In the face of continued turmoil in the global financial markets, investment bank Leerink Swann last week downgraded a number of life-science tools companies, while Waters independently lowered its fourth-quarter revenue guidance.
Among the firms whose ratings Leerink Swann downgraded were proteomics instrument manufacturers Thermo Fisher Scientific, Waters, and Bruker, and proteomics consumables and reagents players Sigma-Aldrich and PerkinElmer.
The brokerage firm based its ratings on an internally conducted survey of 117 university-based life-science researchers showing that life-science spending by research institutions may be shrinking: 68 percent of respondents have seen or expect to see research budget cuts at their institutions, stemming from endowment pressures.
While funding from the National Institutes of Health makes up a large slice of the total research funding pie for many researchers — and current draft legislation could raise NIH funding for fiscal 2009 by 4 percent to 6 percent — Leerink Swann analyst Isaac Ro said in a report on the life-science market that university endowments represent an important funding source.
“We do think it’s important to highlight the new-found pressure on endowments that could in turn pressure university-based funding, which often constitutes the bulk of remaining funding for academic labs,” Ro wrote in the life-science report, which was released concurrently with a number of reports in which Ro provided more detailed outlooks on individual companies.
Ro cited Harvard University, which recently said that its endowment shrank 22 percent, or by about $8 billion, since the end of June. Likewise, Yale University this week said its endowment lost 25 percent of its value to around $17 billion during that period.
“We assume other universities are seeing similar declines,” Ro wrote.
The recently conducted survey found that about 30 percent of respondents said that capital-equipment purchases, such as mass spectrometers, will be the first casualty of the current spending cuts, while others said proteomics tools are the second-lowest spending priority in the current environment behind science research tools.
However, genomics and consumable assays/kits “clearly came away as the winners,” as top spending priorities. Spending on capital equipment may be in danger, but transformative technologies such as next-generation sequencers and genotyping assays would continue to see “good adoption,” Ro wrote.
His report is particularly dim for big-ticket tool vendors, and cites results from the survey suggesting that such tools are especially vulnerable to tighter budget constraints.
And Ro told ProteoMonitor this week that the ongoing financial turmoil will be particularly tough for proteomics in general and for mass specs in particular.
“I would think mass spectrometry would be a pretty tough product area to grow in,” he said. “Somebody who sells mass specs … [is] going to have a hard time in those businesses” and may have to resort to deep discounts.
Breaking Bruker, Brackish Waters
According to Ro, of the major mass spec players Bruker could suffer the most “given the fact they have a pretty big mass-spec franchise.” Leerink Swann downgraded Bruker’s shares to “market perform” from “outperform” and lowered its 12-month price target for firm’s shares to $4 from an earlier expectation of between $6 and $7.
Ro said Bruker has posted “several disappointing quarters from an operating margin standpoint” year to date, and said he does not expect the performance to change in the near-term.
“The rapid economic downturn comes at an especially bad time for [Bruker] as the integration of BioSpin continues,” Ro wrote. Bruker BioSpin, which designs, manufactures, and distributes systems based on magnetic resonance core technology, was brought by Bruker in February.
“We think pressure on academic and drug industry R&D budgets will present significant headwinds on capital equipment spending.”
Bruker did not reply to requests for comments.
Likewise, in its report on Waters Leerink Swann said that “we think pressure on academic and drug industry R&D budgets will present significant headwinds” on their ability to make big-ticket buys.
According to Ro, that situation could worsen if there is consolidation within the pharma industry.
“That would really be something that would slow down demand from where we are now,” he said, adding “there’s a decent chance of that happening” in the first quarter of 2009.
Ro downgraded Waters to “market perform” from “outperform” and cut the company’s 12-month stock estimates to between $34 per share and $37 per share from between $48 and $52.
A “market perform” rating means the company’s stock is expected to perform in line with its benchmark during the next 12 months. “Outperform” translates to expectations that the stock will outperform its benchmark during the 12 months.
