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Genomic Solutions Brings Losses, Tumbling Stock for Harvard Bioscience

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Harvard Bioscience last week reported that its Genomic Solutions business was a “major disappointment” in the first quarter of 2004, and that the company may consolidate the business to cut costs — announcements that sent its stock plunging by 50 percent during the week.

Genomic Solutions took in $2 million less than expected, according to the company — pushing Harvard Bioscience out of the profitability zone. The company experienced a net loss of $51,000 for the quarter, compared with a net income of $776,000 in the year-ago period.

Harvard Bioscience’s CEO Chane Graziano blamed a soft market and the poorly managed integration of the companies GeneMachines and BioRobotics for the weak showing. Harvard Bioscience acquired both companies, which primarily make microarray spotting instruments, in 2003.

Jeff Williams, Genomic Solutions’ former president, resigned from his position in March and has been replaced by former vice president of sales and marketing David Strack, Graziano said. Williams is now CEO of Ann Arbor, Mich.-based HandyLab, a spin-off from the University of Michigan that is developing microfluidics technologies. Strack has previously worked for Graziano in positions at Waters and at Analytical Technology, both companies where Graziano formerly served as president.

Genomic Solutions sells proteomics products such as 2D gel tools and mass spec search engines, in addition to genomics products like microarrays, and a variety of high-throughput screening products. The subsidiary, acquired by Harvard Bioscience in 2002, has proteomics-related distribution deals with PerkinElmer, Bruker BioSciences, and Nonlinear Dynamics (see PM 1-13-03, 3-24-03, 10-24-03). Harvard Bioscience also bought the Hoefer 1D gel product line from GE Healthcare (then Amersham Biosciences) in November (see PM 11-28-03).

In its press release, the company blamed part of the loss in operating margin it experienced with Genomic Solutions on the fact that the subsidiary took in a “higher percentage of revenues through distributors” than in the past. Graziano, however, told ProteoMonitor that while the company is looking to “strengthen the direct side of our business,” he did not expect the nature of any of distribution relationships to change. “Our relationships are strong … today,” he said.

But investors have not viewed the company as strong since it announced its first quarter results after market close on the Nasdaq exchange on May 6. The company’s stock closed at $8.55 on May 6. It closed at $4.70 on May 7. Since then, the stock has continued to slide slowly, closing at $4.43 on May 12 (see chart below).

Cynthia Davis, an analyst who covers Harvard Bioscience for Caris and Company, said that she does not think the stock will recover anytime soon. “We’ve always been quite negative on their business model,” she said. “I think that this is more of a rational correction and kind of a reality check for investors.”

Graziano, however, said he is confident that the Genomic Solutions product lines will get back on track by Q3. During the company’s quarterly earnings conference call last week, he blamed much of the decline on a “soft overall market” for genomics, proteomics, and high-throughput screening products. In the company’s 10-Q filing with the US Securities and Exchange Commission, Harvard Bioscience also placed blame on the fact that many of the products from the acquired companies and from Genomic Solutions were types of capital equipment, and thus were more subject to quarterly fluctuations than Harvard Bioscience was used to. “The capital equipment market is very seasonal compared to our traditional catalog business and as such, we believe we have experienced, and we believe we will continue to experience, substantial fluctuations in our quarterly revenues,” the company wrote in the 10-Q report.

But the brunt of the blame, Graziano said to ProteoMonitor, should really be placed on Genomic Solutions itself. “To be honest with you, I think the revenue stream trends are very clear on what the issues are, and they’re all addressable. I don’t think it’s the market. I think it’s more of, we didn’t manage the transition of a couple acquisitions very well,” he said. Graziano said that since the two acquired companies’ product lines overlapped with each other and with existing Genomic Solutions products, poor integration of the companies with each other caused cannibalization, such that revenues in all the product lines could not be sustained.

“When Jeff Williams, who was managing that process for us from Genomic Solutions managed the integration of that, we obviously didn’t’ do a very good job,” he said. Williams had not returned calls from ProteoMonitor seeking comment as of press time.

In addition to replacing Williams, Harvard Bioscience has hired a new sales manager and additional sales people. It is now working on an “action plan,” which Graziano hopes to iron out by the end of this week, to cut expenses. Although he would not elaborate on what expenses might be cut, “there’s potential we may consolidate some of the functions,” he said. He said that things have already been looking up in the second quarter, and as such, “I don’t anticipate we’re going to have to make drastic [changes], but we are going to get expenses in line with what I feel are fairly predictable revenues, to ensure profitability in the third and fourth quarters.”

Graziano didn’t entertain the possibility that the problems experienced this quarter with Genomic Solutions were beyond a quick fix — he insisted that “there isn’t anything that isn’t solvable — it’s always in our control.”

But Davis said she is skeptical that Harvard Bioscience’s business plan, which she said relies on acquisitions for most of the company’s growth, is ultimately sustainable. The company has made 17 acquisitions in its history but maintains a relatively low R&D budget. “Showing that you can have such margin contraction over one quarter is pretty significant for their business model, meaning that they don’t really have control over what’s going on,” Davis said. Harvard Bioscience has gotten itself into a Catch-22, she added. “It’s kind of a compounding problem — when their stock price goes down so much, in order to grow, they need to buy these companies, but they don’t have the currency to do it.”

Harvard Bioscience’s revenues totaled $22.2 million in the first quarter of 2004, up from $19.5 million during Q1 last year.

The company’s R&D expenses increased slightly, to $1.7 million, from $1.4 million during the same quarter in 2003.

As of March 31, Harvard Bioscience had $9.8 million in cash and cash equivalents.

— KAM

 

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