賽默飛世爾科技 (TMO) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2006 Invitrogen Corporation earnings conference call.

My name is Minosha and I'll be your coordinator for today.

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

We will conduct a question-and-answer session towards the end of today's presentation. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Ms. Amanda Clardy, Vice President of Investor Relations.

Please proceed, ma'am.

Good afternoon and welcome to our first-quarter conference call webcast.

I am Amanda Clardy, Vice President, 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 want to caution our listeners that our discussion today includes forward-looking statements, including but not limited to statements about future expectations, plans and prospects for the Company.

We believe that these statements are based on reasonable assumptions, but actual results may differ materially from those indicated.

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

Also on today's call, as we have in the past, we will discuss organic growth and pro forma financial performance.

Which includes non-GAAP financial measures at that term is defined in Regulation G. We believe the inclusion of these non-GAAP financial measures helps investors to gain a more meaningful understanding of our performance and is consistent with the manner in which management evaluates the Company's performance.

The non-GAAP financial measures are not meant to be considered superior to or a substitute for results of operations compared in accordance with GAAP.

You can find the comparable GAAP measures and reconciliations to those GAAP measures on our website and in today's press release.

So today, we will begin today's call with an overview of our results by Greg, then turn it over to David, and we will follow that with a Q&A session.

I'll now turn the call over to Greg.

Thanks, Amanda.

Let me give you a summary of our first-quarter 2006 performance.

Turning to page 4, you can see that our sales for the first quarter were $309, million, that is up 12%, but importantly, without the dragging effect of currency, they were up 15% in the quarter.

Our gross margins also improved substantially by 50 basis points in the quarter, and we are very pleased with our performance and our ability to manage both the mix and the price and productivity for the benefit of shareholders.

Our pro forma operating income was up 2%, but without the effect of currency was up 8%, as was EPS.

This really reflects our continued very strong investment in research and development and sales, and is part of our integrated technology and sales strategy.

The last thing I would ask you to draw your eye to would be the reduction in shares.

As we have said before, we are excluding the shares that remain as part of our 2.25% convertible bond.

They are not going to ever be turned into equity.

We will be redeeming them in the balance of the year.

And there is still about $180 million of debt that sits out there that Dave Hoffmeister will talk about, but that again will be redeemed in the balance of the year.

So overall, solid growth in the Company, good investment in where we want to, in R&D and sales, and very nice improvement in gross margins.

Now if we can go a little bit deeper into the two segments, our BioDiscovery business had sales in the first quarter of over $200 million, up 25% versus last year.

You can see our organic growth rate for that segment was at 7%.

And we are very pleased with the performance taking place in that one.

The 25% overall reflects our continued acquisition strategy and the 7% organic growth is really important because we had spend a lot of time focusing on turning that into a much higher-growth, higher-margin business, and we are doing that.

In the BioProduction, our results were not as positive, and I will explain why in more detail in the coming pages.

But the volume was down 8% year over year and our organic growth was a negative 5%.

This is mainly attributable to timing in our BioProduction business that is the media for biologics in production; the BioReliance business, which I will speak about again; and quite frankly, we had a very tough comparable in the first quarter of 2005.

Now let me go a little bit deeper into each one of these segments.

In BioDiscovery, overall it was a very good quarter.

Our European business was up 8%.

U.S. government at the NIH was up 7%, in spite of a very flat funding environment.

If you look at the business that we have acquired over the last couple years in terms of Molecular Probes, BioSource, our antibodies business, that is about a $180 million a year business that is growing well over 20% right now.

We had a fantastic quarter of new product introductions.

And Japan was flat, and I will speak to that, but the rest of Asia had very big growth.

Now Japan for us is a particular issue.

Over the last few years, we were growing at 20% year over year with a particular strategy that we had implemented.

And we're now in the process of retooling that strategy to allow for the next few years to have continued double-digit growth.

As we are right now, we are in between our strategies, and I would say that our growth probably reflects what everyone else does in Japan, which is flat to very low single digits.

But we are confident as being the leading life science reagent tool company in Japan that we are going to be able to re-establish that growth curve we have had.

On the BioProduction side, let me say a few words as well.

