Invitrogen Corporation Q4 2005 Earnings Conference Call Transcript (IVGN)

Invitrogen Corporation Q4 & Year-End 2005 Earnings Conference Call Transcript (IVGN)

February 28, 2006

Executives:

Gregory Lucier, Chairman and CEO
David Hoffmeister, Sr. Vice President, CFO
Travis Chester, Vice President, Investor Relations

Analysts:

Quenton Li, Robert W. Baird
Tyco Peterson, JP Morgan
Derrick DeBruen, UBS
Edward Tentoff, Piper Jefferies
Rich Watson, William Blair and Co.
Frank Pinkerton, Bank of America Securities
John Sullivan, Leering Schwam
Dan Leonard, First Analysis

Presentation

Travis Chester, VP Investor Relations.

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

Before we begin the presentation, I just want to caution our listeners that our discussion today includes forward looking statements including statements about future expectations, plans and prospects for the Company. We believe these statements are based on reasonable assumptions, but the actual results may differ materially from those indicated by the forward looking statements due to a number of risks and uncertainties discussed in our annual report on form 10K. Our intention is that these forward looking statements be protected under the safe harbor created by the present stream of litigations going back to 1995 and while the company may elect (inaudible) these statements at some point in the future, the Company disclaims any obligation to do so. Also in today’s call as we have in the past, we’ll discuss organic growth and pro forma financial performance, which includes non GAAP financial measurements as that term is defined in Regulation G we believe the inclusion of these non GAAP financial measurements help investors get a more meaningful understanding of our performance and is consistent with the manner in which management evaluates the Company’s performance. They’re not considered to be superior or a substitute for the operations in GAAP and you’ll find comparable measures and reconciliations on our website in today’s press release.

We’ll begin the call today with an overview of results by Greg who will turn it over to Dave, followed by questions and answers. Now I’ll turn the call over to Greg Lucier.

Gregory Lucier

Thanks Travis. And good afternoon everybody. Before we get into the financials for the fourth quarter and total year we may have some new participants on the call so I just briefly want to share with those people a little bit about who Invitrogen is. On page 1 you can see that Invitrogen has two publicly reported segments: BioDiscovery and BioProductions. In each of these segments we participate in a very large market. $15 to $20 billion the way we define it now. And our business of about $1.2 billion is generated over 50% of its sales outside the United Sates. Very well known brands, number one and number two virtually in every key area of life science research, very strong intellectual portfolio and as you can see, a very diverse customer base. Not any one customer, not any one geography, not any one customer segment, represents that disproportionate percentage of our sales and gives us a very well diverse and balanced portfolio.

If we go to the next page, the core of our strategy is to create a biological operating system. This is a system that allows scientists to move from one procedure seamlessly to the next. And our whole goal is to build up this biological operating system to allow research and the development of diagnostics and therapeutics to proceed at an ever faster rate. We do this by delivering great new technology, by having over 600 scientists on our team and by having the number one rated sales force by third party organization that are out there each and every day talking to researchers all over the world.

Those people are complemented by an E-science and E-commerce platform that’s second to none and again, rated number one by many third parties. And so our operating system expands all the way from genomics to the end where we’re doing commercial bio production with a client. And again, our goal is to make each of these steps move seamlessly from one to the other.

Now in 2005, as we’ve done in previous years, we continue as I said to build up our biological operating systems. Those through our own internal development but then also through acquisition. In 2005, we had a record year for acquiring new technologies into our biological operating system. And I’d like to just share with you a little bit of perspective of what we’ve done over the last few years.

If you look at Invitrogen back in 2003, it was a company that was heavily weighted in genomics, which is a small and subculture business, and only growing at about 3%. Our goal at that point and what we’ve executed in a fairly disciplined way is to move into higher growth segments, down stream in discovery and development and production process for these biological diagnostic and therapeutics. In 2005 we added some very important capabilities to the portfolio. Dynel, the largest bio tech company in Scandinavia, done well in excess of 10%, Quantum Dot, a new labeling technique that we think will revolutionize molecular diagnostics, Mortotech, a technology that’s complimentary to our BioReliance business that allows the testing and development of new cell lines, and BioSource (inaudible) another highly valued assay in the drug discovery area.

