賽默飛世爾科技 (TMO) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Invitrogen third-quarter 2007 earnings release.

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

(Operator Instructions).

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

I would now like to turn the call over to Ms.

Amanda Clardy, Vice President of Investor Relations and Corporate Communication.

Please proceed, ma'am.

Thank you, Melanie, and good afternoon, everyone.

Welcome to Invitrogen's third-quarter 2007 earnings conference call.

Joining me on the call today are Greg Lucier, our Chairman and CEO; David Hoffmeister, our Chief Financial Officer; and Nicolas Barthelemy, Senior Vice President of Cell Culture Systems.

If you haven't received a copy of today's press release, you may obtain one from our website at invitrogen.com.

Before we begin, I want to remind our listeners that our discussion today will include forward-looking statements, including but not limited to statements about future expectations, plans and prospects for the Company.

We believe 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.

Additionally, we will be discussing GAAP and non-GAAP measures.

A full reconciliation of the non-GAAP measures to GAAP can be found in today's press release or on our website.

For today's call, we will be referencing a presentation that you may view online.

Instructions to access the webcast are on the website.

In addition, we will be posting the presentation to our website following the conference call.

We will begin today's call with Greg discussing the business accomplishments within the quarter.

Then Nicolas will discuss financial results and progress within Cell Culture Systems, and David will follow him with a more detailed review of the Company's third-quarter operating results and fourth-quarter guidance.

I will now hand the call over to Greg Lucier.

Thanks, Amanda, and welcome, everyone, to the call.

Before starting, I would like to address the devastating wildfires that occurred last week here in San Diego County.

As you can imagine, it was a difficult time for our community.

Our priority all along has been the safety and well-being of our employees and their families, and to that end, we made the decision last week to close the facilities in Carlsbad for most of our personnel for at least the first portion of last week.

Many of our employees live in areas that were evacuated, and we're still in the process of determining what kind of losses or damage any of them may be dealing with.

Our thoughts continue to be with our employees, their families and all those here who have been affected by these devastating fires.

That said, we have sound business continuity plans in place that allowed us to continue to ship products to our customers, primarily from other sites.

As of last Thursday, we're back to full operations in Carlsbad.

At this point, it would be premature to assess the exact impact of this situation on our business.

However, we believe it to be manageable.

With that, let me turn now to talk about our Q3 results.

I'm pleased to report another quarter of solid results, which is our fourth consecutive quarter of financial improvement.

We continue to execute upon our three focus areas, which are driving organic revenue growth, optimizing the mix of products sold and improving the operational efficiencies across the Company.

We're very encouraged with the progress we've made against these initiatives and the financial results delivered thus far.

This quarter, we grew revenue to $315 million, which represents an 11% growth over the same period last year.

Year to date, revenues have increased by $96 million or 11%.

In the third quarter, operating margin was a strong 24.6%, which is a 190 basis points improvement over last year's level, driven by significantly improved gross margins.

This also represents a sequential increase of 60 basis points over Q2 2007.

The sequential improvement is even greater than that when you take into account we had an unrepeated legal settlement in Q2 that resulted in 75 basis points of margin in that particular quarter.

Non-GAAP earnings per share increased by 40% to $1.15.

All in all, this was a terrific quarter, and we couldn't be more pleased with the results from our teams across the world.

Some of the highlights within the quarter were as follows -- organic growth of 8%.

Every region and both divisions contributed to this result.

The growth was attributable to a continued positive pricing environment, volume gains and new product introductions.

Clearly, we're pleased with this revenue growth and feel it is a testament to our market-leading portfolio of products, coupled with very good sales and marketing execution.

It may have taken us some time to optimize the performance of the system, but we now feel the operations are in line with the original vision we set forth a few years ago for this Company.

Second, we generated record free cash flow of $78 million within the quarter.

As you know, our business generates lots of cash, especially when volume is high, as it was in this quarter.

In addition, we spent less than expected in capital expenditures as we dedicated IT resources on further enhancements to the ERP system that will improve customer loyalty versus rolling the system out to new geographies, which usually involves larger hardware purchases.

We do expect, though, capital expenditures to be ramping up again next quarter and into next year as we continue the geographic rollout of these information systems and also invest in key manufacturing facilities around the world.

Third, we continue to execute on our new $500 million share buyback authorization with the purchase of 450,000 shares for $35 million within the quarter.

We plan to continue to repurchase our shares even at today's stock level because we believe it is a solid economic use of our cash.

