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Thawing of Pharma Budgets Giving Lift to Proteomics Tool Vendors, but Will It Last?

After several years of frozen business with pharmaceutical firms, proteomics tool vendors are cautiously optimistic that demand from that market may be on the rise again.
No one is saying there’s been a return to the free-spending days of the late-90s to the early part of the millennium — a time that tool vendors recall with dewy fondness  — and most are loath to predict how long the upward spending trend may last.
But as the second-quarter earnings season draws to a close, officials from some companies said they are seeing a pattern of looser spending by pharma, particularly for front-end research and development applications.
“We’re seeing continued improvement in demand from our large pharmaceutical customers, a market segment that you remember was under pressure for most of the past couple of years,” said Douglas Berthiaume, CEO of Waters, during a conference call accompanying the release of the company’s second-quarter earnings results. Berthiaume cited a bounce-back in Waters’ pharmaceutical business as reason number one for the 17 percent rise in the company’s overall sales and an 18 percent climb in sales of instruments with proteomics applications.
“From businesses associated with orders for new high-resolution mass spec systems to the replacement of older HPLC systems to the replacement of network information systems, the entire range of our product offerings benefited from this healthier spending environment,” he continued.
It is a far change from just a year ago when he and his fellow CEOs were lamenting the effect of pharma spending on their bottom lines. During Waters’ second-quarter earnings call last year, Berthiaume called pharma spending, or the lack of, a “depressant to our overall sales growth rate.” [See PM 07/26/06]
And in the fall, Tony White, interim president of Applied Biosystems and CEO of parent company Applera, characterized the global pharma picture as “mixed.”
But slowly, drug firms have released their grip on their purse strings, and the funding, while not exactly pouring in, is at least flowing. In a conference call accompanying the release of his company’s second-quarter earnings results recently, Thermo Fisher President and CEO Marijn Dekkers said that large pharma business “continues to get better,” driving sales of the company’s analytical technologies and bioreagents.
“I think it’s been a very gradual recovery so far,” Dekkers said. “Obviously very early on in 2005, it was a disaster … then it started getting better in the second half of ‘05. 2006 got better again, ‘07 is better again.”
And at Agilent Technologies, which won’t be reporting its fiscal third-quarter results until next week, Ken Miller, global marketing director for mass spectrometry at the company, said that its suite of mass spectrometers introduced during the past two years has seen wide acceptance within pharma.
“We’re finding that people are buying them in great numbers,” he told ProteoMonitor this week.
Slashing the Cash
Most agree that the bounce-back in pharma spending is partly due to a realization by drug firms that after years of slicing their budgets, they could cut no deeper. A few years ago, drug firms were slammed for being lax with their safety protocols, and stories about drugs such as Vioxx contributing to the deaths of thousands of patients sent pharma stocks plummeting.
At the same time, they scurried to meet earnings targets, creating the perfect environment for budget cuts. But, said Peter McDonald, an analyst with American Technology Research, all the cuts, particularly to R&D budgets, have left the industry’s major players with few candidate blockbuster drugs in their pipelines.
“There was a sense that they were cutting too much, and if they were going to get out of their current situation, they had to innovate rather than just add more sales people,” he said.
As pharmas are once again opening up their wallets, proteomics tool vendors are seeing the benefits. In particular, rather than replacing older instruments, pharma is looking to adopt new technologies, tool vendors say.

“The current spending pattern suggests that 2007 may well mark a turning point for this segment in our business.”

Berthiaume said the uptick in Waters’ instrument system sales, such as the Acquity UPLC and UPLC-MS instruments, is a product of pharma’s interest in “advanced technology for drug discovery and development activities.”
Commenting specifically about the sales of its Acquity platform during the most recently completed quarter, he added “Clearly the preponderance is in the front end [R&D], not in the back end” QA/QC, which is more of an indication of replacement purchases.
Similarly, Miller said that Agilent’s pharma customers are purchasing its newest triple quadrupole and quadrupole-time-of-flight line of mass specs for R&D purposes.
One of the hottest research areas is biomarker research and, according to David Hicks, senior director of the proteomics mass spectrometry business group for Applied Biosystems, “Certainly we see pharma … expressing a lot of interest, a growing interest in biomarkers versus where they were five years ago, and I think, overall, that’s part of the drive that we’re seeing with biomarkers.”
Pushing interest along in that area has been the US Food and Drug Administration’s Critical Path Initiative. Last year, the initiative identified biomarker development, including protein biomarkers, as one of six broad categories that should receive top priority in the search for new medical innovations
“It’s starting to heat up at the FDA, so I think it’s a trickle-down theory,” McDonald said. “If the FDA’s interested in it, you’d better do some work about it.”
However, it is unclear how sustainable the current spending trend is, with viewpoints running the gamut. According to Berthiaume, the worst is over. Historically, he said, when Waters’ larger pharma accounts are under budget pressure, the company will see a delay in budget releases to later months of the calendar year, but that has not happened this year.
“The current spending pattern suggests that 2007 may well mark a turning point for this segment in our business,” he said.
On the other end of the spectrum, Thermo Fisher’s Dekkers is taking a don’t-hold-your-breath approach. While the environment has improved, “this is not in my mind an inflection point to the good old days,” he said. What he is hearing from his pharma customers is that it will be another year to 18 months before a full recovery is made and they will be “operating more on a historical type of investment scheme from an R&D point of view.”

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