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At UBS, Instrument Vendors Acknowledge Pharma Spending Growth May Not Return to Previous Highs

Officials from several instrument vendors that are part of the BCW Index acknowledged at an investors’ conference this week that they do not expect pharma spending growth to return to the relatively high levels of a few years ago, though most agree that the spending environment has improved recently.
 
At the same time, many of these firms, which presented at the UBS Global Life Sciences Conference in New York this week, tried to sell investors on new product launches and other initiatives that they believe will drive revenue growth in the second half of this year and beyond. 
 
Some of these tool vendors, particularly Waters, have felt the pinch more than others, but all seemed to agree that the lull in pharma spending has bottomed out. They also said that the proliferating number of generic drug manufacturers is now helping to increase sales of certain products, such as liquid chromatographers.
 
The rate of growth at which drug makers invest in life science tools and technologies may never reach the levels seen during the 2000 or 2001 “boom” period, said Bruker BioSciences CEO Frank Laukien during a break-out session following his presentation at the conference.
 
“It’s certainly better than it has been but may never again be at the 2000-2001 levels,” Laukien said.
 
Fran DiNuzzo, senior director of business development for Agilent’s Life Sciences and Chemical Analysis business, agreed, saying that the pharma market had made somewhat of a comeback. “We would like to see it a lot stronger than it is now,” he said during the firm’s breakout session at UBS, but “I don’t know if we’ll ever see pharma spending go back to what it was.”
 
Laukien said pharma spending “continues to be pretty selective and judicious” across all life science tool segments. “I don’t think it’s realistic to expect [the spending growth] to return to the boom levels of 2000,” he said.
 
Laukien’s comments were an expansion of a pronouncement he made last month when he said that "pharma [spending] in the first half of the year … has been healthier than a year ago. Clearly, pharma and biotech are still restrained in their spending, but it is healthier in general" (see Biocommerce Week 8/2/2006). 
 
During his UBS presentation he said that pharma spending “for all of our businesses has gone up in the last few quarters.”
 
Officials from Waters — which twice last year warned that revenues would not match quarterly guidance due to weak pharma spending — had a similar take on the current state of the market.
 
“Pharma spending has returned to a more normal pattern” and the market may see more of a recovery in the second half of 2006, Gene Cassis, vice president of investor relations for Waters, said at UBS. However, he noted that the firm is still experiencing declining sales among its larger accounts.
 
Cassis’ comments echoed remarks made in late July by Douglas Berthiaume, chairman, president, and CEO of Waters, during the firm’s second-quarter conference call (see BioCommerce Week 7/26/2006).
 
“In our view, the issues facing these companies were not likely to dissipate quickly,” said Berthiaume during the July call. “However, we felt that the lower spending levels we had experienced for the past few quarters had pretty much bottomed out and that sales to this customer set were likely to either stabilize or see a moderate recovery.
 
“Though our business to big pharma did sequentially grow from the first quarter of ’06 to the second quarter on a year-to-year basis, this segment was a depressant to our overall sales growth rate in the second quarter with a double-digit decline,” said Berthiaume.
 
He said that feedback from customers in pharma labs “suggests that spending will improve later this year. However, our recent history suggests that we should maintain a pretty conservative outlook.”
 
The firm has noted that the top 15 pharmaceutical firms represent roughly 15 percent of its business.
 
Agilent’s DiNuzzo offered a reason for the dip in pharma spending that hurt the growth rates for nearly all instrument vendors over the past year and a half. “The pause we’ve seen was the result of mergers in the pharma industry” that didn’t pan out as planned, he said.
 
However, DiNuzzo said the proliferation of generic drug firms is driving a comeback in pharma sales, noting a trend mentioned by other tool vendors after the close of the second quarter. “The good news is, I don’t see a slowdown in the expansion of generics,” he said.
 
Greg Summe, chairman, president, and CEO of PerkinElmer, said during the firm’s breakout session, “We don’t see an inflection point in the growth rate of the pharma industry. It’s just chugging along. We didn’t see a significant change” this year.
 
Agilent, Waters Pitch Investors on
Growth In Second Half and Beyond
 
While these tool vendors fret over the relative difficulties in selling to the pharma market, they tried to sell investors on new product launches and other initiatives that they believe will drive revenue growth in the second half of this year and beyond.
 
Agilent is focused on selling its 1200 Series LC system to help drive growth in the liquid chromatography market and take market share from its rival Waters. According to DiNuzzo, the 1200, which was launched at the beginning of the year, is exceeding sales expectations and sales are growing above the market average. He said it was too early to talk about market share for the system, but he said he believes it is taking share from competing products.
 

“We felt that the lower spending levels we had experienced for the past few quarters had pretty much bottomed out and that sales to this customer set were likely to either stabilize or see a moderate recovery.”

DiNuzzo said that, overall, more than 30 percent of revenue for the LSCA business is coming from products introduced within the last two years. He said the firm’s growth is also helped by several acquisitions it has made during that same period, including the purchases of Silicon Genetics, Computational Biology, Scientific Software, and Yokogawa Analytical Systems.
 
DiNuzzo said that although Agilent is keeping an eye on the cell-analysis market, which has become a hot area for tool vendors, he does not think the firm will jump into the market anytime soon. “We’ll get into something when we know we can be number one or two in a market,” he said.
 
DiNuzzo further noted that the firm does acquisitions in a “very measured, calculated” way, with an eye toward ensuring a 20-percent return on invested capital in the third year following an acquisition.
 
Meanwhile, Waters is banking on recent launches in its mass spectrometry portfolio to boost its growth rate. The firm highlighted the launches this year of its Acquity SQD, Acquity TQD, AutoPurification System, and Synapt HDMS System as keys to its mass spec strategy.
 
CFO John Ornell said, “We haven’t had the competitive offerings” over the last couple of years in the mass spec market, which had enabled competitors such as Thermo Electron and Applied Biosystems to take market share from Waters. But, he said with the new introductions, “we think we’ll exit the year with double-digit growth” in the mass spec product category.
 
While other firms at the conference addressed investors’ questions about their acquisition strategies, Waters’ officials were asked if they had heard rumors that they were an acquisition target themselves. Ornell said that such rumors had been floated in the market for years, and it is “hard to see” who would be able to make such an expensive acquisition and provide Waters’ investors with a significant premium.
 
— Kirell Lakhman contributed to this article.

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