Fourth, the price and mix strategies we initiated a few quarters ago continue to pay off, with margins reaching near-historical highs.

Clearly, our focus is to first meet our customers' needs by providing them with breakthrough technologies needed to accelerate their research.

But we are now consistently doing this in a way that ensures a beneficial outcome for both us and the client.

Productivity programs are starting to kick in nicely, but we have much more room to go in this area.

As we look to the future, we have detailed plans for productivity from the plant floor, material cost savings and new logistical approaches that will bring gross margin-level improvement.

Our global enterprise resource planning system continues to be implemented on track.

The team is now focused on enhancing the system to achieve even greater benefits regarding the customer experience, as well as our supply chain efficiencies throughout USA and Europe.

Moving into 2008, we will finish implementing the system in the remaining acquisitions, such as Cascade Biologics, and implement the technology in key Asia-Pacific countries.

Finally, our online investments continue to pay off.

We had another great quarter for e-commerce orders globally.

This not only allows us to have a lower cost of transaction, but it also lets our customer service team spend more time on creating relationships with those customers that continue to call in their orders.

In the coming quarters, we will bridge the online world and the customer service call center through features on our website that make it easy for customers to get a live voice when they have a question searching our website.

The accomplishments I just discussed for Q3 are the result of three overarching goals we established for 2007.

First, organic growth -- once again, organic growth was driven by every region in every major product area.

Let me give you a few highlights.

BioDiscovery had 7% organic growth, driven by both molecular and cellular biology products.

We are particularly pleased with the revitalized growth we are experiencing in our molecular biology product areas, which is a result of new products, positive price realization and more effective selling by the sales teams.

A great example of an area where we are having nice success is real-time PCR consumables.

Our growth in this segment is in excess of 25% due to the superior performance of our kits, which leverage our years of experience in enzymology and molecular probes labeling.

Organic growth is also driven by the changes we've made to our selling model, both in terms of direction, compensation and infrastructure, and they've been paying off all year.

In particular, our U.S.

academic sales team has been doing an amazing job growing volume and profits in the face of a difficult NIH funding environment.

This team continues to gain more share of wallet from existing customers and find new customers to supplement growth.

Our Cell Culture Systems organization also delivered 8% year-over-year growth without the impact from currency.

For those of you who follow this unit closely, you understand that this segment has multiple product areas within it, all of which had very strong growth within the quarter, and you'll hear more from Nicolas in a moment.

Finally, as I've mentioned before, we're putting the cell at the center of our strategy, the key link between our BioDiscovery and Cell Culture Systems segments.

While we continue to innovate molecular biology elements, we see more and more work being done by scientists to put biology in context, that context being the cell.

In this area, we feel our position is differentiated, with extremely promising growth trends.

Next, when it comes to optimizing our mix, we have also made some nice progress in the last 12 months.

We're not only driving margin expansion across the Company, but more importantly, we're better serving customer needs.

There are now more tools in the hands of our sales force to help them assess how they can increase the penetration of specific products at specific customers, comparing their accounts to others around the world in order to pinpoint the best opportunities for Invitrogen and for the client.

This is especially beneficial for those customers with limited funding because in an environment where research dollars are scarce, it's all the more important to find reagents that accelerate the discovery process within the customers' economic means.

And finally, on operational efficiencies, we continue to make improvement, although we're not quite where we want to be yet.

This year, the productivity we've realized is mostly due to volume increases.

With the fixed plan infrastructure, which has historically been a single-shift operation outside of our media business, as we continue to increase volume, the economies are obviously beneficial.

But just leveraging our fixed cost is not enough, so we're focused on implementing lean techniques on the floor, reducing material costs by opportunistically sourcing material in low-cost countries, as one example, and by refining our distribution system network.

In the coming quarters, I'm going to share with you more information on the progress to drive productivity throughout the entire supply chain.

Before I close, I would like to address two questions that I'm often asked by our investors.

First, what is working so well this year to allow us to deliver such solid results, and second, what is your future acquisition strategy?

If you could indulge me for a moment, let me just share with you my thoughts on each of these questions.

In the last four years, we have radically reshaped Invitrogen from a smaller genomic company with virtually no infrastructure to a company now approaching 2X that size, with a very exciting thrust in cell biology and an organization that knows what it's doing and has the tools to do it.

Without a doubt, though, the integrations of our previous acquisitions, coupled with the critical structural upgrades being made, caused strain on the business last year, and we lost some footing in markets where we shouldn't have.

That said, any traction we lost last year has been gained back and then some.

