Invitrogen Q3 2007 Earnings Call Transcript

| About: Invitrogen Corp. (IVGN)
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Invitrogen Corporation (IVGN) Q3 2007 Earnings Call October 30, 2007 5:00 PM ET

Executives

Amanda Clardy - VP, IR

Greg Lucier - President, Chairman and CEO

David Hoffmeister - SVP, Finance, CFO

Nicolas Barthelemy - SVP, CellCulture Systems Division

Analysts

Quintin Lai - Robert W. Baird

Derik De Bruin - UBS

Tycho Peterson with JP Morgan

John Sullivan - Leerink Swann

Dan Leonard - First Analysis

Jon Wood - Banc of America Securities

Steven William - Thomas Weisel Partners

Operator

Good day ladies and gentlemen and welcome to theInvitrogen's Third Quarter 2007 Earnings Call. My name is Melanie and I will beyour coordinator for today. At this time, all participants are in a listen-onlymode. We will conduct a question-and-answer session at the end of thisconference. (Operator Instructions). As a reminder this call is being recordedfor replay purposes.

I would now like to turn the call over to Ms. Amanda Clardy,Vice President of Investor Relations and Corporate Communications. You may proceed.

Amanda Clardy

Thank you, Melanie and good afternoon everyone. Welcome toInvitrogen's third quarter 2007 Earnings Call. Joining me on the call today areGreg Lucier, our Chairman and CEO; David Hoffmeister, our Chief FinancialOfficer; and Nicolas Barthelemy, our Senior VicePresident Cell Culture Systems.

If you haven't received a copy of today's press release, youmay obtain one from our website at Invitrogen.com. Before we begin, I want toremind our listeners that our discussion today will include forward-lookingstatements including but not limited to statements about future expectations,plans and prospects for the company. We believe these statements are based onreasonable assumptions, but actual results may differ materially from thoseindicated. Its our intent that these forward-looking statements be protectedunder the Safe Harbor created by the Private SecuritiesLitigation Reform Act of 1995.

Additionally, we will be discussing GAAP and non-GAAPmeasures. A full reconciliation of the non-GAAP measures to GAAP can be foundin today's press release or on our website. For today's call we will bereferencing a presentation that you may view online, instructions to access thewebcast are on the website. In addition, we will be posting the presentation toour website following the conference call.

We'll begin today's call with Greg discussing the business accomplishmentswith the quarter, Nicholas will discuss financial results and progress withincell culture systems and David will follow him with a more detailed review oftoday's third or the Company's third quarter operating results and four quarterguidance.

I will now hand the call over to Greg Lucier.

Greg Lucier

Thanks Amanda and welcome everyone to the call. Before starting,I would like to address the devastating wild fires that occurred last week herein San Diego County. And you can imagine, it was adifficult time for our community. Our priorities all along, have been thesafety and well being of our employees and their families. And to that end,we've made the decision last week to close the facilities in Carlsbad, for most of our personnel, for atleast the first portion of last week. Many of our employees live in areas thatwere evacuated and we are still in the process of determining what kind oflosses or damage any of them may be dealing with. Our thoughts continue to bewith our employees, their families and all those here who have been affected bythis devastating fire.

That said, we have sound business continuity plans in placethat allowed us to continue to ship products, to our customers primarily fromother side. As of last Thursday, we are back with full operations in Carlsbad. At this point,it would be premature to assess the exact impact of the situation on ourbusiness. However, we believe it to be manageable.

With that, let me turn now to talk about our Q3 results. Iam pleased to report another quarter of solid results, which is our fourthconsecutive quarter of financial improvement. We continue to execute upon ourthree focus areas, which are driving organic revenue growth, optimizing the mixof product sold, and improving the operational efficiencies across the company.We are very encouraged with the progress we have made against these initiativesand the financial result deliver thus far.

This quarter we grew revenue to $315 million, whichrepresents an 11% growth over the same period last year. Year-to-date, revenuehave increased by $96 million or 11%. In the third quarter operating margin wasa strong 24.6%, which is a 190 basis points improvement over the last year’slevel, driven by significantly improved gross margins. This also represents asequential increase of 60 basis points over Q2 2007. The sequential improvementis even greater than that when you take into account we had an unrepeated legalsettlement in Q2 that resulted in 75 basis points to margin in that particularquarter. Non-GAAP earnings per share increased by 40% to a $1.15 all in all,this was a terrific quarter and we couldn’t be more pleased with the resultsfrom our teams across the world.

Some of the highlights within the quarter were as follows.Organic growth of 8%, every region in both divisions contributed to thisresult. The growth was attributable to a continued positive pricingenvironment, volume gains and new products introductions. Clearly, we arepleased with this revenue growth and feel its testaments to our market leadingportfolio of products, coupled with very good sales and marketing execution.

It may have taken us sometime to optimize the performance ofthe system, but we now feel the operations are in line with the original visionwe set forth a few years ago for this company. Second, we generated record freecash flow of $78 million within the quarter. As you know, our businessgenerates lots of cash, especially when volume is high as it was in thisquarter.

