賽默飛世爾科技 (TMO) 2006 Q2 法說會逐字稿

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

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

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

We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions).

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

I will now turn the presentation over to Ms. Amanda Clardy, Vice President, Investor Relations.

Please proceed, ma'am.

Thank you.

Good afternoon, everyone, and welcome to Invitrogen's second-quarter fiscal year 2006 earnings conference call.

I am Amanda Clardy, 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 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 of 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 as that term is defined in Regulation G. We believe the inclusion of these non-GAAP measures help 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 prepared for in accordance with non-GAAP.

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

We'll begin today's call with an overview of results by Greg, and then turn it over to David, followed by a question and answer session.

I will now turn the call over to Greg Lucier.

Thanks, Amanda.

It's my pleasure to talk to you about our second quarter financial results.

First, in looking at the second quarter and the first half of 2006 in total, I think we've had some good, solid growth in many of our new areas of drug discovery, labeling and detection, gene expression and others.

However, these results have really been masked in the first half by three challenging items.

The first, the timing of our Bioproduction orders in the first and second quarter; second, our overall Sera business and cycling through a commodity phase -- commodity pricing phase; and then third, the normal disturbances associated with integrations, facility closures and the implementation of a global ERP system.

We have plans in place for each one these items and David and I will be speaking about them during this conference call.

The second point I'd like to summarize is that, in addition to our earnings announcement here today, we are also announcing the authorization by our Board of Directors of a $500 million share buyback.

At our low share price, we think the best acquisition with our available cash is our own stock and we intend to execute on this share buyback.

The next point I'd like to make is about our cost structure.

Clearly in the first half of the year, we have been investing in R&D, in technical sales specialists and continuing to operate on a presumption of revenue being higher than it actually turned out.

In the second half of this year, we intend to seriously look at all of our investments and make changes accordingly to return our pretax margins to their historically 25%, and these plans are already underway.

And lastly, just a point, is that this company has greatly expanded its footprint over the last couple of years.

We have moved into a number of new business segments and we are now at this point taking a step back, looking at our entire portfolio and conducting a strategic review on each and every one of the businesses in which we operate with a focus in particular our Sera business.

We intend to do this over the next several months and if actions are needed, actions will be taken in order to make our portfolio one where we can differentiate with science and produce high margins in a very stable, consistent way.

The second point I'd like to make is just a bit of a housekeeping.

We have heard from many of our investors that the name of our one publicly reported segment -- Bioproduction Systems and Services -- has not always been clear.

And so with that here on this particular earnings call, we're making a name change to our one segment.

The new will now be called Cell Culture Systems, of which as you can see is comprised of four basic components -- our cell culture research business, our Biomanufacturing business, the Sera business, and finally, Bioservices, ostensibly, our BioReliance business unit.

These four businesses comprise the cell culture systems business, which again is just a name change from our formerly called Bioproduction Systems and Services.

With that, I'd like to turn it over to Dave Hoffmeister for him to share with you in particular our second quarter financial results.

David?

Thanks, Greg, and good afternoon everyone.

Thank you for joining our second quarter earnings call.

As reported in this afternoon's press release, second quarter of 2006 sales were 314 million, up 2% year-over-year.

This represents a 2% increase over first-quarter 2006, which is in line with the low end of our previously stated expectations.

Although this represents only a slight increase from the first quarter, the overall revenue growth for the Company is really a tale of two cities -- solid growth in Biodiscovery, offset by a decline in our cell culture systems.

An important item to note as it relates to total revenue growth is that we sold off the [German] contract manufacturing business of our BioReliance unit at the end of April.

This divestiture accounted for 1.5 million of lost revenue in the second quarter, affecting growth rates by 50 basis points.

As reported, revenue numbers have not changed for this divestiture, but we have adjusted organic revenue calculations to reflect the sale which impacted our Cell Culture Systems segment.

Gross margin for the second quarter was 61.6%, in line with last year, reflecting our ability to offset the negative mix from lower gross margin acquisitions with positive price impacts.

SG&A increased year-over-year to 97 million for the quarter.

This is a 10% increase and reflects our continued investment in our technical sales force, our ERP compression and merchandising systems.

As we discussed in the past, we have a lot of catching up to do in infrastructure and we are investing here to support the long run growth of the Company.