Our cell culture research business -- this is media in the GIBCO bottles -- was up 8%.

And we're feeling very strong about what is going on with the team there.

In BioReliance, there is a few points to be made.

Our orders exceeded sales for the first time in several quarters, which I think is a good bellwether of what the future holds.

And in fact, we see that business coming back nicely per our plan, and they in fact have positive growth now in the second quarter and we see continued increasing growth in the balance of the year.

I will tell you we are investing heavily in that business.

We announced a major investment in Scotland with a brand-new BioReliance facility to consolidate that to our Invitrogen site in Scotland so they have a large biotech campus there in Scotland.

And importantly, we named a new leader.

Tim [Derrington], who has just joined us from Quintiles, has been named the President of BioReliance.

And we are very bullish about the expertise Tim brings and where we want to go with BioReliance.

I think our soft spot for the quarter was BioManufacturing, again, the media, the sera that you need for BioManufacturing.

And for us in the quarter, it was about a $7 million timing impact.

Quite frankly, we don't have the best visibility to the approvals that take place.

And I'm not sure so sure our clients do, either.

And so we see that business being tough on a comparable basis in the first two quarters, but coming back incredibly strong in the second half of the year.

And finally, just an important news that we divested the BioReliance Germany plant.

This was part of our preannounced strategy to not be a contract manufacturer, and this was the last plant that BioReliance had in Germany.

As you know, we divested of one before in the United States.

About an $8 million revenue business for us that we divested yesterday.

So overall, pretty good news in the BioDiscovery business.

We see nice organic growth happening there, and we see really good growth for the balance of the year.

In our BioProduction business, I think we had a disappointing quarter, but let me just say a few words about that business -- on to the next page.

You know, when we look at biologics as a manufacturing process, what we're looking at on the right-hand side of this chart is that most of the biologics are in preclinical today.

And so when there is forecasts made, whether it is by Frost and Sullivan or other market research entities, I think they see what we see, which is a very strong double-digit business over the next decade.

And so we're going to have this lumpiness in a quarter or two, but overall I will tell you we continue to invest in our facilities and our technology, and we are very I think positive on the long-term outlook of this biologic production business.

And certainly, the GIBCO name and the GIBCO technology has a leading position in this overall pipeline.

So our first half is certainly lumpy, but I will tell you that we are expecting and certainly have produced high growth and we see high growth in the future.

Now let me jump to the BioDiscovery side and just say a few words about what is driving growth in that business.

As you know, we have acquired a number of companies over the last few years, and the one that I have often highlighted -- and what I would like to do now is just go a little bit deeper and talk about a transformation that has taken place.

In 2003, when we acquired Molecular Probes, we acquired that business for $325 million.

They had about 68 patents, and the revenue per new product introduction was around $3000.

Cutting now to 2006, the last 12 months, this is a business now that has done in excess of $100 million.

It has 80 new patents pending with the United States Patent Office.

And an important metric we track very closely in this Company is revenue new product introduction, and you can see we have exploded that one to $16,500.

And we have about 300 employees.

By our calculations, if you just use, well, at least historical multiples of EBITDA, we have created over $500 million of shareholder value in just 36 months on this acquisition alone.

So this is a very positive thing.

And we've done it really in three ways.

The first is scientific investment.

We are opening up our new nanotechnology center, chemistry center in Eugene on May 8.

It is a $25 million investment, a very specialized facility for R&D around materials and chemistry.

We have moved into new businesses that allow us to start surrounding our reagents with consumable gadgets and instruments.

And lastly, our goal is to always remain the preeminent labeling and detection company, and through Quantum Dots, which we think will have huge application in not only research but in diagnostics, we really set ourselves out as having that position as being the preeminent labeling and technology company in the years to come.

Now the other part of our strategy is cutting across both of these segments -- BioProduction and BioDiscovery.

And one of the areas that I think gets a lot of sizzle in the press, and certainly we have focused on it, is stem cells.

One of the things this Company does well is we quickly mobilize to pull resources together, to pull hot teams together to go after what we think are emerging trends in science.

It is one of the advantages we have.

