquisitions doing that you have made in the past.

And one of the ones that I like to continue to highlight is Molecular Probes, just give you a better perspective and viewpoint into this particular one.

This is a business that revenues continue to increase over 15% per quarter.

So this is a business that will almost have doubled in the under 24 months that we have owned this business.

And it is really driven by a couple of different things.

One, we have stepped up the R&D investment considerably in the Probes franchise, and yet we have enabled that franchise to leverage the Invitrogen commercial channel around the world.

There's particularly strong growth happening in Japan right now, as Probes was virtually unrepresented in Japan, probably the second-largest life science market in the world, and now with Invitrogen we have been able to allow them to penetrate that.

Just by the picture in the lower left you can see the investments in facilities we're making.

This facility when it is all said and done will be somewhere between 20 and $25 million.

And it is for chemistry and nano sciences to pursue some particular ideas we have in order to move this business ever closer to the patient.

And as we have said in the past, this is a business that not only generates great revenues on its own, is also is a net exporter of technology across the Invitrogen portfolio.

And as you can see on the right side of this chart, whether it is in proto-ray with Probes' labels on our electric primers, the CyberSafe gels, the nucleic acid purification, or now taking a business that historically been in vitro and taking it in vivo, we think that opens up billions of dollars of opportunity.

It is a great team up there.

They really execute, and they're doing a nice job.

What I would like to do now is just wrap it up, and just give you an update on our view for the balance of the year.

And as you can see, after each quarter or each acquisition of major significance, for example with Dynal, we were able to revise our guidance upwards.

And that is what we're able to do here now.

Let me just explain where we think revenues will turn out, and where we think the EPS will be by the balance of the year.

We have narrowed the range to the upper part.

Think revenues will be somewhere between 1190 to north of 1195.

And we say that with very good confidence and guide our investors as such.

Now in terms of the EPS, why we keep it where it is, quite frankly when we look to the second half of the year, I think there are just two things that cause us some consideration before we would raise our guidance.

One is a slight effect of currency, although we think we can work through it.

And then the second, as we close some of these acquisitions, like BioSource, is there could be some integration costs that we have to absorb.

So we were taking a conservative approach, just to keep the EPS where it is for now.

And of course as we move through the third and fourth quarter, you'll get the benefit of what we do.

So we're still targeting 6 to 8% organic growth for the year.

And in the second quarter when we got the 7% we feel very confident we will deliver on that.

And we think we going to have a record year once again.

And with that, Adam, I will turn it back to you.

Operator, at this time we would like to open up the line for questions.

(OPERATOR INSTRUCTIONS).

Aaron Geist with Robert Baird.

Congratulations on a very nice quarter.

I'm sorry, I am in a suboptimal place, so sorry for the background noise.

Can you talk a little bit more about the margins on the BioProduction business?

They were flat year-on-year.

We are looking for a more favorable product mix as FBS is replaced with higher margin products.

Can you give us a mix -- an idea of what the mix was in the quarter, and what your expectation is going forward?

Just to give you more transparency.

The GIBCO business had a nice slight rise in gross margins and operating margins as their mix of business continues to shift towards chemically defined medias, so that stays very much on track.

And on the BioProduction side I think it was just pulled down by a softer quarter in BioReliance, in terms of the margins not expanding there.

Now having said that, that team last year executed incredible improvements in operating margins on BioReliance.

So I think there will be quarters where perhaps it is flat, but overall they're trending in the right direction at BioReliance in what they're trying to do to improve productivity.

A quick follow-up question, if I could.

You accelerated your spending on SG&A and R&D in the quarter to generate stronger organic growth, which continues to move stepwise up through the year.

Your goal as you said for next year is 8 to 10%.

Can you give us an idea of how much incremental investment you're going to need in SG&A and R&D to obtain that 8 to 10% of run rate for next year?

Yes, when you look at where we are with our R&D investment, I think we will exit the year somewhere around 9% as a percentage of sales, which is up as you know substantially from just 24 months ago.

We tend to think that is going to be in the zone where we need for just a period time.

