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Beckman Coulter Hopes Consumables, Asia Expansion Will Drive 2006 Revenue Growth

After reporting a 5.4-percent decline in fourth-quarter revenue, Beckman Coulter officials said the best way to track the firm's growth over the next year would be through the sales of its consumables.

Beckman's fourth-quarter results were affected by the firm's change in its hardware-leasing policy, which was launched in July along with a restructuring of the firm's operations (see BioCommerce Week 7/28/2005). In addition to expecting consumables growth of 10 percent in 2006 and beyond, Scott Garrett, Beckman's president and CEO, said the firm expects to rapidly grow revenue in China and India, where it expanded its operations in 2005.

Beckman reported fourth-quarter revenue of $655.5 million, down 5.4 percent from sales of $693 million in the fourth quarter last year. Sales in the US were down 12.4 percent for the fourth quarter, but up 4.6 percent for the rest of the world, as the change in lease policy primarily affected transactions in North America.

"Customers adopted operating-type leases faster in the quarter than our outlook contemplated, trimming reported sales by $4 million more than we had projected," Garrett said during the firm's fourth-quarter conference call last week.

"Flat government funding of research and careful biopharma R&D investment leads us to modest growth expectations in the life sciences market. Our best opportunities are likely to be in emerging areas like biomarker screening and proteomics research."

Fourth-quarter consumables sales grew 12 percent year over year, and Garrett said such sales were a fair way to judge the firm's progress during the transition in leases. "As we go through this transition, if we can consistently grow our consumables quarter after quarter, it has to be coming from an increasing installed base and better utilization of our installed base," he said.

Beckman posted a profit of $17.8 million, or $.28 per share, for the quarter, down 70 percent from a 2004 fourth-quarter profit of $59.8 million, or $.91 per share. After adjusting for charges, the firm would have posted a profit of $.73 per share.

"The disappointing fourth-quarter results indicate to us that, like its peers, Beckman Coulter faces a tougher environment and management does not yet have its arms around the one-offs that have been negatively impacting its margins," wrote Matt Miksic, a Morgan Stanley analyst, in a research note last week.

The fourth-quarter results did not sit well with Beckman's investors, who sent the firm's shares down 6 percent to close at $56.53 on Friday, the day the results were released.

Garrett maintains that the switch from offering sales leases to operating-type leases will translate into less "lumpy" automation products sales, more predictable revenue, and improvement in productivity, manufacturing, and commercial operations. However, it will take until the fourth quarter of 2006 before investors and industry observers can gain an accurate picture of how the changes affect revenue growth, Garrett said.

Previously, the firm would aim to ship a large number of instruments at the end of the quarter so it could recognize revenue for that period, Garrett explained. Now, with the operating-type lease model, Beckman gets paid in monthly installments over five years, rather than recognizing the revenue all at once.

"The OTL model takes some of the pressure off of period-ending sales of hardware," Garrett said. Since the change in policy, "we were less concerned about shipping against every order that came in and more concerned about managing our inventory according to the forecasted demand," he said.

"We really had a chance to drive down inventory for the first time in a long time, especially in the area of hardware. We focused on cash flow in the quarter, and felt that inventory was our best opportunity to maximize cash flow in the second half of the [2005] year," said Garrett.

2005 Hit by Charges

For full-year 2005, Beckman posted revenue of $2.44 billion, a 1.5-percent increase over revenue of $2.41 billion in 2004. Its net income fell 28.6 percent to $150.6 million, or $3.21 per share, from $210.9 million, or $2.32 per share, in 2004.

Beckman's 2005 results include $62.7 million in charges, of which $36 million are related to the firm's restructuring and $26.7 million was attributed to non-cash write-offs of impaired assets and inventory.

In addition to the change in lease policy, Beckman's restructuring included 350 lay-offs and reviews of "minor product lines, facilities, and other assets that do not support the one-company strategy," which are likely to result in divestitures. In fact, the firm already has discontinued the IC 100 high-content screening technology that it acquired along with startup Q3DM in late 2003 and shut down its San Diego-based Cell Analysis and Development Center (see BioCommerce Week 11/24/2005).

The Q3DM product line "really didn't seem to have the potential to move the needle for us and we decided not to invest in it any further," Garrett said during the call.

Company officials said Beckman discontinued several product lines in its discovery and automation businesses during the second half of the year, but they declined to provide further details.

The firm also noted that spending by certain life sciences customers continued to be constrained in the second half of 2005. "Flat government funding of research and careful biopharma R&D investment leads us to modest growth expectations in the life sciences market," said Garrett. "Our best opportunities are likely to be in emerging areas like biomarker screening and proteomics research."

Positioning for Stronger Growth?

During the year, Beckman made several moves beyond the restructuring and change in lease policy that were intended to position the firm for stronger growth. It made two major acquisitions, including the $140-million purchase of Agencourt Bioscience in April (see BioCommerce Week 5/5/2005). In addition to gaining Agencourt's "sequencing by synthesis" technology, Beckman also gained the firm's Solid Phase Reversible Immobilization technology for isolating and purifying DNA and RNA in its automated sample preparation systems for biomedical research and molecular testing. During the conference call last week, Garrett called the SPRI technology a "key element of our plan for growth in molecular testing."

In October, Beckman expanded its clinical diagnostic operations by acquiring specialty immunoassay provider Diagnostic Systems Laboratories for $138 million, less a certain amount of undisclosed debt.

During the year, Beckman also launched its Vidiera NsP nucleic sample-preparation platform, which the firm hopes will be purchased as a companion to its launched Vidiera NsD nucleic sample-detection system. Together, Beckman is hoping the systems will help it expand into the molecular diagnostics market.

Beckman also took steps to expand its business in the fast-growing markets of China and India. In 2005, Beckman's sales in China exceeded $100 million, according to Garrett. In order to ensure continued growth, the firm established its own trading company in China, called Beckman Coulter Commercial Enterprise.

Garrett said the enterprise status provides the firm with "broader capabilities [that are] expected to accelerate instrument placements and market penetration," Garrett said.

During the fourth quarter, Beckman formed a wholly owned subsidiary in India, enabling the firm to sell its products there directly. Garrett said the firm is in the process of hiring staff in India and is optimistic about rapid revenue growth in that market.

Beckman officials forecast first-quarter 2006 revenue of $555 million to $575 million with earnings per share of $.30 to $.40. They predicted full-year 2006 revenue of $2.525 billion to $2.6 billion and EPS of $2.70 to $2.90.

— Edward Winnick ([email protected])

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