賽默飛世爾科技 (TMO) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2005 Invitrogen Corporation earnings conference call.

My name is Angela, and I will be your coordinator for today.

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

We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded for replay purposes.

And now, I would like to turn the presentation over to your host for today's call, Mr. Adam Taich.

Please proceed, sir.

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

This is 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;

Claude Benchimol, Invitrogen's Senior Vice President of R&D, and Ben Bulkley, our Senior Vice President for Global Commercial Operations.

Before we begin our 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 our press release and in our SEC filings, including our most recent 10-K and our 10-Qs.

On today's call, as we have in the past, we're going to discuss organic growth and pro forma financial performance.

And those are 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 acquisitions.

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

I also want to make a quick comment on organic growth and how we define organic growth, as I have received numerous calls over the last several days from investors and analysts interested in our definition.

Our definition of organic growth as we present it here today and as we presented it in the past neutralizes any effects from currency, either positive or negative, and more importantly, because we are an acquisitive company, revenues from the acquisitions that we do are not included in this organic growth calculation until 12 months postclosing.

So none of the revenue associated with Dynal, Zymed, Caltag, Bio Asia, BioSource -- businesses that are growing at double digits -- none of those revenues are included in our organic growth calculation until those businesses have been part of the Invitrogen organization for one year.

And with that, let me turn the call over to Greg Lucier.

Adam, thanks.

On page 4, you can see that the third quarter of 2005, our revenues were 290 million, up 13% versus the same quarter of last year, and pro forma EPS of $0.80, an increase of 5%.

Just some highlights for the third quarter of 2005 -- year-to-date revenue growth of 15% for the total company.

And we closed on some important acquisitions of BioSource, which moves us into signal transduction of proteomics in a bigger way -- and then through the acquisitions of QDots and BioPixels, some new labeling and detection technologies.

And we continue to generate very strong free cash flow, 167 million year to date.

The third quarter of 2005 is really a revenue story.

And what I would like to do is share with you some of our thoughts around the overall markets and how we are doing, and then our two segments that we publicly report.

In our view, Q3 was an anomaly.

And I'll take you through how we got from where we started in the quarter to where we ended.

And we think that it's really just basically a onetime event.

It's important to note that Q4 is off to a great start, and we think we'll actually have record revenues in the fourth quarter and then for the total year.

As we have done in the past, we continue to play with the variables in our business.

And one of the things that perhaps could have impacted our volume was our decision to lower marketing expenses to truly understand its ability to drive volumes.

We think that may have been one of the consequences that led to where we are here in the third quarter of 2005.

And then finally, our currency, which had been working for us, is now working against us, in that our results in the quarter would have been 294 million if we had had the same currency rate as we had in the second quarter.

So now currency is working against us.

Having said all of that, let me now comment about our two publicly disclosed segments.

BioDiscovery continues to grow nicely -- an organic growth rate of 4%.

That's in the zone of where we want to be.

And we continue to have very strong revenue performance at our molecular probe and drug discovery business and positive moves in our genomics and proteomics businesses.

Clearly, where we have disappointing revenue performance is in our BioProduction segment.

There are some onetime events that account for that.

The organic growth in that segment was a negative 2% for the quarter.

However, we were expecting a very large order of media for a biotech customer that, unfortunately, was also impacted by an FDA ruling which took that biologic off the market.

We do expect that biologic to come back on the market sometime in the future, so this is not gone forever.

And there were other orders at Gibco -- media orders -- that had unfortunate timing in the third quarter that we believe will happen in the fourth quarter to deliver for the whole year.

And then as we disclosed in the second quarter, we continue to have softness in our BioReliance business.

And we think that will continue for the next couple of quarters while we turn around the performance of that important acquisition.

Now, if you turn to page 6, let me take you through how we ended up at the $290 million.

As you know, we provided guidance of $606 million for the second half of the year.

Internally, we were targeting about $300 million for the third quarter.

And as you can see, we had a couple of different areas that took our revenue down from 300 to 290 million.

As I just talked to you about, our BioProduction business had a tough quarter.

We think that turns around somewhat in the fourth quarter, so this is a third-quarter event.

Important to note in Europe, the August vacation definitely impacted our research run rate, and that was worth about $2 million.

