賽默飛世爾科技 (TMO) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Invitrogen fourth quarter and year-end 2005 earnings release conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's conference, Travis Chester, Vice President of Investor Relations. Please proceed sir.

Thank you. Good afternoon and welcome to our fourth quarter and full year 2005 conference call and webcast. I'm Travis Chester, Invitrogen's Vice President of Investor Relations. Joining me on the call today are Greg Lucier, our Chairman and CEO, and David Hoffmeister, our Chief Financial Officer.

Before we begin the presentation, I just want to caution our listeners that our discussion today includes forward-looking statements, including statements about future expectations, plans and prospects for the Company. We believe that these statements are based on reasonable assumptions, but the actual results may differ materially from those indicated by any forward-looking statement due to a number of risks and uncertainties discussed in our annual report on Form 10-K.

Our intent is that these forward-looking statements be protected under the Safe Harbor created by the Private Securities Litigation Reform Act of 1995. And while the Company may elect to update these forward-looking statements at some point in the future, the Company disclaims any obligation to do so.

Also on today's call as we have in the past we will discuss organic growth and pro forma financial performance. This includes non-GAAP financial measurements as that term is defined in Regulation G. We believe the inclusion of these non-GAAP financial measurements to help investors in a more meaningful understanding of our performance and is consistent with the manner in which management evaluates the Company's performance. They're not considered to be superior or a substitute for the operations in GAAP. And you'll find comparable measures and reconciliations on our website and today's press release.

We will begin the call today within an overview of our results by Greg. He will turn it over to Dave, followed by questions and answers. Now I will turn the call over to Greg Lucier.

Good afternoon everybody. Before I get into the financials for the fourth quarter and the total year, we may have some new participants on the call. I just briefly want to share with those people a little bit about who Invitrogen is.

On page one you can see that Invitrogen has to publicly reported segments, BioDiscovery and BioProduction. In each of these segments we participate in a very large market, 15 to $20 billion the way we define it now. And our business of about $1.2 billion is generated, over 50% of the sales, outside the United States. A very well-known brand, number one or number two, virtually in every key area of life science research. A very strong intellectual property portfolio. And as you can see, a very diverse customer base. Not any one customer, not any one geography, not any one customer segment represents that disproportionate percentage of our sales, and so they give us a very well diverse and balanced portfolio.

If we go to the next page, the core of our strategy is to create a biological operating system. This is a system that allows scientists to move from one procedure seamlessly to the next. And our whole goal is to buildout this biological operating system to allow research and the development of diagnostics and therapeutics to proceed at an ever faster rate.

We do this by delivering great new technologies, by having over 600 scientists on our team, and by having the number one rated salesforce by third-party organizations that are out there each and every day talking to researchers all over the world. Those people are complemented by an e-science and e-commerce platform that is second to none, and again rated number one by many third parties.

Our operating system spans all the way from genomics to the end when we're doing commercial BioProduction with our clients. And again, our goal is to make each of these steps move seamlessly from one to the other.

In 2005, as we have done in previous years, we continue, as I said, to buildout this biological operating system, both through our own internal development but then also through acquisitions. In 2005 we had a record year for acquiring new technologies into our biological operating system. I would like to just share with you a little bit of prospective of what we have done over the last few years.

If you look at Invitrogen back in 2003, it was a Company that was heavily weighted in genomics, with a smaller cell culture business, and only growing at about 3%. Our goal at that point and what we have executed on in a fairly disciplined way is to move into higher growth segments, downstream into discovery and development and production process for these biological diagnostics and therapeutics.

In 2005 we added some very important capabilities to this portfolio; Dynal, the largest biotech company in Scandinavia, growing well in excess of 10%; Quantum Dots, a new labeling technique that we think will revolutionize molecular diagnostics; [Morphitec], a technology that is complementary to our BioReliance business that allows the testing and development of new cell lines; and BioSource in cytokines and other high valued assays in the drug discovery area. Our overall portfolio continues to grow and also continues to accelerate in its organic growth, which I will mention more about in a few minutes.