In addition, we spent less than expected in capitalexpenditures, as we dedicated IT resources on further enhancements to the ERPsystem that will improve customer loyalty, versus rolling the system out to newgeographies, which usually involves larger hardware purchases. We do expect thecapital expenditure to be ramping up again next quarter and into next year, aswe continue to geographic roll out of this information system and alsoinvestment in key manufacturing facilities around the world.

Third, we continue to execute on our new $500 million sharebuyback authorization with a purchase of 450,000 shares for $35 million withinthe quarter. We plan to continue to repurchase our shares even at today’s stocklevel, because we believe it is a solid economic use of our cash.

Fourth, the price mix strategies we initiated a few quartersago continue to payoff with margins reaching near historical highs. Clearly ourfocus is to first meet our customers’ needs by providing them with breakthroughtechnologies needed to accelerate their research. But we are now consistentlydoing this in a way that ensures the beneficial outcome for both us and theclient.

Productivity programs are starting to kick in nicely. Wehave much more room to go in this area. As we look to the future, we havedetail plans for productivity from the platform, material cost savings and newlogistical approaches that will bring gross margin level improvement

Our Global Enterprise Research Planning System continues tobe implemented on track. The team is now focused on enhancing the system toachieve even greater benefits regarding the customer experience, as well as oursupply chain efficiencies throughout USAand Europe. Moving into 2008 we will finishimplementing this system in the remaining acquisitions, such as CascadeBiologics and implement the technology in key Asia Pacific countries.

Finally, our online investments continue to pay off. We hadanother great quarter for e-commerce orders globally. This not only allowed usto have a lower cost per transaction, but also lets our customer service teamspend more time on creating relationships with those customers that continue tocall in their orders. In the coming quarters we will bridge the online worldand the customer service call center to features on our website that make iteasy for customers to get a live voice when they have a question searching ourwebsite.

The accomplishments I just discussed for Q3 are the resultof three over arching goals we established for 2007. First, organic growth;once again organic growth was driven by every region in every major productareas. Let me give you a few highlights. BioDiscovery had 7% organic growthdriven by both molecular and cellular biologic products. We are particularlypleased with the revitalized growth we experienced in our molecular biologyproduct areas, which is a result of new products, positive price realizationand more effective selling by the sales teams.

A great example of an area where we are having nice successis Real Time PCR consumables. Our growth in this segment is an excess of 25%due to the superior performance of our kits, which leverage our years ofexperience in enzymology and Molecular Probes Labeling.

Organic growth is also driven by the changes we have made toour selling model, both in terms of direction, compensation and infrastructureand they've been paying off all year. In particular, our U.S. academic sales team has beendoing an amazing job growing volume and profits in the phase of a difficult NIHfunding environment. This team continues to gain more share of valet fromexisting customers and find new customers to supplement growth.

Our Cell Culture Systemsorganization also delivered 8% year-over-year growth, without the impact fromcurrency. For those of you who follow this unit closely you understand thatthis segment has multiple product areas with in it, all of which had verystrong growth with in the quarter and you will hear from Nicholas in a moment.

Finally, as I mentioned before we are putting the cell atthe center of our strategy, the key link between our BioDiscovery and Cell Culture Systems segments. While we continue to innovatemolecular biology elements, we see more and more work being done by scientiststo put biology in context. There context being the cell being the cell. In thisarea we feel our position is differentiated, with extremely promising growthtrends.

Next, when it comes to optimizing our mix, we have also madesome nice progress in the last twelve months. We are not only driving marginexpansion across the company, but more importantly, we are better servingcustomer need. There are now more tools in the hands of our sales force to helpthem asses how they can increase the penetration of specific products ofspecific customers, comparing their accounts to others around the world, inorder to pinpoint the best opportunities for Invitrogen and for the client.

This is especially beneficial for those customers, withlimited funding, because of an environment where research dollars are scarce.It's all the more important to find a reagent that accelerates discoveryprofits, within the customers economic needs.

And finally on operational efficiencies, we continue to makeimprovement, although we are not quite where we want to be yet. This year theproductivity we have realized is mostly due to volume increases. With the fixedplan infrastructure, which has historically been a single shift operationoutside of our media business, as we continue to increase volume, the economieswere obviously beneficial.

But just leveraging our fixed cost is not enough, so we arefocused on implementing lean techniques on the floor, reducing material cost byopportunistically sourcing material in low cost country as one example and byrefining our distribution system network. In the coming quarters I am going toshare with you more information on the progress to drive productivity throughoutthe entire supply chain.

Before I close, I would like to address two questions that Iam often asked by our investors. First, what is working so well this year toallow us to deliver such solid results? And second, what's your futureacquisition strategy? If you could indulge me for a moment, let me just sharewith you my thoughts on each of these questions.

In the last four years we have radically reshapedInvitrogen, from a smaller genomic company with virtually no infrastructure toa company now approaching (inaudible), with a very exciting thrust in cellbiology and an organization that knows what it's doing and has the tool to doit. Without a doubt though, the integrations of our previous acquisitions,coupled with the critical structural upgrades being made, caused strain on thebusiness 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 in the (inaudible).