And then we had some other exceptional items -- the stronger U.S. dollar I just spoke about, the impact of the hurricane on some of our larger customers in the Southeast.

And then our Illumina partnership has not reached its full potential yet, but will now start really getting going in the fourth quarter as their new high-volume output machine is coming on-line.

So those are the events that we think impacted us in the third quarter.

We know what happened.

I think what's more important, though, is to talk about what we see happening in the fourth quarter.

So now, let me take you from 290 million up to what we are targeting, which is 317 million in the fourth quarter of 2005.

First, our Asia-Pacific business is having a good fourth quarter start.

And it's a seasonal part of -- when they have acceleration, that's worth a couple million dollars.

As I said before, our BioProduction business shows a nice turnaround in the fourth quarter.

Those orders I spoke about in the third quarter that were delayed will get shipped in the fourth quarter.

Our European business is having a very strong performance.

So whatever run rate was impacting them in August is now coming very strongly into the fourth quarter.

And then, as we disclosed before, we closed on the BioSource acquisition earlier than we thought.

And that's also worth $10 million of revenue.

So $317 million provides us a clear path to the 6% organic growth that we are targeting for 2005, and we feel confident we can achieve this forecast.

Now, let me put it into a broader context, looking at it over the course of several years.

As we have talked to you in the past, one of the things that we really focus on here inside Invitrogen is our organic growth rate.

With our current guidance of 11.90, we're targeting a 6% organic growth rate for 2005.

Quite frankly, we hoped it was going to be a lot larger than this, but with our BioReliance softness, with actual some negative growth over the last couple of quarters, getting above 6% has proved difficult.

As we look at 2006 though, we think 8% organic growth is doable, and is part of our plan for next year.

And as we continue to get very sophisticated in our investments in key salespeople and marketing, that will have an impact.

We'll continue to see the benefit of our increased investment in R&D with new product sales.

As Adam disclosed, we'll have higher growth segments coming into our organic growth rate of Dynal, Zymed, and others.

And then we think we will see a BioReliance recovery in the second half of 2006.

So targeting 8% growth in 2006 is what the Company is totally focused on.

With that, I'm going to turn it over to Dave Hoffmeister to talk about our gross margins and other financial performance metrics in the quarter.

David?

Thanks, Greg.

As you can see on this slide, despite a challenging quarter in terms of sales (technical difficulty) actually expanded, increasing from 61.4% in Q3 '04 to 61.6% in Q3 '05.

That was driven primarily by improvement in our mix.

BioDiscovery margins held steady at 70% versus the prior year.

And we continue to get good revenue growth in BioDiscovery without sacrificing price or margin.

BioProduction margins did decline 2 percentage points to 47% versus the prior year.

And that consisted of, actually, margin improvement in Gibco offset by declines in BioReliance.

So we continue to manage price and mix effectively.

If you take a look at the next page -- just a couple of highlights from the income statement.

As we mentioned previously, revenues increased 13% in the quarter versus prior year.

Pro forma operating income was up 5%.

Operating margins were 24%.

That's about a 1% decline from the prior quarter, but well within our guidance -- or in our guided range of 24 to 27% -- in spite of increases in spending in R&D, which is 9% of sales, sales and marketing and G&A remained constant at 11% of sales.

If we take a look at earnings per share -- as Greg mentioned, pro forma earnings per share for the quarter were $0.80 versus $0.76 for last year.

And on a year-to-date basis, our earnings per share are $2.56 cents, a 21% increase over the prior year.

Finally, a few points on our balance sheet and cash flow.

The business continues to generate terrific cash flows.

Cash flows for the quarter were 64 million.

Year to date, free cash flow is $167 million.

That is after a substantial increase in capital expenditures.

Capital expenditures year to date are 51 million, an increase of 30 million over the prior year.

We have had an opportunity and we have taken it to accelerate investments in a couple of key areas -- IT and facility expansions at Gibco for manufacturing and probes for production and R&D.

On the balance sheet side, we have approximately 850 million in cash and investments.

We continue to work on our working capital to bring that into line or bring it down.

We are planning to repatriate cash in the fourth quarter.

We have about $115 million in the UK that we will be repatriating -- take advantage of the tax holiday or the tax law.

That will generate about 10 million in income in the fourth quarter.

