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Despite Better Q2 Trends, Tight-fisted Spending Expected for Remainder of 2012, Goldman Sachs Survey Says

NEW YORK (GenomeWeb News) – Despite healthier than expected spending during the second quarter, life science researchers are expected to tighten their purse strings for the remainder of the year, according to the results of a survey conducted by investment firm Goldman Sachs.

The survey also found that 30 percent of respondents were not aware of the possibility of a nearly 8 percent cut to the National Institutes of Health's budget for fiscal year 2013, further punctuating a pessimistic outlook for the remainder of 2012.

In the first of a new series of quarterly R&D spending surveys that Goldman Sachs plans to publish before the start of each earnings period, researchers reported healthy budgets for the three months ended in June. In aggregate, 61 scientists said that their budgets for the quarter were up 11 percent year over year. In the US, researchers reported an 11 percent increase, for example, while in Italy researchers said that their budgets rose 23 percent.

Spain was the only country which reported a decrease, 2 percent year over year. While Goldman Sachs analyst Isaac Ro said he was skeptical about the 11 percent increase across all researchers, he did not dispute the possibility that budgets had increased during the quarter.

Nonetheless, the spending environment and spending trends for the rest of this year are expected to be noticeably darker, and in particular, Ro noted the survey finding that a large percentage of scientists in the US were not aware of possible sequestration, which would result in a 7.8 percent reduction to NIH's budget next year.

Speaking on a conference call this morning, Ro called the finding "the single most important takeaway. … It strains the imagination to think that any plurality of scientists [is] not aware of this issue."

Congress is expected to work on a budget plan that would avoid sequestration, and many observers expect the eventual NIH cuts to be closer to the 2 percent to 3 percent range. Funding may even be flat compared to 2012. Still, in the more than 70-year history of NIH, the institute's funding has declined nominally just six times, Ro said, and many researchers may be unprepared for any funding cuts.

"Given the surprisingly strong [Q2] funding growth responses and surprisingly high percentage of respondents who are not aware of the pending fiscal cliff, we therefore remain concerned that [H2] spending pullbacks could be greater than expected," Ro said in a research note.

Additionally, of the respondents who knew about sequestration, many said they will be more tight-fisted with their dollars: 33 percent plan to put off buying new equipment, and 49 percent said they will hold back spending.

Also, 12 percent said they will reduce their headcount, which may be especially troubling longer term as fewer scientists will lead to less demand for both instruments and consumables from life science companies.

"The magnitude of these withheld budget dollars is going to be hard to measure for a while," Ro said on the conference call. "It is a somewhat new phenomenon, and longer term we do think the reduced head count is going to lower the growth rate that you get out of the aggregate consumables business," particularly in 2013 and 2014.

For companies whose consumables business makes up a higher percentage of their total revenues, such as Illumina, Life Technologies, Sigma-Aldrich, and Thermo Fisher Scientific, this will be problematic, he said.

Overall, survey respondents said that consumables are the highest purchasing priority, followed by equipment, other, overhead/supplies, and software/IT.

The survey also asked researchers whether they plan to withhold a greater percentage of their available budget in 2012 than in 2011. Fifty-five percent of respondents in the US and 36 percent of respondents in Europe said they do.

Among those who answered affirmatively, the amount they plan to withhold was significant, Ro said. In the US, for example, researchers said they plan to withhold 15 percent of their available budgets, contradicting what management at some life science firms are stating, he said.

With a challenging second-half to the year anticipated, Ro maintained PerkinElmer as his top stock pick among 'omics-related firms, noting the company has limited exposure to NIH funding and an operating margin expansion of up to 300 basis point available over the next few years. Goldman Sachs has a "Conviction-List" Buy rating on the company

Ro maintained Sell ratings on Affymetrix and Life Tech. On Affy, he said the company has limited balance sheet flexibility after its $315 million purchase of eBioscience. Despite that deal, he added, it doesn't meaningfully change Affy's end-market mix.

On Life Tech, he reiterated concerns about that firm's PCR and capillary electrophoresis sequencing businesses, where "a large percentage of the company's cash flow is driven [by] and a majority of growth has been a function of pricing."

In a research note published last week, Ro also said that he believes that Life Tech's Ion Torrent business, on which he is bullish, nonetheless will be a profit-and-loss drag through 2014 and beyond, due to high levels of R&D investments.

The survey was conducted between June 21 and July 2. A total of 52 academic laboratories and nine biopharma labs participated. Forty-seven labs were from the US and 14 were from Europe.

The European labs were located in Spain, Sweden, Denmark, and Italy. The survey did not include respondents from locations such as the UK or Germany, where much life science research is conducted, because researchers there did not respond in time, Ro said.