R&D rose by $2 million year-over-year which represents an 8% increase.

The increase in sales was not enough to offset our investments, and therefore, operating income decreased by 8%.

As Greg mentioned, our cost structure is under review because, although the second quarter came close to our expectations, we don't feel that our current level of revenue growth supports a continued increase in expenses.

Pro forma earnings per share for the second quarter increased 3% over last year while GAAP earnings-per-share increased 33% over the same period last year.

Turning our attention to the first half, in total sales increased by 7% year-over-year.

Recall from the first quarter that we had a $10 million negative impact from currency which affected the growth rate by 2 percentage points.

Without currency, revenue grew 9% in the first half.

This revenue growth was driven by acquisitions and solid organic growth of 5% and in our Biodiscovery segment, which as I mentioned before, was offset by a decline in organic revenue of 7% in Cell Culture systems.

And I will give more detail about the growth rates in the various business units within Cell Culture Systems in a minute.

Gross margin was 62% for the first half.

This represents an improvement of 20 basis points over last year.

SG&A ended the first half at 30.1%, again, driven by our investments in a few key areas mentioned earlier.

R&D was 8.6% of sales.

The hiring is now flattened out in R&D and we are continuing to optimize the returns on this investment. earnings per share increased to $1.80, representing a 2% growth year-over-year.

Now I would like to provide a little more detail on the growth in our individual segments because as I said earlier they are really on two different trajectories at the moment.

Starting with our Biodiscovery business segment, second quarter revenue was 205 million, up 11% year-over-year, driven by acquisitions and 3% organic growth.

First half revenue growth was 5%, which was in line with market growth rates.

We are satisfied with the 5% year to date given this growth is less than it could have been due to a couple of specific hurdles encountered in the second quarter.

First, we had a major ERP system conversion occur in Europe during April.

This was our initial installation of a global system and we had a normal set of complications and interruptions to business to contend with.

Specifically, we had several weeks of challenges relating to logistics, ordering and shipping and this is not entirely unexpected.

But despite our best efforts, such as building inventory in advance of implementation, we did cause some customer delays and missed orders in shipments.

We estimate that the impact of those misses to be approximately 2 million in sales, mostly affecting our Biodiscovery business segment.

Second, we're in the midst of fully integrating facilities, processes and procedures for our Zymed, [CalTag] and [Biosource] acquisitions.

This includes shutting down our South San Francisco operations and moving people and products to Camarillo, California or Eugene, Oregon.

As anyone has been involved in these types of efforts knows, full-scale integrations are time and resource intensive and can impact revenue streams.

Toward the end of the second quarter, we began seeing an impact from this integration project on growth rates and some of the products within these businesses.

We estimate that the impact from this integration to be roughly another point of growth in our Biodiscovery segment.

However these issues will be largely behind us by the end of the year and we continue to believe that in order to achieve the full potential of a broad portfolio as well as to exploit all of the cost synergies, it's in our best long-term interest to fully integrate all of our acquisitions.

The integration project for our Cell Analysis division and our systems conversion in Europe had a combined impact of two points on our Biodiscovery organic growth for the quarter.

Without these hurdles, Biodiscovery organic revenue growth would have been 5% in the second quarter and 6% year to date.

Even with the two items just discussed, we had some very strong growth in many of our core brands and customer segments as Greg alluded to earlier.

For instance, academic and Biotech were solid across the globe with the exception of Japan which continued to be a soft market.

Emerging markets such as India, China and Korea had high double-digit growth and we're very proud of the work our teams are doing to customize the brand to these emerging markets.

Other areas of strength were Realtime PCR, RNAi, Drug Discovery Services and Labeling and Detection, among others.

We continue to build out our market leadership positions in these product areas with new product introductions, customer collaborations and novel workflow solutions.

In summary on the Biodiscovery segment, we are pleased with our revenue growth in spite of the specific hurdles I just outlined.

With the systems implementation behind us and the facilities integration project now scheduled for completion at the end of the year, we are confident in a continued acceleration of organic growth in this segment.

Now for Cell Culture Systems.

Total revenue in this segment was 109 million for the second quarter, representing a decline of 8% organically.

On an as-reported revenue basis, the decline was 10% again due to the divestiture of the German BioReliance plant.