And then finally, we did complete a share repurchase early in the quarter.

We repurchased about 0.5 million shares.

The share count -- and we did that to primarily -- or completely to offset the unusually high exercise of options by employees over the course of the year.

Our share count is still approximately 1 million higher than the prior year.

Our fully diluted shares are 60.7 million.

Let me turn it over to Claude Benchimol, our Senior Vice President of R&D, to talk about some of our recent acquisitions.

Thank you, Dave.

I'm excited to present two companies that joined our family with absolutely world-class technology -- this is Quantum Dot and BioPixels.

And they bring semiconductor nanocrystals as a new form of labels which will continue to enhance and strengthen our leadership position that we have with Molecular Probes in labeling and detection.

Let me tell you why this is important for the future of this business.

Nanocrystals have a narrow emission.

What that means is we will be able to have a larger number of nonoverlapping colors, enabling multiparametric detection, multiparametric analysis, which is the future of this field.

The second thing is with a single excitation, we can generate multiple colors that will by itself be able to apply to high-end applications as well as low-end applications, and enable and unleash a new set of low-end applications.

The third advantage is these colors and these labels never fade.

So all of these combined means that we can have simpler detections, lower-cost detections, enabling point of care applications.

And last but not least, these have a very low cell toxicity.

So this has an enormous synergy with the rest of our portfolio, and in particular, the recently acquired antibody businesses.

And in the upcoming months that you will see a whole new set of applications where we are going to unleash the potential of this technology.

These companies are being integrated as I mentioned into the molecular probe business, and the effect will be a $0.04 dilution in the fourth quarter, and neutral in 2006.

And back to Greg.

Claude, thanks.

Let me also just give you an update on some of our other integrations underway.

Our Zymed Laboratories, which, as you know, we acquired for their antibody capability, is essentially integrated.

And we are filing the PMA to the FDA for our TISH (ph) test, and we expect approval in 2006.

Caltag, the back office integration is on track.

Customers will be able to buy all of the Caltag products, flow cytometry products, in Q4 on our website.

And as you know, we are building a single-site antibody Center of Excellence just outside San Francisco.

And our goal is to have the largest array of antibodies in the industry.

Protometrix, an important acquisition we made a bit ago, our protein chip business, is right on track with our goal to have 5,000 human proteins on a chip.

That shipped in October.

Getting many new applications now with that technology, and next year, we will be up above 10,000 human proteins on the chip set.

And then finally, BioSource, as I said, closed a little earlier than we thought it would.

Our goal though is to do probably one of the most intense integrations that we have done yet so that we can get the maximum impact on BioSource next year.

And so consequently, we're expecting some dilution due to all of these integration activities that will take place in the next 100 days.

But we will add some sales -- about $10 million -- in the fourth quarter for 2005.

Now bringing it all together, let me just give you an updated 2005 outlook.

The last time we provided guidance was at the end of our second-quarter results, where we were targeting revenue of 1.190 billion to 1.195 billion, and pro forma earnings per share of $3.50 to $3.53.

Based on what we currently see, due to both currency changes that are now working against us quite strongly, and then also the Quantum Dot integration and the BioSource integration, we are still holding the revenue at 1.190 billion to 1.195 billion.

However, how we get there is a little different.

As you can see below the walk (ph), the currency movement in the second half of the year impacts us negatively about $10 million.

On the plus side, though, we expect to get 10 plus million out of BioSource, which will then compensate that and basically keep the guidance that we had given before.

What we can't overcome, though, are the integration costs of these two acquisitions in the fourth quarter.

And as you can see, there will be some dilutive effect in the final quarter of the year.

Overall though, I would emphasize 2005, in spite of perhaps the landscape of how we get there, will turn out to be a great year -- 16 plus percent growth on the top line, 18 plus percent growth on the bottom line.

Now, if you look the organic growth, which I continue to emphasize is what really is the focus of management, we thought we were on quite a nice upward trend -- 4% in Q1, 7% in Q2, and quite frankly, internally, we were targeting something north of 7% in Q3 until we had some of these issues.

However -- perhaps it was timing, perhaps it was some onetime event -- in Q4, we're now targeting a 9% organic growth rate which will deliver a 6% overall year performance of organic growth, which I think is for us in the zone of where we wanted to be, and sets the tone and the pace for where we want to go higher next year.