So what we have done with stem cells is assemble a really world-class team, both on the R&D side and in the marketing side, through Dr. Mahendra Rao, who is probably one of the leading names in stem cells in the world today and really led that section in the NIH, is now leading our R&D effort for Invitrogen.

I think it says a lot about the caliber of R&D talent that we have been able to attract and built over the last few years in this Company.

And then Dr. Joydeep Goswami, who has done a wonderful job with us in licensing and now leading our stem cells initiative, really bring strong business expertise to what we're doing.

As you can see, what we are doing is assembling all of the tools necessary that a scientist needs in isolation, characterization, expansion and differentiation of cells.

And for us, this is about a $30 million product set that we track very closely and is growing at 30% year over year.

We've done this in a couple of other areas and we see similar types of growth.

Let me provide you now an update on corporate development, first around our integration.

As you know, we made eight acquisitions last year, and I'm glad we made them last year, because it seems acquisitions have gotten more expensive in the first quarter.

But just to give you an update on the ones we've done, Dynal is all fully integrated now and was part of our very focused strategy to move into a supply position for molecular diagnostics and cell therapy.

And particularly around cell therapy, we see a lot of growth happening over the next decade.

And so Dynal will become an ever-more important part of our strategy.

BioSource is being merged in with our drug discovery business, and we really now have the broadest drug discovery offering in the business.

And you can see they've been completely integrated into our fulfillment side and will in the next 60 days be completely integrated, both on the front end and their technology offerings into some other technologies that we are developing.

And then lastly, Quantum Dots is already being sold on the Internet for us through our distribution system.

And then we are pursuing many new applications.

And so I would say that one has about another 90 days to finish out its multigenerational technology plan.

I often get asked about our M&A activity.

And I will tell you that we still have a very robust pipeline.

And you can see some of the areas that we're looking at.

And we've got great financial horsepower -- over $700 million in cash.

We've put in place a $250 million revolver and we'll generate north of 225 million in free cash flow this year alone.

So about $1 billion of financial horsepower to really put our strategy in place.

But importantly, our acquisitions are about 90% integrated from 2005, and obviously we're focusing now on 2006.

We think that we have had the right strategy over the last few years.

This integrated technology and selling is what customers want in this era of tighter economics.

And importantly now, customers are seeing it.

You know, the one area where we are most proud is what our customers have said and voted for us.

And I think one of the areas that we pay a lot of attention to is this Life Science Industry Awards by The Scientist magazine.

They gave out 12 awards.

We were nominated for all 12 to be a first-place winner, and we won seven of the 12.

No other company got even close in terms of winning The Scientist's preference for who they like and what types of products they like.

And I think it says a lot about our focus on the customer and the customer saying they like our focus.

With that, I'm going to turn it over to Dave Hoffmeister and he can take you into deeper details around our financials.

Thanks, Greg.

If we take a look at gross margins, gross margins were up nicely for the quarter at 62.3%.

That compares to 61.8% for the first quarter of last year and 59.8 for the fourth quarter.

Really three things drove that margin improvement.

One was pricing, and we'll say some more about that later, but we basically raised our list prices with the distribution of our catalog in the United States in January and slightly later in Europe.

Positive impact from the segment mix -- as we've said before, BioDiscovery segment has a higher gross margin than BioProduction.

As that increases, that helps our gross margins.

And finally, royalty expenses -- we have over 1000 royalty agreements.

Each quarter, we have puts and takes that typically total something less than $1 million up or down in our royalty expense.

Just so happens this quarter we've started to manage those royalty contracts more aggressively and have identified about 2 million or 1 percentage point in gross margins improvement in royalty expenses.

And that should have an ongoing impact, positive impact of a couple hundred thousand dollars a year.

With that increase of gross margin, we have continued to invest in research and development.

Research and development spending is up slightly to 27.9 million versus the fourth quarter of last year.

And our research and development efforts, we're really started to see some payoff from those.

We've had 31 product launches in the first quarter, a four-times increase in new products revenue.

We've also continued to invest in sales and marketing in the quarter.

Sales and marketing expenses were 59 million.

That compares to 56 million for the fourth quarter and 48 million for the first quarter of the prior year.