As many of you are aware, there are three business units, actually four within our Cell Culture Systems -- cell culture research, cell culture production, Sera and BioReliance.

Cell Culture, although we don't plan to comment on the growth rates of all of these business units each quarter, we do feel that given the lumpiness of our cell culture production business unit and the decline of our Sera businesses, it's worthwhile giving shareholders more detail on the dynamics of these business units at this time.

So let me go into a little detail.

Demand for cell culture research media continues to be strong.

Revenue in this business unit has increased 6% year to date.

We continue to refresh this product line with innovative packaging and merchandising and we're seeing the benefits of this investment pay off in greater than market growth.

BioReliance remains a challenge although we are seeing modest improvements in the business each quarter.

Cell Culture production media grew 10% sequentially while Sera production continued to have a significant decline of 40% year-over-year.

As we mentioned at our investor day in June and Greg reiterated earlier, our Sera business is under strategic review.

Now I would like to turn our attention to slide 10 to discuss some balance sheet items.

We ended the quarter with 733 million at cash and marketable securities.

We experienced increases in accounts receivable as well as an increase in inventory.

Total debt was 1.3 billion at the end of the second quarter.

Free cash flow for the quarter was $6 million.

Although on the surface this seems low, it's driven entirely by uses of cash for working capital.

Our ERP system conversion in Europe caused some disruption in invoicing, days sales outstanding increased by two days, which equated to a 7% increase in accounts receivable.

Additionally, inventory increased by 10 million in large part due to additional Sera collections.

And that's just the nature of the Sera business -- you cannot control the timing of supply, you collect it when it's available knowing that you probably are not going to be able to sell it immediately.

Those are the main items and that led to our increases in working capital for the quarter.

Fluctuations in working capital needs in any given quarter are not unanticipated.

We fully expect to reverse all of the first half uses of cash for working capital during the second half of the year.

Additionally, there are plans in place to further improve working capital throughout the year as we did last year.

The business overall has always generated a great deal of cash and this year will be no exception.

So in summary, the second quarter results were in line with internal company expectations, albeit at the lower end.

We're pleased with the growth in our key customer segments and core products.

We have several isolated areas of weaknesses in Sera, cell culture production and our site consolidations, but these are identified and plans are already underway to address the issues.

With that, I would like to move onto the outlook for the rest of 2006.

Given we're seven months into the year, we have much better visibility into our current market and customer-specific trends are going to affect our business.

Therefore, we are adjusting our revenue guidance to 1.26 billion to 1.3 billion for the year.

The change from previous guidance is due to two main factors.

The first is lower than expected growth from some of the acquisitions, mainly due to the site consolidations that Greg and I spoke about earlier.

The second factor is the greater visibility we have into the second half of the year for cell culture production and the timing of those orders.

Our new revenue range assumes continued strength in Biodiscovery with estimated organic growth of 6 to 8%.

The revised range also includes certain assumptions for Cell Culture Systems.

We assume that Cell Culture Media will continue to grow at 6 to 8%, on par with the rest of our Biodiscovery business.

BioReliance is expected to return to modest growth in the second half of the year starting in the third quarter.

Cell Culture production will increase sequentially each quarter.

The unknown for us is how Sera will perform.

This is a hard predict as we have several customers who are evaluating how much of animal origin Sera is taken in the second half versus waiting until 2007 or beginning to version to animal origin-free sooner than expected.

With this adjustment in the revenue range, we are also adjusting our operating margin to approximately 24% for the full year.

Most of our cost structure is the fixed in nature so a reduction in revenue has a similar impact on operating margin.

However, in order to achieve 24% for the full-year we will need to do significantly better in the second half to outweigh the 23.3% we experienced in the first half.

This improvement will be achieved by cost structure reprioritization mentioned earlier to ensure our costs are in line with our revenue expectations.

At this point, we don't feel it's necessary to make sweeping cost reductions, however we believe we have specific pockets of opportunity in our cost structure that could be optimized with no impact on future revenue growth.

In line with the revenue and operating margin adjustment, we have adjusted our EPS guidance to $3.70 to $3.90 a share.

This represents a 7 to 13% growth in EPS over 2005.

This guidance does not include any impact from the share repurchase.

Lastly, we're adjusting free cash flow guidance to be approximately 200 million for the full-year.

The change in the free cash flow is commensurate with the operating profit change.