So we're making those investments now is my point.

I don't think there needs to be a lot of incremental investment in R&D.

In terms of sales and marketing, that is where we continue to invest more.

And again though we are guided by staying within that 24 to 27% operating margin.

And so we don't want to make any investments that would take us out of that range at this point in time.

Thank you very much.

Congratulations again.

Derik de Bruin with UBS.

A question on -- just going up on a couple of things Aaron mentioned.

So when you talk about doing the 24 to 27% in the operating margin, that is assuming that on a quarter by quarter basis and you shift around a bit, I mean -- I guess like how much do you know going into the quarter where you're going to be spending?

And (indiscernible) in terms of -- are we all of a sudden one day everyone is modeling 26%, you come in 24%.

And then you're going to have an EPS miss there.

I was just wondering how much of -- you know whenever you give guidance on a quarterly basis and you start looking forward, how much that is planned whenever you start talking to us?

I would say folks like you that are in the business spend more time worrying about the 24 to 27 than we do inside the Company.

We just really look at those as guard rails inside the Company.

And as long as we are within that zone that is what guides our investments.

So 25% for us is fine.

It is in the zone.

I know in the first quarter we were higher.

But I don't think we had one conversation on it, just as long as it was within the zone to investors.

But, Dave, do you want to add anything on that?

No, I think that, as Greg had said, we feel very confident that the business is going to perform within those range -- within that operating margin range.

We're not going to make any investments that take us below that range.

That said, what we do is take a look at what our opportunities for attractive returns are in either R&D or additional salespeople (indiscernible).

And thus far we feel confident that those investments are paying off.

And we are going to, I think, continue to make them.

But again, we're going to stay within those operating margins that we've got targeted.

Just let me add another consideration, which is I think the conversations we do have around here are wanting to make sure the operating margins don't get too high actually.

And so that we're not making the investments in the future we need to make.

That is probably more of a worry point of our discussion we have inside the business.

So I think we had flexibility in the quarter to continue to make strong investments, hire a lot of people, and that is what we decided to do.

Fair enough.

A question then do on following up on the BioReliance issue.

Could you just give us some color in terms of where you thought some of the issues were?

Weaker bioanalytical testing is something -- just talk about how you are seeing it.

I would say this is a business for us that as you know is different from that other acquisitions we have made.

And so we put a new team on the ground there March, -- not even like June of last year -- about a year now.

We just hired a new sales leader About 90 days ago.

And that individual is retooling the way that we sell.

And so I think we're going through the natural gestation period of when you change how a salesforce sells.

The overall market therein is fine.

In fact we think it is probably going to be the strongest grower we have in the future, as we see more and more outsourcing.

I think the issues are particular to us, as we implement the way we want to manage that business, some of the strategies we have to manage that business, that we're just going to -- and we are moving through a period of time, like we did in Invitrogen in 2003, where that operates in a new way, in a new strategy over the course of the next couple of quarters.

I guess just looking at this -- this is a new market (indiscernible) how much attention does it have, the focus relative to the consumables business?

It has gotten a lot more lately.

But I would say to you it gets a lot of attention now, because we do see -- and we have seen.

And what brought us to the acquisition is a lot of synergies with our GIBCO business, and a lot of synergies with our drug discovery and development business.

We think we landed in the right spot.

We think we got a good asset with good people.

And we're managing it now and bringing it much closer into the portfolio.

I would also just look at the silver lining here to our investors, which is we reported 7% organic growth for the quarter, which I think is right in the middle of our zone.

And quite frankly, had BioReliance executed the way we all would have wanted them to do in the last 90 days, that growth rate would have been even higher organically.

We think we are on the right track.

We think we created a bigger P&L that can absorb the occasional issue like this.

And it allows us then to really make investments and continue to grow the top line in a very strong way.

So for us we simply say, they are executing on the right strategy, and we're working through it right now.

Just one final question.

When you look at -- you had mentioned the Molecular Probes and one of the products you highlighted was the LUX primer series.

