Capstone Presentation Prepared for Dr. Ian Lee and the Strategic Management Class of Fall 2003...

Capstone Presentation Prepared for Dr. Ian Lee and the Strategic Management Class of Fall 2003 Carleton University

Introduction Invitrogen is a manufacturer of biotech equipment and supplies used by academic, government and corporate researchers.

Part I Macro Environment A. Technological Environment B. Economic Environment C. Socio-Cultural Environment D. Political-Legal Environment

Technological Environment Nanotechnology Development of super small products Technology still in its infancy Currently 100 startups Nanobiotechnology, most promising for the Biotech industry Creation of drugs as well as diagnostic tools Gene Chip Ability to store entire human genome onto a single chip Technology still in its infancy, 5 years old Making personalized medicine a reality Ability to expand the biotech industry

Technological Environment Gene Testing Direct analysis of DNA molecules Newborn screening, prenatal diagnostic testing, risk analysis of adult cancers Few tests exist today, many waiting to be discovered

Technological Environment Gene Therapy Correct defective genes Replacing, repairing, regulating non-functional genes Technology still in an experimental stage FDA has placed a temporary ban on gene therapy Source: U. S. Food and Drug Administration (FDA)

Technological Environment DNA Computing Developed in 1994, by L.M. Adleman Information density greater then that of silicon Allowing large mathematical calculations to be performed DNA is natures hard drive Extension of current industry Bioterrorism Increasing bioterrorism, using sophisticated technologies, Anthrax, Sarin gas Provides demand for remedies

Economic Environment Source: The Statistical Yearbook of the Economic Commission for Europe 2003

Economic Environment Beyond 2003 SOURCES: Congressional Budget Office; Department of Commerce, Bureau of Economic Analysis; Department of Labor, Bureau of Labor Statistics; Federal Reserve Board.

Economic Environment Source: Ernst & Young Biotechnology Industry North America accounts for 77% of global biotech revenues

Socio-Cultural Environment Aging Demographic North American and European Population is aging The elderly population will require proper diagnostic tools, as well as various treatments Increased demand for the industry Health Care Expenditure Increasing trend 58% increase in spending since 1990 Increase in spending for Prescription drugs by 17%

Increasing Death Due to Illness Increasing trend for the population over the age of 44 Opportunity for innovation, and development of remedies Socio-Cultural Environment

Political-Legal Environment Heavily regulated, largely to benefit the industry North American states are attempting to lure the industry Large number of regulating bodies around the world, APHIS, EPA, FDA, DFO

Industry Analysis

Strategic Group Map Level ofIntegration Innovativeness Biopharmaceuticals Amgen Inc. Genentech Chiron Biogen Medimmune Biopharma R&D IDEC Celltech Imclone Corixa Protein Design Labs Biotech Equipment/Supplies Applera Invitrogen BD Biosciences Qiagen Affymetrix Molecular Devices Ciphergen Emerging Genomics & Bioinformatics Exelixis Lexicon Genetics LION Biosciences CuraGen DeltaGen Inc.

Pharmaceutical Industry

Revenues (June 30, 2003)

Profitability

Market Capitalization (Nov.10, 2003)

Five Force Analysis Threat of Direct Competitors : 9 Threat of Entry : 3 Substitutes : 5 Suppliers : 2 Buyers : 9 Average : 5.6 / 10

Direct Competitors (9) Many Competitors. Technologies can be rendered obsolete!

Threat of New Entrants (3) Many competitors. High costs: R&D, HR. Strategic Alliances, Patents.

Little Threat Profitability

Market Capitalization

Biotechnology Funding

Threat of Substitutes (5) Moderate. New Technologies being developed. Biochemical markets secure.

Power of Suppliers (2) Low. Numerous suppliers for most inputs. Outsourcing. FBS.

Power of Buyers (9) High. Biopharmas faced with high costs. New entrants = more buyers = lower buyer power.

Five Forces Summary Moderately Unattractive Industry. Major forces: buyers, competitors. Profitability Measures.

