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Goldman Sachs Survey Finds Spending on Life Science Tools Remains Challenged by Funding, Fiscal Concerns

NEW YORK (GenomeWeb News) – Despite a temporary deal in Washington to avert the fiscal cliff, spending by academic research laboratories on life science research tools may remain flat in the short to medium term, according to survey results released today by Goldman Sachs.

The survey tracked sentiments and behavior by research lab managers in the fourth quarter of 2012 and provides a window into spending patterns during the quarter as well as priorities for the first half of 2013.

A key takeaway from the survey is that while lab budgets grew during the fourth quarter of 2012, the rate of growth was down sequentially from the third quarter, demonstrating "further deterioration in the overall funding environment," analyst Isaac Ro said during a presentation of the survey's results. In an accompanying research note, he added, "We believe spending will remain constrained until greater clarity is gained … [and] we do not expect any significant rebound in spending until greater clarity is gained from the government on future budget cuts."

By geography, the largest budget growth slowdown was seen in Germany, where five labs said their budgets grew by 3 percent in the quarter year over year, compared to 13 percent growth reported in the third quarter. In the UK, five labs reported 2 percent growth in the fourth quarter compared to a year ago, and down from 6 percent growth in the third quarter.

In the US, 31 labs said their budgets increased 5 percent year over year, down from 8 percent in the third quarter. On a conference call, Ro said that although he is skeptical about the magnitude of the increase, "the directional trend there is important, and importantly it's still relatively positive … still relatively stable."

Goldman Sachs' survey was conducted between Jan. 4 and Jan. 9, after Congress reached its fiscal cliff deal averting deep cuts to government programs, including an approximately 8 percent cut to the National Institutes of Health. However, the fix is temporary, and in March lawmakers in Washington will have to act again to avoid a fiscal cliff.

The longer term uncertainty about government funding was reflected in the investment bank's survey. During the fourth quarter a lower percentage of respondents said they had low to moderate visibility on funding compared to the third quarter, 49 percent vs. 63 percent.

The survey also found that while most of the lab managers, 58 percent, said that the uncertainty around the fiscal cliff had no impact on their year-end spending, among those who said that it did, 77 percent said they expect their spending to stay constrained in Q1 2013.

The results, Ro said, suggest "that lab managers are unable to come to a consensus view on what future funding will look like" and that "uncertainty is a new reality, and perhaps a greater degree of it."

When asked what would lead them to spend more moving ahead, lab managers most frequently cited the need for new grants as well as clarity on future funding.

"While there may have been some year-end spending in the fourth quarter, these responses serve as a reminder that long-term trends remain highly dependent on political dealings and macroeconomic improvement," Ro said in a note accompanying the survey results.

The survey results further suggest that pessimism about funding is greater in the US than in Europe. It found that fewer lab managers are withholding their budgets than their counterparts in the US: 10 percent in the European Union said they are withholding a greater percentage of their budget than in past years because of uncertainty around funding, while 58 percent in the US said they were doing so.

There was some positive news, however, for equipment manufacturers suggesting that the fourth quarter may have been a relatively bountiful one. While consumables were still the main priority as far as purchases were concerned, its lead over equipment purchases narrowed in the fourth quarter compared to the prior quarter.

Ro attributed that to a possible budget flush often seen at the year-end as well as pent up demand for new technologies, whose purchases may have been delayed from earlier in the year.

In light of the survey, Ro said that PerkinElmer remains his top pick in the life science tools and diagnostics space. Bruker, Agilent, Mettler-Toledo, and Hologic are also top picks. Those firms have low exposure to NIH funding and high exposure to emerging markets.

The survey along with better than anticipated earnings pre-announcements from Illumina, Danaher, Affymetrix, and Quidel allow us to be "tactically positive on [life science] tools into fourth-quarter earnings season," Ro said.