Real-time PCR at -- whenever you started talking about it awhile back, Invitrogen had a relatively small share of that market.

My guess -- I seem to remember you said it was around 1%, if that.

Could you tell us how you see -- have you been gaining share in the real-time PCR market -- or now that you have been focusing more energy on it?

It is a business for us that continues to grow phenomenally fast, but albeit still off a very small base.

We think that as instruments get more and more placed that there is just going to be ever more reagents.

And we think we have got the winning reagents actually out in the business.

So for us I think the business is up in excess of 40% year-to-date, and so it is incredibly strong.

But I think everyone is doing very well right now in that area.

If is 40% is the market, then obviously we're growing at the market.

If the market is not 40%, then we're gaining share.

And I think we're generally gaining share.

Adam Chazan with Pacific Growth.

Nice to see the uptick in the organic.

A couple of quick questions.

Can you remind us what the hedging looks like as you go into into the second half and start talking about FX?

David?

Well, again, what we do in terms of hedging is we hedge our -- 80% of our intercompany transactions, and then of course all of our foreign receivables.

So the net effect is that we're about 60% hedged overall.

Great.

Two questions.

One related to the antibody business.

You announced the closure -- sorry, the acquisition of BioSource.

You already have two pieces in place.

Was there anything you learned from getting those transactions under your belt that might be applied to this newest asset?

And then one other quick question related to other businesses.

As we look at what transpired in the quarter for BioReliance, can you talk about the mix of services, perhaps, was there an area that was more or less impacted by the factors you are seeing in the quarter.

Let me start with BioReliance.

Just as an example on that, last year at the fourth quarter BioReliance, the toxicology business was absolutely booked solid, booming.

And just again as we integrate this company, the team had to stop selling literally and turn away orders.

Well, they turned them away for too long.

So we had some timing orders -- timing of orders now hitting us in the second quarter.

These are the types of things that we have grown accustomed to as we acquire companies where it is a little bit of you trip up on your shoelaces.

It is nothing serious.

It is just issues you work through as you absorb the company and you make it part of Invitrogen.

That is one of the issues that impacted us in the second quarter was a lower execution rate in toxicology.

But it is because we had to stop selling in a prior period, if you will.

We won't make the mistake twice.

Now back on the antibody question.

At the beginning of the year, as I said in our BioSource conference call, we set out with a very deliberate strategy to build what we hoped to be very best proteomics franchise in the world.

And all you see happening right now is an unfolding of the chess pieces.

We are not done.

We have other things to do.

And yet we feel great that we've created a business in a very short amount of time that is well north of $100 million in proteomics.

And we think it is going to be just a great franchise going forward.

Tycho Peterson with JPMorgan.

I was wondering if you could talk a little bit about China?

It has been a while since we got an update on Bio Asia.

I was wondering if you can give us some color there and -- on the outlook for that market?

China just continues to invest very strongly in biotechnology.

They are buying lots of the things that perhaps over here in the United States we would consider plain vanilla, primers, sequencing, etc.

And we think it plays very strongly to our portfolio of a lot of the things that we have as bread and butter.

We built a new -- we have a new facility in Shanghai as a result of our Bio Asia acquisition.

It is a world-class facility.

And we continue to build out our salesforce there.

So nice growth, good business for us.

And we hope in time it is going to be really a much larger contributor to the overall P&L.

And then secondly, one of your competitors this morning talked quite a been about stem cells.

Are you starting to see spending trickle-down from Prop 71 or any other of these other state-based initiatives?

I don't think we see a lot of that yet.

We haven't topped a lot about our stem cell initiatives, just because we want to keep it before it is ready.

And then when it is ready for prime time, you'll hear lot about it actually.

Suffice it to say we have been working quite a lot on it.

If you look at surveys from scientists on who do they consider to be the number one stem cell company from, for example, the Scientist Magazine, Invitrogen is number one, mainly due to a lot of our transaction reagents and the like.

But we have a whole effort around this that as it really delivers I think revenues to the Company, we will talk more about it.

But it is too early to say Prop 71 is giving any meaningful revenue at this point.