In summary, our revised guidance -- on our revised guidance, we are reiterating the target of 6 to 8% organic growth for our research business units, but full-year total company organic growth is being adjusted to 1% to 4% as a result of our Cell Culture Systems segment.

Now I would like to briefly covered the share repurchase program that we announced today.

We see the buyback as a means of returning excess cash to our shareholders and enhancing our return on invested capital.

The current stock price is an additional factor in our decision since we're confident in the future of the Company and therefore know that we will get an attractive return for purchasing the stock at this price.

We have a significant amount of funds currently available to do this buyback as well as acquisitions.

With our cash balance of over 700 million plus the current revolver and the addition of the second half free cash flow, we have plenty of funds at our disposal to execute a significant portion of the buyback immediately as well as move quickly on acquisitions as opportunities arise.

So to recap, the first-half performance was in line with our previous expectations with strong results posted for all of our research business units, partially offset by declines in our production businesses.

To account for factors we discussed earlier such as the site consolidations, Sera and the timing of orders in production, we've adjusted our full-year guidance.

In addition, we're taking a number of specific actions to ensure shareholder value is optimized.

First we're conducting a strategic reassessment of our portfolio.

Second, we have a review of our cost structure underway, and third, we are implementing a significant share buyback.

So with that, I will turn the call back over to Greg.

Thanks, David.

I think with the first half of the year, really a tale of two cities, as David explained, it is important to take a step back and really look at how we are doing relative to our strategy in the first half of 2006.

We used a scorecard on a regular basis with three important points to make sure that we're the most competitive essential research tools company in the marketplace, and at first, always having the most innovative offering; second, when you have thousands of products, you must have world-class IT systems; and third, when you have these thousands of products and you can sell just about anything, it's important to have a disciplined commercial approach.

Against these three criteria, let me just give you a first-half update.

First, on the most innovative offering we feel very confident and comfortable with the investments we've been making in R&D to really provide the most fresh, most essential tools to our biotechnology researchers?

We continue to invest in core technologies, such as transsection.

We have now moved into desktop instruments organically with new products like our [Cubit] florescent instrument and we're also moving into new markets with the [omnikinase] assays that are being taking up by drug discovery researchers around the world.

And importantly, we continue to expand our footprint in gaining important new licenses in stem cells and [ephigenetics], two very promising areas of cutting-edge research.

In short, we think we have a wonderful balanced portfolio in high technology biotechnology tools.

In world-class IT systems, as David said, we had our challenges in the second quarter, but we knew that we would have some disturbances, we did our best to plan against them and we feel that most of these disturbances are now behind us and we have learned a lot from the implementation in Europe.

Our North American implementation will take place next year and the overall refined merchandising model we have created is continuing to be enhanced by what we picked up in the European implementation.

In short, IT systems are the single largest capital expenditure investment we have and will continue to make in this business in order for us to really penetrate important customer segments around the world.

Lastly, in terms of a disciplined commercial approach, as David also said, we continue to invest in technical sales specialists, our e-commerce site and importantly stepping up our move from just being a catalog company to being also a collaboration company with important research areas now under contract with important partners in nanotechnology, diagnostics and antibodies and in fluorescence molecules.

We think that we can be very differentiated relative to other companies out there and our progress to date is very promising.

Let me just finish up with talking about the long-term sustainable enterprise.

Clearly, the first step for us has been challenging.

Our Sera business, our legacy business is one that has now cycled down against us and its overall results clearly have had their impact.

As David said, we're taking a step back three years into our work to create the most exciting dynamic tools company in the world to say what all are the businesses that we have today and what all are businesses do we want to have tomorrow.

In particular, we have to look at the Sera business.

It's one that serves a very important customer need but one that does not always have the opportunity to be differentiated by science, which is one of the most important criteria that we have as we build out his portfolio.

The second point to be made is that we're making very long-term investments.

These IT systems don't come cheap, they do bring disturbances with them, but in spite of all of that, we are investing to create a single billable ERP enterprise that will allow us to cross-merchandise and cross-sell thousands of products into the future.

And lastly and importantly, we continue to invest in emerging markets, important footprints being expanded in Korea, India, China.

In China alone, we now have hundreds of employees where last year, we only had a few and it's a good example of where we have invested not only in line with the market, but sometimes ahead of the market in order to establish the Invitrogen brand as being that essential partner in biotechnology research.