We're now operating on all cylinders, and we know we have the right strategy and actions in place to keep the Company performing as it should.

That doesn't mean investors should expect 8% organic growth with 200 basis points in margin expansion from us every quarter, but it does mean we feel our efforts of sticking to the basics that we're good at is paying off nicely, and we expect to continue to make improvements in all measures over time.

Ladies and gentlemen, please stand by.

We are addressing sound quality issues.

Melanie, that's better from our end.

The basic fact is that we can't possibly be the inventors of all the cutting-edge technologies that are important to our customer segments, so acquisitions will always be part of our strategy.

Additionally, now that we have the ERP implemented in the majority of the world, it's much easier for us to integrate a company and gain the required synergies to make the investment pay off.

With that, I will now turn it over to Nicolas to share with you our progress in Cell Culture Systems.

Thank you, Greg.

This quarter, we thought it would be helpful if I spent a few moments talking about Cell Culture Systems, the growth we've had this year and the trends that we see in the different segments within CCS.

The Cell Culture Systems division has grown 12% year to date and 8% in Q3 without the impact from currency.

This growth has been driven by all segments within the business, which are sera, research media and reagents, and production media and reagents.

Let me start with sera.

This segment is performing better than we had anticipated this year, both for research and production applications.

I believe these improvements are driven by the changes we've made over the last 12 months in our approaches to sourcing, demand generation and margin management.

At the beginning of the year, we expected the sera segment to decline by up to 10%, mostly driven by production sera.

With only a couple months to go in the year, we expect it to grow modestly in the low single digits.

While we have been helped by certain production customers ordering more sera, the far greater benefit has come from the research sera side, as we have been able to execute on our approach to focus on gross margins dollar growth and to only do deals that are good for Invitrogen shareholders.

Because of this work, while overall sera will grow in the low single digits, the overall profitability is growing in the strong double digits.

Moving on to the second business area, the research media segment, which includes both core and specialty media and reagents, the core includes our staple subculture products, while specialty includes application-specific products, such as stem cells.

The last business area within Cell Culture Systems is production media, which has had the most significant growth this year.

This is the business where we sell media and reagents to customers producing biological therapeutics or vaccines.

As it relates to the financial results for this business, I'm very pleased about the year-to-date financial performance, which is on track to meet our full-year expectations of low-double-digit growth.

I'm also pleased with our progress in getting traction in the preclinical and Phase I trials as a result of our process development service business called PD-Direct.

This is a small unit that provides media and cell line development services to our customers.

Our expectation in these areas has enabled us to enter into strategic collaborations with some of our largest customers, further building our pipeline of drug candidates requiring our media.

In addition, I'm very pleased by the performance of a number of new products that were introduced in 2007.

One in particular that we launched earlier this year is FoamAway.

This product is used to control foam levels in bioreactors, a common outcome of large-scale cell culture.

Developed in collaboration with one of our largest customers, it was designed in disposable packaging format and eliminates multiple steps in the customers' workflow.

FoamAway has become one of the most successful new product launches we've had this year, and it's a perfect example of how our technical expertise in cell culture and packaging, coupled with our close connection to the customer, can produce tremendous results.

The last point I would like to cover on the BioProduction segment pertains to its lumpy nature, which can cause frustration when trying to predict it on a quarterly basis.

In a nutshell, the spikes and dips in the short-term BioProduction growth rate are the net effect of inventory buildups or reductions for our customers.

These inventory swings stem from the step-change nature of biologics manufacturing, which is driven by the unpredictability of the regulatory approval of new products, new indications or manufacturing facilities, and by the binary outcome of clinical trials.

It is also driven by the fact that many products are manufactured in campaigns which typically result in high stock levels and large purchases ahead of the first batch and few purchases for the remaining six to 18 months that a campaign may last.

These sector-specific dynamics are further compounded by inventory adjustments factors common to most industries, such as ERP implementation, facility shutdowns and inventory change policies.

The bottom line is that in a given quarter, the combination of all the aforementioned factors can result in up to a 10-point swing in growth rate.

The good news is that these spikes and dips average themselves out over time.

And when you look at our rolling four-quarter performance, you actually see the very positive low-double-digit growth underlying the BioProduction market.

Coming back to the performance of the CCS division as a whole, and in summary, I'm very encouraged by the results my division has produced this year.

The horizon for growth is very bright for all areas of the business, and my team has never been performing better.

We're focused on meeting our customer needs every step of the way, and we believe that this will help us maintain our leading position as the top cell culture provider to the research and production markets.

