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Thermo Fisher’s Q2 Revenues Rise on Better Pharma Spending, Analytical Instrument Demand

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Thermo Fisher Scientific officials last week said that strong customer end markets for its analytical instruments, particularly in biotech, helped the firm achieve 9 percent revenue growth in the second quarter. The firm also announced that it had acquired an Indian chemical supplier as its footprint in the region continues to grow.
 
The quarter was the third for the company as the combined entity of Thermo Electron and Fisher Scientific, and the firm reported revenues of $2.39 billion, a 236 percent increase from the $714 million reported by Thermo Electron for last year’s second quarter. However, including both firms’ results from last year, second-quarter revenues increased 9 percent, year over year.
 
Company officials echoed a recent refrain from rival Waters that spending by big pharmaceutical customers continues to pick up. During a conference call last week, Thermo Fisher CEO Marijn Dekkers said that although pharma spending has not reverted to the historical highs of several years ago, it may reach that point in the not-too-distant future.
 
“We continue to benefit from the fact that our primary end markets are healthy, and there were really no dramatic changes from what we have seen the past few quarters,” said Dekkers. “Biotech has remained strong, big pharma continues to get better, and both are driving strong sales of our analytical technologies and bioreagents used for life sciences research.”
 
He said that the National Institutes of Health budget “is what it is,” and offers very low growth. However, he added, “We often forget that … you cannot just focus on the NIH budget when you think about academic or government spending because we benefit a lot from donations in the life sciences area,” such as new cancer centers being funded by private donors.
 
Asked during the call about how much of a recovery there has been in the pharma spending market, Dekkers said, “I think it’s been a very gradual recovery so far. Early on in 2005 it was a disaster. It started getting better in the second half of ’05, ’06 got better again, [and] ’07 is better again.
 
“But this, in my mind, is not an inflection point to the good old days,” he added. “That may come next year. I actually think, in listening to pharma companies, that they are confident that some of the issues will be behind them within the next 12 to 18 months, and that the companies will be operating more at a historical type of investment scheme.”
 
Dekkers’ comments backed assertions made last week by Waters CEO Douglas Berthiaume, who said during his firm’s Q2 conference call, “We’re not seeing universal strength across the large pharmaceutical universe, but if you look at the top 15 to 20 pharmaceutical accounts we definitely saw very good double-digit growth … and that’s consistent but a little better than we saw in the first quarter of this year.” (see BioCommerce Week 7/25/2007)
 
Undaunted by M&A Market
 
Though Thermo Electron and Fisher Scientific completed their $10.6 billion merger less than nine months ago (see BioCommerce Week 11/15/2006), company officials insisted they would not shy away from pursuing another big deal.
 
The recent merger “doesn’t prevent us from doing bigger deals in the future,” said Dekkers. “We feel that we are the forefront of doing sizeable deals in our industry having just put this merger together. This is our third quarter we’re reporting as one company and we’re quite confident we’re on the right track.
 
“In the biosciences area, scientific instruments [and] diagnostics, we can take on a good-size acquisition if the right opportunity would come along,” he said.
 
And while other industry competitors have been surprised at what they view as inflated prices in the mergers and acquisition market – particularly for diagnostics firms – Dekkers appeared unfazed. 
 
“I understand why people are paying the prices they are paying for these assets because [in] life sciences [and] healthcare — if you are running a company, you know the market will always be there, and it will be fairly stable,” he said.
 
Siemens paid more than $7 billion over the past year to acquire Bayer Diagnostics and Diagnostics Products Corp., and last week announced that it would buy another major diagnostics player, Dade Behring, for $6.3 billion. Its closest rival, GE, recently dropped its plans to acquire two of Abbott’s diagnostics businesses for $8.1 billion (see BioCommerce Week 7/18/2007), but industry observers expect GE to make a bid for another diagnostics firm in the near future.
 
Asked specifically about Siemens and GE, Dekkers said their M&A activity makes sense.
 
“I’m not an expert on GE’s strategy, but it makes sense for them to have a similar [strategy] to Siemens, which is to have a broader diagnostics platform and have imaging and clinical chemistry together in one company,” said Dekkers.
 
“Over time, these two will be more integrated. I can understand it from covering the customer base point of view,” he said. “We at Thermo Fisher are doing the same thing in research laboratories.”
 
While a big deal may not be far off for Thermo Fisher, the firm last week made a smaller, strategic acquisition by acquiring Indian chemical supplier Qualigen. Dekkers said during the call that the acquisition expands Thermo’s reach in India and is complementary to the firm’s bioscience business.
 
Qualigen’s chemicals are used by the pharmaceutical, petrochemical, and food and beverage industries in India. The firm, which had 2006 sales of roughly $24 million, also sells a range of diagnostic test kits.
 

“But this, in my mind, is not an inflection point to the good old days. That may come next year.”

Dekkers said “scale is important” in emerging markets such as China and India. “Anybody can sell something in Boston or San Jose,” he said. But a Western-based company trying to drive revenue growth in those countries “really [has] to have a significant support structure in place. The market has become so global that it’s hard for a smaller company to serve the far-away market.”
 
Strong Quarter for Analytical Instruments
 
Thermo said revenue from its Analytical Technologies segment nearly doubled to just over $1 billion, while receipts from the Laboratory Products and Services segment increased to $1.43 billion from $182 million. On a pro forma basis, Analytical Technologies revenue grew 13 percent, while revenue for the Lab Products and Services segment grew 6 percent. The firm listed $86.3 million in “eliminations” from its revenues but did not provide further details.
 
North American organic sales were slightly below the company’s average growth, while Europe and Asia-Pacific were slightly above the average, company officials said during the call. They said China and India, in particular, were strong markets for analytical instrument sales.
 
The clinical diagnostics market is showing “robust” growth, said Dekkers, which is driving sales of Thermo’s anatomical pathology products.
 
Thermo Fisher’s profit rose to $163.9 million, or $.37 per share, from $47.9 million, or .29 per share, in the year-ago period, and its R&D spending increased to $58.7 million from $40.7 million.
 
Dekkers noted during the call that Thermo Fisher opened a new RNAi lab in the quarter for contract drug-screening services. He said that the potential of RNAi technology is “unbelievable. You find that the customers are not experts in how to apply this technology. It’s one thing to demonstrate it in your own laboratory and show them how to use RNAi, it’s another thing to then say, ‘If you want us to do that work for you we can do that as well.’
 
“I think we’ll see more of that in the future, because it’s a very good way to drive adaptation of the new technology with a customer base that is not really used to it,” he said.
 
Thermo Fisher said it had around $951 million in cash and cash equivalents and $22.7 million in short-term investments as of June 30.
 
Dekkers said the company is increasing its revenue guidance to a range of between $9.5 billion and $9.55 billion for 2007, from its previously announced guidance of between $9.4 billion and $9.5 billion.

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