Illumina Curbs Outlook

Illumina’s third quarter top line growth fell 3% below its expectations, as the company missed guidance for the third time in the last five quarters. Sales advanced 10.3% to $607.0 million driven by demand for sequencing consumables and microarrays. In addition, shipments for oncology testing applications remained strong, climbing 24%. However, despite a projected drop due to the strong year-over-year comparison, sales of HiSeq systems missed company estimates. Furthermore, the company tapered its fourth quarter sales projections for high-throughput systems.

Following an internal review of its sales results, Illumina concluded that the variance in guidance for high-throughput systems in the second half of the year was negatively impacted by delayed US government funding, capital constraints as well as a change in delivery date for four of its customers. Furthermore, the company acknowledged a shift in demand and orders from HiSeq 2500 and 4000 to the HiSeq X and NextSeq platforms, which also may have impacted consumables purchases. While the company noted that there is little to suggest any market share losses or oversaturation of systems, Illumina may face some potential cannibalization of its HiSeq products by the lower-priced NextSeq.

Illumina’s sequencing sales improved 7%, led by consumables revenue growth of 24% to $333 million, or roughly 56% of sequencing sales. Consumables were driven by strong utilization rates, especially for the HiSeq X and NextSeq. In view of slower demand for high-throughput instrumentation, sequencing systems revenue contracted 26%. However, sales of benchtop systems, especially NextSeq, MiSeq and MiniSeq, performed well and were in line with expectations.

Accounting for roughly 16% of revenues, microarray sales jumped 35%, led by demand from direct-to-consumer and 20% growth to agricultural customers. With orders for two million Infinium Global Screening Array (GSA) samples and growing interest in the Infinium XT, total array orders jumped 90%. Since the beginning of the year, the company has received orders for more than five million GSA samples, creating a healthy backlog for the next few years.

Total service and other revenue grew roughly 18%, led by genotyping services and sequencing instrument maintenance contracts.

Illumina sales in the Americas grew 2%, a significant drop from the 13% growth in the second quarter. Including currency, Asia Pacific sales climbed 35%, led by China, where sales soared 85%. Following a decline in the second quarter, sales in Europe grew 16%, slightly ahead of expectations.

Adjusted gross margin slipped 63 basis points to 72.0% of sales because of increased investments in the clinical business, and expansion of sequencing consumables and array manufacturing operations. Given the increased financial commitments to its genetic startups Helix and Grail, adjusted operating margin fell 142 basis points to 28.7%. The company sharply lowered its fourth quarter sales growth expectation from roughly 16% to approximately flat or up 1%.  Full-year sales are now expected to grow roughly 7%.

PerkinElmer Falls Flat

PerkinElmer reported disappointing third quarterly results, as adjusted sales contracted roughly 1.6% organically to $548.1 million. Excluding the extra week in the previous year, organic sales were flat. Sales missed company expectations by 4% primarily due to weak industrial and medical imaging markets, and lower analytical instrumentation sales. Strategic actions by the company to focus away from slower-growth areas as well as capital spending delays mostly resulted in the revenue shortfall. Total instrument sales declined in the mid-single digits. Conversely, consumables and services revenues each grew in the low single digits excluding the extra week.

On the positive side, the company stated that combined sales for targeted higher-growth businesses, such as reproductive health, food analysis, pharmaceutical services and diagnostics products, grew in upper single digits excluding the extra days and were up low double digits organically year to date.

Organic Human Health (HH) revenue was roughly flat, but grew in the low single digits excluding the extra week. Core diagnostic sales climbed in the high single digits organically, led by more than a 50% increase for the Haoyuan blood screening business and strong laboratory service revenue in India. However, Medical Imaging sales declined double digits. Life Science Solutions sales contracted in the low single digits as sales growth for the OneSource business was negatively impacted by the extra days. In addition, sales for the radiochemical business were weak. HH adjusted operating margin expanded 168 basis points to 24.6%.

Environmental Health (EH) sales contracted 5% organically due to weakness in environmental and industrial markets. With the exception of China, sales of environmental products declined, especially in the US and Europe. Food analysis organic sales were again strong in the quarter, and are up in the low teens for the year. EH adjusted operating margin climbed 277 basis points to 15.0%.

Overall, PerkinElmer sales in emerging markets grew in the high single digits organically, including 20% and 10% growth in China and India, respectively. Organic sales in developed regions declined in the mid-single digits.

Despite the revenue decline, adjusted gross profit margin improved 169 basis points to 49.0% as a result of productivity improvements and product mix. Adjusted operating margin advanced 126 basis points to 18.3% due to increased margins and cost saving measures.

The company cut its 2016 organic growth outlook from 4% to 2% due to the softer-than-expected demand from academic and government customers, as well as slower projected growth in developed regions. Fourth quarter organic sales are expected to grow just under 2% to $610–$620 million.

