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Microarray Technologies Drag Down Harvard Bioscience Q1 Financial Report

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There was no joy found in the executive suites at Harvard Bioscience on Thursday when the company reported its first-quarter financials in a conference call with analysts.

The 450-employee Holliston, Mass.-based company, which sells reagents and lab supplies through catalogs and e-mail, reported an increase in its receipts to $22.2 million with a net loss of $51,000, compared to $19.5 million in revenue and a net gain of $776,000 for the same quarter in 2003.

Chane Graziano, CEO of Harvard Bioscience, said in a statement that the company’s leadership was “extremely disappointed” with these results, and repeated this sentiment when speaking to analysts.

“Most of our product lines did well, or even exceeded expectations for the quarter. However, our genomics, proteomic, and high-throughput screening products delivered far less operating margins than we had expected,” he said in the statement.

Operating margins are what is left out of each sales dollar, after direct costs and overhead — such as CEO or employee salaries — are subtracted. Revenues on these products — genomics, proteomics, and high-throughput screening products — were down $600,000 on a year-to-year basis and approximately $2 million away from expectations, Graziano said.

Sales Channel

Harvard Bioscience’s genomics, proteomic, and high-throughput screening products are sold primarily through Genomic Solutions, a company it bought for $26 million in 2002 and now uses as a distribution umbrella to sell its products as well as products from its portfolio of other acquisitions, including GeneMachines (acquired for $8.1 million in March 12, 2003) and BioRobotics (acquired for $3.2 million on Sept. 19, 2003).

The company, said Graziano, is preparing an “action plan” to improve operating margins on these product lines and plans to implement it in the second quarter. “We may end up doing some additional consolidation,” he said to analysts.

“This is a setback for us, but we believe that it is a recoverable situation,” said David Green, president of Harvard Bioscience.

Green said the company’s microarrayer lines were the lowest performer of the three product lines highlighted so harshly.

In many ways, Genomic Solutions’ sales can serve as a gauge of the homebrew microarray industry, as these products are key purchases in the shopping basket of robotic tools that enable the high-end self-spotting market.

Green said he did not feel that the performance of the company’s microarray product sales reflected any kind of movement to platforms provided by the commercial microarray instrument and chipmakers, such as Affymetrix.

“We have not seen any customers identifying that as an issue,” Green said. “We have not seen a loss of orders to competition, but we did see orders delayed in the first quarter that we were expecting to pick up.”

The overall market for genomics and proteomics products appears soft, with orders for these products particularly weak in the US and Japan, Graziano said. The second quarter, he said, is off to a good start, particularly in both markets.

The delays in spending were in part caused by the late implementation of the NIH budget in the US, the change in funding arrangements for Japanese universities, and certain pharmaceutical companies delaying capital spending in the first quarter, Graziano said.

“We may be being overcautious,” he said, “but we believe in running a very profitable business. Last year, Genomic Solutions contributed significantly to our profits, maybe 30 percent. The first quarter was a huge surprise and we are going to fix it so that we don’t have any surprises going forward. That’s the fundamentals. I don’t think it is a market issue.”

He said that when Harvard Bioscience acquired GeneMachines and BioRobotics, it ended up pitting the two businesses against each other and “We didn’t sustain the revenues that were there.”

Those revenues, he added, did not go to anyone.

The company, which has served as a consolidator of sorts with its previous acquisitions, may be shopping again.

“The environment for acquisitions remains attractive,” said Graziano. “We are evaluating several opportunities.”

Meantime, in the microarray market, the university market continues to spot its own arrays, while pharma buys the commercial platforms, he added. “That is the dynamic going on,” he said.

—MOK

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