Spending Weakens in First Quarter

In the face of slower spending by big pharma, weaker semiconductor spending and economic turmoil, calendar-year first-quarter revenues for major instrument and laboratory product companies stayed on track. First-quarter sales for 11 of the 13 companies profiled on pages 9–11 increased 11.8% in US dollars (see graph, page 10) (Affymetrix was excluded from the calculation due to the material effect of a one-time payment.)

Beneficial currency effects were a big part of the story. Currency transactions added more than 5% to revenue growth for five companies’ instrument businesses (see graph, page 9). The weak dollar helped US companies in most cases, as a it gave US companies a pricing advantage abroad. Sales fell during the quarter for the Japanese firm Horiba, in part due to the weak dollar. However, German-based Analytik Jena AG reported double-digit sales growth, despite the strong euro. Excluding currency effects, sales were also down for Bruker’s BioSpin segment. Including currency, sales declined for Affymetrix, excluding a one-time payment, and for Applied Biosystems’ Other Product Lines segment.

Adjusted operating profits remained robust, as new products, acquisitions and efficiency improvements increased margins. For the 11 companies, calendar-year first-quarter adjusted operating profits gained 17.5% in US dollars (see graph, page 11). However, the two foreign companies in the graph, Analytik Jena and Horiba, recorded operting losses in both US dollars and home currencies.

Slower spending by big pharmaceutical companies was mentioned by nearly all of the companies profiled. Agilent reported flat pharmaceutical spending in the US, while Dionex and Waters discussed weak spending by drug companies in Europe. However, Agilent and Waters also commented on the strength of pharmaceutical spending in Asia, partly attributing it to the offshoring and outsourcing of drug research and manufacturing. Particularly hard hit by slower pharmaceutical spending were sales of Affymetrix’s gene expression products and Applied Biosystems’ MS systems.

Despite economic uncertainties, food, environmental and petrochemical spending held up. However, Thermo Fisher Scientific noted weakening oil and gas sales toward the end of the quarter. Thermo, as well as Agilent, also reported slower sales for semiconductor-related products. Academic spending in the US remained largely stagnant, according to most companies.

MS demand remained robust for Agilent, Thermo Fisher Scientific and Waters. GC and LC sales buoyed results for Agilent and Varian. Consumables remained a strong spot for Applied Biosystems and PerkinElmer.

Japan and the US remained the slowest growing regions, as noted by Applied Biosystems, Bio-Rad Laboratories and Waters. Emerging markets in Eastern Europe and Latin America continued to show strong growth, led by petrochemical sales, which benefited Agilent and Varian.

Profiles of company results are based on financial reports and the companies’ quarterly conference calls.

Affymetrix’s first-quarter revenues jumped 110.8% to $169.6 million, counting a one-time $90 million intellectual property (IP) payment (see IBO 1/15/08). Excluding this payment, revenues declined 1.0%. Total product revenue declined 2.6% to $62.8 million. Consumables revenue, which includes arrays and reagents, grew 4.9%, to $58.8 million and benefited from the acquisition of USB (see IBO 12/31/07). Instrument sales declined 52% to $4.1 million. Service revenue slipped 3.8% to $8.4 million, while Royalties and Other revenue improved 16.1% to $8.4 million, excluding the IP payment. In addition, a $5 million shortfall in pharmaceutical revenue, lower prices and declining sales to Perlegen Sciences negatively impacted sales. DNA revenue (genotyping) grew 24% to $21.3 million, while RNA revenue fell 5%. Adjusted operating loss widened to $5.6 million compared to $3.3 million, while gross margins declined 420 basis points to 60.2% of sales. For 2008, revenues are estimated to grow 8%–13% to $400–$420 million with gross margins of around 62% of sales, excluding the IP payment.

Fiscal second-quarter revenues for Agilent Technologies’ Bio-Analytical Measurement (BAM) segment grew 20.1%, 13% organically, to $556 million to account for 38.2% of total company sales. Services and consumables revenues increased 19%. Orders grew 21.4% to $596 million, including 7.5% growth from the acquisitions (see IBO 4/15/07, 11/15/07). BAM’s Asian sales grew 44%, excluding Japan, while sales in the Americas and Europe rose 19% and 13%, respectively, and Japanese sales increased 12%. Life Sciences revenue improved 33%, 16% organically, to $259 million, led by strong sales of high-end LC/MS, as well as by GC, GC/MS and ICP-MS. Pharmaceutical and biotech sales climbed 24%, 11% organically, accounting for strong demand in Asia, but modest growth in the US and Europe. Academic and government revenues jumped 74%, 36% organically, with strong MS sales and a 41% increase in microarray revenue due to CGH applications. Chemical Analysis revenue rose 11% to $297 million, or 16% excluding the decline in materials science revenue. Petrochemical sales rose 27%, sales to the food safety markets increased 19% and environmental sales grew 5%. Materials science sales declined 22%, following slow demand in the semiconductor market for laser interferometers. Adjusted operating profits grew 21.1% to $92 million, while operating margins remained unchanged at 17.0% of sales.