And the investments have been in sales specialists -- these are specialists that supplement our general sales organization; the division structure, where we have put in some key marketing personnel; and finally, as I mentioned before, our catalog went out in the first quarter of this year.

Despite these investments, operating margins are also up nicely to 24%.

That is a 1 percentage point increase from the fourth quarter of last year.

And we are very pleased with that improvement in our operating margins.

If we go to the next page, just do a quick comparison between GAAP and pro forma EPS.

GAAP EPS for the first quarter of this year was $0.35.

We had $0.38 worth of adjustments, pro forma adjustments, basically related to amortization associated with our acquisitions.

Last year, in our pro forma numbers, there was a significant currency gain on forward contracts related to our purchase of Dynal.

We had business consolidation expenses of about $0.03, primarily associated with the integration of our BioSource acquisition that was completed at the end of last year.

And this year, as you all know, we have FAS 123R stock option expense that amounted to $0.14 for the quarter.

So on a comparable basis, first-quarter earnings -- last year, earnings per share were $0.88.

This year, we are reporting $0.90 earnings per share.

To take a look at our balance sheet and cash flow, just briefly, we continue to have a strong cash and marketable securities position of over $700 million.

Accounts receivable were basically flat.

Inventory was up slightly, and that was primarily associated with an inventory build that we did to ensure uninterrupted sales to our customers as we converted to a new ERP platform in New York -- or in Europe.

That is well on track, and we expect to have that completed in the next couple of months.

Accounts payable and other liabilities were down slightly.

And debt remained the same at about $1.3 billion.

Free cash flow for the quarter was $19 million.

That compares to $51 million in free cash flow for the first quarter last year.

The first quarter of last year had, as I mentioned before, significant one-time gains associated with the currency and the Dynal acquisition.

The increase in working capital also impacted our free cash flow for this quarter to tune of about 4 million.

And again, that was the inventory build associated with our ERP system.

So adjusted for those things, our free cash flow was similar to what it was last year.

And we continue to remain optimistic.

We are on track for free cash flow for the year of 225 million to 235 million.

Greg?

Dave, thanks.

And now, going to 2006 guidance, as you know, a few weeks ago we issued a preliminary press release where we essentially maintained guidance on our pro forma EPS of $3.90 to $4.10, up 13 to 19% in that range.

The only thing that we did was lower the bottom part of the revenue range to 1.3 billion.

It's really mainly associated with the sale of some businesses and discontinuation of products as we have consolidated a number of these acquisitions that we've made in the past year.

So we thought it was prudent to lower the bottom end of the range.

We believe our pro forma OM, operating margin, will be around 25%, up 50 basis points versus last year, and as David just said, 225 to 235 in free cash flow.

Most of our business, if you will, is -- I shouldn't say most, but we see the second quarter being slightly better, ahead of the first quarter, and then third and fourth quarter really being much stronger than the first half.

So that is the general landscape I would give you of how we see this year playing out.

Now moving beyond this year, I would just like to continue to focus on what we are focused on, which is the long-term building of the Company.

And as we look out over the next couple of years, we continue to be positive and focused on building revenues to 10 to 12% year-over-year growth, continuing to get more leverage in the business in terms of operating margin expansion, and seeing double-digit growth in pro forma EPS.

The question is how we are going to do that.

Look, it is around, for us, innovation.

You can acquire a lot of companies.

We have and others certainly have.

But at the end of the day, it is about your ability to actually create value.

And we're doing that through better and better innovation, by putting together all these technologies that we have assembled.

Because we're such a global company -- we do business in over 70 countries -- we are in the emerging markets in a very big way, and we are experiencing the growth where the growth is happening.

We talked about the biologic pipeline -- the ensuing years, the second half of this year looks very positive.

And we've got a lot of financial flexibility, as I mentioned before.

So this is a company very focused on the long term, and we would just continue to like to remind our investors that is where the managements' head set is.

With that, Amanda, I will turn it back over to you.

Great.

And now we will open it up for questions and answers.

(OPERATOR INSTRUCTIONS).

Quintin Lai, Robert W. Baird.