Thank you for your time, and I will be happy to answer any further questions about my business at the end of this call.

David?

Thank you, Nicolas, and good afternoon, everyone.

Let me take you through some of the financial details for the quarter.

This quarter, we grew revenue at 11% including the impact of currency, 8% without currency.

BioDiscovery grew 10.5% year over year, or 7% without currency, to $220 million.

As Greg said earlier, the volume, price and new products all contributed to the growth in BioDiscovery.

This quarter, we had no unusual licensing or settlement agreements as we did in the first two quarters.

The aggregate BioDiscovery growth was driven by growth in all regions and products.

Our molecular biology products continue the traction we've been making all year, with strong growth in protein separation, RT enzymes, real-time PCR consumables and RNAi, among others.

Cellular analysis also continues to have attractive growth as we launch new products and maintain our leadership position in fluorescent technologies, including molecular probes and quantum dots.

Cell Culture Systems had a good quarter, as Nicolas just described, growing at 12%, or 8% without currency, to $95 million.

Growth was driven by solid performance in all business units.

As it relates to currency, we had a $9 million revenue benefit this quarter, or 3 points of growth.

In the first nine months of 2007, currency has provided a benefit of $24 million.

Currently, currency is flowing through at a rate slightly above the total corporate operating margin percentage.

So we estimate the impact to EPS is roughly $0.05 in Q3.

Moving on to the other line items in the P&L, gross margin was 64.4%, an increase of almost 360 basis points from Q3 2006, as a result of better price and productivity and volume-related fixed-cost leverage.

Perhaps the more appropriate comparison, though, is sequential, because for those of you that follow us closely, you know last year was not a typical quarter for gross margin.

Sequentially, gross margins improved by 70 basis points.

The increase was greater if you exclude the legal settlement we received in Q2 of this year.

The sequential increase in gross margin was the result of improved margins in both divisions, but primarily in Cell Culture Systems.

Cell Culture Systems' margins improved sequentially 160 basis points as a result of favorable product mix, improved sera gross margins and some productivity gains.

BioDiscovery gross margins improved slightly, by 30 basis points, as a result of volume-related productivity gains and lower logistics costs, which were partially offset by lower royalties related to a legal settlement received last quarter.

Operating expenses were $125 million, an increase of $17 million over previous-year levels, mainly as a result of higher employee-related expenses, including incentive compensation.

Sequentially, operating expenses declined $2.2 million, primarily due to lower outside service fees, including legal and consulting costs recorded in G&A.

Operating income was $78 million, an increase of 20% year over year.

Operating margin was 24.6%, representing nearly 190 basis points of improvement year over year and 60 basis points sequentially.

Interest income was $7.7 million versus $7.2 million last year and $7.9 million last quarter.

Other income was $1.5 million, mostly as a result of currency translation gains.

Interest expense was $6.9 million.

The non-GAAP tax rate was 30.5%, approximately equivalent to last-year and last-quarter levels.

Our diluted share count for the quarter was 48.2 million, in line with our guidance.

We continued our share repurchase program, buying approximately 450,000 shares for $35 million in the quarter.

The reduction in share count resulting from our buyback program was offset by increased dilution from exercised options and convertible debt.

Non-GAAP earnings per share, which does not include stock options expense, was $1.15, which is an increase of 40% over last year.

Stock option expense for Q3 was $8.7 million pretax, $6.3 million after tax $0.13 per share.

This compares to prior-year levels of $9.9 million pretax expense, $7.8 million after-tax expense and $0.15 a share.

Net stock option expense has decreased by 15% year over year.

If you include stock option expense in your non-GAAP numbers, our earnings per share with stock option expense was $1.02 in the quarter, a 52% increase.

GAAP earnings per share were $0.63 as compared to $0.31 last year.

As a reminder, there is a full reconciliation between GAAP and non-GAAP measures in today's press release and on our website.

Let me now take a moment and talk about our share count and the different factors that may increase or decrease it.

We plan to continue to execute on our buyback authorization, so that will decrease the count.

On the flip side, as our stock price increases, the amount of stock options exercised increases, as does the dilution impact from outstanding options and convertible debt.

You can calculate the dilution from our convertible debt using publicly available information provided in our 10-K or quarterly SEC filings.

If you review this information, you can calculate that it had an average stock price in the quarter of $85.

The dilution is 1.1 million shares.

At $90, it's 1.4 million shares.

And at $100 a share, it is 1.8 million shares.

Another question we have received lately is how the proposed FASB Recommendation APB 14-a will affect us.