Analytik Jena AG’s fiscal second-quarter sales grew 15.7% to €18.6 million ($27.7 million = €0.67 = $1) from €16.1 million ($21.1 million = €0.76 = $1), a 31.2% gain in reported US dollars. Instrument sales improved 22.6% to €12.5 million ($18.6 million), including Analytical Solutions sales of €9.9 million ($14.8 million), Bio Solutions sales of €0.9 million ($1.4 million) and Optical Solutions sales of €1.7 million ($2.5 million), which grew 24.6%, 42.8% and 4.5%, respectively. Project Solutions revenue improved 3.7% to €6.1 million ($9.1 million). Adjusted operating profit slipped 1.1% to €0.8 million ($1.2 million), excluding a one-time depreciation expense of €0.5 million ($0.7 million) related to the company’s disposal of the majority stake in AJZ Engineering (see IBO 3/31/08). The company anticipates full-year revenues to grow around 20% to €51.0 million ($75.0 million).

Applied Biosystems’ fiscal third-quarter revenues grew 4.3% to $552.6 million, including approximately 4% growth from favorable currency effects. Revenues were primarily driven by higher sales of Consumables, which grew 7.4% to $237.3 million as demand for CE sequencing, Ambion, Taqman and real-time PCR products were particularly strong. Revenues from Other Sources, which includes services and royalties, improved 8.1% to $100.9 million. Instrument sales slipped 0.6% to $214.4 million due to lower sales of MS products and DNA sequencers. US sales declined 4.5% to $217.2 million, European sales improved 7.2% (1.2% on a currency-neutral basis) to $196.0 million, sales to Asia-Pacific rose 14.2% (8.0% on a currency-neutral basis) to $111.5 million and sales to Other markets increased 26.2% to $27.9 million. Adjusted operating income grew 13.0% to $106.2 million, leading operating margins 148 basis points higher to 19.2% of sales. Gross margins improved 53 basis points to 56.9% of sales, benefiting from foreign currency exchange and lower cost of goods, despite competitive pricing in the MS product category. The company expects fiscal 2008 revenues to grow in the midsingle digits with Consumable revenues increasing, but flat Instruments sales. Growth is expected for all product categories, except Other Product Lines.

Bio-Rad Laboratories’ first-quarter Life Science (LS) revenue improved 9.2%, 2.3% on a currency-neutral basis, to $154.6 million, led by sales of process chromatography and detection products, to represent 37% of total company revenues. Excluding BSE sales, LS revenue increased 4.9%. Sales to Asia-Pacific and emerging markets each grew in the double digits, while revenue growth in the US and Japan remained slow due to weaker demand from the biopharmaceutical and academic research markets. In particular, the company reported slower sales of higher priced capital equipment, which makes up about 30% of LS revenue. Operating income for the LS segment soared 76.4% to $9.7 million due to increased sales, a change in product mix and lower operational costs.

For the first quarter, Bruker’s revenues grew 14.9%, 4.9% on a currency-neutral basis, to $238.4 million (see page 12), including the acquisition of Bruker BioSpin (see IBO 12/15/17), which was completed on February 26. Product revenue rose 14.0% to $207.0 million, while Service revenue improved 18.9% to $30.0 million and Other revenue nearly doubled to $1.4 million. Revenue for the BioScience segment rose 26.5%, 17.6% on a currency-neutral basis, to $142.6 million led by strong system sales. Revenue for the BioSpin segment rose 4.2% to $112.1 million, but fell 5.7% excluding favorable exchange rates. Adjusted operating profits climbed 10.2% to $21.7 million, while operating profit margins slipped 40 basis points to 9.1% of sales due to increased acquisition-related charges. Despite the impact of a weakening dollar on overseas manufacturing, gross margins improved 190 basis points to 47.5% of sales, following a shift in product mix.