With respect to BioProduction in Japan and the issues that happened in Q1, have you done anything to improve the visibility internally on that business and to give you confidence that it will return, especially like BioProduction, for the back half of the year?

Right.

So in terms of BioProduction, obviously as these events happened in the first quarter, we went very deep with the team and with our clients just to better understand the context of when shipments were going to be taking place.

And so we feel very confident we have a good register on just that profile of shipments in that business now for 2006.

In Japan, it is a matter of a retooling of a strategy, Quintin.

We rely a lot on information from dealers.

That was the strategy we had had, and very successfully.

And I just think that the information exchange between the dealers and us in the first quarter was not as robust as it could have been.

And so that is why there was a slight shortfall near the end of the quarter that I don't think will be replicated.

I think the team there understands what has to happen.

So in your opinion, it was more of a communication issue?

Or do you think that there was a market share shift in Japan?

I don't think there is a market share shift at all in Japan.

When we have caucused in Japan and seen one of our competitors, no one is growing very robustly there right now.

I think everyone is experiencing about the same growth.

Now for us, it is a particular issue because we were growing incredibly fast, year over year, 20%.

And so now, we're not growing at that rate anymore.

And we have ideas and strategies in place to really return to that level of growth.

So what I would say is we are experiencing what everybody everyone else experiences.

But for us, it is just a different situation because Japan had been up until last year a very fast-growth market for us.

And my final question, and I will jump back into the queue -- over the last two days, we have seen some big deals, with Millipore buying Serologicals, and then today Siemens bought Diagnostic Products.

Are we standing at the edge of some big industry consolidation?

Or do you see that M&A might continue to go back to these small deals?

Well, in terms of DPC and Sero, I would tell you that those two properties have been available for some time.

And we have known about it, and I'm sure many of my colleagues in the industry knew about it.

So we are not surprised to see them sold.

What I would just reflect on is I am glad that we have done a lot of our industry consolidation in the years past, because we were able to do it at a far more economical rate than what others are having to do at this moment.

So that's just some comments I would give.

Derik De Bruin, UBS.

Greg, since you came on board in 2003, we have had three quarters where there seems to be a disconnect between results and guidance.

I guess what are you doing personally to better handle volatility and also just to -- is there some common theme between these events that you can help better control?

Look, I think it is a fair statement, Derik.

We do pretty well on the years.

I think we hit our yearly estimates pretty well.

But it is the quarterly fluctuations that you are referring to that we haven't done as good in.

And I do take responsibility for that.

And so whether it is retooling how we do sales forecasting, how we do bottoms-up budgeting when we set these numbers, these inconsistencies in the quarter have caused a lot of review of just how we're doing that.

So will this be replicated again?

I don't think this will be replicated again.

And I think I can tell you that we are very internally focused on consistency of performance relative to guidance from here on out.

But there had to be some new disciplines installed just to make sure that takes place.

And I am confident we are on the right track now.

I don't mean to harp on this, but only because I get asked the question all the time, and I really don't know how to answer it, I guess -- is it a case of being overly optimistic on management's behalf of what the market is out there, or the fact that the business hasn't quite come up to its full potential yet?

Well, look, I think this is a matter of having a good grasp on reality, and then that would be called a forecast, and then achieving that forecast.

For us, it's really -- most of our effort is focused on that good grasp of reality and not necessarily achieving it.

I think actually the business in most of the areas, 85% of the portfolio, is performing quite well.

I think we've still got some, obviously, as you've highlighted, better work to do around forecasting.

And that is where we have put a lot of our efforts.

Finally, just one question -- so there was $0.14 of option expense in the first quarter.

Is the guidance for the full year still $0.44 in option expense?

Yes.

Tycho Peterson, JPMorgan.

Question on serum pricing.

I noticed in the slides you had talked about that being fairly stable.

I was actually under the impression that that pricing had come down a little bit and that some of the competitors in the market, in particular from the Midwest, had been fairly aggressive in terms of trying to get some deals and had put some pressure on pricing for serum.

Is that the case?

Here's how that pricing has worked, Tycho, is that if you look at sera pricing this quarter versus first quarter '05, it's certainly come down.

If you look at sequential pricing, let's say week over week, month over month over the last few months, it is now definitely stabilized.