Just to wrap it up, and then we'll open it back up to questions, this Company has a great tradition of growth.

From a very small beginning a few years ago, we're close to 1.2 billion in sales.

And I will tell you that next year looks very strong.

And we have a continuing tradition of delivering great shareholder value, with earnings per share somewhere north of 3.42 this year and substantially higher next year.

So this is a management team focused on delivering for shareholders.

And that's what we intend to do in the fourth quarter and for the total year 2005.

With that, Adam, I'll turn it back over to you for questions and answers.

Great.

Operator, at this time, we're ready to open up the line for questions.

(OPERATOR INSTRUCTIONS).

Derik De Bruin, UBS.

So I guess -- how certain are you in your ability to deliver on the fourth quarter?

Are we expecting another surprise in the BioProduction business?

Do you -- is there a chance of other slippage?

What is your level of certainty?

And I guess how are you modeling right now BioProduction going into '06?

We would not put a forecast out there of 317 million unless we had certainty that we could deliver that number.

Now, since it is a prediction of the future, I can't tell you with utter, complete certainty that that will happen.

I will just tell you based on our analysis, our probabilities, all of the work we have done around the world to properly figure out the right numbers for the quarter, that's what we are willing to disclose publicly.

So I think that says a lot about our confidence in that number.

In terms of BioProduction next year and guidance -- perhaps more holistically -- I'd ask that you stay tuned for our guidance conference in December of this year, when we will provide a complete picture of what's going to happen.

I guess I’ll ask another question is -- since it was clear there was going to be a shortfall in the quarter, why didn't you preannounce after the quarter closed, just to avoid a -- probably a bigger reaction than is necessary?

Let me just take a stab at that.

When we give guidance, it's been very clear -- trying to guide people to a longer-term view on the Company.

And so when we gave guidance at the end of the second quarter, we were explicit in that we were guiding for a year number.

And I think we provided the walk here that shows the calculus that we were anticipating about 300 million in sales this quarter, 306 in the fourth quarter.

And as we went through our analysis, as the quarter was coming towards a close, and then in the days and weeks after the quarter ended, we have had confidence in our analysis at every step along the way that we could deliver that 6% organic growth number and maintain our guidance.

Okay.

So could you walk us through the integration of the BioSource and the other two -- the Quantum Dots?

And I guess, why are they going to be so dilutive?

What are you planning on doing with them?

Fair question.

In terms of Quantum Dots, we're closing down the Hayward facility where they were located.

We've had to do a substantial termination of employees, and then potential relocations of people to Eugene, Oregon to the Molecular Probes campus.

And that's what explains the $0.04 or so on that particular acquisition.

In terms of BioSource, we're going to be looking at parts of their business, and which ones fit directly into the Invitrogen system and which don't.

And we'll have to make some announcements on that business as well.

So that's what explains the $0.04 in each one of those acquisitions.

So mostly in SG&A costs, then, for the most (ph) of those -- you would see that?

I would say virtually all in SG&A costs.

Aaron Geist, Robert W. Baird.

Can you talk a little bit about the changes that you put in place in BioReliance in the last 90 days or so?

It was weak last quarter, and it seems like it was weak again this quarter.

Yes, thank you, Aaron.

We have completely changed around the operations team in the last 90 days.

We have moved to what we call a work cell cluster, where we have technical people, lab people, quality control people all on teams centered around particular testing areas.

And we think that's going to deliver two things -- one, consistent quality and consistent service levels that I think are just absolutely essential to compete in that business.

Can you maybe spend a little bit of time talking about what you're seeing on the revenues to give us a little bit more comfort and confidence in the fourth quarter in terms of what you've seen sequentially month on month on month in terms of the bookings that you now carry and think that you can close through the end of this year?

Aaron, you're talking about the total Company, or BioReliance?

I'm talking totally about BioReliance.

In terms of BioReliance, I think that BioReliance will have an okay quarter in the fourth quarter.

We have an incredibly rigorous process of forecasting what's going to happen in the quarter.

I will tell you that there's not a lot of degree of variability off of those numbers, which is one of the nicer aspects of that business.

However, having said all that, we're not going to see that business return to positive growth in the fourth quarter of 2005.