With that, I would like to turn it back over to Amanda for questions and answers.

Jenn, you may now open up the line for questions.

(Operator Instructions).

Quintin Lai, Robert W. Baird.

Good afternoon.

Could you tell us a little bit about the Sera business?

How much of a percent of your cell culture systems is that now?

Quintin, the Sera business is over 100 million in sales.

It's comprised of a production element where we are providing animal origin material into Bioproduction customers, and then a research element for obviously early-stage research.

What we've seen in the last year is a cycling down of the animal origin products as customers move and more to chemically defined media.

And in the research business, it's one where both raw material prices and perhaps competitive moves by others have move to commoditize the overall pricing in that market.

Again, it's one where we have limited control over the end market pricing and we cannot differentiate it by science.

So for Invitrogen, it's a substantial business in its entirety, and it's one where certainly in the past we have benefited by higher prices and now we are on the opposite side of that cycle.

The issues with Sera, is it simply just price, or do you that think there has been a market share shift with your business?

It's a very complicated business.

There's a lot of moving parts.

Just to give you the complexity of it, the origin of the material in terms of what country it comes from determines obviously the cost.

You have then also the end markets of where customers are buying, which is highly differentiated by certain local competitors.

I would say overall that we've basically held our ground in this business, but we have seen a substantial deflation in profitability in the last eight months.

So, Greg, let's just talk general strategy now.

As you are trying to maybe start to focus on more differentiated products, is that a statement that Invitrogen doesn't think that bigger is better and one-stop shop where you need to have a Sera business, even if it is going to have fluctuation with price?

Strategically, it doesn't make sense, and therefore a one-stop shop isn't what Invitrogen wants to be?

I think Invitrogen very much is still pursuing a strategy where a broader footprint of intertwined and interconnected and interoperable tools is important.

So that is very much the cornerstone of our strategy.

In terms of our Sera business, historically it has served us well.

We're just now on the opposite side of its cycle.

It's obviously impacting our overall results.

A key question for us is, do we need to be broadly in the Sera business in all facets and all aspects, or can we just be in certain parts of it in order to be that single source that customers are looking for?

Those questions are underway.

We have a great Sera team, management team in place that's helping us understand it and we hope to have the answers here over the next six months in terms of our actions.

Derik De Bruin, UBS.

The first question, I'm just curious at what dramatically changed from the time that you had your analyst day in June to, you're giving the business now?

Certainly when we were at the analyst day, I think we spent a lot of time drilling down onto your visibility into the back half of the year, and I think I will speak for a lot of the people on the phone that want to know what the hell happened?

I think it's, Derek, basically three things.

One is the acquisitions that we completed last year and are in the process of integrating now, we expect to see the sales of those products accelerate as they were integrated over the course of the year, and that is just moving slower than we originally anticipated -- that's number one.

Number two is orders in Bioproduction.

We've talked about this in the past that we believe is a very attractive, has been and will continue to be a very attractive marketplace.

But we have little control over the timing of the orders.

The timing of those orders were pushed into the second half of the year and beyond.

And as we have better visibility now, some of those orders have moved out into 2007.

And then finally, is just the Sera business.

Pricing and volume have continued to decline in that business, as Greg just outlined.

And those are the changes really from our June investor day to now.

Okay.

So when you start looking now going out into beyond 2006 -- let's say you're working on the cost structure and you're committed to getting (indiscernible) the margin back to 25% and you think that is an achievable target next year?

Absolutely.

We have significant opportunity to drive margin improvement over the next several years.

Okay.

So I'm looking at the top line.

So assuming you think that 6 to 8% is a reasonable run rate on the organic Biodiscovery growth?

Correct.

And then for Bioproduction, do you expect to see a substantial decline in -- further decline in the serum prices?

I guess as you look at Bioproduction when you move into next year, you're saying you see orders pushed out.

Would you expect a flat year, I guess?

On the Sera business, Derek?

Overall Bioproduction business.

The Bioproduction media business is expected to have a very strong second half of the year in 2007.

The Sera animal origin business for production is going to go down perhaps as much as another 50% in 2007.

This is a business that was quite substantial in Invitrogen and we're announcing the historical decline taking place as orders are moving to media.

