Capital equipment firms such as mass-spectrometry makers are not likely to have an immediate benefit from an expected increase in National Institutes of Health funding in coming years, although other life-science vendors are, according to investment bank Leerink Swann Research.
In a report issued this week, the bank also predicted that the pharma industry will face uncertain times in the new year, and that the largest firms will eye merger-and-acquisition opportunities, which in turn could create further hardships for big-ticket tool manufacturers.
The 140-page report by Leerink Swann follows a report issued last month by Isaac Ro, an analyst at the firm, which also outlined rocky times ahead for life-science tools firms amid pressures on scientific research budgets due to shrinking university endowments [See PM 12/18/08].
This week’s report didn’t specifically address the proteomics market but rather covers the broad life-science tool space and other healthcare players, including hospitals, biotechnology firms, and in vitro diagnostic developers.
However, its dismal assessment of the capital-equipment space may cause some proteomics instrument manufacturers heartburn. Overall, “capital equipment will suffer mightily” during the first half of 2009, said Ro, one of the authors of the report. Along with the broader current economic uncertainty, he blamed “a general lack of significant technology advances in core areas such as HPLC and mass spec,” for the outlook.
A clearer picture of the cap-equipment space won’t appear until the second half of the year, Ro wrote, but first-half seasonality is a “perennial issue” for companies in the space, “and we think the impact will be more pronounced than ever this year.”
Of the firms covered by Leerink Swann, Waters and Bruker have the highest exposure to seasonality issues, and last month the investment bank downgraded both companies’ stock to “market perform” from “outperform,” and lowered the 12-month target price for both companies’ shares.
Leerink Swann ranks a company “market perform” when it expects that firm’s stock to perform in line with its benchmark during the coming 12 months. An “outperform” rating is given when a company’s stock is expected to outperform that benchmark.
The report also said that the expected increase in NIH funding in coming years, spurred by a more science-friendly White House, will help the broader life-science tool space to “thrive” in 2009.
Funding for biomedical research has been essentially flat since 2003, but president-elect Barack Obama has pledged to double the agency’s budget over the next decade.
In addition to NIH funding, Ro based his “marginally positive” outlook for life-science tool shops on an expected persistent need among drug firms to invest in R&D, and growing use of life-science tools in the applied markets.
On the M&A front, Ro made no predictions of any deals on the same scale as last year’s combination of Invitrogen and Applied Biosystems, which spawned Life Technologies. Any M&A activity will be driven by three companies, he said: Thermo Fisher Scientific, Agilent, and GE Healthcare, each of which have the necessary cash balances along with a stated desire to buy up other public companies.
“Capital equipment will suffer mightily” during the first half of 2009.”
Ro also called GE the “wild card.” Ongoing turmoil within other GE businesses may hinder its Healthcare division from doing M&A deals, but John Dineen, who became GE Healthcare’s CEO in July, has said that he expects life sciences along with healthcare IT to be main drivers of growth in the business during the year.
“We presume that acquisitions will be part of the equation here given the company’s historical success with franchises such as [past GE Healthcare acquisitions] Amersham and Biocore,” Ro said. Life Technologies, he said would probably be more of an observer than player due to balance-sheet limitations and a heightened focus on internal operations.
Other firms such as Sigma-Aldrich and PerkinElmer, which have footprints in the proteomics consumables and reagents market, are expected to make “highly strategic” tuck-in purchases, Ro wrote. In Sigma-Aldrich’s case, he said, the company will seek “to leverage global brand and distribution reach to drive accretive growth.”
This week, the company said it had purchased a depletion technology and antibody library from GenWay Biotech [See related story, this issue].
PerkinElmer, meanwhile, is looking to move away from its consumer lighting and related industrial businesses as it hopes to broaden its presence in the diagnostics field, Ro said.
Of the companies operating in the proteomics space, he said, Life and Thermo Fisher are best prepared to weather the ongoing upheaval in the capital markets. Ro favorably compared Life’s valuation to its competitors by citing its transformative technologies — though he didn’t identify them — along with a heavy reliance on academic and government sales, which stand to benefit from any increase to NIH funding.
Ro said also that Life’s “defensive” product sales mix — more than 75 percent of its revenues derive from sale of consumables to the academic and government segments — better positions it in the current environment than capital equipment firms that depend on pharma and industrial customers.
Meanwhile, Ro credited Thermo Fisher’s management, saying it “retains a very favorable standing among investors.” In addition, the company has a strong balance sheet, “unparalleled” distribution reach, and “untapped operating leverage.”
Following lowered revenues guidance issued by Agilent and Waters last month [see PM 12/11/08], Thermo Fisher could follow suit, he said, but “we remain bullish on the long-term value of the [company’s] franchise and management’s ability to execute.”
Shrinking Pharma Pool?
Leerink Swann also evaluated the pharma environment and gave it a lumpy outlook. While large-cap pharma should outperform the Standard & Poor 500 index during the year, the industry is heading toward its toughest five-year “patent expiry period to date.” Potential losses stemming from expiring patents between 2010 and 2015 are estimated at $40 billion in the US and $26 billion internationally, Leerink Swann said.
“As a result, we believe M&A and restructuring activity will increase,” wrote Seamus Fernandez, a Leerink Swann analyst, who authored the portion of the report covering large-cap pharma. “Following meetings with the management teams of all the major US pharmaceutical companies in December 2008, it is clear that M&A activity is poised for a significant uptick in 2009.”
If pharma were to undergo consolidation, tool makers could feel some pain, Ro told ProteoMonitor last month, as demand for big-ticket items, including mass specs, would slow.
This week, Fernandez said that following the December meetings with pharma, he expects Merck, Bristol-Myers Squibb, and Wyeth to announce licensing deals and/or acquisitions in the first half of 2009, while Pfizer expects “significant business development and restructuring announcements ‘soon.’”
On deadline, a Pfizer spokeswoman was unable to confirm the company had made any such statement to Leerink Swann, and added that it had not met any analysts since the early fall.
Similarly, the contract research organization market received a mixed outlook from Leerink Swann. The first half of the year is likely to be a down period as small drug firms will be forced to optimize their pipelines and reduce both preclinical and clinical work, Ro wrote, but big pharmas are expected to outsource much of their work in the second half of the year, renewing growth in CROs.
A factor that may help that industry would be a tougher US Food and Drug Administration. With a new, still-unnamed FDA chief set to take over leadership, a tougher regulatory environment may prevail, translating to more clinical tests and potentially more outsourcing to CROs.
However, it is too early to make a forecast on the agency, John Sullivan, director of equity research at Leerink Swann, wrote. “We expect that even if a new head is installed in early 2009, the operating environment will be difficult to discern for much of the year.”