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Thermo Fisher Increasing Mass Spec R&D Spend in 2010; Reports 7 Percent Spike in Q4 Revenues

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This story originally ran on Feb. 3.

By Tony Fong

Thermo Fisher Scientific's CEO reiterated his company's commitment to further invest in its mass-spectrometry business and technology today during his company's fourth-quarter and full-year 2009 earnings conference call.

At the JP Morgan healthcare conference last month CEO Marc Casper told investors the company would be "ruthlessly focused on winning" in the mass-spec space [See PM 01/15/10]. Today, he continued to talk up that business and added that in 2010, Thermo Fisher plans to increase R&D spending over 2009's amount of $246.1 million by about $30 million in order to build up its technologies.

The $30 million is on top of any additional R&D spending that would come from any acquisition of new businesses.

Not all of the increases in this spending will be directed toward mass specs, of course, but in his comments during the conference call, and even before, Casper made clear that the firm has high mass spec ambitions.

"We believe that the exciting growth prospects for our leading technology platforms such as new applications for mass spec and new capabilities for specialty diagnostics and biosciences easily justify this investment," he said. "We could go out and spend $30 million on a technology acquisition. We think we're going to get a much higher return by putting the $30 million in our own R&D capabilities."

The added R&D expense, along with increases in other expenses, such as increased marketing in emerging markets and information technologies, are expected to result in long-term returns to the company beyond 2010, added Chief Financial Officer Peter Wilver.

The company did not disclose revenues for its mass spec business, but as 2010 increasingly looks as if it will turn out to be an unusually competitive year for the space, both technologically and financially, Thermo Fisher has signaled its intention to aggressively stake its place among the leaders.

Even before today, Casper had made remarks that suggested that the company was sensing a shift in the market and a changing of the guard, and was prepared to capitalize on it.

For years, Applied Biosystems was seen as the leading mass spec vendor, both in terms of market share and technology innovation, but more recently, as a result of technology drought and its odd-man out status in the Life Technologies business, ABI's place atop the mass spec heap has been threatened.

Because mass spec sales figures are generally not disclosed by vendors, it is not clear who ranks as number one anymore, but the general consensus is that even if Thermo Fisher has not displaced ABI at the top, it has at least narrowed the gap between it and ABI, now called AB Sciex.

At the JP Morgan conference, Casper said that ABI, now called AB Sciex, had lost a "reasonable amount of share" to his firm.

This week, Danaher closed on its acquisition of the ABI/MDS mass spec joint venture, and created AB Sciex as its own company dedicated to the instruments [See accompanying story this issue].

Casper has said that he does not expect the change in ownership to affect the space. Commenting on the general competitive dynamics in the mass spec business today, he added: "What's great about mass spec is [that] everybody claims that they've got the best and the most exciting [systems] and I think that's fine. …I think our track record speaks for itself in this area. We've gone from a distant player nine years ago to a market leader over that period of time, and we feel very good about our prospects."

In 2009, the company maintained the same amount on R&D spending as a percentage of revenue, 2.4 percent, as in 2008, despite the more challenging economic environment "because of the great track record we've had in bringing out innovative products," Casper said.

At the American Society for Mass Spectrometry conference in late spring, Thermo Fisher launched its newest technologies, the Velos and LTQ Velos platforms [See PM 06/04/09]. The launch, Casper said, has resulted in the "fastest uptick" of any mass spec in the company's history.

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At the same time, its Orbitrap franchise had record bookings in 2009, he added.

In the company's third-quarter earnings conference call in October, Casper said that half of all mass spec-related applications for government stimulus-related funds employ Thermo Fisher technology. Those applications have not yet necessarily translated to orders, he acknowledged, but he anticipates that they will.

During the fourth quarter, Thermo Fisher realized about $50 million in stimulus revenue, primarily from Japan and China. For 2010, it projects between $50 million and $150 million in stimulus revenue, most of it from the National Institutes of Health, and "very much tilted" toward the purchase of instruments such as mass specs, Casper said.

"We're confident in the competitive position of our technology, and [are] particularly excited by the fact that the typical grant allocation of $500,000 was increased to $600,000, which really plays well, then, to the Orbitrap family," he said.

Instruments Still Down in Q4

During the fourth quarter, Thermo Fisher posted receipts of $2.84 billion, a record and a 7 percent bounce from $2.65 billion in Q4 2008. Organically, revenue rose 1 percent.

Profits shrank almost 5 percent to $273.3 million, or $0.65 per diluted share, from $287 million, or $0.67 per share, a year ago.

The Analytical Technologies segment, which houses Thermo Fisher's mass spec operations, saw revenue rise 5 percent to $1.19 billion in the quarter, compared to $1.14 billion in Q4 2008. Sales of instruments and equipment improved sequentially, to mid-single digit decline in the fourth quarter from high-single digit decline in the third quarter, Wilver said.

Geographically, North America returned to positive growth in the quarter, in the low-single digits on an organic basis, he said, while the company's Asia-Pacific business grew in the high-single digits. Europe declined by mid-single digits against a "tough" year-ago comparison and continuing softness in demand for capital equipment. The rest of the world saw double-digit growth, driven by "high demand' in the Middle East, Wilver said.

R&D spending for the quarter rose to $69.3 million from $60.9 million a year ago.

For full-year 2009, Thermo Fisher revenue slid 4 percent to $10.1 billion from $10.5 billion for full-year 2008. Revenue declined 3 percent for the year organically. Profits shrank 13 percent to $850.3 million, $2.01 per diluted share, from $980.9 million, $2.25 per diluted share, a year ago.

Analytical Technologies receipts declined 7 percent for full-year 2009 to $4.15 billion from $4.47 billion in 2008. Revenue decline was 6 percent organically.

Commenting on its end markets, Casper said that the company sees improvements in its biopharma business driven by share-gain in its top-20 accounts, composed mostly of biopharma customers. Growth in that segment outpaced the average growth of the company, he added.

In 2009, Thermo Fisher targeted $115 million in cost-savings, which included closing 15 manufacturing sites, layoffs, and control of discretionary spending. The company exceeded its target figure, Casper said, and for 2010 expects another $25 million in savings stemming from the initiatives.

Thermo Fisher said it had $1.56 billion in cash and cash equivalents as of Dec. 31, 2009.

For 2010, the company is forecasting revenue growth of 5 to 7 percent to a range of $10.6 billion to $10.8 billion.

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