We are now operating on all cylinders and we know we havethe right strategies and actions in place, to keep the company the performingas it should. That doesn’t mean investors should expect 8% organic growth or200 basis points in margin expansion from us every quarter, but it doesn’tmean, we feel our efforts of sticking to the basics, that we are good at, ispaying off nicely and we expect to continue make improvements in all measuresovertime.

Amanda Clardy

Pardon for the interruption, this is Amanda. Melanie, we aregetting a lot of feedback, I don't know if you guys can hear, but we can hearon our side.

Operator

Ladies and gentlemen, please standby, we are addressingsound quality issue.

Amanda Clardy

Melanie, that’s better from our end.

Greg Lucier

Let me then answer the second question regarding our acquisitionstrategy. The basic fact is that we can't possibly be the inventors in all thecutting edge technologies that are important to our customer segment, soacquisition will always be part of our strategy.

Additionally, now that we have the ERP implemented in themajority of the world, it's much easier for us to integrate a company and gainthe required synergies to make the investment payoff. We remain focused onfinding those unique companies that have a highly dependable market position,unique technologies and a situation that could create great synergies, whencombined with our company. Although we have not acted on many opportunities inlast 18 months, our current pipeline is very promising.

With that I will now turn it over to Nicholas to share withyou our progress in Cell Culture Systems.

Nicolas Barthelemy

Thank you, Greg. This quarter we thought it would be helpfulif I spend a few moments talking about Cell Culture Systems, the growth we'vehad 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 Q3without the impact from currency.

This growth has been driven by all segments within thebusiness which are sera, research, media and reagents and production media andreagents. Let me start with sera. This segment is performing better than we hadanticipated this year, both our research and production applications. I believethese improvements are driven by the change that we've made over the last twelvemonths in our approaches to sourcing, demand generation and margin management.

At the beginning of the year we expected the sera segment todecline by up to 10%, mostly driven by production sera, but with only a coupleof months to go in the year, we expect it to grow modestly in the lower singledigits.

While we have been helped certain production customersordering more sera, the far greater benefit has come from the research seraside, as we have been able to execute on our approach to focus on gross margindollar growth and to only to deals that are good for Invitrogen's shareholders.Because of this work, while overall sera will grow in lower single-digits, theoverall profitability is growing in the strong double digits.

Moving on to the second business area, the research mediasegment, which includes both core and specialty media and reagents. The coreincludes our stable cell culture products, while specialty includes applicationspecific products such as stem cells. We are achieving greater than marketgrowth in core research media as a result of innovative, interactive marketingprograms and strong sales execution.

Specialty media is also growing faster than expected inparticular around our product lines focused on stem cells and primary cells.The acquisition of Cascade Biologics earlier this year, allowed us to betterposition ourselves in this high growth area of the market and increase thepenetration of our existing primary cells products lines.

Our last business area within Cell Culture Systems isproduction media, which has had the most significant growth this year. This isthe business where we sell media and reagents to customers producing biologicaltherapeutics or vaccines. As it relates to the financial results for thisbusiness, I am very pleased about the year-to-date financial performance, whichis on track to meet our full year expectations of low double-digit growth.

I am also pleased with our progress in gaining traction inthe preclinical and Phase 1 trails as a result of our process developmentservice business called PD-direct. This is a small unit that provides media andcell line development services to our customers. Our expertise in these areashas enabled us to enter in to strategic collaboration with some of our largestcustomers, further building our pipeline of drug candidates requiring ourmedia.

In addition, I am very pleased by the performance of anumber of new products that were introduced in 2007. One in particular welaunched early this year is FoamAway. This product is used to control foamlevels in bioreactors, a common out come of a large scale Cell Culture.Developed in collaboration with one of our largest customers to what's designin disposable packaging format and eliminates multiple steps in the customerswork flow.

FoamAway has become one of the most successful productlaunches we've had this year and it's a perfect example of how our technicalexpertise in Cell Culture and packaging, coupled with our close connection tothe customer can produce tremendous results.

The last point I would like to cover on the bioproductionsegment pertains to its lumpy nature which can cause frustration when trying topredict it on a quarterly basis. In a nut shell, despite some dips in theshort-term bioproduction growth rate are the net effect of inventory build upsor reductions by our customers. These inventory swings stem from the stepchange nature of biologics manufacturing, which are driven by theunpredictability, of the regulatory approval of new products, new indicationsor manufacturing facilities and by the binary outcome of clinical trails.

It is also driven by the fact, that many products aremanufactured in campaigns, which typically results in high stock level andlarge purchases ahead of the first batch and few purchases for the remaining 6to 18 months that a campaign may last. These sectors specific dynamics arefurther compounded by inventory adjustments factors, common to most industriessuch as ERP implementation, facility shutdowns and inventory change policies.

The bottom line is that, in the given quarter, thecombination of the all the four mentioned factors, can result in up to 10 pointswing in growth rate. The good news is that despite some dips average(inaudible) 12 – 1.11 is up overtime and when you look at the rolling fourthquarter performance, you actually see the very positive low double-digit growthunderlying the bioproduction market.