So without seeing positive growth at BioReliance in the fourth quarter and 9% forecasted for organic growth, which is a level that you haven't generated in a very, very long time, can you talk a little bit about the other areas of the business that are hitting on all cylinders that give you the confidence that you can get to that 9% growth?

Interestingly enough, some of our core molecular biology business -- the functional genomics business -- are having just terrific success now around the world.

I think we've begun to really get the formula down to how to position those products, whether it's directly or on the Web.

And we're seeing good performance there.

I would say our drug discovery business -- the old PanVera business has really come on strong, has done a nice job relative to the competition.

We have the most kinases out there.

We've built a service offering around there.

We're getting incredibly strong growth in our drug discovery business.

Ben, would you like to comment any other areas and sectors that see real strength?

From the regional perspective, Europe is very strong right now.

And there are across-the-board improvements in North America as well.

So regionally, we're seeing great strength.

I think the drug discovery and Molecular Probes franchises are doing just terrifically for us now, and they're big enough that they make a significant difference.

You generate most of your revenues on a day-to-day basis.

If you were to look at October, the first month of the quarter, where would you say organic growth was?

Organic growth would be in the mid single digits.

It's not at 9%, but it's ahead of where we were last year.

Thanks a lot, Greg.

Just to add, it's on track -- if we continue at the rate that we're at, we will achieve our target for the fourth quarter.

Tycho Peterson, JPMorgan.

Question on BioProduction -- I guess the comments you made were that there was a big order that fell through, but then you followed up, saying that BioProduction would probably come back in the fourth quarter.

And it sounds like BioReliance is relatively weak in the fourth quarter.

So what is really going to be driving growth in BioProduction in the fourth quarter?

So let me just the clear on BioProduction.

In our Gibco business, we had some lumpiness due to timing of just generally some medium-sized orders.

We had a onetime loss of a very big order, but that was due to an external issue with our client and the FDA that we think will turn around in the future.

What I was saying is that in the fourth quarter, we think that lumpiness which was bad in the third quarter is a positive now for us in the fourth quarter.

So our Gibco business -- that's what happened there.

As I said earlier to a previous question, we see continued softness in BioReliance.

We're not expecting a dramatic turnaround in that business in the fourth quarter.

So based on all of that, and based on our other side of our business, the BioDiscovery, we have come up with the 317 million and a 9% organic growth rate.

Okay, would you be willing to comment on pricing for BioDiscovery?

Has that stuck?

Has it held?

Well, I think that is something I would encourage investors to look at, that on two measures -- one, gross margin has continued to expand, so we're doing a good job of managing price and volume and mix, so that's fine.

And second, in spite of what we would all agree is substantial revenue shortfall, in a quarter, we still stayed within our operating margin of 24 to 27, which should signal to investors we have pretty darn good control of our costs inside the business.

So margins are good in this industry.

I think we continue to do okay there.

And where we're focused now is on 317 in the fourth quarter.

Rich Watson, William Blair and Company.

Thanks for taking the question.

I had a question about some of the deals we've seen from RNAi companies recently.

I think there was one with Sirna and Halvorgan (ph), and one with Fisher and Alcon.

And I was wondering whether that might be a direction you guys could go in with that part of your business, and whether we could -- is that something -- maybe not very near-term, but maybe in the midterm -- we could think about as a potential deal activity there?

And then in general, can you comment, Greg, a little bit on the M&A environment and what you guys are thinking as of today -- where you're going in that direction?

Thanks.

Sure.

We actually have a very healthy collaboration business in RNAi with a number of different clients.

We don't publicly disclose a lot of that.

In fact, I'm just thinking we haven't publicly disclosed any of them, actually.

So what you hear others are doing, we have been doing.

In terms of mergers and acquisitions, I've heard some of our colleagues in the industry talk about an enormous M&A pipeline.

That's good.

We would agree that there's just lots of opportunities out there to invest money in good technologies, good revenue streams, good earnings streams.

And I think we continue to buy the right properties that add to our portfolios.

So that's what I can say on M&A right now.

Frank Pinkerton, Banc of America Securities.

I guess first question -- the 4Q guidance -- does that include the repatriation of earnings -- the 10 million you spoke about?

No.

That's excluded from the numbers.

