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As Pharma Spending Continues to Plod Along, Multi-Platform Providers Seek Opportunities

San Francisco — Many of the firms in the BCW Index expect the challenging pharma spending environment that tempered sales of certain capital equipment in 2005 to continue into 2006. But they also believe that opportunities still exist to grow revenue, depending on the technologies being offered.

In interviews with BioCommerce Week over the past couple of weeks, manufacturers and industry observers have suggested that the problem has less to do with the amount of research dollars available than what pharmaceutical and biotech firms are willing to spend on certain applications. Companies that offer equipment to perform functions such as cell analysis and ADME-Tox, and those that can offer integrated packages of tools, are not likely to feel the pinch from decreased spending as much as those that have a narrow focus on more mature applications.

A decline in pharma spending hurt Waters, which twice last year had to issue earnings warnings after sales failed to meet expectations. Speaking last week at the JPMorgan Healthcare Conference here, Waters President and CEO Doug Berthiaume said, "We think we've seen a bottoming out of the difficulties with large pharma." However, he said he does not believe large pharma "will open up the checkbook" in the first quarter (see BioCommerce Week 1/11/2006).

PerkinElmer Chairman and CEO Greg Summe added, "It's tough and it's not going to get better until pharma returns to a growth track. [Right now] there is no recovery. It's a restructuring challenge for pharma," he told investors during a breakout session following the company's presentation at the conference.

The pharma spending problem is "certainly somewhat company specific" to multi-platform tool vendors. "Those companies introducing new products are seeing fairly robust sales."

In the meantime, PerkinElmer, which saw slow improvement in pharma spending as 2005 progressed, has shifted its focus partly to higher-growth opportunities, such as cell analysis and biomarker discovery — a strategy employed by many of the multi-platform tool vendors.

The pharma spending problem is "certainly somewhat company specific," said JP Morgan analyst Tycho Peterson, referring to multi-platform tool vendors. "Those companies introducing new products are seeing fairly robust sales." For example, he cited Thermo Electron's introduction of its OrbiTrap. Unlike certain competitors, "their mass spec business is growing in the double digits," he told BioCommerce Week.

Peterson said strategies such as bundling and offering services and software can mitigate declines in pharma spending, and are employed by firms such as Invitrogen and Thermo Electron. "Ultimately, the companies that are getting squeezed are smaller, such as Ciphergen and Cepheid."

Thermo Electron President and CEO Marijn Dekkers said the firm has not been hit hard by declines in pharma spending. He acknowledged that while there has been "some deceleration," sales to the top 10 pharmaceutical companies were up 6 percent in the first three quarters of 2005. While Thermo's sales to Pfizer, the world's biggest pharmaceutical company by revenue, were down, he said, sales to Merck, the No. 4 drugmaker, were up.

Dekkers also recently said that pharmaceutical companies' ongoing move toward outsourcing certain services has been a benefit to Thermo, as has many firms' decision to consolidate their supplier base. In addition, he reminded investors at the conference that while sales to big pharmaceutical firms were important, sales to such customers accounted for only 5 percent of Thermo's total sales.

"I won't deny this is a challenging market," said Cathy Burzik, president of ABI, at the conference, "but I think that what we are finding is ... people will pay for innovation. It is also important for Applied Biosystems not be focused just on the research market. The real growth is in the applications area, and it's in making the discoveries real."

This reasoning was clearly behind ABI's recent decision to sell its 50-percent stake in Celera Diagnostics to Celera Genomics in exchange for the right to sell instruments to end-user diagnostic customers (see BioCommerce Week 1/11/2006).

And just as pharma spending woes are not felt evenly among research tool vendors, the problem is not universal among the top drug firms.

"I hear very specific things about spending at Pfizer [being] awful, spending at Merck and Glaxo is very good, and Bristol-Myers is good," said JP Morgan's Peterson. "It's also company-specific in a sense that Pfizer's going through a lot of growing pains. They're cutting $600 million in costs, but in the interim you don't want to be the guy who goes out and buys a $500,000 mass spec and then gets a call from [CEO] Hank [McKinnell] saying, 'What are you doing?'"

The Money is Still There, But Where is it Being Spent?

Despite the lack of spending by some big pharmaceutical companies and a relatively flat National Institutes of Health budget for 2006, there are still tens of billions of dollars being spent by pharma and biotech firms on research. According to a recent report from the Institute of Electrical and Electronics Engineers, pharma and biotech firms spent $51.7 billion on research and development worldwide in 2004. Couple that with the NIH's allocation of $27.6 billion for basic and applied research in 2006 — a .5 percent increase over 2005 — and the picture isn't as bad as some vendors have suggested.

"We're still very bullish on growth opportunities in discovery [tools] and diagnostics," said Panna Sharma, CEO & managing partner of TSG Partners, a life sciences advisory firm. "Not the aggregate growth, but the pockets of growth."

"Biotechs continue to spend aggressively on tools and technology," he said, and not just the large firms. Smaller and specialty pharmaceutical companies are spending more because tools are coming down in price, he said. "So, what was $1 million four years ago is now a $300,000 system. The [smaller pharmas] that are surviving can now afford one or two of them," Sharma said.

"People are still spending more money on target validation, and are doing more of it in certain cases, but there is price erosion in that market," he said. "What cost a dollar five years ago is costing 70 cents or 60 cents today. The profit margins are thinner and the revenues are lower."

According to Peterson, academic spending also might not be as bad as many people think. Invitrogen, for example, is expecting growth from its NIH customer base of 30 percent, he said. "They're not seeing that academic crunch other companies are talking about."

Sharma agreed with that assessment. "One of the things that did surprise us in '05 was how strong some of the global spending was from the academic and research consortium market — much more of an appetite there than we had anticipated," Sharma said. TSG had anticipated growth of 8 percent in those markets, but its research suggests growth in that area was actually around 14 percent to 15 percent for the year.

"There is more money going to ADME-Tox, [and] there is more money going to the preclinical work," he said. "But we do see trends toward cell-based activity earlier on."

This trend is what has pushed many BCW Index firms, both capital equipment players and those focused on consumables, into the cell-analysis and RNAi spaces. Almost every firm in the Index now has a play in at least one of those areas.

"I think companies will continue to make bets in both areas," said Sharma. "They're both very attractive. I do think you can expect for the discovery tool companies more activity in the cell-based assays or the cell-based analysis market than the RNAi market, which is a smaller market, [and] there's still a cloud of IP issues in the RNAi market," he said.

"The cells market is much more poised for long-term growth. It doesn't have the 40 to 50-percent growth that RNAi has, but it's a much more sustainable market. And a lot of RNAi stuff is used in conjunction with cell-based analysis," Sharma noted.

He also said there are a lot of opportunities in the proteomics field with growth coming from medium-throughput proteomics and more high-content proteomics. "I think that is going to be another area as well — protein chips, peptide chips, protein arrays — those markets are maturing quite nicely," said Sharma.

— Edward Winnick ([email protected])

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