Amid a 17 percent slide in its mass-spectrometry business during the final three months of 2008, Life Technologies said last week it will no longer include revenues from that division as part of the company's total revenues.
Starting with last week's earnings results, Life will use equity method accounting for its mass specs, and “the entire financial impact from our mass-spec division will now be shown in 'other income' [in earnings releases], thereby removing all impact of the mass-spec business from revenue and operating income," the company said during a conference call accompanying the earnings results for its fourth quarter and full-year 2008 last week.
According to a company spokeswoman, the move is not unusual for a firm in a joint-venture agreement. Life's mass spec business is jointly operated by its Applied Biosystem business and instrument firm, MDS.
However, the change in accounting method is likely to reignite speculation that Life Tech is considering divesting the unit — something the industry has considered a possibility since Invitrogen and ABI merged last November to create the company — even as company officials reiterated last week their commitment to "run the business for success."
Life announced the accounting change to its mass specs as it said that total revenues for the three months ended Dec. 31, 2008, rose 61 percent to $540.6 million from $336.4 million in 2007 Q4. ABI contributed $191 million to the top line during the period.
For full-year 2008, Life's receipts totaled $1.6 billion on a pro forma basis, with $525 million of that coming from mass spec sales.
During the firm’s earnings call, CEO Greg Lucier suggested the company plans on a long-term relationship with its mass-spec instruments. "We're going to invest in this business, and we're going to grow this business as best we possibly can through the economic environment," he said.
Speaking about its mass-spec joint-venture partnership with MDS, he said "we have some very interesting products that have been invented in the MDS R&D shop that we intend to fund and bring to market quicker."
Life gave no reason for the accounting change during the call, but in an e-mail to ProteoMonitor, a company spokeswoman said that when Invitrogen and ABI closed their merger, "we looked at the [ABI/MDS] joint-venture agreement and decided the most appropriate method of accounting for the joint venture was to use the equity method, which is not an atypical way of accounting for a joint venture."
She declined to comment further on possible changes that may face the mass spec business.
Peter McDonald, an analyst at investment and research firm Wall Street Access, said the accounting change is usually done to better reflect actual costs to both parties in a JV agreement.
"You operate the entity almost as a separate [profit-and-loss statement] and then at the end of the day you take whatever profits or losses [there are] from the JV and put it on the respective balance sheets," he said.
While he said he doesn't interpret the change as a signal that Life is preparing to divest the mass-spec business, "I think people have been” interpreting it in such a way. “It was probably done for the right accounting reasons, but it doesn't hurt in the current environment when your consumables business is doing pretty well, and the capitals business is struggling a bit," he added.
Stressing that he hasn't heard that Life is shopping its mass-spec business, McDonald said the new reporting structure “doesn’t' hurt them if they did want to explore options. It makes it a little easier to carve out if they wanted to."
But given current market conditions, he said, Life is probably more inclined to keep the business and grow it. "It seems they're committed to it, as far as I can tell," he said.
And at a time when its mass-spec business has lost some of its shine, moving it below the top line, "you remove the drag from the revenue, at least in the near-term," McDonald added.
The move comes as Life's mass-spec business struggles to find some stability in a global capital-equipment market expected to be battered this year. Of all the life-science capital tools, mass specs are widely viewed as being particularly naked to the freeze in the capital and credit markets.
But even before the effects of the ongoing financial meltdown began to take its toll on life-science tool vendors, investors and industry insiders were scratching their heads over Life's mass-spec operations.
When ABI and Invitrogen announced their intent to join forces, many Wall Street analysts said ABI’s mass-spec business was a bad fit with the overall merged entity, and a sale of the division was likely [See PM 06/19/08].
Buttressing that theory were ABI’s pre-merger comments that the future of the company rests in its second-generation genome-sequencing business; an overall dismal outlook for the mass-spec industry in general; and speculation that MDS would eventually buy Life’s mass-spec arm.
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The last theory seems unlikely today as the Toronto-based firm tries to pull itself out of its own financial slump. MDS recently formed an exploratory committee to raise shareholder value, and has hired investment banks Goldman Sachs and RBC Capital Markets to advise it and its board on the process.
Also, last fall Obrem Capital Management, which with a 5.1 percent stake in MDS makes it one of the company's largest shareholders, pressed MDS to sell the mass-spec division and take other steps to raise shareholder value [See PM 11/06/08].
During last week's conference call, Lucier said that he, Mark Stevenson, the company's president and COO, and Laura Lauman, president of mass spectrometry, recently met with MDS' board and had a "very constructive dialogue."
The two companies are "making joint decisions to further fund investments in growth," he said. And while the partnership leverages "a lot of our core competencies … at this stage we're trying to be constructive with MDS, whatever happens on their side of the joint venture.
"We'll just have to see what happens on the MDS side over the next couple of months,” he added.
The Life spokeswoman declined to comment on whether any assurances were given by either company to keep the JV agreement intact for the foreseeable future. She also declined to comment whether there was any discussion about one company buying out the other.
In the meantime, the two-year decline in Life's mass-spec business continued, the victim of a stalled technology pipeline and increased competition.
For the quarter ended Dec. 31, 2008, Life said that mass spec revenues slid 17 percent to $114.2 million from $137.6 million year over year on cutbacks in pharma and biotech spending and adverse currency-exchange rates.
Organic mass-specs sales declined 14 percent, Life said.
The mass-spec segment generated $70 million in revenues during the five weeks it was part of Life, the company said.
During the fourth quarter, the company released two new instrument platforms — the Triple Quad 5500 and the QTrap 5500 — the most significant mass-spec launches with proteomics applications in years [See PM 10/16/08]. In a relatively normal financial environment, the launches could have lifted sales figures for the entire portfolio, but "nobody was spending" during the ongoing global gloom, McDonald, the analyst, said.
During the call, Lucier said that sales of the instruments were doing "very well, especially given the current market environment in the pharmaceutical sector," and that there was a "sizeable" backlog in orders for the two instruments.
"You're seeing the ramp-up in the first quarter, so we see a potential improvement in growth trends here versus what the experience was in the fourth quarter," Lucier said.
McDonald, however, said he doesn't expect the two instruments to cause Life to report a significant mass-spec revenue increase in the first-quarter because of researchers’ continued reluctance to spend.
For full-year 2008, mass spec revenues declined 1.4 percent to $525 million from $532.2 million during full-year 2007 on a pro forma basis. "Overall, across the mass-spec business, we're seeing good response to the new instruments by all of our customer segments including pharma, proteomics, and applied markets," a Life spokeswoman said in an e-mail.
For 2009, organic mass-spec revenues are projected to be flat or 10 percent below first-quarter 2007 receipts, depending on the effects of pharma spending, Life CFO David Hoffmeister said.
For proteomics, Stevenson said during the call that its mass spec business will be exposed to some extent to the National Institutes of Health budget "as we think about biomarkers and more of that translational medicine."