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Some Cap-Equipment Vendors Cautious on Pharma s Fourth-Quarter Spending Plans

Spending by pharmaceutical companies on life-science research tools appears to be slowly improving as the year nears its conclusion, and that improvement is expected to continue through the fourth quarter, according to industry observers and executives of several firms selling instruments to the pharma market.

As quarterly results for firms in the BCW Index streamed in over the past month, it became clear that earlier worries about pharma spending had largely subsided for many of the companies, with some of them anticipating a strong finish to the calendar year.

For example, Thermo Electron, PerkinElmer, and Fisher Scientific have each said they're optimistic about the last months of the year, and claim that pharma and even academic spending trends will continue improving. But this belief is far from universal.

Some of the larger multi-platform tool vendors covered by BioCommerce Week remain cautious that pharma spending on capital equipment will continue to be somewhat restrained.

The Cautious

Among those firms is Applied Biosystems, which had reported a 1-percent decline in mass spec sales in its fiscal fourth quarter ended June 30, but bounced back with an increase in mass spec sales of 9 percent, year over year, in its fiscal first quarter. "While we are seeing modest signs of a recovery in pharma spending in the US, we remain cautious on the pharmaceutical spending industry as a whole, especially given what we perceive to be a difficult environment in Western Europe," ABI President Cathy Burzik said during the firm's first-quarter conference call (see BioCommerce Week 11/3/2005).

"While we are seeing modest signs of a recovery in pharma spending in the US, we remain cautious on the pharmaceutical spending industry as a whole, especially given what we perceive to be a difficult environment in Western Europe."

She added, "We remain cautious about the growth rates in our end-user markets throughout the remainder of the fiscal year."

Likewise, Scott Garrett, president and CEO of Beckman Coulter, which reported third-quarter sales growth of 2 percent, cautioned against assuming that the pharma spending environment had significantly improved. He said during his firm's conference call, "Academic research, pharmaceutical R&D, and biotechnology funding continue to be somewhat constrained with pockets of investment in proteomic and genomic-based technology." (see BioCommerce Week 11/3/2005).

Waters, for a second time this year, had to caution that its quarterly sales and earnings would be lower than expected due to weak sales to large pharma accounts (see BioCommerce Week 10/20/2005). The firm reported 3-percent sales growth in the third quarter, instead of the 8-percent growth that it had projected a few months earlier (see BioCommerce Week 10/27/2005), and it anticipates a continuation of the challenging business conditions it experienced in the third quarter, with comparable sales growth before currency impacts.

"When we last spoke in July, we thought that the situation was improving, and that our larger customers were showing signs towards a return to more customary spending trends," Doug Berthiaume, president and CEO, said during his firm's third-quarter conference call. "However, this optimism was obviously premature, and capital spending again tightened during the third quarter."

Agilent, which last week reported fiscal fourth-quarter revenue gains of 5 percent, said that spending by large pharmaceutical companies in the US was softer, but spending had picked up among biotech firms (see BioCommerce Week 11/17/2005). Though the firm didn't offer any predictions on pharma spending in the current quarter, Adrian Dillon, Agilent's CFO, said, "We've seen sustained growth from mid-sized pharmaceutical companies and good growth from generic pharmaceutical companies on a worldwide basis."

Europe and Japan were cited by several firms as weak markets for pharma spending, and they expect that trend to continue. Solveigh Maehler, director of investor relations for Qiagen, which does not face the same difficulties as some of the other BCW Index firms because of its focus on consumables, told BioCommerce Week that those pharma markets have been affected by consolidation, and that some of the larger firms, such as Novartis, have shifted R&D operations to the US.

The Optimistic

Unlike the caution expressed by some of the cap equipment vendors, Maehler expects pharma spending to pick up in the fourth quarter due to the release of capital budgets.

The third quarter has traditionally been a slower period for firms that sell more expensive laboratory instrumentation, as pharmaceutical companies, their typical customers, gear up to release budgets and European holidays make a dent in sales opportunities. But industry observers and participants said the quarterly results seemed to signal a gradually improving spending environment, and some said they expect spending on big-ticket instruments to pick up even more in the fourth quarter.

Merrill Lynch analyst Adam Chazan 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."

Thermo Electron, which posted a 25-percent gain in third-quarter revenue (see BioCommerce Week 10/27/2005), also expects pharma spending trends to continue improving. Thermo President and CEO Marijn Dekkers said the life sciences market "continues to be good, with big pharma recovering from weak first-quarter levels. Performance is still a little bit mixed there with some companies doing very well in big pharma and some not so well, [but] big pharma is certainly not a problem area for us, and it's not holding back our overall growth."

He added, "Reading what's being said about mass spectrometry by some of our competitors we can't help but think we are gaining significant share in this area." Thermo does not break out numbers for specific product lines, but Dekkers said the mass spec line "did very well for us in the quarter."

PerkinElmer, which reported third-quarter revenue growth of 6 percent to $259.1 million for its Life and Analytical Sciences business segment, said biopharma spending has slowly improved throughout the year (see BioCommerce Week 10/27/2005), and the company expects that trend to continue through the fourth quarter and beyond.

Greg Summe, chairman and CEO of PerkinElmer, said, "Within [the] pharmaceutical [market], we see a mixed issue. We see some pharmaceutical companies have gone through a bit of a restructuring themselves, others are more aggressive on the spending. We see the biotech market continuing to get stronger, [and] we see the academic market continuing to strengthen for us, principally because there has been more of a shift into drug discovery."

"We continue to see good pharma spending … and downstream spending," said Dan Sutherby, a PerkinElmer spokesman. He told BioCommerce Week that the markets for ADME-Tox, cellular screening, systems biology, and other instruments focused on the "preclinical bottleneck" were likely to gain continued investment. "That's where we have focused our new products over the last 12 months," he said.

Fisher Scientific, which offers a diverse portfolio of products to researchers, said that although it is largely insulated from swings in specific research-products segments, it did not encounter some of the difficulties selling to the pharmaceutical research market that was reported by competitors (see BioCommerce Week 11/17/2005). And like some of the other larger competitors in the BCW Index, the firm cited strong revenue growth for its pharmaceutical services business, as pharma companies continue to outsource certain activities.

— Edward Winnick ([email protected])

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