NAICS 325414 - Biological Product (except Diagnostic) Manufacturing

NAICS 334516 Analytical Laboratory Instrument Manufacturing

NAICS 541710 Research and Development in the Physical, Engineering, and Life Sciences

Key Success Factors Human Resources. Networking and alliances. Access to capital. National Policies. Product Strategy.

Driving Forces Success of Biopharmaceuticals. Government policy. Bioterrorism defense spending. IP

Industry Summary A moderately unattractive industry. Profitability is negative. Capital markets are volatile. ButGrowth is high!

Firm Analysis Listed on the Nasdaq, Invitrogen has a market capitalization of about $3 billion. They offer an integrated technology platform to support their customers efforts in molecular and cell biology research, drug discovery, and commercial biomolecule production.

Firm Analysis 2002 Summary Wide-ranging plan of new product innovation. Emphasis on high growth, high margin products. Revenues increased to $649 million Pro forma EPS grew to $1.81. Over $1 billion in cash puts Invitrogen in strong position for further investment.

Employees At the end of 2002, Invitrogen had 2744 employees, 916 of whom were employed outside the United States. Strong competition for talented employees in the industry. Continues success dependant on ability to attract and retain qualified employees.

Value Creating Activities Research & Development Research & Development Sales & Marketing Sales & Marketing Technology Licensing Technology Licensing Patents and Proprietary Technologies Patents and Proprietary Technologies Suppliers Suppliers

Research & Development Invitrogen has 213 employees principally engaged in R&D. 5.20%, 6.06% and 9.59% were the percentage of revenues spent on R&D in 2002, 2001, and 2000 respectively 2002 was a transition year; R&D was co-located with marketing and manufacturing facilities in Carlsbad to improve speed and efficiency of product development.

Sales & Marketing Invitrogen sells directly in 24 countries Sell through agents and distributors in 45 additional countries There are 893 employees in the Sales and Marketing group They employ scientists as their technical sales representatives. Marketing departments across the globe Comprehensive website

Technology Licensing Many products are manufactured or sold under terms of licensing agreements. Most expire at various times over the next 15 years. Must pay royalties to licensors based upon a percentage of sales which involve licensed product. Renewing licenses involves significant risk.

Patents and Proprietary Technologies Company protects proprietary technology using patents, licenses, copyrights, and trademarks. Invitrogen enters into confidentiality agreements with third parties, employees, and consultants. In U.S. alone, Invitrogen has over 100 patents, which tend to last for 20 years.

Suppliers Materials are bought from many different suppliers. The company is not dependant on any one supplier or group of suppliers. Raw materials, with the exception of fetal bovine serum (FBS) are available from multiple suppliers. Invitrogen acquired Serum Technologies which provides the company with its own source of FBS from Australia.

Emerging Market Opportunities Invitrogen has developed a reputation as a pioneer for developing new technologies and packaging them into kit format. Currently refocusing beyond individual products to develop application- centered technology platforms to address an emerging market opportunity. They hope to become a total integrated solutions provider to their customers.

Core Competencies Large amounts of valuable intellectual property is one of Invitrogens strengths. Currently owns over 125 patents in the U.S., and has almost 300 licenses covering 400 patents. A strong line of products is another strength, with a catalogue of over 10000 products.

Strategic Acquisitions and Mergers An important component of Invitrogens business strategy is identifying growing or emerging markets, and entering these markets through strategic acquisitions. Invitrogen uses strategic acquisitions to improve its market share and acquire new technologies.

Summary of Value Adding Factors Brand Leadership Commitment to Innovation Strategic Acquisitions Emphasis on Customer Service and Product Quality Strong Global Presence Constant Improvement of Operational Efficiency and Financial Performance

Financial Analysis Cash represented 20% of total assets. Liabilities represent 37% of total assets. 200220012000 Gross Margin58.39%54.60%49.35% R&D (000s)$33,698$38,145$23,620 R&D %5.20%6.26%9.29%

Financial Analysis 2002 was the first time in 3 years Invitrogen had a positive net income (7.35% of revenues) 2001 and 2000 had net losses, mainly due to restructuring and large acquisitions. 2002 shows that this restructuring and acquisitions are paying off.