Coming back to the performance of the CCS division as awhole and in summary, I am very encouraged by the results my division hasproduced this year. The horizon for growth is very right core areas of thebusiness and my team has never been performing better.

We are focused on meeting our customer need every step ofthe way and we believe that this will help us maintain our leading position, asthe top cell culture provider, to the research and productions markets.

Thank you for you time. Now, I will be happy to answer anyfurther questions about my business at the end of this call, David.

David Hoffmeister

Thank you, Nicholas and good afternoon everyone. Let me takeyou through some of the financial details for the quarter. This quarter we grewrevenue 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 thegrowth in BioDiscovery.

This quarter, we had no usual licensing or settlementagreements as we did in the first two quarters. The aggregate BioDiscoverygrowth was driven by growth in all regions and products. Our molecular biologyproducts continued attraction we have been making all year with strong growthin protein separation, RT enzymes, real time PCR consumables and RNAi among others.

Cellular analysis also continues to have attractive growthas we launch new products and maintain our leadership position in fluorescent technologies, including molecular probes andquantum dot.

Cell Culture Systems had a good quarter as Nicolas justdescribed growing at 12% or 8% without currency to $95. Growth was driven bysolid performance in all business units. As it relates to currency, we had a $9million revenue benefit this quarter or three points of growth.

In the first nine months of 2007, currency has provided abenefit of $24 million. Currently, currency is flowing through at a rateslightly above the total corporate operating margin percentage. So, we estimatethe impact to EPS is roughly $0.05 in Q3.

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

Perhaps the more appropriate comparison though issequential, because for those of you that follow us closely, you know last yearwas not a typical quarter for gross margin. Sequentially, gross marginsimproved by 70 basis points. The increase was greater if you exclude the legalsettlement we received in Q2 of this year.

The sequential increase in gross margin was as a result ofimproved margins in both divisions, but primarily in Cell Culture Systems. CellCulture Systems margins improved sequentially a 160 basis points as a result offavorable product mix, improved sera gross margins and some productivity gains.

BioDiscovery gross margins improved slightly by 30 basispoints as a result of volume related productivity gains and lower logisticscosts, which were partially offset by lower royalties related to a legalsettlement received last quarter.

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

Sequentially, operating expenses declined $2.2 million primarilydue to lower outside service fees including legal and consulting costs recordedin G&A.

Operating income was $78 million, an increase of 28%year-over-year. Operating margin was 24.6% representing nearly 190 basis pointsof improvement year-over-year and 60 basis points sequentially.

Interest income was $7.7 million versus $7.2 million lastyear; excuse me and $7.9 last quarter. Other income was $1.5 million, mostly asa result of currency translation gains. Interest expense was $6.9 million.

The non-GAAP tax rate was $30.5% approximately equivalent tolast year and last levels. Our diluted share counts for the quarter was $48.2million in line with our guidance. We continued our share repurchase programbuying approximately $450,000 shares for $35 million in the quarter. Thereduction in share count resulting from our buyback program was offset byincreased dilution from exercised options and convertible debt.

Non-GAAP earnings per share, which does not include stockoptions expense was $1.15, which is an increase of 40% over last year. Stockoption expense for Q3 was $8.7 million pre-tax, $6.3 million after tax and$0.13 per share. This compares to prior year levels of $9.9 million pre-taxexpense, $7.8 million after tax expense and $0.15 per share.

Net stock option expense has decreased by 15%year-over-year. If you include stock option expense in you non-GAAP numbers,our earnings per share with stock option expense was $1.02 in the quarter, a52% increase.

GAAP earnings per share were $0.63 as compared to $0.31 lastyear and as a reminder, there's a full reconciliation between GAAP and non-GAAPmeasures in today's press release and on our website.

Let me now take a moment and talk about our share count andthe different factors that may increase or decrease them. We plan to continueto execute on our buyback authorization. So, that will decrease the count. Onthe flip side, as our stock price increases, the amount of stock optionsexercised increases, as does the dilution impact from outstanding options andconvertible debt. You can calculate the dilution from our convertible debtusing publicly available information provided in our 10-K or quarterly SECfilings.

If you review this information, you can calculate that at anaverage stock price in the quarter of $85, the dilution is 1.1 million shares;at $90, it's 1.4 million; and at $100 a share, it's 1.8 million shares.

Another question we have received lately is how the proposedFASB recommendation APB 14A will affect us.

As you know, this proposed accounting change has no impacton cash and does not change the economics of the convertible debt. If approved,it would increase accounting, not cash, interest expense by requiring companiesto record implied interest. Additionally, it would lower debt levels andtherefore improve leverage ratios.

At this point, there has been no definitive ruling and thereare several important assumptions that are still unclear. So, we are notproviding an estimated impact to our GAAP financials.

Again, this is a GAAP accounting change only and does notimpact cash or the economics of these debt instruments. As such, we would notinclude this implied interest in our non-GAAP results.

As a reminder, we provide non-GAAP financial as a better wayto illustrate the ongoing operations and therefore, future earnings for thepotential of the company.