So our overall portfolio continues to grow and also continues to accelerate (inaudible) which I’ll mention more about in a few minutes. Now let me give you the financials. Fourth quarter of ’05 our revenues were $325 million a record high for us and a growth of 24% compared to the fourth quarter of 2004. A pro forma EPS was 90¢ up 13% versus 2004 and as you can see, we had very high quality earnings with the GAAP free cash flow measure of $1.20 per share. If we look at the year in its entirety, it was a record year for Invitrogen. Our revenues were just under $1.2 billion, $1,198,000,000 a growth of 17%. Our pro forma EPS of $3.45 was up 19% and again, very high quality earnings with a GAAP free cash flow measured of $3.96 in cash earnings per share. A great year for Invitrogen, a great year for the team.

We’ll go to the next chart, let me just say a few words now about segment revenue growth. Our BioDiscovery business had organic growth rates of 12% in the fourth quarter, a new high for us .and our BioProduction business was up 8% giving us a total composite organic growth rate of 10%. We’re very pleased with this performance and we just think it shows the strength of the portfolio we’ve been building. Let me say a few words of the context of the markets we have been participating in, in fourth quarter. In the biotech, academic and government segment they’re all very strong for the business and growing at double digits. (inaudible) for us was actually very good, overall growing in the high single digits but as we’ve conveyed to you in the past, it just depends on the account you’re at to determine what your growth rate is. It’s not a secular trend that we can generalize on. In terms of geography, we have broad double digit growth across all the regions except for Japan, but Japan still grew at high single digits. And our very strong growth platforms of molecular probes, our drug discovery business, the old Panvera business and our gene regulation business here in Carlsbad were up at very strong double digits. And so as we look at our discoveries a very strong portfolio now and we are very pleased with the mix we have there.

In terms of bio production, Gibco had a very nice quarter and that offset the continued rebuilding that we’re taking place in BioReliance and I’ll say a few more words about that momentarily. The very balanced portfolio (inaudible) very balanced growth profile and a record quarter for net growth. Just to give you a walk on the revenues for the quarter, as we shared with you at the end of the third quarter, our guidance was $317 million as we anticipated the fourth quarter would be. But as you can see, we ended up higher than that of $325 million and these are the various components that lead us there. In terms of acquisitions, Dynel delivered well above plan, but that’s really because they had OEM orders which are a large component of the business scheduled in the fourth quarter and that’s something you can see repeated and will be repeated each and every year. BioDiscovery, we continued to emphasize our strategy of moving just from the bench moving to the purchasing suite and doing larger deals with our client and so we had some good timing that we anticipated in terms of the BioDiscovery orders. And in BioProduction, we had a large BioProduction order that fell into the fourth quarter that just was beneficial to our timing, and those components lead us to $325 million of growth, of revenues in the fourth quarter. So overall 10% organic growth that we met our commitment to our customers.

Looking back for a moment. If you look at the organic growth rate of the Company, for the second quarter 2003, this was a business that was heavily weighted in genomics, really only growing at 3% organically. In 2005, we met our commitment to grow at 6%, and our growth rate forecast for 2006 now is between 6% and 8%. Just a few words on how we triangulated the 6% to 8% growth rate. If you take our existing businesses and just add what will they do if they continue to grow at what they did in 2005, our organic growth rate will be 7%. Now when we look at the funding environment we continue to see our ability to grow in US academic and government segment in spite of the soft NIH funding. It seems that with the type of funding, perhaps the consolidation that’s happening and that certainly benefits the large player like Invitrogen. Our biotech segments are very strong. In Farma we continue to penetrate the important accounts for us and grow in some cases very strong double digits. And so with an overall assume that we’ll have another strong year in the US and Europe and that we continue very strong growth in Asia Pacific and we very confidently believe that we’ll grow between 6% and 8% organically for the total year 2006.

What I’d like to do is turn it over to Dave Hoffmeister, our Chief Financial Officer and let him get into the similar details of our financials.