As you know, this proposed accounting change has no impact on cash and does not change the economics of the convertible debt.

If approved, it would increase accounting, not cash, interest expense by requiring companies to record implied interest.

Additionally, it would lower debt levels, and therefore improve leverage ratios.

At this point, there has been no definitive ruling, and there are several important assumptions that are still unclear.

So we're not providing an estimated impact to our GAAP financials.

Again, this is a GAAP accounting change only and does not impact cash or the economics of these debt instruments.

As such, we would not include this implied interest in our non-GAAP results.

As a reminder, we provide non-GAAP financials as a better way to illustrate the ongoing operations, and therefore future earnings potential of the Company.

Through the first nine months of 2007, our revenue growth has been 11%.

Our operating margin has improved by 120 basis points.

EBITDA has grown by 16% and non-GAAP EPS has grown 36%.

The underlying growth in EBITDA and earnings per share is even higher if you take into account the fact that we've been accruing bonuses this year, whereas this time last year, we had no accrual for bonuses.

Although we don't disclose the exact amount of bonus we accrue each quarter, we have said in the past that annual bonus amount is approximately $28 million.

Moving on to free cash flow, it was $78 million in the third quarter.

This represents an increase of $19 million over the previous-year level.

Comparing free cash flow to last quarter, the sequential change was mostly driven by improvements in working capital, timing of tax payments and lower capital expenditures.

Capital expenditures were $10 million in the quarter.

Year to date, cash flow has been $189 million, and we ended the quarter with $648 million of cash and short-term investments.

With that, I will now move on to our expectations for the future.

As you know, our practice is to give full-year guidance only.

But as we approach the last quarter of the year, we will now provide our expectations for the results for the fourth quarter.

We expect revenue to grow in the mid-single digits in Q4 and EPS to grow three to four times this rate.

More specifics relating to our expectations for the fourth quarter are as follows.

As it relates to the fires in San Diego, it's too early for us to assess what this impact may have been on our business, if any.

We were able to keep our distribution facility in Carlsbad operating at close to normal levels during most of last week.

That said, we do have several large customers in the area, so we don't know yet how their need for product will be affected, if at all.

Turning back to normal business operations, we expect revenue to follow typical seasonal patterns in BioDiscovery in the fourth quarter.

At this point, we expect Cell Culture Systems revenue will be similar to Q3 revenue levels, based on the customer ordering patterns for production media that Nicolas described earlier.

Gross margin will be in the range of 63% due to an increased mix of lower-margin OEM business and fewer production days.

Operating expenses are expected to be in line with Q3.

We expect the non-GAAP tax rate will be 30.5%.

Interest expense will be $7 million.

The share count in the fourth quarter is expect to be in the range of 48 to 49 million shares.

The actual amount will depend on the average stock price for the quarter, as well as further share repurchases.

As I said earlier, we plan to continue to execute on our buyback authorization, but the level and timing will depend on several factors, such as operating cash generated, the uses of cash for capital expenditures and acquisitions.

Capital expenditures are still expected to be in line with our original guidance of $60 million to $70 million for the year.

Based on all of the above factors, Q4 earnings per share are expected to be below Q3 levels and within our guidance of three to four times revenue growth.

So, as Greg said, we're very pleased with the success of our improvement efforts thus far and continue to be focused on execution for the remainder of the year.

I will now hand the call back to Amanda.

Thanks, David.

Melanie, you can now open up the line for questions.

(Operator Instructions).

Quintin Lai, Robert W.

Baird.

Congratulations on a very nice quarter.

Diving into BioDiscovery, is it possible now to try to come up with how much of the success that you are seeing is just simply the sales efficiencies and asking for the business in a better fashion versus some of the new products?

Because it seems like that last time that we talked at the analyst day, you were seeing some nice pickup in some of the iPrep and iBlot, as well as some of the other new products.

So, I guess, what is the bigger factor in the turnaround?

You know, Quintin, I think it's a combination of two factors, the first being what you just mentioned, which is that clearly, our sales force is really executing well this year, and I think two, the design spec we had in terms of creating account managers supported by very sophisticated technical specialists.

So that is certainly helping us.

I think the second factor, though, is the end markets for our particular portfolio seem to be good this year, and that we're being helped by a positive buying environment for the Invitrogen products.

Now, that could be driven by the products that we have introduced or just the particular portfolio that we had at hand, but either way, the end markets we're selling into are very good right now.

Great.

And then, I guess looking at cell culture, this year seems to not be as lumpy so far as last year.