Financial Analysis Profitability Ratios12/31/200212/31/200112/31/2000 Return on Equity2.9-8.84-3.05 Return on Assets1.82-5.54-2.29 Return on Investment7.06-21.83-30.23 EBITDA of Revenue24.622.0210.78 Operating Margin10.57-23.93-27.33 Effective Tax Rate31.2-6.80.94 Liquidity Indicators12/31/200212/31/200112/31/2000 Quick Ratio4.7683.73 Current Ratio6.879.524.39 Working Capital/Total Assets0.320.40.22

Financial Analysis Debt Management12/31/200212/31/200112/31/2000 Current Liabilities/Equity0.090.080.09 Total Debt to Equity0.410.40.1 Long Term Debt to Assets0.260.250.08 Asset Management12/31/200212/31/200112/31/2000 Revenues/Total Assets0.250.240.1 Revenues/Working Capital0.780.580.47 Interest Coverage3.95-11.15-5.1

Industry Avg.Invitrogen Profitability Ratios ROE-42.32.9 ROA-145.321.82 EBITDA of Revenue-1212.0324.6 Operating Margin492155617.210.57 Effective Tax Rate0.1331.2 Liquidity Indicators Quick Ratio5.794.76 Current Ratio6.236.87 Working Capital/Total Assets-0.950.32 Debt Management Current Liabilities/Equity3065.820.09 Long-term Debt/Equity230719.590.41 Debt/Total Assets0.180.26 Asset Management Revenues/Total Assets0.590.25 Revenues/Working Capital1.50.78 Interest Coverage-159.543.95

Corporate Strategy Current Strategies. Strategy Analysis. Recommendations.

Vertical Positioning

Core Business Molecular Biology (NAICS 325414 Biological Product (except Diagnostic) Manufacturing). 66% of Revenues.

Horizontal Diversification Cell Culture (NAICS 335416 Analytical Laboratory Instrument Manufacturing). 34% of Revenues. Highly Related.

Life Technologies Merger Spawned creation of two segments. Combined income in 1999: 477.9 million. Invitrogen revenue in 2001: 629.3 million. A 31% increase. Staff reduction: 2,981 to 2,744. Pro forma income reporting.

Regional Revenue

Asset Allocation

Subsidiaries Serum Technologies Pty Ltd. Informax Invitrogen B.V. Research Genetics Ethrog Biotechnologies Gene Express Inc.

Corporate Strategy Analysis Global International Strategy. Growth Strategy. Informax PanVera LLC, Molecular Probes

Selected CPI Data

Relative Labour Wages

Recommendations Manufacturing Abroad. Slow rate of acquisition. Reduce Debt/Increase Flexibility.

A New Strategy Gateway Technology Open Architecture Open licensing, Market driven pricing. Enables sharing of information amongst researchers. Speeds research / drug development. Creates a bigger market for equipment and supplies!

Business Strategy Invitrogen currently employs a differentiation strategy. This means they offer something which their competitors can not provide, and which their customers are willing to pay for. Invitrogen differentiates itself by refocusing beyond individual products.

Differentiation Invitrogen has over 10,000 products, which is not itself a source of differentiation. What is unique about Invitrogens strategy is that they are developing and optimizing application-centered technology platforms.

Differentiation Instead of presenting their customers with the list of their many products, Invitrogen, through these technology platforms, is positioning themselves as an integrated solutions provider. The value of these platforms is greater then the sum of its parts.

Differentiation Many of Invitrogens competitors offer substitutes to the over 10,000 products which Invitrogen offers. However none of the competitors are providing these products in the form of application-centred technology platforms. This is one area that differentiates Invitrogen.

Differentiation These platforms are unique, and customers are willing to pay for the value they provide. Invitrogen can offer custom solutions or a complete package, and combined with Invitrogens solid reputation, Invitrogens customers know they are getting good value for their money.