So I think it came down dramatically through '05 and we are now stabilized.

And my hope is that that price starts to increase again.

And as the industry in general kind of migrates towards serum-free or chemically defined media, can you talk a little bit about where margins are for that business now and potentially what the percentage of your revenues now are coming from serum for your products?

Well, the margins are much more like our BioDiscovery business, in total, 60s, 70s-type percent, and serum-free media is in the tens of millions and growing rapidly.

And I think we are just seeing a conversion take place between animal-origin material and chemically defined media.

So this becomes more and more just a reagent type play as time goes on.

And then finally, just a question on diagnostics and the strategy, and I guess more importantly potentially for investors, the timeframe in which you will convey a path to market for diagnostics.

Is that something that will happen this year, in your view?

Yes, I believe that will happen this year.

And can you comment a little bit I guess on the Mayo collaborations and what you may hope to achieve from those?

And I will leave it at that.

Sure.

Our goal with the Mayo collaboration was to first see how our tools could be applied to the development of a molecular diagnostic test and assay.

And again, we had very low expectations that we could actually develop something that would turn into a marketable product.

At this stage, we have been very fortunate to been able to develop we think a cutting-edge test.

We are moving into the trials internally of that with Mayo.

And if that's all positive, then our goal, then, would be to try to move that on to the outside and turn it into an FDA-certified test.

Rich Watson, William Blair.

I just wanted to ask a question for Greg.

In light of your comments about the sort of the landscape you're seeing for M&A and valuations being driven up, how should we think about the guidance -- I don't know if I want to call it guidance -- but the plan to spend may be as much as 500 million in acquisitions this year?

Is that still intact, or could that maybe be a little bit less when all is said and done?

I think it all remains to be seen.

We do deals to add to our strategy.

And so if we can create shareholder value, then we will pay the price to obviously acquire a company.

And if we can't, then we won't So it just remains to be seen, from my vantage point, of do we spend less than 500 million, like you suggest.

At this point, I'm sticking with our direction that we will spend about $0.5 billion on acquisitions.

And on BioProduction, just kind of eyeballing the historical trends there, I know you talked about a lot about the lumpiness quarter to quarter.

But it does seem like it's gotten more lumpy.

And I was just wondering if anything underlying is going on in that business, anything that has changed in the past year or two, or is it really just the timing of one or two orders?

And then if I could, just one quick follow-up housekeeping one for David.

BioProduction is a double-digit growth business -- has been a double-digit growth business.

And what you're seeing is that we have customers that have become much more impactful on our revenue.

And that is good.

That is good.

But it is also bad when a quarter like this happens.

And I would just encourage investors to look, if they are long-term investors, look a little longer term, and all will be fine.

And Dave, just on the FAS 123 impact for the full year, it was a little higher in the first quarter than we were expecting.

How should we think about that for full year at this point?

And then can you just -- I know you said this, but I just want to make sure I heard you right on gross margin, operating margin, what the year-over-year improvement we should think about for those two metrics?

Rich, we're not changing any of the forecasts for our 123 option expense for the year.

So we are continuing to project 40 to 44 million for the entire year in terms of total expense.

And then your second question was around the margins, again.

Could you elaborate a little on that?

Yes, I was just confirming the year-over-year improvement you guys are targeting for gross and op margin in terms of basis points?

In terms of gross margin?

Yes, and I don't know if you gave out margin as well?

Well, in terms of the op margin, we're looking at a 50 basis points improvement throughout the year.

And longer term, we are targeting -- we think that we can do that for the next two or three years in terms of basis point improvement.

Edward Tenthoff, Piper Jaffray.

Actually, I think my questions were answered.

But just one quick one, a little bit of housekeeping -- could you give us what the breakout was between interest income and interest expense in the quarter?

Interest expense was 1.9 million.

And interest income was about 454.

I'm sorry, 454,000?

Could you repeat that one?

Sorry.

We're just looking at it.

We are just checking on it here.

So net interest of 1.9, and actual total interest income of about 6.5.

Interest expense of 8.3.

Okay?

And then other income of $454,000.

John Sullivan, Leerink Swann.