Let me get into the financials. In the fourth quarter of '05 our revenues were 325 million, a record high for us, and a growth of 24% compared to the fourth quarter of 2004. Our pro forma EPS was $0.90, up 13% vs. 2004. And as you can see, we had very high-quality earnings with the GAAP free cash flow measure of $1.20 per share.

When we look at the year in its entirety it was a record year for Invitrogen. Our revenues were just under 1.2 billion, 1,198,000,000, a growth of 17%. Our pro forma EPS of $3.45 was up 19%. And again, very high-quality in earnings with the GAAP free cash flow measure of $3.96 in cash earnings per share. A great year for Invitrogen, a great year for the team.

If we go to the next chart, let me just say a few words now about the segment revenue growth. Our BioDiscovery business had organic growth rates of 12% in the fourth quarter, a new high for us. And our BioProduction business was up 8%, giving us a total composite organic growth rate of 10%. We're very pleased this performance, and we just think it shows the strength of the portfolio that we have been building.

Let me say a few words about the context of the markets we have been participating in in the fourth quarter. In the biotech, academic and government segments they are all very strong for the business, and growing at double digits. Big pharma actually for us was also good, overall growing in the high single digits. But as we have conveyed to you in the past, it just depends on the account you're at to determine what your growth rate is. It is not a secular trend that we can generalize on.

In terms of geographies, we had broad double-digit growth across all the regions, except for Japan, but Japan still grew at high single digits. And our very strong growth platforms of Molecular Probes, our drug discovery business, the old PanVera business, and our gene regulation business here in Carlsbad were up at very strong double digits. And so, as we look at BioDiscovery it is a very strong portfolio now, and we're very pleased with the mix we have there.

In terms of BioProduction, GIBCO had a very nice quarter. And that offset the continued rebuilding that was taking place in BioReliance. And I will say a few more words about that momentarily. So a very balanced growth portfolio, very balanced growth profile, and a record year -- a record quarter for organic growth.

Just to give you a walk on the revenue for the quarter, as we shared with you at the end of third quarter, our guidance was $317 million as we anticipated the fourth quarter would be. But as you can see, we ended up higher than that at $325 million. And these are the various components that led us there. In terms of acquisitions, Dynal delivered well above plans, but that is really because they had some OEM orders, which is a large component of their business, scheduled in the fourth quarter. And that is something you can see repeated and will be repeated each and every year.

BioDiscovery, we continue to emphasize our strategy of moving just from the bench to moving to the purchasing suite and doing larger deals with our clients. And so we had some good timing that we had anticipated in terms of the BioDiscovery orders.

And then, BioProduction, we had a large BioProduction order that fell into to the fourth quarter that just was beneficial to our timing. And those components led us to $325 million of growth of revenues in the fourth quarter. Overall 10% organic growth, and we met our commitment to you, our investors.

Stepping back for a momentum, if you look at the organic growth rate of the Company, as I said before, back in 2003 this was a business that was heavily weighted in genomics, and really only growing at 3% organically. In 2005 we met our commitment to grow at 6%, and our growth rate forecast for 2006 now is between 6 and 8%.

Now just a few words on how we triangulated this 6 to 8% organic growth rate. If you take our existing businesses, and just said, what will they do if they continue to grow at what they did in 2005, our organic growth rate would be 7%.

And then we look at the funding environment, we continue to see our ability to grow in the U.S. academic and government segment in spite of this soft NIH funding. It seems that with the tighter funding, perhaps consolidation is happening, and that certainly benefits a large player like Invitrogen.

Our biotech segments are very strong. And in pharma we continue to penetrate the important accounts for us, and grow in some cases very strong double digits. And what it overall assumes is that we have another strong year in the U.S. and Europe, and that we continue to have very strong growth in Asia-Pacific. And we very confidently believe that we will grow between 6 and 8% organically for the total year of 2006.

With that what I would like to do is turn it over to Dave Hoffmeister, our Chief Financial Officer, and let him get into the -- some more of the details of our financials.