And Nicolas kind of mentioned that there are times when you can see big swings.

Has your process now evolved a little better to give you a little more visibility on when those swings might occur?

It has evolved.

And I would say there are two parts of the variability.

One is internal to Invitrogen.

The other is really related to our customers.

I think we've done a pretty nice job reducing the first one.

The second one is outside of our control.

All we can do is increase communication with our customer, which we've done.

Nonetheless, because of the reasons I mentioned earlier, there will always be lumpiness, and we're going to see it for the year.

If you compare Q1 to Q4 and with the quarters in the middle, you'll see that there is quite a bit of variation.

Final question and I will jump back in the queue -- now that you've got some of these new processes in place, can we take a look at the most recent acquisition of Cascade and how that integration -- do you see some benefits, I guess, for the new operational efficiencies and integration process, and how will that carry forward to future acquisitions?

I think we have gotten a lot more savvy about how we integrate particular companies into Invitrogen.

We're not following a one-size-fits-all that perhaps we would've done back in 2005 and early 2006.

For example, in the case of Cascade, at the end of the first quarter, they will be completely integrated into the Invitrogen global information systems.

But they are going to also have a fairly independent selling force working on particular products with customers that are just requiring a lot more hand-holding due to the sophisticated nature of them, for example, products that go into cell therapy clinical trials.

So we're trying to build a custom approach with each acquisition, and we're finding it being and paying off a lot more than the practices we did in the past.

Derik De Bruin, UBS.

So just trying to feel around the outlook on the numbers, when you look at the cell culture business, and I have to say seeing the margin on that business above 51% is refreshing after it being down so much, you know, is a range, assuming the lumpiness, about 7% to 9% growth in that business, organic growth a reasonable range to model?

We don't give specifics by division.

Okay.

Well, I was going to ask the same thing with BioDiscovery, so I guess I will skip that.

Okay.

So given that you are likely to get at least a 2%, maybe a little bit more FX impact in 4Q, your mid-single-digit revenue growth number is a bit perplexing, considering that your guidance for Cell Culture Systems is basically on par with 3Q.

So I'm just wondering, what is baked into the conservatism?

You know, Derik, I will just give you my thoughts on it.

First, we're obviously pleased with our performance year to date.

I think the organization has stuck to the basics and has executed quite well.

And when I look at the revenue growth we've had so far this year, it is driven by good work on the price side, better volumes from new and existing customers, and I think we are penetrating the market more successfully than we have in the past.

But without currency or legal settlements, our growth is roughly around the mid-single-digits level.

I think that's why we publicly continue to be comfortable committing to mid-single-digit revenue growth.

Now, I would also say this -- moving beyond fourth quarter, we're in the middle of our planning process for 2008, and I commit to you we're going to give you a lot more specifics on what we think growth will be for the next year on our call -- fourth-quarter call in February of next year.

Fair enough.

The 51% margin in the bioproduction cell culture business, is that a sustainable level?

You know, I think we're in the range of being able to sustain that level.

It fluctuates mainly on the basis of mix as bioproduction media.

I think you're starting to see some rays of sunshine here that we're not getting worse and that we may actually start trending to get better out of the NIH.

Tycho Peterson, JPMorgan.

As we think about the portfolio and maybe where you are investing some of the R&D dollars, can you give us a sense of some of the focus areas here in the near term?

And as we think about kind of the broader instrument consumable mix, I mean, you've had a few introductions on the instrument side, but how you think that may play out over the next year or so.

Yes, you know, Tycho, we continue to invest in broad definition of cell biology.

So the stem cell team continues to get bigger and more share of our R&D dollars.

The cell culture research business has some very exciting plans and they are getting funded as we see obviously more and more cells being grown and they need our media.

So that's one big area.

The second big area for us is instrumentation.

And we're building more and more capability to develop on our own lower-priced, more consumable-like instruments that are tied to our reagents that obviously save time, save money and are easier to use.

And so that's really another key focus area for Invitrogen.

Is there an opportunity for you to go after kind of point-of-care diagnostics as we think about some of the decentralization that's happening in the diagnostic industry?

I think we have the technical capabilities to do things in the diagnostic space.

But I would say at this stage our primary focus is becoming the best scientific tools company in the world and powering diagnostic companies as partners.

Okay.

And then, on the sales force, you've obviously had very good traction with the kind of reorganization and then incentivization plans.

Can you give us a sense of what retention has been like?

Are you keeping the reps you have and are you adding reps, and how we should think about maybe sales footprint going forward?