Through the first nine months of 2007, our revenue growthhas been 11%. Our operating margin is proved by 120 basis points. EBITDA hasgrown by 16% and non-GAAP EPS has grown 36%.

The underlying growth in EBITDA and earnings per share iseven higher if you take into account the fact that we have approving bonusesthis year, whereas this time last year, we had no approval for bonuses.Although, we don't disclose the exact amount of bonus we approve 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 thirdquarter. This represents an increase of $19 million over the previous yearlevel. Comparing free cash flow to last quarter, the sequential change wasmostly driven by improvements in working capital, timing of tax payments andlower 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 $648million of cash and short-term investments.

With that, I’ll now move on to our expectations for thefuture. As you know, our practice is to give full year guidance only, but as weapproached the last quarter of the year, we’ll now provide our expectations forthe results for the fourth quarter. We expect revenue to grow in the mid-singledigits in Q4 and EPS to grow three to four times at this rate.

More specifics relating to our expectations for the fourthquarter are as follows. As it relates to the fires in San Diego, it's too early for us to accesswhat this impact may have been on our business if any. We were able to keep ourdistribution facility in Carlsbadoperating at close to normal levels during most of the last week. That said wedo have several large customers in the area. So, we don't know yet how theirneed for product will be affected if at all.

Turning back to normal business operations, we expectrevenue to follow typical seasonal patterns in BioDiscovery in the fourthquarter. At this point, we expect Cell Culture Systems' revenue will be similarto Q3 revenue levels based on the customer ordering patterns for productionmedia that Nicholas described earlier.

Gross margin will be in the range of 63%, due to anincreased mix of lower margin OEM business and fewer production days. Operatingexpenses are expected to be in line with Q3. We expect the non-GAAP tax ratewill be 30.5%. Interest expense will be $7 million.

The share count in the fourth quarter is expected to be inthe range of $48 to $49 million shares, the actual amount will depend on theaverage stock price for the quarter, as well as further share repurchases.

As I said earlier we plan to continue to execute on ourbuyback authorization, but the level and timing will depend on several factorssuch as operating cash generated, the uses of cash for capital expenditures andacquisitions. Capital expenditures are still expected to be in line with ouroriginal guidance of $60 million to $70 million for the year. Based on all theabove factors Q4 earnings per share are expected to be below Q3 levels andwithin our inner guidance of 3 to 4 times revenue growth.

So as Greg said we are very pleased with the success of ourimprovement efforts thus far and continue to be focused on execution for theremainder of the year.

I will now hand the call back to Amanda

Amanda Clardy

Thanks David. Now let me, we can now open up the line forquestions.

Question-and-AnswerSession

Operator

(Operator Instructions). And our first question comes fromthe line of Quintin Lai with Robert W. Baird. Go ahead.

Quintin Lai - RobertW. Baird

Hi good afternoon. Congratulations on a very nice quarter.

Greg Lucier

Thank you

David Hoffmeister

Thank you.

Quintin Lai - RobertW. Baird

Diving into BioDiscovery is it possible now to try to comeup with how much of the success that you are seeing is just simply the salesefficiencies and asking for the business in a better fashion versus some of thenew products, because it seems like that last time we talked at the analyst dayyou were seeing some nice pickup in some of the iPrep and iBlot, as well assome of the other new products. So what's the, I guess what is the biggerfactor in the turnaround?

Greg Lucier

You know Quiden I think it's a combination of two factors: thefirst being what you just mentioned, which is clearly our sales force is reallyexecuting well this year and I think too the design spec we had in terms ofcreating account managers supported by very sophisticated technical specials.So that's certainly helping us.

I think the second factor though is the end market's for ourparticular portfolio seem to be good this year and that we are being helped bya positive buying environment for the Invitrogen products. Now that could bedriven by the products that we have introduced or just a particular portfoliothat we had at hand, but either way the end markets were selling into are verygood right now.

Quintin Lai - RobertW. Baird

Great. And then I guess, looking at Cell Culture this yearit seems to not be as lumpy so far as last year. And Nicholas kind of mentionedthat that there are times when you can see big swings. Has your process nowevolved a little better to give you a little more visibility on when thoseswings might occur?

Nicolas Barthelemy

It has evolved then I would say there are two parts of thevariability, one is internal to Invitrogen and the other is really it relatesto our customers. I think we have done a pretty nice job reducing the firstone, the second one is out side of our control. Now, all we can do is increasecommunications with our customer, which we have done, nonetheless because ofthe reasons that I mentioned earlier, there will always be lumpiness and nextyear we can see it, for the year. So you compare it Q1 to Q4 and with theportions in the middle you will see that is quite a bit of variations.

Quintin Lai - RobertW. Baird

Final question, I will jump back in the queue. Now, that youhave got some of these new processes in place can we take a look at the mostrecent acquisition of Cascade and how that integration? Do you see somebenefits, I guess for the new operational efficiencies and integration processand how will that carry forward to future acquisitions?