Finally, I guess what was the stock option expense in the quarter, and is it still $0.44 for the year?

We should have the stock option expense up there on the Q&A slide -- 10.7 million for the quarter.

That's pre -- what's the after-tax?

After tax is 8.4; that's about $0.15 per share.

Alright, and then for the full year?

For the full year, we're still projecting $40 million pretax, about $31 million after-tax.

On a per-share basis, it's going to be slightly higher than we originally projected for technical tax reasons.

Okay.

I will get back in the queue.

Thank you.

Ross Muken, Deutsche Bank.

I just wanted to make sure I understood something you said on the call.

So you said that there is some indecision and clearly there is a negative outlook going forward for the Sera business, but that was the main route of the uptick in working cap on the balance sheet.

But you also said that you feel confident we're going to work through that.

So I mean, sort of help me rectify those two statements, maybe I did not have it completely correct.

And then sort of from a cash-flow perspective, you continue to I guess generate fairly strong cash flow still in light of all of these difficulties.

I guess is that what gives you the confidence to do such a large repurchase?

Let me give you a little more detail there and reiterate what I said earlier.

So the working capital increased for two reasons.

One is, our accounts receivable increased and that was really driven by some of the issues with our systems implementation in Europe.

And that's just temporary in terms of sending out bills and collecting associated with transitioning over to the new system.

We have a team in place and we are already starting to see those days sales outstanding come down.

That is number one.

Number two was inventory increased, and the primary reason that inventory increased is because for our Sera business, there are one or two times per year where we collect the raw material which we then process and subsequently sell over the course of the year.

And the second quarter is a period of time for large collections of raw material.

And so inventories increased, and as they typically do in this quarter and that will be worked out over the course of the year.

So in terms of free cash flow, we are projecting 200 million in free cash flow for the year.

The business has always generated a lot of cash, we're confident it will continue to generate a lot of cash.

And, yes, when we looked at the buyback of the this size, we did a very careful analysis of what our cash flow needs would be, the amount of cash flow the business would generate, what we thought we would need for acquisitions and other investments.

And we feel that we have more than adequate cash to accomplish all of that to implement all of our strategies and still return a significant amount of cash to shareholders and drive up our return on invested capital.

And just to stay on cash flow for a second here, clearly, one of the key [terms] of your strategy over the last several years has been acquisitions, continuing to sort of supplement some of the older businesses like the Sera business which we're now seeing difficulties in with more higher, faster-growth businesses like your probes business and Dynal.

Now given the fact of the size of this, I know you still have some capacity to do another series of transactions.

But should we look for that to be something that you will see upcoming, or are you now so internally focused that we'll probably see things more of a tuck-in or small add-on nature?

Greg, you want to take that one?

Yes, Dave, that's fine.

I would simply reiterate what Dave said, is that we look to balance continuing to make acquisitions with the ability to drive our return on invested capital higher by returning cash to shareholders and you're seeing the first step of what will be multiple steps in that overall plan.

We still have substantial debt capacity.

We believe that we can handle more debt because we believe that we can continue to increase the free cash flow in the business over the next several years.

So I would just simply say around acquisitions that we're not signaling any change in our overall growth stance, we're still pursuing many acquisitions and we'll continue to invest in acquisitions.

But we think we can do it now in a balanced away to also drive our return on invested capital by returning capital back to shareholders.

Thanks guys.

Tycho Peterson, JP Morgan.

Thanks for taking the call.

Greg, you've done a lot of acquisitions here, and I guess part of the finger-pointing in this quarter comes at slower than expected growth from some of the acquisitions and some of the integration efforts.

What should give investors confidence that you're going to be able to work through some these integrations in the next couple of quarters?

And why aren't you taking more extreme steps at this point to work them through quicker?

In terms of extreme steps, let me just reiterate three things that we have communicated here.

First, we've announced a substantial share buyback, $0.5 billion, and you will be hearing more about execution of that in the coming weeks.

Second, we've also said to you that we're going to look at our investments and our overall structure.

We don't think we need to make sweeping changes, but we can make good changes to return us to the historical 25% pre-tax level.

And thirdly is that we're doing a detailed strategic review of our portfolio and our real goal is to have products that can be differentiated by science, be high margin and be stable.

That's really what we're trying to get to investors here and what our goal is in the second half.