We’ve taken the benefit of that out.

That's really more of a GAAP earnings impact, not a pro forma earnings impact, because we're trying to keep pro forma really more at a run rate basis.

Okay, great.

And I guess this is maybe a little fishing -- you guys have a convertible, I believe, that's callable at the end of the year.

If you call that, I think it would pretty much dramatically lower your share base.

What are the plans on use for cash in association with calling convertibles?

We've made no decisions on calling that -- the outstanding convertible bonds.

We've got 375 million outstanding that are callable in December.

But those bonds don't actually mature until the end of next year.

So we continue to evaluate it, but we've made no decisions either way.

Okay, great.

And then shifting a little bit, looking at more the sera market and some comments that have been made there recently.

I know there are several facility expansions there.

Can you speak about, I guess, capacity that Invitrogen has in that market, what you're bringing on-line?

And then more importantly, if you could also speak to synthetics that you guys have internally there that you're researching, and how you think those market dynamics play, especially on the pricing side, over the next couple of years?

In terms of sera pricing, I think we saw a softness in the pricing over the last, let's call it 100 days.

Our view is that the sera pricing is probably coming back now into a more positive trajectory.

So that's the trend we see there.

And I would just continue to remind investors that that represents a very small portion of our business -- less than 8%.

In terms of synthetic media, that has been where we've put all of our focus -- not so much to expand capacity, although we've done that too, but to expand R&D.

And we feel just terrific about our intellectual property estate there, and also the clients that have agreed to work with us in terms of using that media for the production of their biologics.

I think that's a very good new story in our Gibco business.

And then just last one, if I can throw it out, on the diagnostic side -- and you have spoken a couple of times about moving more towards an offering in the diagnostic markets.

Where does that stand, especially with Dynal?

And then, I guess, Zymed and Caltag, both on the antibody side -- there are some interesting things there.

What are you looking to bring together with those businesses on the diagnostic side?

And can you update us with the plan?

Thanks.

Thanks.

As I said, we're filing the PMA for our TISH (ph) technology.

We are building out a broader pathology (ph) sales force to not only sell the Zymed reagents, but then also the instrument that Zymed had, as well as then when we get this TISH technology approved.

So that's one of our thrusts.

We're investing heavily into our HLA business, which is pre- and posttransplantation diagnostics and -- not screening, but -- reviewing the -- seeing the antibodies after a transplantation -- that's also a positive move for us.

And then we announced in the quarter our collaboration with the Fred Hutchinson Clinic on oncology diagnostics, which is continuing our -- I would just call it experimentation on looking at very next-generation molecular diagnostic tests.

So lots of activities.

They will start amounting to I think substantial -- significant revenues next year.

And I would just say to investors, stay tuned.

John Sullivan, Leerink Swann.

A couple of quick ones.

Talking about the BioReliance business just for a second -- thanks for the comments regarding the steps you're taking within the business.

Are there any macro issues that concern you regarding the business that BioReliance is trying to do?

Is there any shift on the part of customers away from contracting for these services, for example?

We've looked into that, and I would say -- I don't see anything different based on my own opinions now versus the noise we've heard in the market perhaps by the people who have been in BioReliance a longer period of time, over the last couple of years.

There's always the decision of outsource or in-source, etc.

And we see that as a constant tension in the business.

What I would just remind investors is the reason that brought us to BioReliance is that we still fundamentally believe that our pharmaceutical clients become much more of a variable cost structure instead (ph) of organizations, and that over the longer term, they are going to outsource more and more.

And BioReliance is one of our plays to capture that increased revenue stream.

It is unfortunate we're going through a transformation of that business right now.

I wish we weren't, like you.

But it's still in the right space in the right spot, and we'll get it going, I think, in the next couple of quarters.

And it will be the right decision and the right place.

So I would tell you -- I think it's long-term the right place for where we want to play.

Okay.

And then shifting gears, can you just talk about a couple of newer product initiatives over the last several quarters?

Can you talk about ChargeSwitch nucleic acid purification, and traction that you may be getting there?

And then in kinase profiling, assay development and services?

Yes.

Let me start with the kinase profiling.

We set a goal out to have the largest set of kinases in the industry last year to outbest Upstate, which we always regarded as a good competitor.

And now we have done that.

