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ABI Blames ‘Down’ Pharma Market for 9.8-Percent Dip in Fiscal Q1 MS Revenue

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Applied Biosystems, just off its most significant mass-spectrometry introductions in years, this week announced mass spec revenues dipped 9.8 percent during its fiscal first quarter of 2009 on sluggish sales to pharma companies.
 
Mass-spec revenues for the three months ended Sept. 30 dropped to $109.2 million from $121.1 million. Sales of the instruments represented 21 percent of the company’s total revenues during the quarter, down from 24 percent of total receipts a year ago.
 
Overall, ABI’s revenues increased 6.4 percent to $533.1 million from $501.2 million a year ago, while profits rose 25.1 percent to $77.2 million from $61.7 million during the year-ago period. Excluding the effects of currency, revenue grew by about 4 percent during the quarter.
 
Mass spec sales to the proteomics market were flat, COO Mark Stevenson said during the company’s earnings call this week, adding the results were “disappointing but not altogether surprising as customers awaited the launch of new platform products,” referring to the introductions earlier this month of the ABI Sciex Triple Quad 5500 and ABI Sciex QTrap 5500 [See PM 10/16/08].
 
Stevenson this week also blamed the decline on a weak pharma market, which he said was dragged down by increased outsourcing to contract research organizations; purchase delays in anticipation of the launch of the two new mass spec platforms; and competitive pressures.
 
On the first point, Stevenson said that the company believes it is sustaining its share of the pharma mass-spec market, but that “the tightening in the market had a significant impact” on the quarter’s results. The company did not elaborate.
 
On the second point, company officials said that unlike the relative hush that accompanied the launch of its last major new mass spec — the API 5000, which debuted in January 2005 — the company had been telling researchers ahead of time of the two Sciex systems, creating an environment that may have discouraged them from purchasing equipment.
 
“We actually, under [confidential disclosure agreements], talked to about 30 different customers in advance of the launch, just letting them know it was coming … so there was a stalling in the market as a result of that,” Laura Lauman, president of ABI’s proteomics and small-molecule division, said during the call. 
 
ABI CEO Tony White also said that the timing of the launch may have hurt sales during the quarter. According to White, some potential customers knew that a product introduction was imminent, but they did not necessarily know when. So when ABI failed to launch the systems at the American Society for Mass Spectrometry conference in June — the main venue for new mass spec debuts — it created a negative perception that transferred to its balance sheet.
 

“My sense in just watching this thing was that this was like a slow-motion crash, between not being ready to introduce the product at ASMS and when we actually did it.”

“I think that just had one of those effects on the market where people were really starting to [ask], ‘When is this thing happening? It’s late,’” White said during the conference call. “My sense in just watching this thing was that this was like a slow-motion crash, between not being ready to introduce the product at ASMS and when we actually did it.”  
 
While company officials declined to provide guidance on future mass-spec sales, Lauman said that customer response to the new launches has been positive, orders have already been placed and shipped, and that labs have booked demonstrations to try out the systems.
 
White added that while ABI expects the pharma market to continue to be a challenge for its mass-spec business, the market has cracked open for transformative technologies, putting ABI’s Triple Quad 5500 and QTrap 5500 into that category.
 
“Even in a down market for pharma, if you have a new product introduction that has compelling advantages in terms of their cost and quality in getting the clinical work done, they will find the money, because it’s cost analysis on the total project, and sometimes the cost of the upgrade is justified even in a tight capital market,” he said. “Certainly there are indicators from our experience that that’s something we’re going to watch for and could very well happen.”
 
Other Numbers
 
In contrast to ABI’s drooping mass spec sales, the company’s other product categories saw healthy growth. DNA sequencing rose 9 percent year over year to $140 million; real-time PCR/applied genomics increased 13 percent to $202.7 million; core PCR and DNA synthesis spiked 17 percent to $54.3 million; and the company’s other product lines grew 10 percent to $26.9 million.
 
Overall, sales of instruments across all product categories rose 1 percent in the quarter to $192.2 million, while consumables sales increased 7 percent to $231.5 million. Other sources including service and support, consulting, and royalties and licenses increased 14 percent to $109.4 million during the period.
 
Geographically, revenues rose 1 percent to $226.9 million in the US and 8 percent to $178.6 million in Europe. Revenue from Asia-Pacific markets excluding Japan spiked 38 percent to $58.1 million while Japanese sales dropped 10 percent to $43.1 million.
 
ABI said it had $368 million in cash and short-term investments as of Sept. 30, down from $543.2 million, due primarily to a reclassification of $113 million from cash and cash equivalents to other receivables and loan repayments associated with the share repurchase program completed during the company’s fiscal 2008.
 
Research and development spending decreased 2.6 percent to $49.3 million from $50.6 million.
 
On its impending $6.7 billion merger with Invitrogen, ABI last week pushed back the date of its special shareholder meeting to Oct. 28. During the conference call this week, White said that votes that have already come in have “demonstrated overwhelming support” for the merger.
 
In addition, Invitrogen recently raised its expected first-year synergies from the merger to $80 million from $60 million, which it attributed mostly to cost savings.
 
The companies have filed with the European Commission for the merger and expect a response by Nov. 11. Pending that approval and an OK from shareholders, the deal is expected to close in mid-November. 
 
During Invitrogen’s earnings call this week, company CEO Greg Lucier said he was mindful of his firm’s recent troubled history of integrating new buys.
 
“2006 is not too distant a memory for me or anyone on my management team,” he said, alluding to the $191 million loss Invitrogen incurred as it tried to integrate 15 acquisitions it made during the previous three-and-a-half-year period.
 
”We understand what it takes to make hard decisions and how to focus organizations on the most important things extremely quickly,” Lucier said. “We are prepared to deliver on the promise of the ABI combination even if that has to be done in difficult macroeconomic times.”
 
Mark Smedley, global head of operations for the company, and the person in charge of integrating Invitrogen and ABI, said the integration efforts were going “very well.” In total 250 employees from both companies are working on the transaction, he said.

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