Greg Lucier

I think we have gotten a lot more savvy about how weintegrate particular companies into in Invitrogen. Andwe are not following a one size fits all that perhaps we would have done back in2005 and early 2006. For example, in the case of Cascade, at the end of thefirst quarter they will be completely integrated into the Invitrogen globalinformation systems, but they are going to also have a fairly independentselling force working on particular products with customers that are justrequiring a lot more hand holding due to the sophisticated nature of them. Forexample products that go into self therapy clinical trails. So, we are tryingto build a custom approach with each acquisition and we are finding it's beingand paying off a lot more then the practices we did in the past.

Quintin Lai - RobertW. Baird

Thank you for answering questions.

Operator

Our next question comes from the line of Derik De Bruin withUBS. Go ahead

Derik De Bruin - UBS

Good afternoon.

Greg Lucier

Good afternoon

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 it seem that themargin in that business is above 51% is refreshing after being down so much. Isa range with similar lumpiness about 7% to 9% growth in that business, organicgrowth reasonable range model?

Amanda Clardy

We don't give specific by divisions.

Derik De Bruin – UBS

Okay. Well, I was going to ask the same thing withBioDiscovery, so I guess I’ll skip that, okay. So given that you are likely toget at least 2%, maybe a little bit more FX impact in 4Q. You're midsingle-digit revenue growth number is bit perplexing considering that yourguidance for Cell Culture Systems is basically on par with 3Q. So I am justwondering what’s – are you – what's baked into the conservatism?

David Hoffmeister

Derik, I‘ll just my thoughts on it. First, we are obviouslypleased with our performance year-to-date. I think the organization has stuckto the basics and has executed quite well. And when I look at the revenuegrowth we have had, so far this year, it's driven by good work on the priceside, better volumes from new and existing customers. And I think we are penetratingthe market more successfully than we had in the past. But, without currency orlegal settlements our growth is roughly around the mid single-digits level. AndI think that's why we publicly continue to be comfortable committing to midsingle-digit revenue growth.

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

Derik De Bruin – UBS

Okay. Fair enough. The 51% margin in the bioproduction CellCulture business, is that a sustainable level?

David Hoffmeister

I think we are in the range of being able to sustain thatlevel. It fluctuates mainly on the basis of mix as bioproduction media salesincreased or decreased relative to the Cell Culture Research Media sales, whichas we said the 4.5 margins that are higher.

Derik De Bruin – UBS

Okay.

David Hoffmeister

But I think that is the range we feel pretty comfortablewith.

Derik De Bruin – UBS

And then just one final question, Greg when you look at the– your interaction with bio and you look at what’s going on in terms of funnyenvironment outlook what is the – what are your feeling about the academicbudgets as you look into 2008?

Greg Lucier

Well I think we are keeping our fingers crossed that SenateLegislation, which has about a 3% increase for the NIH, will be the one thatprevails and it will be the one that also is approved by the President. And soI think if you look at a 3% increase relative to increases we've seen over thelast couple of years I think you are starting to see some rays of sunshine herethat were not getting worse and that we may actually start trending to getbetter out of the NIH.

Derik De Bruin – UBS

Thank you

Greg Lucier

Thank you

Operator

Our next question comes from the line of Tycho Peterson withJP Morgan. Go ahead.

Tycho Peterson withJP Morgan

Hi good afternoon. Thanks for taking my call. As we thinkabout the portfolio and then maybe where you are investing some of the R&Ddollars, can you give us a sense of some of the focus areas here in thenear-term and as we think about kind of the broader instrument consumer mix,you had a few introductions on the instrument side, but how do you think thatplay out over the next year or so?

David Hoffmeister

Tycho, we continue to invest in broad definition of cellbiology so the stem cell team continues to get bigger and more share of our R&Ddollars. The Cell Culture research business has some very exciting plans andthey are getting funded, because we see obviously more and more cells beinggrown and they need our media.

So, that's one big area. The second big area for us isinstrumentation and we're building more and more capability to develop on ourown lower-priced more-consumable like instruments that are tied to our reagentsthat obviously save time, save money and are easier to use. And so, that'sreally another key focus area for Invitrogen.

Tycho Peterson - JPMorgan

Is there an opportunity for you to go after kind point-of-carediagnostics as we think about some the decentralization that’s happening in thediagnostic industry?

David Hoffmeister

I think we have the technical capabilities to do things inthe diagnostic space. But I would say at this stage, our primary focus isbecoming the best scientific tools company in the world and powering diagnosticcompanies as partners.

Tycho Peterson - JPMorgan

Okay. And then on the sales force, you obviously have verygood traction with the reorganization and then incentivization plans. Can yougive us a sense of what retentions that are you -- are you keeping reps you hador you are adding reps and how we should think about may be sales force doingforward?

Greg Lucier

Yeah. I will give a broad fabric answer what's going on. Weare adding lots of sales peoples throughout Asia-Pacific, primarily China, India,Korea.In Europe, the sales force is relatively steady as well it is in the United States.

