Invitrogen Corp. (IVGN); recent price, $41) is a leading manufacturer and supplier of life science research kits and reagents for gene cloning, gene expression, and analysis, as well as protein analysis. It is also the largest supplier of cell culture media for research and biopharmaceutical production. We see solid sales growth and improving margins for Invitrogen, and view its proposed merger with Applied Biosystems (ABI) positively, as we believe the combination of Applied Biosystems' strength in instruments with Invitrogen's in consumables (non-reusable products) would create a leading life sciences company.
We believe Invitrogen's current share price offers a compelling value, as we think investors are concerned over the pending ABI merger and potentially challenging integration issues. However, we think the combination of Invitrogen's leading position in reagents and consumables with ABI's leading position in instruments will create a well-balanced and well-positioned leader in life sciences with a solid platform for expansion into high-growth markets within genomics, proteomics, and the applied markets. We think the long term potential benefits outweigh the short-term integration challenges Invitrogen may face.
With the stock trading significantly below our 12-month target price of $64, we have a 5 STARS (strong buy) recommendation.
COMPANY PROFILE
California-based Invitrogen develops, manufactures, and markets a broad line of tool kits and reagents, and provides other products and services used in life science research and the commercial manufacture of biopharmaceutical products. The company divides its business into segments centered on biodiscovery and cell culture systems. Invitrogen's BioDiscovery segment serves governmental and academic laboratories as well as biotechnology and pharmaceutical firms engaged in research on biological and genetic substances. The Cell Culture Systems segment primarily serves companies engaged in the commercialization of such substances; these concerns typically require large amounts of biologic or genetic materials, or the growth media used in their manufacture.
The BioDiscovery segment (70% of sales in 2007) includes molecular biology, cell biology, and drug-discovery product lines. Molecular biology encompasses the initial cloning and manipulation of DNA, the examination of RNA levels and regulation of gene expression in cells, and the capture, separation, and analysis of proteins. These products include research tools used in reagent and kit form that simplify and improve gene acquisition, gene cloning, gene expression, and gene analysis techniques. This segment also includes a full range of enzymes, nucleic acids, other biochemicals, and reagents, along with software that enables the analysis and interpretation of genomic, proteomic. and other biomolecular data for pharmaceutical, therapeutic, and diagnostic development.
The Cell Culture Systems segment (30%) includes cell-culture products and services. Products include sera, growth factors, cell- and tissue-culture media used in both life sciences research and to produce biopharmaceuticals, and other end products made through cultured cells. Services include the creation of commercially viable, stable cell lines and the optimization of processes used for the production of therapeutic drugs.
We view favorably Invitrogen's strategic efforts to increase its business through organic growth, supplemented by strategic acquisitions. The company has expanded its product portfolio through extensive research and development efforts and strategic acquisitions. Recent sales force realignments were focused on expanding its client-base coverage to include smaller biotech and pharmaceutical firms, which has enabled Invitrogen to smooth out potential sales variations when larger customers cut spending. We also see improved efficiency through its e-commerce efforts, leading to better margins. By our analysis, e-commerce accounts for about 60% of sales in the Americas and 45% globally, which we believe frees up the sales force to cultivate new relationships and pursue higher value activities. We think these efforts should enable the company to expand its market opportunities and grow its client base.
We believe Invitrogen's pharmaceutical and biotech end markets are healthy and stable despite the soft economic environment and some challenges within a few large pharmaceutical firms, particularly in the U.S. The company's product mix consists primarily of reagents and consumables. Consumable sales typically remain stable during challenging economic environments, in our view, as these products are typically not subject to capital budgets. We think research and drug-discovery laboratories consistently need Invitrogen's reagents and consumables to conduct research.
Sales grew a robust 11.3% in 2007 (8.1% organically), with solid growth in both Invitrogen's BioDiscovery segment, up 10.7%, and in Cell Culture Systems, up 12.8%, despite the expected decline in production sera. We expect continued robust growth in 2008 and 2009, aided by the successful development and introduction of new products (1,400 new products were launched in 2007, and we see a comparable amount coming out by the end of 2008) and continued market penetration by Invitrogen's realigned sales force. On a stand-alone basis, we see 2008 sales advancing 12.6% (6% organically and a 5.8% benefit from foreign exchange) and we expect 2009 sales to rise 7.4% (6.6% organically, with foreign exchange neutral). We expect both BioDiscovery and Cell Culture Systems to grow in the low double digits in 2008 and in the mid-to-high single digits in 2009—driven by new product introductions, price increases, and robust growth in international markets, particularly India and China.
We also believe Invitrogen benefits from moves by pharmaceutical and biotech firms to limit their number of suppliers in efforts to reduce costs and improve efficiency. Invitrogen's breadth and depth of products and global distribution infrastructure make the company an attractive supplier, in our view, and should drive incremental growth.
We expect to see continued robust margin expansion from higher gross margins, improved efficiencies, and operating leverage. For stand-alone Invitrogen, we see adjusted operating margins expanding 270 basis points in 2008 with a further increase of 110 basis points in 2009.