Revenues for Dionex’s fiscal third quarter grew 15.8% to $98.4 million, including 7% from favorable currency transactions. Sales in the petrochemical and environmental markets rose 50% and 20%, or approximately 40% and 13% on a currency-neutral basis, respectively. Revenue from the food and beverage market grew in double digits, or high single digits in local currency. Electronics and power sales were modestly higher or flat on an organic basis, while life science sales grew 2%, but declined roughly 5% in local currency. Operating profit rose 11.0% to $20.0 million, while operating profit margins declined 80 basis points to 20.4% of sales and gross margins slipped 10 basis points to 65.6% of sales. For fiscal 2008, the company raised its revenue forecast to 13%–15% growth to $372–$375 million.

For the first quarter, revenues for Horiba’s Analytical Instruments and Systems declined 9.5% to ¥9,152 million ($87.0 million = ¥105.25 = $1) (see page 12) due the global economic slowdown to account for 29.6% of total company sales. Reported in US dollars, revenues gained 2.6%. Segment operating profit fell 74.4% to ¥271 million ($2.6 million), while operating margins declined over seven percentage points to 3.0% of sales. The company anticipates full-year 2008 Analytical Instrument and Systems revenues to be approximately ¥40,000 million ($380 million), equivalent to the previous year.

Mettler-Toledo’s first-quarter sales of laboratory products improved 8.6% to make up 45% of total sales. Demand was strong for process analytics products, analytical instruments and laboratory balances.

In the first quarter, revenues for PerkinElmer’s Life and Analytical Sciences (LAS) segment grew 19.1%, including 6% growth each from favorable currency transaction and acquisitions, to $356.6 million, accounting for 73.9% of total sales. Genetic Screening revenue grew approximately 64% to account for 19% of LAS revenues, led by strong sales of neonatal screening and prenatal screening products. Analytical Sciences revenue grew more than 15% to make up 35% of LAS’s sales, following strong demand for inorganic analysis products. Laboratory Services and Biodiscovery sales improved 13% and 5% to account for 24% and 21% of LAS revenues, respectively. Reagents accounted for approximiately 60% of Biodiscovery revenue. LAS’s adjusted operating profits jumped 57.3% to $23.4 million, while operating margins improved 160 basis points to 6.6% of sales due to improved productivity and increase sales. For the second quarter, PerkinElmer forecasts mid to high-teens sales growth for the company.

Revenues for Thermo Fisher Scientific’s Analytical Technologies (AT) segment grew 10.0% in the first quarter to $1.09 billion to account for 42.6% of total sales. Favorable currency transactions and acquisitions contributed 4.6% and 1.5% to revenue growth, respectively. Organic growth was led by higher sales of microbiology, MS and environmental monitoring products. The company reported slower sales for the oil and gas and semiconductor markets. AT’s operating income grew 23.4% to $228.7 million, and operating margin improved 220 basis points to 12.3% of sales. During the quarter, the company transferred approximately $70 million in annual revenues from the AT segment to the Laboratory Products and Services segment.

Varian’s fiscal second-quarter sales grew 7.9% to $248.2 million, while adjusted operating profit jumped 12.2% to $27.1 million. Scientific Instruments’ (SI) sales grew 7.4% to $204.4 million due to strong sales of analytical instruments and consumable products, particularly HPLC and GC columns. Adjusted operating profit gained 4.6% to $25.1 million, while operating margins slipped 30 basis points to 12.3% of sales due to higher costs associated with new product introductions. Total company sales to North America, Europe, Asia-Pacific and Latin America improved 2.0%, 11.0%, 7.2% and 20.5% to account for 29%, 42%, 22% and 17% of sales, respectively. For fiscal 2008, the company expects revenue to grow 5%–7%.

Waters’ first-quarter revenues grew 12.2% to $371.7 million, including 6% growth from favorable currency transactions. Product sales increased 11.7% to $270.5 million, while Service revenue grew 14.1% to $101.2 million. Pharmaceutical sales rose 10%, government and academic sales increased 6%, and industrial and food safety revenue grew 18%. Sales to the US grew 9%, and European sales grew 9%, but declined 3% excluding foreign currency effects. Asian sales (including Japan) grew 18% and Rest of World increased 20%, but grew 11% and 8%, excluding currency effects. Waters division sales rose 12%, including 6% growth from currency, while Thermal Analysis (TA) division sales improved 17%, including 5% growth from acquisitions. Adjusted operating margins improved 21.0% to $90.6 million, leading operating margins 180 basis points higher to 24.4% of sales.

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