Ted Tenthoff with Piper Jaffray.

Congratulations on a good quarter.

A couple of quick questions, if I may.

You mentioned that the Invitrogen venture is off and running.

How are you guys working together there in these early days?

And what are your goals for that venture this year?

And then I have two financials for Dave when he has a second.

Sure.

I think you're asking about alumina.

You had said Invitrogen, but I think you meant alumina.

Sorry about that, yes.

No worries.

I was down with the alumina team just two weeks ago, and totally impressed with what together we have put together here for our clients.

You can go on the Invitrogen website now.

You can order what you need very seamlessly.

The alumina team makes it.

It then gets delivered through the Invitrogen distribution center systems around the world.

And you get invoiced properly, with all the other things you buy from Invitrogen.

And I think it is just very exciting.

And as I said when we announced this collaboration, we think it really changes the whole way that primers and all of those are ordered and done in the future.

So just getting off the ground.

Starting to see some really nice orders, nice pickup.

And I think it is just going to be the way people buy (indiscernible) in the future.

Awesome.

Good to see you back in that business.

And then a -- quick for Dave.

It seemed to me BioDiscovery margins were down a little bit sequentially.

Was 1Q artificially high?

And also the diluted share account was off so much.

Is that due to some of the debt repurchasing?

In terms of the margins, I think the margins are in the range -- we will take a look at it, but I don't believe that there is any significant drop in the margins -- (indiscernible) margins from quarter to quarter.

In terms of the share count, we've got -- our share account is 50.4 million going forward.

And there should be no significant change drop in our shares.

And that was fully diluted shares.

Just to follow-up, and indeed the drop from Q1 to Q2 is primarily as a result of full quarter impact of the debt repurchase.

That's what I figured.

Great.

Thanks guys.

John Sullivan with Leerink Swann.

I had a question about the nucleic acid purification products and ChargeSwitch.

I am just wondering about the traction, you said the products are getting good traction.

Can you specifically talk about the research lab versus maybe some conversations you are having in employing the product in molecular diagnostics?

I'm not sure we want to fully talk about in that level of detail.

I think generally we have been focusing on general research at this point.

However as we build out that team, clearly molecular diagnostics is the next target for us.

But we have been trying to stay focused on where Invitrogen is historically strong, which is in the research labs.

Okay, terrific.

And then separately, can you talk about for the cell culture media products, can you talk about the differences in demand you might be seeing in the research lab versus in the BioProduction setting?

Yes, you know the GIBCO research business had a great quarter, a huge quarter, which is amazing.

This is a very old business.

But I think the GIBCO name.

I think the quality, the new products are growing very nicely.

And we couldn't be more pleased with how that team is performing.

So business is up.

Margins are good.

And cell culture research is great.

Paul Knight with Thomas Weisel Partners.

It is Peter Sephton for Paul Knight.

What was the guidance for BioProduction new organic growth for the year?

The guidance we gave for BioProduction was 11% for the year.

And look we are still targeting to make that happen.

At this point we are still sticking with that 11%.

You said there was a hiccup in BioReliance.

What would the organic growth have been for BioProduction without that?

For BioProduction it would have been -- at 10% -- GIBCO was 10%, and if you add in BioReliance you probably would have been around 10%, so several points more for BioProduction.

And then the overall Company would have been 8 or 9% organic growth.

But that is water under the bridge.

We don't really look that way.

What do you see has to be lifted to gain that organic growth for BioProduction?

Look, I think BioReliance will have a better second half.

I think that GIBCO will continue to execute.

And we're targeting for a big fourth quarter for example in GIBCO.

And I don't think there's any magic here.

It is just basic execution of what is happening.

Tracy Marshbanks with First Analysis.

Good afternoon.

A quick question a little bit more on the strategic direction in the quarter, since it has been pretty well plowed over by now.

But based on some of your actions and words, it looks like you had made an internal decision to be, if you will, a better supplier to the diagnostics industry versus being a diagnostics company.

Is that true, a correct read?

