Revised 2007 Forecast: Encouraging Signs

IBO published its annual analytical and life science instrument industry forecast for 2007 in mid-January (see IBO 1/15/07). While we only had preliminary estimates of the industry’s 2006 performance, it was clear that the year was better than 2005. Still, a fair amount of uncertainty remained about our 2007 forecast, not the least being the slowdown of the US economy, continued hesitancy of the drug industry to invest in new technologies, high oil prices and the prospect of an overheating Chinese economy. Based on historical trends and estimates of future developments, IBO forecasted industry growth for 2007 to be about 6.1%, slightly lower than the apparent growth of 6.5% for 2006—all in all, a respectable expansionary prediction. So how has 2007 developed so far, and what can we expect for the full year? There has been a mixed set of variables, favorable and unfavorable, for our industry’s growth prospects. The US economy performed anemically in the first quarter, expanding only 0.6%, but second quarter GDP estimates are higher at 3.4%. Thus, the US economy averaged 2.0% growth in the first half, and most economists predict a similar growth pattern for the second half. Europe is expanding nicely, compared to the last few years, and Japan seems to be headed for a continued moderate economic expansion. China continues to perform impressively, recording second quarter growth of 11.9%, even better than the 11.1% growth for the first quarter. Some analysts are predicting full-year growth of 12.3% for China. India is not far behind, with its economy expanding at over 10%. The world still has high oil prices to contend with—the price just exceeded $78 per barrel. Higher interest rates and increased inflation in Asia and Europe are also a cause for concern. However, while the economic climate is important, our industry is somewhat insensitive to macroeconomic conditions because of its emphasis on the pharmaceutical and biotech industries, the noncyclical influence of government and academia spending, and specialty investments, such as environmental regulations and healthcare initiatives. An analysis of the performance of industry participants can show how the year is unfolding. Based on the firms listed in the table below, 2007 should be a banner year. First-half organic growth for these companies averaged 11.5% (excluding acquisitions but including currency effects), with full-year sales estimates exceeding 10%. As these firms account for about one-third of instrument industry revenues, such an outstanding performance cannot be ignored, although the second half of the year could be more difficult than expected. These firms also market many of the hottest products, including mass spectrometers, HPLCs, microarrays and XRF spectrometers. Not all firms enjoy these advantages, and much of the industry exhibits slower growth. Still, we cannot ignore the positive business environment and, accordingly, we are revising our 2007 forecast from 6.1% to 6.6%, with 7% growth a possibility. This seemingly small change will increase annual industry revenues by over $150 million. The North American market should expand at our original projection of 5.8% and will benefit from a modest resurgence in pharmaceutical purchasing, as well as from increased food testing and homeland security initiatives. A slower growing economy will, however, impact some industrial markets, especially petrochemical, plastics and even the petroleum industry. The Japanese domestic market is expected to exhibit slower growth because of reduced government expenditure and currency considerations. Europe is the bright spot as market demand has accelerated in line with higher levels of business confidence and, perhaps, as a result of deferred procurement. As the second largest regional market for instruments, Europe has a significant impact on the industry‘s global performance. The Asia Pacific region led by India and China will continue to outperform every other region, but these markets are still quite small in the global equation. The oil and gas producing countries in the Middle East, Russia and Africa are also experiencing strong instrument demand as the result of commodity prices and infrastructure expenditures. Growth for all technology categories, except molecular spectroscopy, has been revised upward. While not the fastest growing segment overall, separations have been revised upward the most. The impact of new systems and chemistries has driven growth, especially in the pharmaceutical and biotech sectors, in combination with mass spectrometry and lab automation, which have also experienced increased market acceptance. Materials characterization technologies are also performing well as the result of polymer and petroleum product expenditures, as well as pharmaceutical R&D and methods development. Surface science instruments are benefiting from the resurging semiconductor industry. The life science market is a mixed bag as some technology segments, such as sequencers and synthesizers falter, while cell analysis products and microarrays experience more intensive interest and widespread application. Even atomic spectroscopy continues to enjoy solid growth as the metals and minerals industries increased purchases, particularly in Asia and Europe. Environmental markets are also contributing to growth around the world for water quality testing.

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