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Pharma Spending to Increase in Second Half Of 2005; Will Multi-Platform Vendors Profit?

Analysts and participants in the molecular biology tools industry are predicting a stronger pharmaceutical spending market in the second half of 2005, erasing earlier concerns about potential long-term revenue declines for the sector.

The predictions, which come after a turbulent beginning of the year marked by spotty R&D spending and volatile investment in molecular biology tools, may help buoy the multi-platform business sector covered by BioCommerce Week.

"I think we're going to see a better environment for purchasing, and I think the key will be having products in the right area," Matthew Arens, a senior research analyst with Kopp Investment Advisors, told BioCommerce Week. "I think there will be spending that will take place in the back half of the year. You're just going to have to make sure that you're providing products that fit the needs of your customers."

Though that may seem obvious, it is crucial for firms to gain a better understanding of what their pharma customers want as competition increases, molecular biology tools evolve, and researchers shift their areas of focus.

Firms such as Invitrogen and Sigma-Aldrich made concerted efforts this past year to gain feedback from both current and potential customers about the types of products they want and how they would like them delivered.

"I think we're going to see a better environment for purchasing, and I think the key will be having products in the right area."

Invitrogen, for example, embarked on a major effort to visit a large number of "key" potential customers around the globe. Representatives from the firm visited 20 to 30 accounts or potential accounts at academic institutions, pharmaceutical firms, and biotechs with a goal of building relationships and gaining a better understanding of customer needs (see BioCommerce Week 5/12/2005).

Sigma-Aldrich earlier this summer announced a reorganization specifically with customer satisfaction in mind. The firm's reorganization came after a six-month market study that included interviews with nearly 650 customers around the world (see BioCommerce Week 7/14/2005).

And while firms like Invitrogen and Qiagen, which focus on consumables sales, are not as exposed to the cyclical vagaries of the capital equipment market, many of the firms covered by BioCommerce Week are. They are the ones most affected by the pharma spending environment, and the kinds of equipment they sell has a significant impact on their overall revenue.

"Anything that is able to increase throughput, decrease expenses," Arens said, and products focused on toxicology have been doing better as the year has gone on, while some of the sequencing areas have been a little softer. "I think it really gets down to the specific product lines and what the appetite is for each area," he said.

Harvard Bioscience recently decided it could not withstand the revenue fluctuations inherent in the capital equipment market and announced plans to spin off that part of its business, including the struggling Genomics Solutions unit (see BioCommerce Week 8/4/2005).

Applied Biosystems, which ended its fiscal 2005 year on June 30, reported a 1-percent decline for its mass spectrometry instruments during its fourth quarter. Cathy Burzik, the firm's president, attributed the decline partially to a "challenging pharmaceutical spending environment." But, she said during a conference call following the release of those results, "We do see in the pharmaceutical area … the potential here for increased spending as they move into the second half of this calendar year."

Waters earlier this year had announced that declining sales in Europe and a decrease in spending by pharma companies on big-ticket research instruments had hurt its first-quarter sales (see BioCommerce Week 4/28/2005).

Waters' woes were due primarily to delays in sales to large, European pharmaceutical customers. But the firm surprised investors and other industry observers when it reported second-quarter sales growth of 9 percent year over year (see BioCommerce Week 7/28/2005).

"Our business in Europe and overall sales to pharmaceutical accounts improved during the second quarter," said Douglas Berthiaume, chairman, president, and CEO of Waters, in a statement. "We are optimistic that this positive sales momentum will continue into the second half of the year."

Sigma-Aldrich, which reported 16.1-percent second-quarter revenue growth for its biotechnology segment, said there had been steady growth in sales to pharmaceutical customers worldwide and improved growth in sales to academic accounts in Europe and other health-related customers.

Europe, in particular, has been a concern for firms that sell capital equipment. The traditional Western European markets do not offer the same growth opportunities as Eastern Europe, Asia, and the Middle East, and industry participants are cautious about prospects for business improving in Europe.

Pacific Growth Equities Analyst Adam Chazan said he was "pleasantly surprised" with the turnaround experienced by many firms in the molecular biology tools sector after a sluggish start this year. "We've had some really solid performances, and … definitely a rebound from the first quarter, where we saw a handful of disappointments," he told BioCommerce Week.

Merrill Lynch analyst Darryl Pardi concurred, writing in a report on Waters in July that "most instrument suppliers we spoke with indicated that pharma spending had improved from Q1."

Chazan cautioned, though, that there could be some softness in the third quarter, which is typical due to summer vacations. But, he said, the fourth quarter "is where you see the big budget flushes, and that's typically where these companies make hay and where they realize a lot of their revenue and their growth."

— Edward Winnick ([email protected])

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