David Hoffmeister

Thanks Greg. If you take a look at the next page our gross margins for the fourth quarter was 59.8%, down slightly from 62% reported in the fourth quarter of 2004. And that decline is largely due to anticipated events in BioDiscovery. We had regularly scheduled OEM orders as Greg alluded to earlier, which lead to a slightly lower margin there and in BioProduction as we discussed before, our BioReliance business which as lower margins fall and we’ve got plans on the way to turn that around and anticipate movements in 2006. We also had slightly lower Sera pricing, the pricing outlook in 2006 we believe looks good and should turn around. I think more importantly, gross margins for the year actually improved slightly, I will talk more about that in a minute and going forward we expect our margins to be flat to better in 2006 and be in the 61% to 62% range. Over the last few years we’ve really focused on delivering increased value to our customers and we’ve been able to do this while maintaining margins by continuing to drive productivity improvements and I think you see that on this page, where as I said before, gross margins for the year actually increased a tenth of a point to 51.2%. In addition, we have continued to invest in our research and development research spending hit or hit 8% of sales this year up from 7% previously, and we’ve got this weighted to our growth businesses and it’s really starting to pay off in generating significant number of new products. SG&A as a percentage of sales stayed at about 28% and this was despite increased investments in IT and as we mentioned before our SG&A includes a cash integration cost associated with our integration in the acquisitions this year we did as Greg pointed out 8 acquisitions. So far our operating margins remain strong in spite of as I mentioned before the investments in R&D information technology and the integrations. We take a look at the next page summary of 2005 performance, I’m not going to go through all of the details here but as Greg said it was a very strong year in terms of revenues, overall growth at 17%. If you look at the middle of the page, we frequently get questions about our tax rate. We continue to improve on our effective tax rate, the rate drops from 33% to 32% as a result of our on-going tax strategy planning. Shares outstanding actually declined slightly from 60.3 million to 60 million shares and pro forma EPS grew 19%.

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

Some of those are the American Job Creation Act. We actually repatriated $113 million in the course of the year at a benefit of $10 million. We liquidated a number of legal entities resulted in another $25 million after tax gain. On our Dynel purchase we placed a hedge on that purchase and actually resulted in a gain of another $13 million. And finally, from the Time of the Life Tech acquisition, there were some healthcare benefit plans that were over funded and various discussions with the IRS we were able to release and recapture $23 million in cash from those plans in the course of the year.

So in total, from these items we had gains of $48 million on an income statement basis and cash recovery of $23 million, all of which we excluded from our pro forma EPS.

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

The company continues to generate very strong cash flow, free cash flow for the year hit a record $238 million, that was driven by a significant improvement in working capital, which basically funded the increase in capital expenditures that we had in the year. We nearly doubled capital expenditures from $39 million to $72 million which consisted of IT investments that I mentioned previously, capacity expansions in our Gibco business, research facilities in molecular probes and elsewhere. The Company continues to generate very strong free cash flow. Just one point of note there, third bullet on that page, there is $15 million of non recurring items that’s the Dynel acquisition price hedge that’s included in our free cash flow, our free cash flow is based on GAAP earnings. We have not historically issued a pro forma free cash flow and that’s why it’s included here.

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

Gregory Lucier

Thanks Dave. So just to summarize 2005, we achieved another year of accelerating organic growth capped off with a 10% organic growth rate in the fourth quarter and as Dave just mentioned, a record free cash flow year for us. We made eight strategic acquisitions that continue to build up as biological operating systems and as Dave also mentioned, anticipate to make further acquisitions this year in the tune of about $500 million of investment. And then finally, we’re very energized by the reorganization that we announced in December to where we now have a much more focused organization around key work flows, we are now able to compete both on breadth and depth in terms of our science and we’re very encouraged here in the first quarter by the receptivity both internally of our own people and also out of customers with now how we’re presenting ourselves. And so again, 2005 was I think a very strong year for Invitrogen

What I’d like to do now is turn our attention, turn our focus to 2006 and just a few words about how we see things unfolding. What you see on this page up top is not changed, it is remaining the same in terms of our guidance for 2006 that we shared with investors back in December. We see revenues up 11% to 13%, we’re going to be improving the pro forma operating margin by about 50 basis points and the free cash flow should be flat to up 5% and again, it’s excluding that ’05 non recurring $16 million. So again, I think free cash flow will be very strong in 2006. Now just fifty words now about the first quarter is that based on what we see right now, this is the general guidance we’re providing for the first three months of the year. We think revenues will come in around $320 million, but as you know, our business can be a little bit lumpy so give or take a couple of million on either side of that number I think is a fair statement of where we think things will land and then the earnings per share will be about 88¢ in terms of pro forma EPS. We do this just so we want to make sure that the consentive estimate and the market match what we see currently in our business and again our guidance for the overall year remains unchanged with what you see above. So, just a few statements in terms of our assumptions for the year, I would reiterate the market remains healthy, our Bio Reliance business is really on tract for nice recovery. We are seeing across the board extremely six sigma performance in terms of the quality of the reports being done by this organization and the timeliness of delivery. And our cornerstone and our marquee is going to be to be the first six sigma company in biological testing and again that recovery is very nicely underway and we’ll see the benefit of that in the second half of this year.