Yes, I will give a broad kind of fabric answer of what's going on.

We're adding lots of salespeople throughout Asia-Pacific, primarily China, India, Korea.

In Europe, the sales force is relatively steady, as well as it is in the United States.

The turnover rates in Europe are extremely low.

I think we are probably considered one of the premier selling forces in Europe in this space.

In the United States, we've seen a nice improvement in turnover from being at rates that I don't think anyone was satisfied with last year to where we're at a turnover rate that I think is appropriate for this industry, and obviously a dramatic decrease from last year in the Americas.

And then, in Asia, it really depends on where you are, and our Japanese sales force is very stable.

But as you know, due to the economic growth of China, I think all companies have seen more turnover in fast-paced economies like a China or an India.

But, having said that, again, back in China, I find that we're able to recruit who we want because we have a good name and that we're able to really gain traction in building a bigger and bigger sales force across all of that country.

Great.

Thank you very much.

That's helpful.

Congratulations.

John Sullivan, Leerink Swann.

A couple of quick questions.

Dave, any contribution into the third quarter from acquired revenues?

Minimal.

Okay, great.

Secondly, as you think about the cell, as you talk about in your opening remarks, Greg, what does being all about the cell mean as a practical matter?

Are there capabilities that you would like to add or grow regarding cellular analysis in particular?

Well, I think in terms of cellular analysis in particular, we have two major thrusts.

First, because you're analyzing something incredibly complex like the cell, you first have to have incredibly broad content that will allow a scientist to decide what they particularly need for their particular experiment at hand.

And so we're building up a very broad content in terms of antibodies, labels, things like that on our website that is very easy to search and then ultimately to purchase.

So content is one of our main thrusts.

The other thrust is multiplexed analysis using an instrument.

So building up our capability in instrumentation and multiplexing is another key thrust in cell analysis for us.

Now, beyond just cell analysis, and again, I more move up to a higher-level definition of just cell biology, we pull in a few more areas of focus for Invitrogen.

Again, as I've just said in a previous answer, cell culture research media is turning out to be a fast-growing business, and because we see more and more cells being grown and we have just a terrific team there doing some very innovative work.

Stem cells broadly defined in terms of honing technologies and other things associated with did the stem cell actually differentiate into what you wanted it to, and can you make it actually visualize itself when it did differentiate, is a whole area of science that's now experiencing nice growth for us.

So I think we take a very broad definition and we are investing primarily in these areas around cell biology with, again, cell analysis probably being the biggest area of investment right now.

Regarding kind of expanding and taking advantage of your opportunity in cellular analysis, can you get there on your own R&D efforts mostly, do you feel like?

Well, I think a big chunk of it we can get there on our own, and another piece of it we're doing through partnerships.

And we find that there's a lot of very good organizations that want to partner with us because we have great momentum in this space.

Thanks very much for that.

And then, my last question -- you had talked about NIH funding outlook potentially turning a little bit more constructive.

What portion of your revenues today are facilitated by NIH funding?

That number has come down, has it not?

Yes, it's definitely come down over the last few years, but it's about a 20% right now.

Congrats again.

Dan Leonard, First Analysis.

Two questions, first one for Dave.

Dave, in the press release, you mentioned a couple -- a few different factors that benefited you on the gross margin side.

Were those ranked by order of importance -- operational efficiencies, positive price, fixed-cost leverage?

I think that they all contributed.

Price is probably the most important factor, and then productivity and volume would be second.

And then, a question for Greg.

Greg, you mentioned that the end markets for Invitrogen products are very strong right now.

The large government budgets are obviously easy enough to see.

So, when you make that comment, which specific sub-buckets are you looking at, or are you building up grant by grant to make that kind of assessment?

Well, I'm really giving you more of a qualitative answer instead of something very specific, and so I would just say that when you look at, for example, our cell biology products are enjoying a fair amount of reception and growth, and perhaps that's because more and more work is being done in pathway analysis and cell biology.

So that's really, I guess, how I was positioning my remarks, that our portfolio seems to be geared towards where a lot of science is being done now.

Okay, and you feel that it's -- just when you are trying to assess share gain versus market strength, is it fair to say you think that both are contributing?

You know, I think we feel we're making good penetration.

And so are we gaining share?

I think the general feeling on our side is that we're doing well in that area.

But as we all know who watch this space, share and who has what is really hard to measure.

So at this point, it's more of an intuitive feel than something we can definitively measure.

Jon Wood, Banc of America Securities.

