Date: Dec 24, 2003 Source: Motley Fool
Invitrogen (Nasdaq:IVGN) is in the business of drug discovery technology, providing equipment and supplies to the genomic research market. Its stock has more than doubled since April, adding over $4 today after announcing an agreement to acquire BioReliance (Nasdaq:BREL). Invitrogen says it expects the BioReliance deal to add 19 cents to pro forma earnings per share in 2004.
BioReliance is a contract service organization (CSO) which provides outsourced testing, development and manufacturing services to the drug and biotech industry. The all-cash deal is valued at $430 million. BioReliance had $82 million in revenues in the past year, not a huge amount relative to Invitrogen's $649 million, but this small company boasts fat profit margins in excess of 14%. Moreover, Invitrogen will be able to leverage its impressive customer base across new business opportunities.
Invitrogen is not like most biotech stocks which are often high-risk/high-reward propositions. This company is the market leader in a fairly stable business, you might call it a "picks and shovels" approach to the genomics revolution. Genomics promises to revolutionizing medicine and drug development, and while it is already bearing some fruit in terms of medical advances, the real bounty is still several years away. There are many different ways for investors to get involved with the genomics theme including information companies, drug developers, and diagnostics technology firms. Another angle is companies that provide the tools for genomics based drug discovery, and Invitrogen is the established leader in this market.
Invitrogen sells research tool kits for gene cloning, expression and analysis, as well as other products and services that cater to the blossoming field of genomics research. This company targets the molecular biology andfunctional genomics markets. Functional genomics refers to the commercial and academic groups working to determine the function of certain genes and apply DNA information to the development of therapeutics and diagnostics.
As demonstrated with today's deal to buy BioReliance, Invitrogen likes to use acquisitions to bolster its market leadership. It recently bought Molecular Probes for $325 million, giving it the "leader in novel fluorescence-based technologies for labeling biological molecules in disease research and biopharmaceutical development," according to that press release. Earlier this year Invitrogen also bought PanVera, adding an impressive portfolio of biochemical research technologies and assets. That $95 million deal included the rights to over 300 patents and patent-pending technologies, proprietary reagents, probes and proteins, as well as a new research, development and manufacturing facility.
Invitrogen's kits are used at the most basic level of research in genomics studies. These kits help researchers isolate, clone and test genes more efficiently. In this way Invitrogen is catering to the scramble by thousands of researchers and companies to advance medicine and capitalize on recent breakthroughs in DNA research.
Researchers have already finished the first step in mapping the entire human genome, and while they found that there are fewer genes than previously thought, they've alsodiscovered that the interaction of genes and proteins to produce human variations is more subtle and complex than most scientists believed. The next decade or more will be spent deciphering the function of specific genes and their role in diseases, discovering drug targets and diagnostic processes, and applying that information to develop drug and gene therapies.
By studying the genetic basis of a disease, researchers hope to understand the cause and develop a drug therapy that targets the biological mechanism or the genetic cause itself. That represents a vast advance over many of today's drugs which often treat symptoms rather than attack the underlying cause of the disease.
The genomic revolution may also lead to patient profiling, where patients receive a certain treatment based on their specific DNA profile. This addresses the issue of why some drugs are effective on some people but not all, and why some people show side effects while others don't. Patient profiling could open up a whole new realm of treatments and allow a drug to be approved for specific types of patients -- based on their DNA -- instead of being rejected because the drug has adverse side effects or lacks efficacy on a small percentage of people.
Drug developers and governments are dedicating tremendous amounts of money and resources to genomics research, and that is driving demand for Invitrogen's kits. Revenues surged from $93 million in 1999 to $649 million last year, though some of that growth came through acquisitions. 2003 revenues are expected at $771 million, up 19% year over year, and they should approach $1 bln in 2004 with the added business from BioReliance. After delivering earnings of $1.81 per share last year, the consensus is for a profit of $2.22 in 2003, followed by $2.84 in 2004 adjusted to reflect guidance on the BioReliance acquisition.
Invitrogen came up short of the earnings consensus by a few cents on several occasions last year, causing the stock to tumble from a peak above $70 to a low near $25. IVGN stabilized in the $30 area earlier this year, then roared back to $69.25 currently. With a market capitalization of $3.5 billion it is large enough to be on the radar of most institutional investors. Further, this company has solid profits and leadership in an attractive growth market--qualities which attract attention in any environment but particularly coming out of a bear market.
While Invitrogen is no longer a cheap ticket into the exciting field of genomics, it does offer a way for investors to participate in the blossoming industry without exposure to the huge risks like FDA approval associated with most biotech investments. That, not to mention actual profits, is the beauty of a picks and shovels play like this.