Just to reiterate, we have not traditionally in the past used price for the last few years, but we do see a changing environment where costs must be recovered and due to the mix of our new products coming out, we see price being a positive factor on 2006 for us this year. And then to just finish up, again we will continue to make acquisitions and we figure on spending about $500 million this year on a creed of acquisitions that are not factored into any of the guidance we have provided so far.

So if I can just summarize then in terms of looking forward. This is a company that has a tradition of growth. It’s really a great story. There’s just a lot of energy and excitement inside the business today and on that note, I’d like to make an announcement that we’ll also send out on a Press Release tomorrow, is that our long-serving Board member, Jim Glynn who both served as our Chief Financial Officer and as our CEO prior to me coming on board has announced his retirement from the Company and we just want to wish Jim all the very best in retirement and thank him for really creating the chart you see in front of you right now which is a great company with an incredible future.

With that, Travis, I’ll turn it back to you.

Travis Chester

Thank you Gregg. We’ll now open up for questions and answers.

Operator

Thank you sir. Ladies and gentlemen at this time if you wish to ask a question, please key star 1 on your touchtone telephone. If that question has been answered or you wish to remove yourself from the queue, you may then press star 2. Again, star 1 for any questions. One moment please.

Sir, our first question is from the line of Quenton Li with Robert W. Baird.

Quenton Li

Congratulations on a very nice quarter. My best wishes to Jim. With respect to the fourth quarter, or 2005, could you take a stab at what the organic growth of Gibco was, so that we can get an ex Bio Reliance number?

David Hoffmeister

You know, Quenton, we have not historically broken that out. But I would just tell you that the Gibco business remains strong, very strong.

Quenton Li

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

David Hoffmeister

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

Quenton Li

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

David Hoffmeister

You know it’s a good point about the acquisition, because if you look at BioSource prior to us owning them, as a stand alone public company, clearly they had gross margins lower than ours. So, that type of mix certainly impacted our gross margin in the quarter, but let me just say a few words about that. We, this is why we’re very bullish on gross margins going forward, is that as we continue to consolidate facilities, extract the synergies that we had planned when we bought these companies, we’re going to get gross margins higher, so inside the company we’re encouraged by gross margins that will happen next. Turning to your question about currency, I would just tell you that had a negligible effect in the fourth quarter.

Quenton Li

Thank you.

Operator

And sir, our next question is from the line of Tyco Peterson with JP Morgan.

Tyco Peterson

Hey thanks for taking the call. I guess following up on that last question on BioSource, can you remind us where we are in the integration process and what the next steps are?

Gregory Lucier

In terms of integration, we have already publicly announced that we have closed their sub culture facility. We have saved the costs there. Integrated that into our Gibco business and we have been able to preserve most of the sales and customers that we had from that piece of the business. There are other elements of that business that will be consolidated into the Camarillo site, and so we actually are very excited by both their site in Massachusetts and in Camarillo, CA, probably picking up other parts of Invitrogen today to really accelerate our growth rate. And example of that is at Camarillo we have uncovered that they’re extremely good at antibody development, thetakines and then high valued assays. We had been doing that in a couple of other locations and so we’ll and we do have a strategy to consolidate that into one location.

Tyco Peterson

Okay. Then a question on the organic growth? Could you just give some broad color about what really has been driving it in terms of new product versus you know more effective selling efforts and then how much is that bi production order from third quarter carried over, is that that $4 million did that all come this quarter?

Gregory Lucier

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

Tyco Peterson

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

Gregory Lucier

Yes, full speed ahead now. So we’re cranking, we’re moving international with our technology with Illumina and so all systems go right now.

Tyco Peterson

Okay. Congratulations on the quarter.

Operator

And sir, our next question is from the line of Derrick DeBruen with UBS.

