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Mass Spectrometers Amass Value


by Scott Greenstone


Mass spectrometry is hot. Ten years ago no one would’ve said anything remotely close. Ten years ago, mass spectrometry was a cyclical industry dictated mostly by the “Finnigan cycle” in deference to the trials, tribulations, and product development stages of market leader Finnigan (since purchased by Thermo Electron). Mass spectrometry and other instrument companies were accorded valuations appropriate of cyclical companies, meaning price-to-earnings multiples equal to the company’s growth rate, 30x and higher during up-cycles followed by half those levels during cycle-troughs. The market seemed pretty adept at anticipating up-cycles as customers began adopting new technologies and replacing their existing systems. As the end of the upgrade cycle neared, the valuations began reflecting the next downturn.

Things have changed. Following advancements in technology — the maturing of MALDI-TOFs, Q-TOFs, ion traps and others — mass spectrometry has started driving investments in new technologies. No longer are purchases simply technology upgrades. Rather, customers of mass spectrometers — pharmaceutical and biotech firms along with academic institutions — are changing the way they do research and investing in the future of drug discovery. They are building capabilities in the new methods. A big part of that future is proteins, and the technology driver enabling the study of proteins is mass spectrometry.

As a result, mass spectrometry sales have leaped out of the traditional cycle and have entered a growth phase. This phase has legs. While firm statistics are difficult to obtain, there is clear evidence that mass spectrometry for use with proteins is now in the third year of mega-growth. Mass spectrometry companies including Applied Biosystems, Bruker Daltonics, Waters, and Thermo Electron have for the most part been reporting very robust system sales. Two years ago, that growth was upwards of 60 percent. Now it has moderated to the 25 to 30 percent range, a remarkable number for a capital equipment industry.

That pace is expected to continue. Why? Because the pace of protein discovery is faster. The interest in identifying these proteins and validating them as drug targets is high and requires lots of mass spectrometry horsepower to complete. The influx of all these proteins means the capacity of mass spectrometers for studying them stays very low, suggesting lots of growth remains.

With such growth ahead, normal cyclical patterns are nonexistent and cyclical-stock valuation methodologies are not valid. This is why companies like Bruker Daltonics, Applied Biosystems, and Waters trade at P/E multiples well in excess of their projected growth rates.

In many cases valuations are at higher levels because the market is assuming earnings growth initially lags revenue growth as companies spend to keep up with demand. As demand moderates, these companies can leverage their existing infrastructure and drive earnings to grow at rates faster than revenues. And that is what the market values. No one knows when the cycle will end; as it does, the multiples will contract but, at the same time, give investors ample return to justify their risk. The market is amazingly efficient at correctly predicting future earnings growth. One only hopes we could be as accurate at predicting the market.


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