The turnover rates in Europeare extremely low. I think we are probably considered one of the premierselling forces in Europe in this space. In United States, we've seen a nice improvement inturnover from being at rates that I don't think any one was satisfied with lastyear to, where the turnover rate that I think is appropriate for this industryand obviously a dramatic decrease from last year in the Americas.

And then in Asia, it reallydepends on where you are. Japanese sales force is very stable. But as you know,due to the economic growth of China,any Gulf company seem more turned over in fast paced economies like in China or in India. But having said that, again,back in China,I find that we are able recruit who we want, because we have a good name, andthat we are able to really gain traction and building a bigger, and biggersales force across all of that country.

Tycho Peterson - JPMorgan

Great. Thank you very much. That's helpful. Congratulations.

Greg Lucier

Thank you.

Operator

Our next question comes from the line of John Sullivan with LeerinkSwann. Go ahead.

John Sullivan -Leerink Swann

Hey, guys. Good afternoon.

David Hoffmeister

Hi, John.

John Sullivan - LeerinkSwann

Couple of quick questions. Dave, any contribution in thethird quarter from acquired revenues?

David Hoffmeister

Minimal.

John Sullivan - LeerinkSwann

Okay, great. Secondly, as you think about the cell, as youtalk about in your opening remarks Greg, what is it being all about the cell,mean as practical matter? Are there capabilities that you would like to add orgrow regarding cellular analysis in particular?

Greg Lucier

Well, I think in terms of cellular analysis in particular.We have two major thrusts. First, because you are analyzing somethingincredibly complex like the cell, you first have to have incredibly broadcontent that will allow a scientist to decide what they particularly need fortheir particular experiment at hand. And so, we are building up a very broadcontents in terms of antibodies, labels, and things like that on our websitethat is very easily to search and then ultimately to purchase.

So, content is one of our main thrusts. The other thrust ismultiplexed analysis using an instrument and so, building up our capability ininstrumentation in multiplexing is another key thrust in cell analysis for us.

Now, beyond the cell analysis, when I again I more move upto a higher level definition of just cell biology, we have pulled in a few moreareas of focus for Invitrogen. Again, as I just said in the previous answer,Cell Culture research media is turning out to be a fast growing business. Andbecause we see more and more cells being grown and we have just a terrificteam, their doing some very innovative work.

Stem cells broadly define in terms of honing technologiesand other things associated with -- did the stem cell actually differentiateinto what you wanted it to and can you make it actually visualize itself whenit did differentiate is a whole area of science that's now experiencing nicegrowth for us. So, I think we take a very broad definition and we are investingprimarily in these areas around cell biology, with again cell analysis as partof being the biggest area of investment right now.

John Sullivan - LeerinkSwann

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

Greg Lucier

Well, I think a big chunk of it. We can get there on our ownand the other piece of it, we're doing through partnerships. And we find thatthere's a lot of good organizations that want to partner with us, because wehad great momentum in this space.

John Sullivan - LeerinkSwann

Thanks very much for that. And then my last question, youhad talked about NIH funding outlook potentially turning a little bit moreconstructive. What portion of your revenues today are facilitated by NIHfunding. That number has come down, has it not?

Greg Lucier

Yes. It's definitely come down over the last few years. Butit's about a 20% right now.

John Sullivan - LeerinkSwann

Thank you so much. Congrats again.

Greg Lucier

Thank you.

Operator

Our next question comes from the line of Dan Leonard withFirst Analysis. Go ahead

Dan Leonard - FirstAnalysis

Good afternoon. Two questions, first one for Dave. Dave inthe press release, you mentioned a few different factors that benefited you onthe gross margin side. Were those ranked by order of importance, operationalefficiencies, positive price fixed cost leverage?

David Hoffmeister

I think that they all have contributed, price is probablythe most important factor and then productivity and volume would be second.

Dan Leonard - FirstAnalysis

Okay. Thank you. And then a question for Greg, Greg youmentioned that the end-markets for Invitrogen products are very strong rightnow. The large government budgets are obviously easy enough to see. So, whenyou make that comment, which specific self buckets are you looking at or areyou building up grant by grant to make that kind of assessment?

Greg Lucier

Well, I am really giving you more of a qualitative answerinstead of something very specific. And so, I would just say that when you lookfor example, our cell biology products are enjoying a fair amount of receptionand growth and perhaps that’s because more and more work is being done inpathway now for cell biology. So, that’s really I guess how I was positioningmy remarks that our portfolio seems to be geared towards where a lot of scienceis being done now?

Dan Leonard - FirstAnalysis

Okay. And you feel that just when you are trying to accessshare gain versus market shrink, is it fair to say you think that both arecontributing?

Greg Lucier

I think we feel we are making good penetration. And so, arewe gaining share, I think the general feeling on our side is that we are doingwell in that area. But as we all know, we watched the space of share and whohas what is really hard to measure. So, at this point, it's more of anintuitive field and something we can definitively measure.

Dan Leonard - FirstAnalysis

Okay. Thank you.

Operator

Our next question comes from the line of Jon Wood with Bancof America Securities. Go ahead.

