A 2005 report by Frost and Sullivan predicted that pharma companies’ so-called streamlining of R&D investments would significantly impact laboratory analytical instrumentation vendors. It noted that the trend was expected to continue in 2006. Instrumentation companies would have to “formulate counteracting strategies to meet the anticipated slowdown in demand from this end-user segment,” the report noted.
The report also noted that while pharma companies have increasingly relied on in-licensing new compounds to sustain pipeline growth, internally derived drugs have a 20% higher chance of making it to market. Additionally, some analysts have anticipated that while big pharma’s demand for discovery tools may not be very high, the situation looks marginally better than in early 2010.
Biopharma spending on R&D last year rose by $1.5 billion, or 2.3%, to a record-high $67.4 billion, according to a study released in March by PhRMA and Burrill. That’s expected to drop next year, however, as some of the biggest drug developers have been reporting cuts to their R&D budgets.
Currently, life science tool companies are arguably better prepared to grow their businesses in response to down turns. They have successfully combined significant acquisition activity with organic growth including internal R&D. Instrument makers struggled in 2009 and experienced falling sales, according to a survey done by Chemical & Engineering News of the top 25 firms.
These companies saw a rebound in 2010, with combined instrument sales up 14% compared to 2009, reaching $24.5 billion. Besides broad market recovery, growth in emerging countries produced an environment in which customers were willing to spend money on new and replacement instruments.
Acquiring Growth v. Organic Growth
A fundamental challenge for life science tools companies, explained David Green, president of Harvard Bioscience, “is how to get strong earnings-per-share growth and increased stock price in an environment that is fundamentally of modest organic growth.” Green made this remark at the America’s Growth Capital Emerging Growth Conference in 2007.
Green told GEN that he would make the same comment today. “2011 is not materially different than 2007. The average organic growth in the life science instrumentation industry, with the exception of sequencing-based businesses, remains a modest 3–6%. No company can survive on a 3–6% EPS growth so everyone makes acquisitions, with very few exceptions; they provide good growth.”
Green pointed out that his company actually grew during the recession. The strategy has been a mix of organic growth composed of adding sales people and new products, operating improvements, and tucked under acquisitions, defined as those that are complementary to the company’s current products. Most recently, on July 1, the company reported that it purchased assets related to the preclinical business unit of CMA Microdialysis, which complements its research products for neuroscience applications. Most importantly, Green emphasized, “it’s really critical to focus on operational improvements, particularly with acquisitions.”
The top three earners for 2010 were Agilent Technologies, Life Technologies, and Thermo Fisher Scientific, followed by Danaher and Shimadzu. With its $1.5 billion purchase of Varian, Agilent moved from third place to first. Life Technologies, formed in late 2008 from the merger of Applied Biosystems and Invitrogen, slipped to second. Thermo, meanwhile, moved from second to third, just slightly ahead of Danaher.
Thermo has completed over 40 acquisitions worldwide for approximately $2 billion since the 2006 merger of Thermo Electron and Fisher Scientific. During Q3 2010, the company increased its R&D spend by 2.7% of revenues.
Life Technologies is also trying to handle both growth through innovation as well as through acquisitions. The latest purchase was of Ion Torrent in 2010 for $375 million in cash and stock. Also, internal innovation resulted in several product launches during 2010, according to analysts. The company reported an overall organic growth rate of 7% in the Americas for 2010.
Agilent’s life science group had revenue growth of 35% over fiscal 2009, including the Varian acquisition, and organic growth of 17%, according to Instrument Business Outlook. Agilent’s R&D spending slipped 9% to $642 million in 2009, mostly because it was based on labor costs, Agilent CEO William Sullivan explained.
Agilent said that the company maintained support for all internal programs, including development of mass spectrometers, DNA microarrays, and food safety testing. As a percentage of sales, Agilent’s R&D budget has exceeded 12% over the past three years, Sullivan stated.
Bruker’s foray into new markets drove total sales up 18% to $1.3 billion last year. Its instrument sales moved it into seventh position, just ahead of PerkinElmer. Even without acquisitions, sales would have been up about 12%, according to Bruker. The company predicts that it will reach total sales of about $1.6 billion in 2011, and the firm is targeting sales of over $2 billion by 2014.
“Organic growth is an absolutely key element that is not going to be replaced by growing through acquisitions,” said Thorsten Thiel, Bruker’s director of marketing communications. “Bruker keeps a very focused strategy on acquiring only technologies and products that really fit our existing portfolio.” For example, it acquired the IR gas technology firm Sigma ElectroOptics to expand its detection business and is buying Michrom Bioresources to gain LC instruments to interface with its mass spectrometers.
Caliper Technologies reached its goal of high organic growth by focusing on a series of relatively new patented technologies, which drive most of the bottom line growth, CEO Kevin Hrusovsky told GEN. “For the last seven years, since 2003 when Zymark merged with Caliper, our growth has been 22% annually, 80% of which has been acquisitional and 20% organic.”
He says the company’s commitment to organic growth has continued. “We are up to 26% year to date thus far,” Hrusovsky noted. The reason for this is increased R&D spending. “We put about 15 percent of sales into R&D and have a significant commitment to our organic growth. Within the last two years, it’s been more like 50-50.”
He further explained that the company prioritizes its R&D spending, focusing it on products with significant market opportunities. “What we look at is whether the base technology is patent protected as well as our probability of success technically and commercially. The primary technologies we have invested in are next-gen sequencing, molecular and companion diagnostics, imaging, and stem cells.”
For 2010, Illumina says its growth strategy included a 10% increase in its internal R&D funding over the previous year. The company also continues a robust strategic acquisition program. In January 2011, Illumina bought Epicentre in a cash and stock deal, giving Illumina exclusive access to Epicentre’s Nextera library preparation kits for the 454 and Illumina platforms.
Illumina posted 50% revenue growth in the third quarter of 2010, with a 70% jump in sequencing orders and strong pull-through of consumables. Illumina has beaten Street estimates in three of the past four quarters, and analysts have increased their 2012 forecast to $1.95 per share, up 29% from 2011.
Life science instrumentation companies have met the challenges posed by R&D spending reductions in the biopharma industry, combining acquisitions with organic growth in rewarding ways. With few exceptions, all have grown steadily, turning around sales declines and rebounding in 2010.
Also, the recent recession has tempered the appetite for risk among many sector investors. This has made the relatively steady growth of life science tool companies an attractive alternative to higher-risk investments in drug development companies.