If you take a look at the next page, our gross margins for the fourth quarter were 59.8%, down slightly from 62% recorded in the fourth quarter of 2004. And that decline is largely due to anticipated events. In BioDiscovery we had regularly scheduled OEM orders, as Greg alluded to earlier, which led to slightly lower margins there. And in BioProduction, we have discussed before. Our BioReliance business which has lower margins as well. And we have got plans underway to turn that around and anticipate improvements in 2006.

We also had a slightly lower Sera pricing. The pricing outlook in 2006 we believe looks good and should turnaround. I think more importantly, gross margins for the year actually improved slightly, and I will talk more about that in a minute. And going forward we expect our margins to be flat to better in 2006, and be in the 61 to 62% range.

Over the last few years we have really focused on delivering increased value to our customers. And we have been able to do this while maintaining margins by continuing to drive productivity improvements. And I think you see that on this page, where as I said before gross margins for the year actually increased .1 of a point, to 61.2%.

In addition, we have continued to invest in our research and development. Research spending hit 8% of sales this year, up from 7% previously. And we've got this weighted to our growth businesses, and it is really studding to pay off and generating significant number of new products.

SG&A as a percentage of sales stayed at about 28%. This was despite increased investments in IT. And as we mentioned before, our SG&A includes the cash integration costs associated with our integrations and the acquisitions this year we did, as Greg pointed out, eight acquisitions. Pro forma operating margins remained strong in spite of, as I mentioned before, the investments in R&D, information technology and the integrations.

If we take a look at the next page, the summary of 2005 performance. I'm not going to go through all of the detail here, but as Greg said, it was a very strong year in terms of revenue. Overall growth at 17%. If you look at the middle of the page, we frequently get questions about our tax rate. We continue to improve on our effective tax rate. The rate dropped from 33% to 32% as a result of our ongoing tax strategy planning. Shares outstanding actually declined slightly from 60.3 million to 60 million shares. And pro forma EPS grew 19%.

As most of you are well aware, we report pro forma EPS because we believe this better reflects the ongoing cash earning power in the business than GAAP EPS. This chart just briefly summarizes some of the details that take you from GAAP EPS to pro forma EPS. I think the message, and I will say more about it on the next page, is that there are a number of positive events in 2005 that we have excluded from our pro forma EPS.

Some of those are the American Jobs Creation Act. We actually repatriated $113 million in the course of the year. We had a benefit of $10 million. We liquidated a number of legal entities that resulted in another $25 million after-tax gain. On our Dynal purchase, we placed a hedge on that purchase, and actually resulted in a gain of another 13 million.

And finally, from the time of the Lifetech acquisition, there were some healthcare benefit plans that worm over funded. And in various discussions with the IRS we were able to release and recapture 23 million in cash from those plans in the course of the year. In total, from these items we had gains of 48 million on an income statement basis, and cash recovery of 23 million, all of which we have excluded from our pro forma EPS.

As we have discussed before the concept, the idea is that we would take some of the money and redeploy it into driving efficiencies and growing the business. As Greg mentioned before, we have restructured the business recently, and we're using some of that money to pay for those restructuring efforts. We anticipate that we will have with our acquisitions ongoing closures of facilities and consolidations to drive efficiencies. There will also be some asset retirements.

The Company continues to generate very strong cash flow. Free cash flow for the year hit a record $238 million. That was to driven significant improvement in working capital, which basically funded the increase in capital expenditures that we had in the year. We nearly doubled capital expenditures from 39 million to 72 million, which consisted of IT investments that I mentioned previously, capacity expansions in our GIBCO business, research facilities in Molecular Probes and elsewhere.

The Company continues to generate very strong free cash flow. Just one point of note there. The third bullet on that page, there is 15 million of non-recurring items. That is the Dynal acquisition price hedge. That is included in our free cash flow. Our free cash flow is based in our GAAP earnings. We have not historically issued a pro forma free cash flow, and that is why it is included here.