Derrick DeBruen

Hi, good afternoon. So, could you just try to give us a little more color in terms of the acquisition strategies you’re looking for? I think there’s some confusion about you know what direction does your plan take. You had made some comments about what your expectations are in terms of new re agent businesses versus other opportunities? Could you give us a little insight into your strategy?

Gregory Lucier

Well, there are two pieces to the strategy. One is that we continue to evaluate the creed of acquisitions in the quarter life science supply space and we continue to agitate and challenge ourselves on just what it means to be an essential supplier to diagnostic and therapeutic development companies. So, that universe gets ever broader in terms of what could make sense for our Company. So, I would just say that core strategy you’ve seen over the last few years and we continue to want to execute on that. The second piece is code if you will that I’ve used on closer to the patient, but really is nothing more than how do we take what we think is some great science at the bench and try to make it more value added in more medical applications. An example of that is our HLA business in tissue typing. We’ll make more acquisitions in these types of endeavors but our goal is to make them creative and to make them so they’re a little closer to the range if you will so that we know how to run them and know how to grow them. So that’s what I can basically say on acquisitions right now.

Derrick DeBruen

So, I guess when you look at the first quarter, when do we expect to see the pricing, the price increases to come in. Are you releasing the January catalog with the increases? Or is it something that’s going to happen later on in the quarter?

David Hoffmeister

We have a large portion of our business that’s exclusively negotiated with clients and those negotiations took place during the fourth quarter and are still going on, so some of that is already in effect in the first of the year. We did release a new catalog that did have a changing in prices, some down, some up. More around value pricing, so that effect has already been put on in the marketplace. And then we still have other negotiations to be had that just really depend on the particular client. So, everything I could tell you about price and value and clients is all in progress as we speak.

Gregory Lucier

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

Derrick DeBruen

When you look at the guidance for the first quarter, I guess, can you see how what how the bio discovery and the bio production is going to split out there? Are you, you know expecting to see a little more lumpiness in bio production? I’m just trying to get a feel for just what goes in the revenue mix.

Gregory Lucier

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

Derrick DeBruen

Okay. Thank you. I’ll get back in the queue.

And sir, we have another question from the line of Quenton Li

Quenton Li

Thank you for taking my follow up. Looking at the Q1 guidance, does that build in kind of a 4% negative FX or so expectation?

David Hoffmeister

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

Quenton Li

Okay, thank you very much.

David Hoffmeister

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

Operator

And sir, our next question comes from the line of Edward Tentoff with Piper Jefferies.

Edward Tentoff

Great, thank you very much for taking my question. And congrats on the strong fourth quarter looked even better once I got the pro forma ETS. Really nice job. I wanted to touch on your progress with the Antibody Library System this year and want to see how the consolidated antibody library is being received on the market and also how you think that effort is differentiated from your competitors?

Gregory Lucier

We have substantial antibody capabilities that and I’m just going to actually be a little broader I’m going to say antibodies, proteins and then assays in three major locations. One is Madison, the other is San Francisco and the other is Camarillo. And we’ve been going through a pretty detailed study of where our core competencies are strongest and I would just tell you that Camarillo the BioSource business was really on an up swing and I think people could see that as it was a publicly traded company and we’re incredibly excited about the talent there and so you know Camarillo is going to figure more prominently into our future than actually we may have thought in the past, and so you know I would just tell you that their need to serve the overall portfolio, there’s more hiring there and you’ll see being done at Camarillo.

Edward Tentoff

Okay, good that’s helpful. Thanks.

Operator

And sir, our next question comes from the line of Rich Watson with William Blair and Co.

Rich Watson

Hi, thanks for taking the question. I just have one question on operating margins and then a follow up on M&A. On operating margins, it seems like if I’m running my numbers right which is not a given by any means, but if I’m running my numbers right and we think about gross margins going up, flatish to going up slightly in ’06, it seems like it implies that you know operating margins could actually you know be flatish or maybe even down a little bit if I’m running my numbers right, but is that the right way to think about gains and second, if that’s so, should we think about that as you know you guys are ramping up your R&D spend and maybe investing for some of the go forward organic growth initiatives and when should we start to think about some of the operating leverage coming down through the P&L? Thanks.