In a matter of 12 months, we now have the largest available kinase collection.

And we have now -- we've done a select screen service around those kinases that is generating several million dollars of service revenue just in the past two quarters.

So we're seeing a great uptake in that business, and they've got a whole game plan to do even more there.

The other part of your question was how ChargeSwitch is doing.

And just a few points to be made there.

We appointed a new leader for our nucleic acid purification business.

Nathan Wood (ph) comes to us from Qiagen, and knows a lot about this business.

And I think he's a very strong leader, is building a very strong team, and we see continued double-digit growth in our nucleic acid purification business.

And I would say he has lots of great ideas on how to expand that portfolio and its penetration -- so great leader there.

And then just in terms of technology, the DRI acquisition we made last year had numerous milestones to take that ChargeSwitch and continue to broaden its applications.

And I'd say we're about 70% through that -- maybe 60% through those new applications.

And everything is right on track.

So we continue to broaden the penetration in terms of what it can do, very aggressively.

So Ben, would you want to add anything on ChargeSwitch?

It's getting great customer adoption.

Customers see terrific performance from it.

And there's strong demand.

It does take time to move it through the whole market, but customers are responding with double-digit growth for us.

We're very bullish.

Ben, if you don't mind, is there any type of experiment for which ChargeSwitch seems especially appropriate relative to competing technologies in the market?

There is a number of them, yes.

I don't know that this is the right place to go into that.

But we are seeing some.

And this has been part of the process.

It's sifting through what are the most appropriate places for this technology to work.

But across the whole portfolio, we're mounting a strong range of products.

And there are clearly some that ChargeSwitch is best suited, and customers are responding.

Paul Knight, Thomas Weisel Partners.

Can you talk about the pricing environment on the sera market changed, trends -- anything like that?

In terms of pricing trends on sera, as I said on an earlier question, we saw softness in the pricing of sera in the last 100 days.

I would tell you, though, that it's not on all sera.

It's primarily centered around Australian sera.

And I think that's just a situation of supply got out of whack with demand.

And I think that's getting corrected pretty much now.

But no, the good news is that the costs have also gone down with that price.

So what I would just continue to say -- it's not a big part of our business.

And next year, it will even be a smaller piece of our business, so it's really not that important to where we're going as a Company.

Tracy Marshbanks, First Analysis.

Quick question just to clarify some wording on the press release, and then the real question.

When you're talking about the performance in the BioDiscovery segment and you talk about the softness in the BioReliance unit, after that, you say specifically a number of changes are being made in the segment.

Are you just referring to BioReliance, or have you actually made additional changes in the other parts of the BioProduction segment?

I am primarily referring to changes that we are making in the BioReliance segment.

That's really where that comment was focused.

Okay.

And related to BioReliance, if I remember back historically, it was a nice business showing growth, but it was variable.

And knowing you guys, you probably sliced and diced that business every way possible in looking at it.

Is it a business -- even if you apply whatever management techniques and processes you want, that you can really make as smooth and predictable as you would like or the investors may think it is?

Or is this something that we should just kind of look for a little bit more variability just because of the nature of the business?

And on a yearly basis, it's fine, but quarter to quarter, it may still be a little bit bumpy?

That's a great question.

I think it will always be more lumpy and bumpy relative to the reagents business.

So I would concur with you there.

Having said that though, I think we're in a particular area in time right now where we have just some things that we're working through, so I don't want to put our current troubles onto it's just the way the business is.

So we're going to get the business right where we want it.

It's just -- I ask investors a couple of quarters to get it there.

Aaron Geist, Robert W. Baird.

Thanks for taking a follow-up question.

Could you provide a little bit more color on the 2 percentage point gross margin impact on the BioProduction side?

How much of it was specific for BioReliance, and how much of it was the BioProduction business as a whole?

Aaron, it was virtually all BioReliance.

But even having said that, as you know, that's a higher fixed cost business.

And because the volumes are not meeting our expectations, it hits obviously the margins then.

So the whole -- I would just generalize; most of the impact of that margin decline on BioProduction was just simply a volume issue at BioReliance.

And you'd be able to say that in the next couple of quarters that 2% negative impact would go away as you bring corrective measures in place?

As we bring BioReliance performance back into line with our expectations, I think you'll see a nice margin expansion in BioProduction.