Finally, sources and uses of cash. The main message on this page is the Company continues to have an extremely strong balance sheet. We spent nearly $650 million on acquisitions this year. That still left us with nearly 750 million in cash and investments, more than ample to fund ongoing strategic acquisitions. We have said that we would expect to continue acquisitions at the rate we have in previous years of about $500 million a year. Greg?

Just to summarize 2005. We achieved another year of accelerating organic growth, capped off with a 10% organic growth rate in the fourth quarter. And as Dave just mentioned, a record free cash flow year for us.

We made eight strategic acquisitions that continue to buildout this biological operating system. And as Dave also mentioned, we anticipate to make further acquisitions this year in the tune of about $500 million of investment.

And then finally, we're very energized by the reorganization that we announced in December to where we now have a much more focused organization around key workflows. We are now able to compete both on breadth and depth in terms of our science. And we're very encouraged here in the first quarter by the receptivity, both internally of our own people and also out of customers, with now how we are presenting ourself. And so again, 2005 was I think a very strong year for Invitrogen.

What I would like to do now is turn our attention, turn our focus to 2006, and just say if you weren't about how we see things unfolding. What you see on this page up top is not changed. It is remaining the same in terms of our guidance for 2006 that we shared with investors back in December. We see revenues up 11 to 13%. We're going to be improving the pro forma operating margins by about 50 basis points. And the free cash flow should be flat to up 5%. And again, it is excluding that '05 non-recurring $15 million. Again, I think free cash flow will be very strong in 2006.

Let me just say a few words now about the first quarter is that based on what we see right now, this is the general guidance we're providing for the first three months of the year. We think revenues will come in around 320 million. But as you know, our business can be a little bit lumpy, so give or take a couple of million on either side of that number I think is a fair statement of where we think things will end. And then the earnings per share will be about $0.88 in terms of pro forma EPS.

We do this just so we want to make sure that the consensus estimates in the market match with what we see currently in our business. And again, our guidance for the overall year remains unchanged with what you see above.

Just a few statements in terms of our assumptions for the year. I would reiterate that the market remains healthy. Our BioReliance business is really on track for a nice recovery. We are seeing across the board extremely strong Six Sigma performance in terms of the quality of the reports being done by this organization and the timeliness of delivery. Our cornerstone and our marquee is going to be to be the first Six Sigma Company in biological testing. And again that recovery is very nicely underway, and we will see the benefits on that in the second half of this year.

Just to reiterate, we have not traditionally in the past used price for the last few years, but we do see a changing environment where both costs must be recovered. And due to the mix of our new product coming out, we see price being a positive factor on 2006 for us this year.

And then just to just finish up, again, we will continue to make acquisitions. And we figure on spending about $500 million this year on accretive acquisitions that are not factored into any of the guidance we have provided so far.

So if I could just summarize then in terms of looking forward, this is a Company that has a tradition of growth. It is really I think a great story. And there's just a lot of energy and excitement inside the business today. On that note I would like to make an announcement that we will also send out in a press release tomorrow, is that our long serving Board member, Jim Glenn, who both served as our Chief Financial Officer and as our CEO prior to be me coming on board, has announced his retirement from the Company. And we just want to wish Jim all the very best in retirement. And thank him for really creating the chart you see in front of you right now, which is a great Company with an incredible future. With that, Travis, I will turn it back to you.

Thank you. We will now open it up for questions and answers.

(OPERATOR INSTRUCTIONS). Quintin Lai with Robert W. Baird.

Congratulations on a very nice quarter, and my best to Jim. With respect to the fourth quarter, or 2005, could you make a stab at what the organic growth of GIBCO was so that we can get an ex BioReliance number?

We have not historically broken that out. I would just tell you that the GIBCO business remains strong, very strong.

And then with respect to I guess -- I see your slide here that in 2006 your expectation is that that BioReliance starts to recover in the second half. So that is why it is not -- you're not expecting any kind of rebound in the first or second quarter of '06?