So I would say what say that's a very succinct and clear set of directives that we're doing and we're going to execute on.

On the serum issue, not to beat a dead horse, but most of the issue has been pricing in the market and has -- I mean, it sounds like there was an issue with warehousing from one of your competitors.

Have they worked through a lot of that supply at this point?

I think that's one of the key issues we've dealt with is potentially a competitor that did a large write-off when we didn't and we're seeing the effect of that in the marketplace.

It has exacerbated whatever market trends there were and we're obviously on the opposite side of that.

In terms of that inventory being worked through, I am not sure we have that clear line of visibility on that question.

I would simply say, it has to be [good] again and we're hopeful it is.

Finally I'm not sure if you can comment on this, but can you just tell us at least when the authorization was -- the share buyback was authorized and whether you've been up to this point?

It was authorized at our most recent Board meeting last week, and we're in the blackout period.

We'll be in the blackout period until Sunday, and at which point we would be free to start executing buyback.

As we've said before, we're running through the mechanics right now, but we would do a substantial portion of the $500 million authorization relatively soon.

Okay, thank you.

John Sullivan, Leerink Swann.

Hi guys, this is [Isaac Rowan] for John.

Just one last question here on the Sera.

Shouldn't this switch to the animal origin-free media, shouldn't that be helping you guys with regards to some of the technology sort of acquisitions you guys have made relative to your competitors?

Again, I think we have communicated that our Bioproduction media business is extremely healthy.

We just simply had two down quarters due to one very large customer changing formats actually, and now that is pretty much behind us.

So you will see sequential quarter-over-quarter growth from here and we see 2007 being very strong.

The Sera business on the Bioproduction side is an amalgamation of lots of different niches.

We make animal-derived ingredients, we do SBS, we do proteins.

It's just made up of a number of different product lines, but SBS overwhelms the vast majority of that particular piece of the business.

And while it's a good cash business, it cannot really demonstrate good near-term growth just due to the change in what drug companies want to do now.

Okay, great.

And then a second question regarding BioReliance.

I think at the end of the first quarter, you guys mentioned that book to bill was over 1.

Was that also the case at the end of the second quarter?

Yes.

Steve Unger, Bear Stearns.

Hi, first question, I appreciate the quantification of the Sera business.

Could you quantify the gross profit contribution of the Sera business?

And then if you were to divest that business, is there some infrastructure that would go with it?

You know, Steve, we're not prepared to have that level of discussion at this time.

I think we've communicated that the portfolio is under review.

Our whole goal is to have product lines differentiated by [science], stable, high margin, and that is really what I'm going to say at this point.

Is it a gross profit contributor?

Steve, you got the words from me at this point.

Okay.

In terms of the Bioproduction shipments that slipped from the first half of the quarter from your original projections, could you quantify for us just how much those shipments were?

We're not going to quantify individual shipments, but the ones that would -- have been in 2006 that have slipped into 2007 are multi-million dollar large shipments for production.

So they haven't gone away, it's just again part of this moving calendar.

But, again, I would reiterate, our Bioproduction media business is showing substantial growth quarter-over-quarter from here on out.

This quarter, it was actually up 10% quarter-on-quarter.

Quarter-on-quarter?

Okay.

Quarter-on-quarter, it's up 10%, but as we look forward, we expect it to continue to grow at that or a better rate.

We just expected it to grow even faster and some of those orders have been moved out.

So it's a very good business.

Okay.

And then could you give us an update on how Dynal and probes are doing at this moment?

Dynal is growing at strong double-digits, probes continues to grow at strong double-digits.

Our PanVera business has become quite formidable and we think is now the market leader in kinases, drug discovery services, a business that has tripled in size just in the last 18 months as one of our competitors has had some disruptions.

So we have substantial strength in new portfolios that we're very proud of.

And of course, our goal is to have over $1 billion portfolio of all of that staff.

Lastly, Greg, your comments about product reviews, are you signaling to us that we may be entering a period where Invitrogen is rationalizing individual product lines, and then we should assume going forward maybe a slower level of growth but higher margins?

What I'm signaling is that our goal is to have a large business that's consistently growing high margin and where we can differentiate it by science and by our time kind of deep investment and presence.

So everything in our portfolio is worthy of review and I would simply say stay tuned.

