Bio-Rad has begun implementing "sales-effectiveness" programs, including revised training methods, in an effort to cut down creeping SG&A costs and improve profitability.
In a conference call following the release of its second-quarter results, which showed a 13.4-percent increase year over year in SG&A spending, Bio-Rad CFO Christine Tsingos cited a "significant increase in legal fees, advertising, and other operation expenses" in the quarter as primary reasons for the increase. Some expenses were one-time in nature — such as the company's ongoing litigation with Applied Biosystems — but the level of profitability "is well below our target, and we have already begun to implement programs that should better manage the spending going forward," Tsingos said.
Norman Schwartz, president and CEO of Bio-Rad, said during the call that the sales-effectiveness programs would include improvements in software, systems, and training with an eye toward increasing sales per head.
"We're just trying to better utilize what we've got," he told BioCommerce Week in an interview. "I would put these in the blocking and tackling category; [things like] better product knowledge and better sales-training techniques." He declined to be more specific.
According to Schwartz, the company expects to see the results of these programs over the next six to eight quarters.
Bio-Rad's SG&A expenses were higher than expected, according to Tsingos, totaling $104.2 million in the quarter, up from $90.2 million in the second quarter of 2004. As a percentage of sales, SG&A spending rose to 35.8 percent from 34.6 percent year over year. According to Tsingos, the firm intends to lower its full-year SG&A as a percentage of sales below its 2004 results of 34.7 percent.
"We're just trying to better utilize what we've got. I would put these in the blocking and tackling category; [things like] better product knowledge and better sales-training techniques."
The firm reported overall sales growth of 11.8 percent — 8.5 percent on a currency-neutral basis — to $291.3 million for the second quarter. Sales in its life sciences segment grew 17 percent, or 13.7 percent on a currency-neutral basis, year over year, to $133.1 million.
"We continue to have strong year-over-year growth from our multiplex array products, process media, and incremental sales from the acquired MJ products," said Tsingos. "We're also seeing increasing demand for Experion, our new automated electrophoresis system."
However, Tsingos noted that organic growth for the life sciences segment was in the "low single digits" if the favorable currency effect and sales from MJ Research, which Bio-Rad acquired last August, are excluded. She said that the segment was hurt by lower margins for the firm's BSE test.
Brad Crutchfield, Bio-Rad's vice president for life sciences, said that the firm expects continuing declines in the average selling price of BSE tests, primarily due to competition. Diagnostic market leaders Abbott and Roche also sell BSE tests, though Bio-Rad said that it continues to hold a greater share of the market.
Sales of its clinical diagnostics products grew 7.5 percent, or 4 percent excluding currency benefits, to $155.2 million, led by diabetes, quality control, and blood virus products.
Bio-Rad's profit dropped 9.3 percent to $18.4 million, or $.71 per share, from $22.9 million, or $.79 per share, during last year's second quarter. Bio-Rad blamed the decline on ongoing internal investment in systems and infrastructure and increased interest payments associated with the sale of bonds late last year.
Over the past few years, the firm has invested in developing and installing an enterprise IT system. Other investments include a project in Europe to re-model the firm's distribution system, Schwartz told BioCommerce Week.
The drop in profits sparked a sell-off in the firm's shares, which fell 7 percent to close at $57.69 on Friday, the first full day of trading after the firm released the results following the close of the market on Thursday. The firm's shares had risen steadily since the end of April and reached a 52-week high of $62.58 last week before declining to $55.75 at the end of trading on Tuesday (see chart).
Bio-Rad officials said that their expectations for the remainder of the year were unchanged by the Q2 results, with sales growth expected to be in the mid- to high-single digits for the full year. They said sales growth was strong in the US and the Asia-Pacific region in the first half, while European sales, particularly in Germany and France, continued to weaken.
"This weakness will likely become more evident during the seasonally slow third quarter," Tsingos said.
Litigation with ABI Inching Closer to an End
Although Bio-Rad would not disclose the legal fees associated with its ongoing litigation with Applied Biosystems (see BioCommerce Week 4/7/2005), Tsingos hinted it its cost. Answering a question during the call regarding one-time items, and legal fees in particular, Tsingos said, "If I look at some of these things that I'll call … one-time in nature — meaning that at some point it will be settled and fees should go down or go away — there's probably a million to a million and a half [dollars] in the quarter that would be at least one-time in nature."
She quickly pointed out that some of the one-time expenses were related to launching and advertising new products. But the ongoing litigation with ABI has clearly cut into the firm's bottom- and top-line earnings, as it continues to be barred from selling PCR instrumentation in the US.
Schwartz said during the call that the firm was "inching closer to resolving the litigation" with ABI's parent, Applera.
Bio-Rad assumed legal liabilities, particularly those associated with a suit filed by ABI against MJ Research, when it acquired MJ last August for $32 million in cash.
In the spring of 2004, a jury awarded ABI and partner Roche Molecular Systems $19.8 million in damages when it found that MJ had infringed several of their PCR patents. That decision was followed this past March by a US Court decision to award ABI and Roche $15.6 million in additional damages (see BioCommerce Week 4/7/2005).
Last year, Bio-Rad set aside $50 million in a contingency fund for the suit.
Where to Go After BioSource?
Bio-Rad recently lost a very public bid to Invitrogen in its attempt to acquire BioSource International, a provider of assays, antibodies, bioactive proteins and peptides, oligonucleotides, and other products. Bio-Rad's April bid of $8.50 per share was rebuffed by BioSource, and last month the firm agreed to be acquired by the Bio-Rad rival for $130 million in cash, which is equivalent to roughly $12.50 per BioSource share (see BioCommerce Week 7/28/2005).
"We were certainly quite surprised by the value that Invitrogen ascribed to the company and its competing bid," Schwartz said during the call. "And we're currently evaluating where we go next with this."
However, it is unlikely Bio-Rad will offer a higher bid to try and sway BioSource's board and shareholders. Industry insiders consider Bio-Rad to be a value buyer that is unwilling to pay significant premiums to add businesses or products to its portfolio, and officials have recently suggested that this strategy would not change.
According to Panna Sharma, CEO & Managing Partner of TSG Partners, a life sciences advisory firm, "Few companies would be able to justify and match the premium that Invitrogen put on their bid — it assumes synergies on both sides of the table that only one or two public companies other than Invitrogen could bring to life."
"There are definitely other attractive opportunities in the marketplace right now," and Bio-Rad could be evaluating a number of private companies, he said. However, these potential targets, which he declined to name, could not offer the same impact or scale as BioSource, unless they planned on bundling two or more of them.
— Edward Winnick ([email protected])