Differentiation Another area in which Invitrogen differentiates themselves from their competitors is through their strong customer relations. Invitrogen creates a competitive advantage through their relationships with their customers through the dimensions of richness, reach and affiliation.

Reach This refers to a firms access and connections to customers. With a presence in over 75 countries, marketing centres in U.S., Europe, and the Asia-Pacific, and a comprehensive website, Invitrogen has good reach with its customers

Richness Richness is concerned with the depth and detail of the two-way flow of information between the firm and the customer. Sales force of almost 900 is composed of scientists with extensive backgrounds in biology and molecular biology. They are able to provide provide meaningful answers and information to customers.

Affiliation Affiliation is concerned with facilitating useful interactions with customers Invitrogen's direct sales presence in 24 countries gives them strong affiliation. Their affiliation is further improved by their on-line catalogue on the Invitrogen website.

Business Strategy Analysis For differentiation to succeed, all functional level strategies must support the business level strategy. The company must ensure it is aware of and able to respond to competitors threats to their business strategy. Company must be able to adapt to ensure strategy remains effective.

Competitor Threats to Business Strategy Any strategy can lose its effectiveness. Because of this, it is important to closely monitor the activities throughout the value chain to ensure that they are continuing to add value and have not become obsolete It is also important to closely monitor the actions of competitors.

Competitor Threats to Business Strategy Competitors could offer a good substitute at a lower price. Competitor could develop products which render Invitrogens products obsolete.

Research & Development Invitrogens functional R&D strategy corresponds to the business-level differentiation strategy. To be an integrated solutions provider, Invitrogen must be on the cutting edge of product development. Failure to continue to develop new products could result in failure of diffentiation strategy and loss of market share.

Sales and Marketing For differentiation to be successful, customers must perceieve value for which they are willing to pay. Invitrogens large and highly qualified sales and marketing staff help make the differentiation strategy successful.

Licensing Invitrogens differentiation strategy consists of offering complete solutions to meet customer needs. Because needs vary greatly, Invitrogen cannot meet customer needs exclusively with internally developed products. For this reason, licensing is an important part of the success of Invitrogens differentiation strategy.

Patents and Proprietary Technology For the differentiation strategy to be successful, Invitrogens products must offer added value compared to the products of competitors. Patents and proprietary technologies help to prevent competitors from copying Invitrogen, and as such, protect Invitrogens source of differentiation.

Business Strategy Recommendations The corporate level strategy of acquiring new technologies and entering new markets through acquisitions has been complemented by the business level strategy of differentiation. Because of this, there is no reason for any dramatic changes to Invitrogens business strategy.

Business Strategy Recommendations It is important to be flexible and to adapt to an ever changing market. For this reason, it is important that Invitrogen does not become complacent and continues to refine and improve. Monitoring the external environment and competitors is essential.

Closely Monitor Competitors Invitrogen must be aware if its products are becoming obsolete. It also must ensure that its customers are willing to pay a premium for the unique features Invitrogen offers. Must be aware if competitors are offering similar products at lower price. Invitrogen must be ready to quickly respond if any of these things occur.

Continue to Improve Customer Relations For continued success, strong customer relations are successful. A good product is useless if customers dont trust Invitrogen. Invitrogen does well in this area, but must continue to seek new ways to improve access and connections with customers.

Move Away from Licensing Although licensing is important to the business strategy, it brings high risk. As much as possible, Invitrogen should move away from licensing and increase internal product development. By doing so, Invitrogen ensures it is responsible for its own fate, and cannot be held hostage by licensors.

Be a Moving Target It is only a matter of time before competitors copy the features that make Invitrogen unique. For this reason, Invitrogen must continue to focus on innovation and the development of new products and technologies. They must stay one step ahead of competitors to maintain competitive advantage.

Capstone Presentation Prepared for Dr. Ian Lee and the Strategic Management Class of Fall 2003...

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