In cell culture, it seems as if the experience of some of your competitors in the 3Q and then both the outlook for the fourth quarter are both less robust than Invitrogen's.

Is it possible to speculate on what is causing that disparity?

I would prefer to concentrate on what I know the best, which is my business.

You know, we had our share of ups and downs, too, because of the lumpiness of the business.

And so that ties to the dynamics of the whole sector, I would say.

But, to your point, Nicolas, really our set of customers is distinct and different from anyone else's, and so our volume and revenue really doesn't track with what someone else in the media business could be quoting right now.

And then specifically on stem cells within that, is it possible to at least qualify what contribution stem cells are having to growth in cell culture?

And then, looking out, can you just review the dynamics of the stem cell market for us, how big it is, how much share you think you have and then potential opportunities?

Yes, let me -- I will take kind of the market overview and then I will have Nicolas talk to kind of the size of what we're doing and its growth rates and the like.

In terms of the overall growth rate -- I'm sorry, in terms of the overall market, we think for reagents, it's probably somewhere around $100-ish million, but growing very quickly.

And when you look at what drives this growth, clearly the California money is now starting to flow.

We see a lot of other states funding research into stem cell or regenerative medicine area.

That's contributing.

And again, overall, we see there's just more interest in doing cell biology or stem cell type of work, and that's clearly where we've been positioning our new product introductions.

So, as an overlay, if you will, the market feels good.

It's not giant, but it's growing quickly.

And then with that, I will turn it over to Nicolas.

Maybe you could describe the overall portfolio and size and growth rates for us.

Thanks, Greg.

So I would say that the contribution would be tens of millions, and the growth rate of the sector for us is in the high double digits.

It's a very good contribution to overall Cell Culture Systems.

And finally, just to put one more kind of exclamation point, we are absolutely committed to being the leader in regenerative medicine, broadly defined, and stem cells would be a subset of that.

And it's getting more and more, as I said earlier in one of my answers, of our R&D dollars.

Okay.

And as far as an instrument solution in particular, would you look to partner that or do you have an instrument capability in-house for that part of your business for stem cells?

Well, for stem cells or cell separation, things of that nature, it just depends on what level of partnership you're describing.

But mostly, in that particular area, we're designing the instrumentation on our own with then ultimately an engineering partner to execute the final piece of work.

Okay, and then one last one.

On the deal pipeline, Greg, can you just comment on what areas maybe specifically you're most excited about, what looks the most robust in the deal pipeline?

Thank you.

You bet.

You know, I prefer not to talk about particular companies or spaces that we're focused on because I would rather not tip my cards to those listening and those competitors perhaps earing in on this particular discussion.

So we've got a good pipeline.

I think I've answered kind of where we are interested right now, and that will indicate where we're going to be investing in acquisitions.

Paul Knight, Thomas Weisel Partners.

This is [Stephen Willie] in for Paul Knight.

Could you guys just remind us where we are with the share repurchase program?

I know you bought about 35 million back this quarter.

Yes.

At the Board of Directors meeting a couple of months ago, a new authorization was put in place for $500 million.

We have repurchased shares in the last quarter of $35 million.

We remain committed to the share repurchase program going forward.

And the amount of shares that we purchase in any given quarter is just going to be a factor of the cash generated in the quarter and the various uses for it.

But we expect to continue to purchase shares on an ongoing basis.

Thanks.

And then, the growth that you are seeing in real-time PCR and the consumables segment, is that really a result of overall market growth during the quarter, or is that just something that you are seeing as a realignment of your sales force?

I think that's more work we've done on our own in terms of realigning the sales force.

I think we have some terrific technology in that space.

I think the market is growing somewhere around 15% or so.

So I think there is an area as an example we spoke about before, where we are having greater penetration.

Thanks, and congrats on the quarter.

Quintin Lai, Robert W.

Baird.

Just a quick housekeeping.

The adjusted fourth-quarter sales number, could you give that for last year for the basis of your guidance?

Hang tight.

Hold on, Quintin.

301.6 million.

And then what was the pro forma EPS off of that $301.6 million?

$0.93 without option expense, $0.80 with option expense.

(Operator Instructions).

That does conclude our question-and-answer session for today.

I would now like to turn the call back over to Amanda for closing remarks.

Please proceed.

Thanks, Melanie.

This conclude our third-quarter earnings conference call.

This webcast will be available via a replay on our website for three weeks.

The presentation will also be posted, as I said earlier.

Thank you again for joining us this afternoon.

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

That does conclude the presentation.

You may now disconnect.

Have a good day.