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Genomics Cos Tighten Belts as Capital Markets Dry Up, Experts Say

NEW YORK, March 22 - Applied Biosystems’ remarks regarding an expected slowdown in their short-term revenues indicates that smaller biotech and genomics companies have decided to limit big expenditures on new equipment while they ride out the economic downturn, company executives and analysts said Thursday. 

“Smaller biotechnology companies, in contrast to large pharmaceutical and large biotechnology companies, are significantly more reliant on the equity markets for financing and are therefore more sensitive to deteriorating equity capital market conditions,” Todd Nelson, an analyst at Dain Rauscher Wessels, wrote in a market report.

On Thursday, Applied Biosystems said that some customers had postponed orders for its 3700 sequencers as well as for the API 3000 LC/MS/MS mass spectrometer. The company attributed the drop in demand to the anticipated release of the next-generation API 4000 mass spectrometer as well as to the current economic downturn in the market.

"I know a lot of these people put a lot of money in the bank last year and have an awful lot of resources available to them," Tony White, CEO of Applera, Applied Biosystems' parent company, said on a conference call. "We've talked to some of our customers who basically said their concern is their ability to go back and get more is going to be limited for a while and therefore they think they need to conserve capital."

While Applied Biosystems expects long-term growth in earnings and sales to return to a compounded rate of 20 percent in two to three quarters, growth in the near term could be just one-half to two-thirds of that rate.

Analysts echoed White's statement saying that the drop off in demand reflected the fact that smaller biotech and genomics companies, which succeed in raising billions of dollars in the capital markets in 2000, had grown more cautious due to the realization that they might have a harder time raising money in the capital markets due to the current market conditions.

“Some of the smaller guys have to rely on their present cash holdings,” said Ellen Lubman, an associate analyst at Robertson Stephens. “They are considering the risks more than before.”

In some cases, analysts said, companies might wait until they sign deals with big pharma before they spend large amounts of cash on new machinery. However, Lubman also noted that genomics companies might not be able to command as much cash up front since some of the pharma companies have indicated that they would opt for deals in which the upfront costs were lower, even if this meant potentially smaller profits.

“One company mentioned that over the last six to 12 months large pharma has been more willing to share risks – offering to put up less money and share more of the rights to future profits,” she said.

Yet, despite the gloom and doom scenario, some analysts said the current situation would have to improve eventually. Winton Gibbons, an analyst with William Blair said he expected the picture to brighten in the next nine to 18 months since companies wouldn’t be able to guard their coffers forever.

“You can only suspend capital expenditure for so long,” Gibbons said. “Companies do have cash in the bank – they might have to tighten their belts now but eventually they will have to loosen up."

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