But I think we have a great business, we have great businesses and some of them may not have to be owned by Invitrogen.

Great, thank you.

[David Lo], Think Equity.

There's a lot of questions that have been asked and they have been covered.

Can we just go back again to the Bioproduction?

For the BioReliance division, were you seeing flat growth quarter-over-quarter or year-over-year?

And how do thank you're going to meet those challenges of trying to build that business within the Bioproduction?

It's a business that first half we predicted would be flattish.

It has been flattish and then we see seeing modest growth happening as David said in the second half per our original projections.

It's a good business that has good trends and I'll just really kind of cap my answer at that point.

Okay.

And, again, for the Japan markets there, are you seeing some price compression with your products there, or possibly are your academic markets in Japan not getting as much reimbursement from the government?

The Japan business is I think a challenge for us and all of our competitors in the life science space.

We don't do any worse than anyone else.

We don't see margin compression happening, it's actually our highest margin business.

It's just a matter of faster organic growth.

And I would say that we're taking a little different tactic on that where we are continuing to invest in Japan.

It is our second-largest market outside of the United States and we are there for the long-term.

So we are working through the challenges like I'm sure many of my competitors are.

Okay, great.

Thank you.

We have time for two more callers.

Paul Knight, Thomas Weisel Partners.

This is Peter Lawson in for Paul Knight.

I wonder if you could just talk through the Sera business?

Are you losing customers in the preclinical stage or is it from drugs in the clinic?

The Sera business is used all the way from basic discovery to large-scale buyer manufacturing.

It's a business that's comprised of hundreds of niches of derived products out of animal origin, it's a business that's a legacy of the Life Technologies acquisition of years ago and it's a business that produced substantial cash flow in certain times of very good growth.

It's just a business that in some cases will always be around and others, it has a different lifecycle.

So I don't really want to get into a long-term discussion of Sera.

I think the listener can listen and understand what we're saying and what we're going to do about it, and we'll be prudent in our decisions.

How fast is the transfer from animal-derived to animal-free media going?

Can you give us some kind of update on year-over-year growth?

What we see happening is for us, because we were the largest we think in the world in that segment.

It has been a dramatic drop-off, dramatic being 40% down this year, a similar drop for us next year, and then we see it stabilizing actually to where there will always be customers for that product -- vaccines, products for animals and veterinary supplies.

So it actually has a very long-term good growth prospect, or good, stable prospects.

We're just now to a phase that I think as you can see from our first (indiscernible) is painful for a publicly traded company.

But longer-term, it's a very good business for a lot of these particular segments.

So can drugs currently in the clinic swap from animal-derived serum to animal-free?

Not easily, so there is ongoing demand for several of those products as well over the next many years.

Okay.

And I just wonder if, excluding the Bioproduction site, what was pharma spending like geographically and sort amongst biotechs and pharma companies?

We see our end markets to be good.

We're growing double-digits now in big pharma overall, which we are feeling very good about.

Our academic business in North America is very solid.

Our European business in the second quarter was difficult.

We think that was really all attributable to our own disruptions due to ERP.

We're seeing great growth already in the third quarter in Europe, so the European markets are good.

Really everywhere around the world is good except for Japan and we think actually Japan is going to be cycling back in 2007 into a normal good growth phase that will be beneficial to a company like Invitrogen.

Okay, thank you so much.

Quintin Lai.

Thank you for taking my call.

The goal of moving back to 25% operating margins for next year, will that change any of your plans, Greg, for your initiatives, the closer to the patient initiatives like diagnostics and some of your longer-range R&D plans?

It's a good question, Quintin.

We're doing a lot of modeling right now.

I would just simply say that the second half of the year, we want to be in a position where as you have seen some of the investments we've been making in R&D and SG&A are not outrunning the growth in revenue.

That's not long-term healthy and we want to make that more in-line to where they're growing less than revenue.

And so that's the near-term actions.

I'm not ready to comment on 2007 just yet, other than our goal internally has been to have a 25% pretax margin and probably be one of the most profitable tools companies out there.

And our goal is to get back to that here in the second half of 2006.

Thank you.

With that, this now concludes our second quarter earnings conference call.

As a reminder, this call will be available via replay on our Web site for one week.

Thank you again for joining us this afternoon.

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

This does include the presentation and you may now disconnect.

Have a great day.