A spokesman for Waters declined to comment about the Leerink Swann report.
In a statement released last week announcing the company’s new guidance, CEO Douglas Berthiaume said it is girding for “a generally more difficult business environment ahead of us,” and blamed weakened global economic conditions.
He added that increasingly cautious spending by Waters’ customers and unfavorable currency-conversion rates will likely continue into next year, “and we are presently assessing our spending plans to align with lower sales expectations going forward.”
A day after Waters lowered its guidance, five banks, including Leerink Swann, downgraded Waters and cut their 12-month target price for the company.
Leerink Swann took a brighter view of Thermo Fisher Scientific and Life Technologies, created last month after Applied Biosystems merged with Invitrogen, because of their diverse product portfolios.
While Leerink Swann did not issue a report on Life, Ro told ProteoMonitor, “A company like Life Technologies, they’re servicing industrial customers … they’re servicing universities, they’re servicing food safety-testing markets, so there are a lot of non-core markets that you might call non-life-science lab-type end-markets that they’re treating that can be really resilient and potentially recover faster than a world in which drug companies are sluggish.”
In his report on Thermo Fisher, Ro cut his 12-month share-price expectation to between $42 and $45 per share from a previous valuation of between $48 and $51, but maintained an ”outperform” rating for the firm.
Ro added that he believes that despite the current environment, Thermo Fisher will continue to be an “aggressive acquirer of assets … thanks to a successful track record, global distribution reach, and a flexible balance sheet.”
A spokeswoman for Thermo Fisher declined to comment on the Leerink Swann report, citing company policy.
Ro was cautious in his appraisal of Sigma-Aldrich and PerkinElmer. In the case of Sigma-Aldrich, Ro did not alter his “market perform” rating but cut the firm’s 12-month stock price expectation to between $33 and $35 per share from between $35 and $37.
In his report, he said that despite a willingness from researchers to spend on assays and kits, “we are concerned that the overall funding environment will place pressure on life science-technology growth” at Sigma-Aldrich.
Ro also said that Sigma-Aldrich management has “expressed caution around the current state of big pharma, where R&D efforts are being disrupted.”
He also lowered estimates for PerkinElmer’s stock to between $14 and $16 per share from $17 to $18 per share. Ro said he made the cut due to “mounting pressures on R&D spending for capital equipment and [foreign-exchange] headwinds.”
A positive note in Leerink Swann’s life-science market report is proposals to raise NIH funding for the current fiscal year by $1.2 billion to $1.7 billion, a 4 percent to 6 percent increase year-over-year and “well ahead” of the 1 percent annual increase seen during the past 5 years, Ro wrote.
Benefits from such an increase may not be seen until the fourth quarter of FY 2009, however, and Ro said that consultants Leerink Swann spoke with recently said they believe bridge funding could be injected into the NIH’s budget immediately after president-elect Barack Obama is inaugurated. He said such a boost could give the agency $200 million to $300 million in additional funding.
Separately last week, Waters lowered its fourth-quarter revenue guidance between 4 and 6 percent due to “deterioration in global economic conditions.”
Waters now expects revenue for the quarter to come in between $410 million and $420 million. In October the company said it expected to generate around $454 million during the period. It recorded $437 million in receipts during the fourth quarter 2007.
The Leerink Swan and Waters announcements are the latest indications that the life-science tools industry will face lean times ahead. Last week, Agilent Technologies lowered its estimates for its fiscal-2009 first quarter, which began on Nov. 1. The company blamed “deteriorating economic conditions,” but reiterated confidence in its Bio-Analytical division, which houses its proteomics instruments and other life-science tools. “There is no lack of issues in big pharma around the world,” CEO Bill Sullivan said at the time [See PM 12/11/08].
And one month ago, proteomics-development firm Pressure BioSciences said it would undergo a corporate restructuring resulting from challenges it has faced rounding up investment financing [See PM 12/04/08].