David Hoffmeister

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

Rich Watson

Okay, that’s helpful. And on the M&A environment, you mentioned some of the consolidation potentially due to the NIH budget, obviously you know benefits to you guys as a larger player, does it, have you seen any shift in terms of maybe more companies having seen sort of the writing on the wall as to what’s going on in this market, being more willing maybe to put themselves on the block? I mean, does this improve your vantage point or negotiating standpoint on potential acquisition going forward?

Gregory Lucier

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

Rich Watson

Great. Thank you.

Operator

And sir, our next question is from the like of Frank Pinkerton with Bank of America Securities.

Frank Pinkerton

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

Gregory Lucier

What we’ve said, Frank, is that R&D this year will be flatish, 8 ½ , 9 ish at the most so it will probably kick up again this year. So, that would be the answer in the near term. A three to five year basis, we’re still triangulating that, but I’ll
give you my off the cuff answer would be around 10%. That’s what we’re thinking this company will be and we’ll want to get to 10% as we finish out over the next couple of years in parallel with that a lot of the back office crunch that we’re doing we could go on and on about with all the Taichi investments so, as G&A goes down, R&D goes up and that’s the basic tradeoff.

Frank Pinkerton

That’s great. And second question, given the acquisitions that you’ve done over the last year and I you know see in my mind a third division here that could be a vastly you know coming together, with Invitrogen, does it make sense to look at the reporting segments, to put the Dynel’s and some of those acquisitions into a separate bucket, they are a little bit different from your core bio discovery market, maybe to show a little bit better the growth in the reinvestment you guys have there?

Gregory Lucier

You know, Frank, the debate we have a lot over the last couple of months as we reorganize, but I think you’ll see us perhaps do something as the year plays out and we do some acquisitions. So, you’re seeing things the way we see it, but we’re going to do a few more things first, before we break out a third leg.

Frank Pinkerton

Okay, great. I’ll wrap it up with kind of a dumb question that I like to ask and that is where you’re investments are currently focused to more of the antibodies, diagnostics, you know kind of the faster growing markets as you’re moving molecular probes and some of the older acquisitions to those technologies, correct?

Gregory Lucier

Yeah, I mean if you look at the R&D investment of molecular probes it’s like nosebleed section. So, we are strongly investing in where we have great growth already but even more exciting growth in the future.

Frank Pinkerton

Okay, great. Thanks.

Operator

And sir, our next question is from the line of John Sullivan with Leering Schwam.

John Sullivan

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

Gregory Lucier

You know we’ve said before this is about and Travis, correct me if I’m wrong, but 3% type reinvestment. This year will be also again $72-$75 million, In 2007 it goes down, but intrinsically to run the Company, it’s very small, it’s 3 percentage points.

Travis Chester

Actually what we’ve said is in our guidance if I can just step in Greg, was that in 2007 we think that our capital investment bubble would be a bit behind us and we probably invested about the rate of $55 million. And, that would bring us down into the 4-5 percentage range. I think that for modeling going forward is probably a good level. If you look back at 2004, we had capital expenditures of about 3.8% of sales. So it’s somewhere in that 3% to 5% range.

John Sullivan

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

Gregory Lucier

Well, so NIH is about 15% of our business and we’re going nicely at NIH. I think it sets up the second part of the answer to your question which is, if you’re a recipient of NIH grants today, obviously it’s been very tough to get those grants. And the last thing you want to do is to waste money away on unnecessary search for duplications, just the overall inertia in the supply chain and the tools that you need for the grant. And trust me, that message resonates extremely well with major universities, and so if they can partner with a very high quality scientific company, not just a supplier, but a scientific company, it really benefits them in the era that we are in with the NIH. And so that represents the, if you will, the motivation for wanting to do more collaborative discussions with Invitrogen.

Travis Chester

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

John Sullivan

Thanks much. Do you think specifically you’re adding capability in, to move that business on-line helps you with those labs in particular?

Greg Lucier

Oh, I think that’s all part of it. Which is we’re setting up extra nets, we’re making it more personal for our client, we have a very high investment in IT and as we said before, that’s where that all is going for the most part right now.

John Sullivan

Thanks very much.

Operator

And sir, we have another question from the line of Derrick DeBruen.

Derrick DeBruen

Hi, just some housekeeping. Could you just break out the specific, I can’t seem to find the specific interest income expense numbers?

Gregory Lucier

Okay. Travis or Dave?