What are the implications on the organization as far as building out an organization to better serve that industry, which is a little bit different then your research -- your traditional research market?

I'm not going to really comment on broad strategic aspects of where we are going.

I would say that one part of your statement is certainly true, which is that our goal is to be a great supplier to molecular diagnostics companies.

And so for example, as you do that, you need to have GMP facilities to produce these reagents for diagnostics.

And that is underway.

We are going to be an OEM supplier in that instance, so we're building out an OEM commercial team that will sell in a particular way.

We're doing a lot of these basic blocking and tackling things to be a tools company for molecular diagnostics companies.

I think one of the challenges will be some of the diagnostics companies don't know how well to deal with, if you will, advanced tools.

So it would say that there may be a burden on you as far as a trainer and a teacher and an integrator.

With that be appropriate?

I think that is certainly true.

That is what you do a lot of times as you enter in new spaces that perhaps aren't intuitively obvious to perhaps the clientele.

However, having said that, we do see this very large growth in molecular diagnostics.

Diagnostics become evermore specific.

Obviously, they match up more and more as a preface to the right therapeutic.

And I just think that it is natural that you'll see lots of need for tools as that business continues to grow.

And you will see lots of new companies come on the horizon.

It is just a natural evolution for an Invitrogen franchise.

Karen Mirage Bremner (ph) with Shaker Investments.

Nice quarter.

I was wondering if you could talk a little bit more about your recent acquisitions and how Zymed and Dynal did in the quarter?

Dynal had a great quarter.

Zymed had a record quarter.

Both these businesses are doing very nicely, and so that would be my basic statement.

They executed as planned.

I think the other thing was that both of them have fit into the rest of the organization very well and very quickly.

I think that we have said in some of our previous calls that we very quickly had the Zymed product line up on our electronic website, and issued a special catalog.

We're going through some of the same steps with the Dynal product line.

Diana Zoo (ph) with Credit Suisse First Boston.

And congratulations on a great quarter.

The first question is just a follow-up question regarding BioProduction.

And you mentioned that this quarter there are some timing order -- and then the business is expected to ramp up for the second half of the year.

Shall we expect gross margin to reach 50% -- you know, a similar level as last year -- towards year end?

Maybe we could best answer that question in terms of gross margins for the Company.

I think that provides you some better guidance of what we think the overall business will do.

Dave, maybe you can comment on gross margins for overall Invitrogen.

Yes, I think gross margins for Invitrogen overall are going to be in that 50% range.

So what we have seen is, as you pointed out, our gross margins in BioProduction are, at least in this quarter, running a little bit below where they were last year.

But fortunately our margins in BioDiscovery are up.

So I think, as we have said, on balance our gross margins were up about 1.5 points.

We would hope we can keep them at that level.

But I think what we are predicting going forward is they are going to be in that 60, 61% level.

And then a second question.

Can you update me on your academic exposure for both of your BioDiscovery and BioProduction businesses?

Last time I checked, I recall 50% of your BioDiscovery business goes towards academic customers, and then BioProduction is about 60%.

Are these numbers still accurate?

What we say is the academic business, the government business, represents about 60% of the overall revenues.

And we're doing well there.

50 or 60?

60.

60.

Okay.

Last question is about organic growth for BioDiscovery.

I understand it is about 6%.

It is very nice.

Can you talk about -- was it mainly driven by your legacy business?

As we had previously discussed with investors, the legacy business of Invitrogen had a pretty tough go last year.

And we have started to see that business rise now.

And they had some lower single digits organic growth, which is very encouraging.

And we see the balance of the year it is actually getting stronger.

So we have repositioned the product line.

We know how to market it now.

I think that team on board is very solid, and we're executing.

We are encouraged that we can continue the performance.

There are no further questions at this time.

I will turn the conference to Mr. Taich for closing remarks.

Great.

We would just like to thank you all for your continued interest in Invitrogen.

And we look forward to seeing you soon.

Thanks.

Ladies and gentlemen, thank you so much for your participation in today's conference.

This does conclude the presentation.

You may now disconnect.

Have a nice day.