That is correct. We do see a nice turnaround though as we get the message back out to our clientele that BioReliance is the place you can go to for -- where you always could get the best science, but now you can also get the best operational excellence. We think that message will take six months or so to really permeate the marketplace. And we are seeing -- and we're expecting, I should say, a recovery to really happen in orders and sales in the second half of the year.

With respect to gross margins that you saw in the fourth quarter, was part of that the acquisitions, for example, like BioSource coming in? And how much of it was FX in the quarter causing maybe a little bit lower than expected gross margin?

It is a good point about the acquisitions. If you look at BioSource prior to us owning them, and as a stand-alone public company, clearly they had gross margins lower than ours. And so that type of mix certainly impacted gross margins in the quarter. But let me just say a few words on that. This is why we're very bullish on gross margins going forward, is that as we continue to consolidate facilities, extract the synergies that we had planned when we bought these companies, we're going to get gross margins higher. Inside the Company we are very encouraged by gross margin and what will happen next.

In terms of your question around currency, I would just tell you that had a negligible effect in the fourth quarter.

Tycho Peterson with JP Morgan.

I guess following up on that last question on BioSource, Greg, can you remind us where we are in the integration process and what next steps are?

In terms of BioSource integration and we have already publicly announced that we have closed their cell culture facility. We have saved the costs there, integrated that into our GIBCO business, and really been able to preserve most of the sales and the customers that we had from that piece of the business.

There are other elements of that business that will be consolidated into the Camarillo site. And so we actually are very excited by both their site in Massachusetts and in Camarillo, California probably picking up other parts of Invitrogen today to really accelerate our growth rate.

An example of that is that in Camarillo we have uncovered that they are extremely good at antibody development, cytokines and high-value assays. We have been doing that in a couple of other locations. And so -- and we do have a strategy consent to consolidate that into one location.

And then A question on the organic growth. Can you just give some broad color about what really has been driving it, and in terms of new product vs. more effective selling efforts? And then how much of that BioProduction order from the third quarter carried over -- is that $4 million, did that all come this quarter?

Yes, the BioProduction order did come this quarter as we said it would, so that helped. In terms of new products, our nucleic acid purification product just continues ramp up and make very nice penetration. The Probes business continues to be incredibly robust. And then lastly, I would a lot of credit to our sales team. This is a team that is really gaining its footing. We have disclosed before that we had a lot of change in terms of that organization planned. And I'm really encouraged by the strength of the team and those strategies now. And I'm very helpful that the fourth quarter was evidence of that.

And then just one last one on the alumina collaboration. I know you talked about quarter about that had not reached full potential yet. Is there any update there now that the big bird has moved forward?

Yes, full speed ahead now. We are cranking. We're moving international with our technology with alumina. And so all systems go right now.

Congratulations on the quarter.

Derik De Bruin with UBS.

Could you just try to give us a little bit more color in terms of the acquisition strategy as you're looking forward? I think there has been some confusion about what trajectories you're planning on taking. You had made some comments about what your expectations are in terms of new reagent businesses vs. other opportunities. Could you just give us a little bit of insight into your strategy?

I think there are two pieces to the strategy. One is that we continue to evaluate accretive acquisitions in the core life science supply space. And we continue to agitate and challenge ourselves on just it means to be an essential supplier to diagnostic and therapeutic development companies. That universe gets ever broader in terms of what could make sense for our Company. I would just say that is the core strategy you have seen over the last few years, and we continue to want to execute on that.

The second piece is this code, if you will, that I've used on closer to the patient, that really is nothing more than how do take what we think is some great science at the bench, and try to make it more value-added in more medical applications. An example of that is our HLA business in tissue typing. We will make more acquisitions in these types of endeavors. But our goal is to make them accretive, and to make them so that they are a little closer to the range, if you will, so that we know how to run them and we know how to grow them. That is what I can basically say on acquisitions right now.

I guess when you look at the first quarter, when do we expect to see the price increases that are ready to come in? Are you releasing the January catalog with the increases, or is it something that is going to happen later on in the quarter?