Emerging Markets Boost Thermo Fisher Scientific Growth

Third quarter sales for Thermo Fisher Scientific grew 8.9%, 4.3% organically, to $4.49 billion. Acquisitions contributed 4.9% to revenue growth, while currency headwinds reduced sales by 0.3%. Excluding the earlier-than-projected closing of the FEI acquisition (see IBO 5/31/16), which contributed just under $100 million in sales, top line growth met expectations. Pricing contributed roughly 0.6% to revenue growth. All sales figures below are organic.

End-market results were similar to the second quarter (see IBO 8/15/16), except for slightly stronger biopharmaceutical sales growth and weaker demand for industrial and applied markets. Biopharmaceutical sales grew roughly 11%, led by growth in the bioproduction and biopharma service businesses, as well as strong demand for chromatography and MS products. Diagnostics and healthcare sales grew approximately 3%, including particular strength in the clinical NGS and transplant diagnostics businesses. Academic and government sales improved roughly 1%, while industrial and applied market sales declined 1%. However, applied sales for environmental and food safety products were strong in China.

Among the four business segments, Life Science Solutions sales recorded the strongest organic growth, climbing 7.0%, led by bioproduction, bioscience and NGS sales. The company noted a strong uptake for the new Ion S5 and S5 XL NGS systems.

Analytical Technologies sales grew 2.7%, including higher sales of chromatography, MS and environmental products. However, growth was partially offset by weakness in the industrial-focused material sciences businesses. In regards to the Affymetrix acquisition (see IBO 3/31/16), sales for the bioscience business were strong, but partially offset by lower microarray sales. The company targeted $11 million in cost synergies from the acquisition for the year, ahead of previous expectations of $5–$6 million.

Sales for the Laboratory Products and Services segment grew 5.3%, including particular strength in the biopharma services and channel businesses. Specialty Diagnostics revenue grew 3.0%, led by growth in the transplant diagnostics and immune-diagnostics businesses.

Geographically, Asia-Pacific sales grew roughly 15%, including 18% growth in China and nearly similar growth in India. Sales in other emerging markets were also strong. North American and European sales each grew roughly 2%. Sales to Rest of World declined approximately 2%.

Thermo Fisher’s adjusted gross margin expanded 60 basis points to 48.9% due to productivity improvements, acquisitions and currency. Adjusted operating margin advanced 35 basis points to 23.0%.

The company raised the mid-point of its 2016 revenue guidance by $400 million to $18.25–$18.39 million. This increase includes $370 million from FEI and $30 million from reduced currency headwinds projections. The organic growth outlook of 4.5% was unchanged. Acquisitions are projected to add 4.5% to revenue growth for the year, with currency headwinds lowering sales by 1%.

Waters Growth Remains Solid Despite Academic Drop 

Third quarter sales for Waters grew roughly 4.8% organically to $526.8 million. Despite continued strength in the biopharmaceutical markets, Waters missed its quarterly sales expectations due to ongoing challenges in the industrial markets, as well as weak academic and government funding across most geographic regions.

Magnified by timing issues, academic and government sales declined 15% to make up 13% of revenues. Demand in this market was particularly vulnerable in Japan, Europe and the US, but grew in the low- to mid-single digits in Asia when excluding Japan.

Accounting for 30% of revenues, combined sales to industrial chemical, food, nutritional safety and environmental markets expanded a modest 1% organically due to weakness in the industrial chemical markets. However, sales for food testing applications climbed 7% organically.

Propelled by stronger-than-expected demand from smaller, specialty and biotechnology customers, biopharmaceutical sales climbed 13% organically to account for 57% of revenues. Growth continued to be particularly strong for large-molecule development.

Sales for the Waters segment grew 5% organically, led by healthy demand for chemistry consumables and services. On the consumables side, sales were strong for protein columns, GlycoWorks labeling kits and ACQUITY UPLC columns. Waters instrument sales expanded 3% organically, led by double-digit growth in China and strong demand for the newer ACQUITY Arc and Vion IMS Q-Tof systems. Sales were also robust for MS/MS, including the Xevo TQ-S micro and Xevo TQ-XS systems.

TA sales grew at a slower-than-expected rate, rising 1% organically. Geographically, TA sales grew in the strong double digits in China, but were mostly offset by mid-single digit declines in the US and Europe.

Overall, sales in Asia climbed 13% excluding currency, led by strong double-digit growth in China and India. US and European sales each declined 1% excluding currency. Weakness in Eastern Europe and the Middle East offset strength in Western Europe. In the US, sales were strong in pharmaceutical markets, especially for specialty and biotechnology companies, but were offset by lower government and academic spending. Japan was mixed, as strength from biopharmaceutical customers was mostly offset by weakness in academic and government, as well as industrial markets.

Total adjusted gross margin slipped 13 basis points to 58.6% of sales primarily due to stronger service revenue. Conversely, this product mix along with currency benefits from the declining British pound and controlled spending boosted operating margin 146 basis points to 29.5%. The company projected 2016 currency-neutral sales to grow 6%, which was at the low end of the company’s previous guidance of 6%–7%.