David Hoffmeister

I think what you’re saying is we have net interest expense for the year of an additional $6 million (is that right Travis?)

Travis Chester

I believe it is, for 2006?

David Hoffmeister

So 2006 we’re expecting a $6 million net interest expense.

Derrick DeBruen

Okay. I actually was looking for the 4Q number on that.

David Hoffmeister

Fourth quarter?

Derrick DeBruen

Yes.

David Hoffmeister

’05?

Derrick DeBruen

Yes. You give a net number but not the specific break down.

David Hoffmeister

We’ll get back to you in a minute; let’s go on to the next question.

Derrick DeBruen

Sure.

Operator

And sir we have a question from the line of Dan Leonard from First Analysis.

Dan Leonard

Hi, Greg, Hi David. There are two points I need a little help understanding. One, the 12% organic growth in your bio discovery business part of which you attributed to a large order from a US biotech company,

Greg Lucier

I’m sorry, you broke up.

Dan Leonard

Is this better?

Greg Lucier

Yeah

Dan Leonard

Okay, great. My first question is on the 12% organic growth in bio discovery. That’s not, and you pointed out specifically a large order from a US bio tech account, now that’s not typically the type of business where one order from one customer will move the meter in any given quarter, so I’m just wondering if you can give me some color around why there was such a big order in the fourth quarter, why that customer was buying so much? Any way you could help me out there would be appreciated

Greg Lucier

Well when we talk a large order it’s ln the tune of less than 3 million bucks, so it doesn’t really move the overall needle that much. Do we see more of those happening in the future? Yeah, yeah we do see more of that happening in the future and I think it pertains to what would motivate them to do that is that they like the product, it’s essential to their overall discovery or development effort and they wanted to enter into a long term supply agreement on that particular technology. So that’s why you see it happening.

Dan Leonard

Okay, but they bought the technology up front and then kind of use it over a period of a year or so, or?

Travis Chester

Well actually, this is a fairly highly consumed product line so they bought it for

Greg Lucier

Three to six month

Travis Chester

It’s not a long term stocking. It was just three months or something like that. So, this will be on-going benefit for us.

Dan Leonard

Okay. And then my other question is related to the gross margin in bio production. I understand how Bio Reliance is a large negative year over year comparison and how Cerra is also a negative year over year comparison, but if I compare the gross margin in the fourth quarter to the gross margin in the third quarter, it would still (inaudible) substantially in the fourth quarter. Did BioReliance weaken further in the fourth quarter because I don’t think that Cerra prices weaken materially in Q4 from Q3, but I could be wrong.

Greg Lucier

Shera pricing definitely weakened from third quarter to fourth quarter. We think we’ve seen the worst of it now, that’s our basic guess on Cerra. It’s a little bit of a swinger right now. The good thing is as we grow it becomes less and less of a component of our Company and that’s the basic message on Cerra.

Dan Leonard

And does the Bio Reliance business have a higher than Company average or higher than Bio Production average gross margin back when it was performing well in 2004?

Gregory Lucier

No, Bio Production has always had a slightly lower growth margin.

Dan Leonard

No specifically Bio Reliance.

Gregory Lucier

Oh, BioReliance, yes did have slightly lower gross margin than our Gibco business.

Travis Chester

When we acquired it, it was approximately 5 to 10 points lower than our bio production business, so lower gross margin, but about the same operating margin. But because it’s a fixed cost business, as volume changes, unless it goes down, your stuck with these fixed costs and because we wanted to maintain the team that’s there and that’s been the basic commitment we’ve made, so as volume comes back on line which we anticipate it will in the second half, this is gong to be a very nice player into the portfolio.

Dan Leonard

Okay.

Gregory Lucier

And the only other thing I’d like to add, for Bio Reliance for Gibco, while the margins are lower than our bio discovery business, the gross margins, the operating margins are very similar.

Dan Leonard

Because they require less R&D, right?

Gregory Lucier

Correct. So Derrick, back to your question on the interest. In the fourth quarter of ’05 we had interest income of $6 million, and the interest expense of $9 million for a net expense of $3 million.

Operator

And ladies and gentlemen this concludes the question and answer portion of today’s conference. I’d like to turn it over to Mr. Chester for any further comments.

Travis Chester

I’d like to thank everybody for joining us for this conference call. We’ll talk to you next time. Thank you.

Operator

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

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