We have a large portion of our business that is exclusively negotiated with clients. And those negotiations took place through the fourth quarter and are still going on. And so some of that is already in effect in the first of the year.

We did release new catalog that did have a changing in our prices, some down, some up, more around mid value pricing. That effect has only been put out into the marketplace. And then we still have other negotiations to be had that just really depend on a particular client. Everything I could tell you about price and value and in clients is all in progress as we speak.

I think the other thing that affects our overall selling price is the mix of our business. As I mentioned before, our continued investment in R&D, is paying off. And we had a record year in terms of new products introduced. And we would expect that to have an impact on our overall average selling price.

When you look at the guidance for the first quarter, I guess can you see how the BioDiscovery and the BioProduction is going to split out there? Are you expecting a little bit more lumpiness in BioProduction? I guess I'm just trying to get a feel for just what goes into the revenue mix?

I don't think we're prepared to do that type of detailed guidance. Our goal is to move away from that. And what I wanted to do was just provide you with our current feel, give or take a few million bucks, of what we see. And so I think I'm going to leave it at that.

Quintin Lai.

Looking at the Q1 guidance, does that build in about a 4% negative FX or so expectation?

The Q1 guidance is based on the same December rates that we provided for full year guidance. We haven't updated that there.

I would reiterate though for everyone is that we are maintaining full year guidance. That just figuring out quarterly splits is never easy. So this is our best guess right now. But we still got a full third of the quarter to go yet.

Edward Tenthoff with Piper Jaffray.

Congrats on the strong fourth quarter. It looked even better once I got the pro forma EPS right.

There you go.

A really nice job. I wanted to touch on your progress with the antibody libraries this year, and want to see how the consolidated antibody library is being received in the market? And also how you think that effort is differentiated from your competitors?

We have substantial antibody capabilities -- and I'm just going to actually be a little broader. I'm going to see say antibodies, proteins and then assays in three major locations. One is Madison, the other is San Francisco, and then the other it is Camarillo. We have been going through a pretty detailed study of where our core competencies are strongest. And I would just tell you that Camarillo, the BioSource business was really on an upswing. And I think people could see that as it was a publicly traded company. And we're incredibly excited by the talent there. And so Camarillo is going to figure more prominently into our future than actually we may have thought in the past. And so I would just tell you that their need to serve overall portfolio -- there is no more hiring there. And you'll see more is being done at Camarillo.

That's helpful, thanks.

Rich Watson with William Blair & Co.

I just had one question on operating margins, and then a follow-up on M&A. On operating margins, it seemed like if I'm running my numbers right, which is not a given by any means. But if I'm running my numbers right and we think about gross margins going up -- flattish to going slightly. And in '06, it seems like it implies that operating margins could actually be flattish or maybe even down a little bit, if I'm running my numbers right.

First, is that the right way to think about things? And second, if that is so, should we think about that as you guys are ramping up your R&D spend and maybe investing for some of the go forward organic growth initiatives? When should we start to think about some of the operating leverage coming down through the P&L?

You bet. Let me make sure we clarify your understanding. On the gross margin line we anticipate gross margin in 2006 to be the same or a little better than 2005. On the operating margin, the pretax line, we anticipate those margins going up 50 basis points this year in 2006. That is an example of where we will get leverage, mostly through G&A and becoming more efficient in our back office.

That's helpful. On the M&A environment, you mentioned the -- some of the consolidation potentially due to the NIH budget. Obviously, the benefits to you guys as a larger player. Does it -- have you seen any shift in terms of maybe more companies having seen sort of the writing on the wall as to what is going on in this market, you know, being more willing maybe to put themselves on the block? Does this improve your vantage point or negotiating standpoint on potential acquisitions going forward?

I certainly can't answer that question in the minds of the sellers. But I would say that you have already started to see a lot of companies put themselves up on the block. And certainly ourselves and other companies have been very active to acquire them. The more recent one is Ambion, which was I think a very good company. But a very stand-alone, very narrow company, and they could see the writing on the wall that they couldn't survive longer term as an independent entity. You'll see more and more behavior like that, like in Ambion. And again, we'll be there if the opportunity is right for us to acquire that.