A quick question regarding BioReliance -- is the thesis for BioReliance still intact?

Invitrogen bought it, I always thought, in part because it provided entree for the company to biotechs at an early point in their biomanufacturing planning and process.

Is this still the working thesis for BioReliance?

That is still the working thesis.

And I actually think the thesis is working.

Are the issues -- there were some human resources issues I think through the last couple quarters with respect to BioReliance.

Is that true and do you feel like those are behind the Company?

That is what I think we're starting to see now, is that we took some tough medicine to turn that business into a very reliable operationally oriented company.

We put program management in place.

We've put some world-class production leaders in place, if you will.

And we are now starting to see the benefits of being able to produce reports really on time, super-high quality that obviously customers expect and I'm not so sure was the tradition of BioReliance, but it certainly is the performance of them now.

Has it been a competitive issues to any extent?

Or has it been more internal issues that got BioReliance to where it is right now?

I think there's always competitive issues.

But most of our issues I think have been self-inflicted, but more that we inherited when we bought the company, quite frankly.

And we have and focused on fixing them over the last year and a half.

Thanks very much for the candor.

And then separately, what is the future of the distribution channel for Invitrogen?

Will it be a catalog company as heavily a couple of years from now as it is right now?

Or will it be more Internet?

How should we think of the distribution channel?

Well, I think we have publicly said this becomes more and more of an Internet company. 40% of our sales are now going through the Internet.

Every time we do a B2B connection with a client, our sales increase by 20%.

So clearly, this is the channel that I think ultimately takes place in the Company.

And there is huge value creation when that happens, because it is a very low-cost way to distribute.

And I think we have mentioned before we are targeting something like 50% of our orders over the Internet in the coming year.

[technical difficulty] the changing costs associated with taking business over the Internet instead of through paper catalogs?

Well, I mean, the catalog costs several million dollars a year.

And the question I guess is will there be a paper catalog in the future, and we have not decided that.

I will tell you, though, we have continued to invest in salespeople in parallel with the Internet.

And our goal is to be looking at channel paybacks and presence everywhere we can.

So that's just part of our strategy, is looking at channel mix over time.

We would hope to see some efficiencies as we take more and more orders over the Internet, but we've not factored in anything explicitly in our forecast at this point in time.

And then to that end, if you're inclined to answer this question, how many employees of Invitrogen have a sales quota today versus a year ago?

I don't think we publicly break that out in specificity.

But it is a pretty big sales force.

A pretty big step up?

Well it is definitely a step up, and it is a pretty big sales force.

I think our sales organization has always had a quota incentive, so --

I think he asked, though, how -- did you ask how many people are actually carrying a quota?

That's correct.

I'm just trying to get some sense -- how many front-line salespeople, say, versus a year ago?

Well, you can look at our sales and marketing expenses are up pretty substantially.

Paul Knight, Thomas Weisel Partners.

This is actually Andrew [Gatlin].

Thanks for taking my call.

Could you discuss a little more about the changes in gross margin in your two divisions?

The changes in gross margins in the two divisions?

Yes.

Well, the gross margins in the two divisions -- the margins in the two divisions, BioDiscovery has traditionally had and continues to have a higher margin than our BioDiscovery business.

You know, the margins there range at around the 70% range, high 60s overall.

Specifically in BioProduction --

Yes.

And BioProduction, the margins are in the high 40s.

And that is basically what they have been.

Those haven't changed significantly.

We've seen some slight improvement as we have gotten positive price impact over the first quarter.

But we don't see any significant change in those margins.

So it is just the price increases?

Yes.

And just to be clear, on BioDiscovery our margins actually went down year over year, but it was because of the mix of new acquisitions.

And also, could you discuss ex-Japan, in Asia, how is business, and also as well in Europe?

Ex-Japan, Asia is growing at very high double digits, China is especially.

Europe I think I said is growing at 7 or 8%.

So that is a market that I think we are clearly taking share in at this point.

Dan Leonard, First Analysis.

Greg, can you give me a little more detail on the discontinuation of products/sale of businesses which caused you to reduce the lower end of your guidance?

As we just publicly disclosed, we just sold off a contract manufacturing business in Germany.