One last question.

You talked a little bit about spending on SG&A, that you spent a little bit less than maybe you should have in the third quarter on marketing.

Can you talk a little bit about the marketing initiatives that you're putting in place, and maybe talk a little bit more about 2006 in terms of initiatives that you think you need to put in place for continuing to grow the business?

One of the folklore stories when I got here was Invitrogen spends a lot on marketing.

And certainly the analysis proves that in the 2002/early 2003 timeframe, we spent a lot on marketing.

Probably had the most placements in magazines of any company in life sciences.

Since that time, we have been playing around with different ideas of how to actually market, up- and downregulating how many placements.

And I would say that in the quarter that just passed, we were playing with a different idea that I won't disclose, other than to say that if you go to our website, you will see a completely redesigned Web.

And we are perhaps making more of a bet that everything is going to be moving to the Internet, and that's where we wanted to place all of our money as opposed to product placements in magazines.

Now, that's what we did in the quarter.

I think what we're doing now in the fourth quarter, though, is putting a lot more into what I would just call visible marketing -- placements in magazines.

If that all sound like a lot of moving parts, it is.

It's just part of trying to get more sophisticated about when you invest in certain types of marketing, what moves the needle in volume.

And I think we're getting better at that.

How confident are you that the weakness in the quarter was not related to marketshares moving around between yourselves and some of the competitors in the industry?

I'm not completely confident.

However, anecdotally, I don't think that's what we hear from our sales force.

And so I don't think that that's necessarily the phenomenon.

But Ben, I will defer to you.

We are waiting in a lot of places (technical difficulty) win.

The discussion you heard here, I think, is very clear -- we are winning where we want to win.

Some of it you heard was with timing.

And we're -- we continue to remain strong where we want to be strong.

And that is why we have line by line, customer by customer, territory by territory lined up what our plan is in the fourth quarter.

We feel good about it.

Aaron, I would also just add that the primary disappointment for us in the quarter was related to BioProduction in combination with BioReliance, and then the BioManufacturing component of the business.

In the BioManufacturing side of the business, it's not really a share gain.

We are locked into those accounts.

It's really just one order moving from one quarter to the next, or as Greg had alluded to, one order just being delayed for a few quarters based on some FDA feedback.

Derik De Bruin, UBS.

So I just wanted to -- curious about the biologic that you mentioned had been pulled from the market.

The one that pops to mind was pulled from the market in February.

I'm just wondering if that is potentially -- and if it was, why did it takes so long for it to eventually impact Invitrogen?

Derik, I can't comment on any of the products of our customers, nor can I comment on what happens behind the scenes, no matter what you read.

And so I think it's best if we just don't disclose anything beyond that.

Okay.

Finally, I guess, just once again going back and saying -- how confident are you in that 8% organic growth number, given some uncertainty in the overall funding environment for next year, pharma acting strange in terms of their R&D spending, NIH budget kind of still in flux.

I guess what -- when you look at next year, what could potentially -- what do you think could potentially be the low end of the estimate?

Do we look at a 5% organic growth, potentially, if things don't fall into place?

Could it be higher than 8%?

You know, when we set out our 6 to 8% organic growth for 2005, we did so presuming BioReliance would have a good year -- not a great year, just a good year -- 8% organic growth.

We didn't anticipate negative growth.

And in spite of that, when we achieve our fourth quarter, we'll end up at 6% organic growth, which is up from 4% organic growth in the past year.

Now, when you ask about can we continue to take that up next year, my suggestion would be twofold -- one is, there are a lot of actions in place that got us to the 6%, which, as you know, is actually higher because we're compensating for BioReliance.

But then also, I would say stay tuned to the December guidance.

You'll have a lot more details then, and I think we can have a lot richer discussion.

And what date was the December meeting again?

December 14th is the plan.

We'll be putting out a press release.

We are going to have that meeting in New York City.

Thanks.

Great.

We'd like to thank you all for your interest and for tuning in.

As always, if you have any questions that arise as a result of the news that we published today, please feel free to call at any time.

And we look forward to your continued participation and interest.

Thanks.

Thank you for your participation in today's conference.

This concludes the presentation.

And you may now disconnect.

Everyone have a wonderful day.