Frank Pinkerton of Banc of America Securities.

My first one focusing in on R&D, I think I remember this from a couple presentations ago, you spoke about the investment in R&D and how that is going to continue to trend up. Can you just outline for me -- I know you launched a lot of products, did a lot of things this year, but where's R&D ultimately moving over a three to five year period?

What we have said is that R&D this year will be flattish, 8.5, 9ish at the most. It will probably tick up again this year. That would be the answer in the near term. On a three to five year basis we're still triangulating that, but I would give you my off the cuff answer would be around 10%.

That is what we are thinking this Company will be. And we will want to get to 10% as we finish out over the next couple of years in parallel with that a lot of the back office crunch that we're doing that we could on and on about with all this IT investment. As G&A goes down, R&D goes up, and that is the basic trade-off.

Second question, given the acquisitions that you have done over the last year, I see in my mind a third division here that could be vastly coming together with Invitrogen. Does it make sense to look at the reporting segments, to put the Dynals and some of those acquisitions into a separate bucket, as they are a little bit different from your core BioDiscovery market, maybe to show a little bit better the growth in the reinvestment you guys have there?

Is a debate we have a lot over the last couple of months as we reorganized. But I think you will see us perhaps do something as the year plays out as we do some acquisitions. You are seeing things the way we see it, but we're going to do a few more things first before we break out a third leg.

I will rapid it up with kind of the dumb question that I like to ask. And that is where your investments are currently focused more of the antibodies, diagnostics, kind of the faster growing markets as you're moving Molecular Probes and some of the older acquisitions into those technologies, correct?

Yes, if you look at the R&D investment in Molecular Probes it is like nosebleed section. We are strongly investing in where we have great growth already, but even more exciting growth in the future.

John Sullivan of Leerink Swann.

A quick question. $72 million in CapEx in 2005 works out to around 6% of sales. How do you think investors and analysts should think about your CapEx rate necessary to maintain and grow the intrinsic business on an ongoing basis?

We have said before this is about a -- and Travis, correct me if I'm wrong -- about 3% type re-investment. This year will be also again 72 to 75 million. In 2007 it goes down, but intrinsically to run the Company it is very small. It is 3 percentage points.

Actually, what we have said in our guidance, if I can just step in Greg, was that in 2007 we think that our capital investment bubble would be a bit behind us. And we probably invested at the rate of 65 million. And we would -- that would bring us down into the 4 to 5 percentage point range. I think that for modeling going forward is probably a good level. If you look back in 2004, we had capital expenditures of about 3.8% of sales. So somewhere in that 3 to 5% range.

Separately, as you talk about the opportunity to be a bigger part of the -- of perhaps a consolidating vendor group with NIH Labs, can you just remind us the portion of your business that comes from NIH funded labs today? And can you comment on whether this opportunity to take share with these labs actually comes from supply chain management type agreements, or beyond being a big fish among those vendors, how do you propose to gain share?

NIH is about 15% of our business, and we are growing nicely at NIH. I think that sets up the second part of the answer to your question, which is, if you are a recipient of NIH grants today obviously has been very tough to get those grants. The last thing you want to do is to waste money away on unnecessary search for reagent duplication, just the overall inertia in the supply chain and the tools that you need to do the grants.

Trust me, that message resonates extremely well with major universities today. If they can partner with a very high-quality scientific company, not just a supplier, but a scientific company, it really benefits them in the era that we're in with the NIH. That represents the, if you will, the motivation for wanting to do more collaborative discussions with an Invitrogen.

I would also tell you that the NIH funding is down now. It won't always be down. The discussion we have inside our Company is if we can grow now, you wait to see us in three to four years when we're going to really grow, because NIH will come back. And this is a good muscle building exercise for us right now.

Do you think that specifically you are adding capability to move that business online helps with those labs in particular?