Jon Wood - Banc of AmericaSecurities

Thanks a lot. In Cell Culture, it seems that if theexperience of some of your competitors in the Q3 and then both the outlook forthe fourth quarter are both [lesser a boss] than Invitrogen. Is it possible tospeculate on what's causing that disparity?

Nicolas Barthelemy

I will prefer to concentrate on what I know the best whichis my business. We had our share of ups and downs too, because of lumpiness ofthe business. And so, that tides to dynamics of the whole sector I would say.

Greg Lucier

But to your point Nicolas, really our set of customers thinkin different from anyone else's and so, our volume and revenue really doesn'ttrack with what some else in the media business could be coding right now,right?

Jon Wood - Banc of AmericaSecurities

Okay. And then specifically on stem cells within there, isit possible to at least qualify what contribution stem cells are having togrowth in Cell Culture? And then looking out, can you just review the dynamicsof the stem cell market force? How big it is? How much share you think you haveand then potential opportunities?

Greg Lucier

Yeah. I will take the market overview and then I will haveNicholas talk to the size of what we are doing and it's growth rate. In termsof the overall market, we think for reagents, it's probably somewhere around100ish million that’s growing very quickly. And when you look at what drivesthis growth, clearly the Californiamoney is now starting to flow.

We see a lot of other States funding research in stem cellsover [genetic] medicine area, that’s contributing. And again overall, we seethere's just more interest in doing cell biology or stem cell type of work andthat's clearly where we have been positioning our new product introductions.

So, as an overlay, if you will, the market feels good. It'snot giant but it's growing quickly. And with that I will turn over to Nicholas,you can describe the overall portfolio and size and growth rates for us.

Nicolas Barthelemy

Thanks Greg. So I would say that contribution will be tensof millions and the growth rate of the sector for us in the high double-digits.So it's a very good contribution to our overall Cell Culture Systems.

Greg Lucier

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 stems cells would be subset of that. And it's getting moreand more as I said earlier in one of my answers of our R&D dollars.

Jon Wood - Banc of AmericaSecurities

Okay. And as far as the instrument solution in particularis, would you look to partner that or do you have an instrument capabilityin-house for that part of your business for stem cells?

Nicolas Barthelemy

Well, for stem cell or cell separation things of that natureit just depends on what level partnership you are describing. But mostly, inthat particular area, we are designing the work instrumentation on our own withan ultimate engineering partnered to execute the final piece of work.

Jon Wood - Banc of AmericaSecurities

Okay. And then one last one on the deal pipeline, Greg, canyou just comment on what areas may be specifically are you most excited aboutwhat looks, the most robust in the deal pipeline, thank you?

Greg Lucier

You bet, I prefer not to talk about particular companies orspaces that we are focused on because I would rather not tip my cards to thoselistening and there is competitors perhaps hearing in on his particulardiscussion. So, got a good pipeline I think, I have answered we are interestedright now and that will indicate where we are going to be investing inacquisitions.

Operator

Our next question comes from the Paul Knight with ThomasWeisel Partners. Go ahead

[Steven William] -Thomas Weisel Partners

Hi, good afternoon. This is Steven William for Paul Knight.Could you guys just remind us where are with the share repurchase program. Iknow you buyback 35 million back this quarter?

David Hoffmeister

Yes. At the Board of Directors meetings a couple of months,the new authorization was put in place for about 500 million. We've repurchasedshares in the last quarter of 35 million. We remain committed to the sharerepurchase program going forward. And the amount of shares that we purchase inany given quarter is going to be a factor of the cash generated in the quarterand the various uses for it. But we expect to continue purchase shares on anongoing basis.

Steven William -Thomas Weisel Partners

Thanks. And then the growth that your are seeing in the RealTime PCR, in the consumable segment, is that really a result of overall marketgrowth during the quarter or is that just something that you're seeing as arealignment of your sales force?

Greg Lucier

I think that's more work we have done on our own. In termsof realigning sales force, I think we have some terrific technology in thatspace. I think the market is growing somewhere around 15% or so. So I thinkthere is an area, as an example, we spoke about before where we are havinggreater penetration.

Steven William -Thomas Weisel Partners

Thanks and congrats on the quarter.

Operator

Our next question comes from the line of Quintin Lai withRobert W. Baird. Go ahead

Quintin Lai - RobertW. Baird

Thanks for taking the follow-up. Just quick housekeeping,the adjusted fourth quarter sales number, could you give that for the lastyear, for the basis of your guidance?

Amanda Clardy

Hold on Quintin. $301.6 million.

Quintin Lai - RobertW. Baird

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

Amanda Clardy

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

Quintin Lai - RobertW. Baird

Thank you so much.

Operator

Ladies and Gentlemen please standby. And that thus concludesour question and answer session for today I would now like to turn the callback over to Amanda for closing remarks. Please proceed.

Amanda Clardy

Thanks Melanie. This concludes our third quarter earningsconference call. This webcast will be available via replay on our website forthree weeks. This presentation will also be posted as I said earlier. Thank youagain for joining us this afternoon.

Operator

Ladies and gentlemen Thank you for your participation intoday's conference. That does conclude the presentation you may now disconnect.Have a good day.

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