We have closed down key plants of BioSource that total millions of dollars.

They had plants in a lot of different locations.

We've discontinued some of the low-margin products.

And so that process will continue through the balance of the year.

What is the total aggregate revenue impact of all those activities?

Well, we took the bottom end of the guidance down -- Amanda?

By $30 million.

Again, this is just broad guidance we are giving to the Street.

And also, how are the acquisition you made in 2005 tracking versus your expectations?

The acquisitions we've made in 2005 -- Dynal, BioSource are some of the bigger ones -- are growing at strong double digits.

And finally, on the options expense, should I assume that it is going to be $0.10 a quarter for the remainder of the year?

Yes, that is about right.

Again, it is $25 million in after-tax expense, about $0.44 a share.

Steve Unger, Bear, Stearns.

Just first off, I am calculating the impact of acquisitions at 35 million in the quarter.

Is that correct?

What are you referring to, Steve?

The impact of acquisitions on the revenue line.

Is that 35 million? 13%, right? 35 million?

I don't --

Year over year --

Is that right?

Yes, that seems about right.

Is there any way you can break that out between what BioSource contributed and what Dynal contributed?

I am assuming that those are the two major acquisitions that are impacting the first quarter.

Yes, those are the two major ones, Steve.

We haven't broken those out in that kind of a detail at this point.

And then how much did the transfer of oligo sales from Illumina add to organic growth in the quarter?

It is negligible at this point.

Negligible?

Yes.

The oligos business -- maybe I'll ask it in a different way -- the oligos business, did that add to organic growth in the quarter?

You know, the business is on track.

I would say that when we look at our sales forecast, though, it is really -- it gained substantially quarter over quarter from year.

So I don't think it had a measurable impact in the quarter.

And then the U.S. catalogs shipped in January -- that's correct, right?

Yes.

Could you remind me as to when that was shipped last year?

It was shipped in the second quarter last year.

So it was shipped in the second quarter of last year.

But just so that -- I wanted to be clear on something.

The catalog was in Q1 of last year.

We didn't change pricing until --

That's right.

So the catalog was shipped last year in January.

The price list for 2005 was shipped in the second quarter of last year.

But I would caution you there is no such thing as a catalog effect.

We have measured it quite well.

There is no such effect.

So the historical catalog effect that we used to see --

You did not see it -- it was all industry phantom.

I can tell you I have never said there was a catalog effect.

And we have measured it.

And so I'm just telling you we shipped catalog in the first quarter.

That is all I will tell you.

But it doesn't have a dramatic impact on volume.

And just my final question -- we had two biologicals approved by the FDA last year.

We had two the year before that.

Does your business plan for BioProduction at this point -- are you expecting another approval or a reapproval of a biological by the FDA this year?

I really can't answer that question.

I am really bound by -- we are bound by confidentiality agreements.

We know what was approved last year.

Derik De Bruin.

Just a couple of quick follow-ups.

So the share count for the year -- you expect that to remain pretty stable at the 54.8 range?

Our share count -- yes.

Our share count currently is 54.8.

The guidance that we provided was 56.5.

And we still expect it to be average 56.5 over the year.

And it is due to -- our stock price we believe will go up.

And we also know that employees will probably be exercising options.

That was actually going to be a follow-up on that.

Thanks for clarifying.

Those are the reasons why we have given that guidance.

And I guess just another follow-up question -- what is your visibility into the ramp going into 3Q?

Is the whole thing dependent upon BioProduction coming back as a major ramp?

Or are there other bits and pieces that you expect to come back up during the second half?

I don't think I want to convey that this is some big hockey stick here.

We know what the year looks like on BioProduction.

Due to these moving out of shipments, we have a better visibility on when we think they are.

And our best estimate right now is that we see a substantial change in the second half of the year, Derik.

So I think we are just being candid with what we know today.

But I don't think we are being overly optimistic.

Now this concludes the question-and-answer part of our call today.

Just to remind you that this call will be on replay for the next eight days and the number will be on our website as to how you can access that.

Thank you, everyone.

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

This concludes your presentation and you may now disconnect.

Everyone, have a wonderful day.