I think that is all part of it, which is we're setting up extranets. We're making it far more personal for our clients. We have a very high investment in IT. And as we said before, that is where that all is going for the most part right now.

Derik De Bruin.

Just some housekeeping. Could you just break out the specific -- I can't seem to find the specific income expense numbers.

Travis or Dave?

Just a minute. I think what we were saying is we have net interest expense for the year of an additional $6 million. Is that right, Travis?

I believe it is. For 2006?

Yes.

That is the guidance number there.

Yes. 2006 we are expecting a 6 million net interest expense.

Okay. I actually was looking for the 4Q numbers on that, the interest expense (multiple speakers).

For 2005?

Yes.

What quarter?

Fourth quarter numbers. You give a net number but not the specific break out.

Give us a minute. We will pull that number out, and we will come back to you. Let's go on to the next question.

Dan Leonard with First Analysis.

There are two points I need a little more help understanding. One, the 12% organic growth in your BioDiscovery business, part of which you attributed to a large order from a U.S. biotech company.

I'm sorry, you broke up.

My first question is on the 12% organic growth in BioDiscovery. That is not -- and you pointed out specifically a large order from a U.S. biotech account. Now that is not typically the type of business where one order from one customer will move the meter in any given quarter. So I'm just wondering if you can give me some caller around why there was such a big order in the fourth quarter? Why that customer was buying so much? Anyway you can help me out there would be appreciated.

When we talk a large order it is in the tune of less than $3 million. It doesn't really move the overall needle that much. Do we see more of those happening in the future? Yes, we do see more of that happening in the future. And I think it pertains to -- what would motivate them to do that is that they like the product. It is essential to their overall discovery or development effort. And they wanted into a long-term supply agreement on that particular technology. That is why you see it happening.

But they bought the technology upfront and they plan to then use it over a period of a year or so or --?

Actually, this is a fairly high consumed productline, and so they bought it for --.

Three to six months.

Yes, it is not a long-term stocking. It was just three months or something like that. This will be an ongoing benefit for us.

And then my other question is related to the gross margin in BioProduction. I understand how BioReliance is a large negative year-over-year comparison, and how Sera is also a negative year-over-year comparison. But if I compare the gross margin in the fourth quarter to the gross margin in the third quarter, it was still down pretty substantially in the fourth quarter. Did BioReliance weaken further in the fourth quarter or did -- because I don't think that Sera prices weakened materially in Q4 from Q3, though I could be wrong.

Sera pricing definitely weakened from third quarter to fourth quarter. We think we have seen the worst of it now. That is our basic guess on Sera. It is just a little bit of a swinger right now for us. The good thing is that if we grow it becomes less and less of a component of our Company, and that is a basic message on Sera.

Did the BioReliance business have a higher than Company average or higher than BioProduction average gross margin back when it was performing well in 2004?

No. BioProduction?

No, it did not.

BioProduction has always had a slightly lower gross margin.

Specifically BioReliance within BioProduction.

BioReliance, yes, it did have a slightly lower gross margin than our GIBCO business.

When we acquired it it was approximately 5 to 10 points I think lower than our BioProduction business.

It is the nature of being a service business.

Lower gross margin, but about the same operating margin. But because it is a fixed cost business as volume changes, let's say it goes down, you're stuck with these fixed costs. And because we wanted to maintain the team there and train the team there, and that has been the basic commitment we have made. As volume comes back online, which we anticipate it will in the second half, this is going to be a very nice player into the portfolio.

The only other thing I would like to add to that for BioReliance for GIBCO, while the margins are lower than in our BioDiscovery business, the gross margins, the operating margins are very similar.

Because they require less R&D, right?

Correct.

Back to your question on the interest. In the fourth quarter of '05, we had interest income of 6 million. We had an interest expense of 9 million, for a net expense of 3 million.

Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I would like to turn it back over to Mr. Chester for any further comments.

I would like to thank everybody for joining us for this conference call. We will talk to you next time. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude your presentation, and you may now disconnect.