Sequencing instrument revenues may be falling, but market niches like consumables and service providers are expected to see growth. [© kentoh - Fotolia.com]
Biotechnology tool and service companies will continue struggling with reduced demand from the academic segment of their customers and portions of the industry, if a check of third-quarter results is any indication. Demand from academic customers is slowing both in the U.S. and Europe, where governments are scrambling to contain spending. That would seem to push tools and services companies toward more commercial customers, but only some of these clients are capable of picking up the slack.
Sequencing giant Illumina last month disclosed to the U.S. Securities and Exchange Commission that it will lay off 200 employees following disappointing earnings. Illumina finished the third quarter with a 43% year-over-year plunge in net income, from $35.45 million to $20.15 million. Revenues dipped 1% from a year earlier to $235.5 million.
By contrast during Q3, PerkinElmer saw net income more than double to $35.3 million from $13.4 million in Q3 ’10, on an 8% year-to-year increase in revenue from continuing operations to $453.7 million. However, a consensus of Wall Street analysts expected revenue to be as high as $469.6 million. Of the company’s revenue, $20 million reflected a string of acquisitions; income from continuing operations rose just 0.6% over the year-ago quarter to $26.7 million. Most recently the firm picked up Caliper Life Sciences for $600 million.
Breaking Down Sequencing Demand
“The disappointing results and consolidation are due to a few short-term trends as well as some longer-term trends,” Harry Glorikian, founder and managing partner of Scientia Advisors told GEN. “Near-term, we believe that academics are gun-shy on building out high-end sequencing capacity. This segment of the market is sensitive to what happens with NHGRI (National Human Genome Research Institute) spending, and they are cutting back on traditional genome center financing.”
Also, Glorikian said, vendors of high-end sequencing tools have made significant upgrades to the capacity of their machines in recent years. “This in and of itself will take some time to digest.”
Longer term, he said, sequencing activity will concentrate at both high-end labs served by sole service providers such as Illumina and Complete Genomics as well as desktop franchisers, which can expect to grow over time as sequencing seeps into individual labs. According to Glorikian, desktop sequencers should attract big pharma given its outsourcing of whole-genome and whole-exome work. “We see that they are currently sequencing amplicons, doing gene expression, doing CHIP-Seq in-house. For these apps we see the desktop version may make the most sense.
“What we don’t see doing well is the middle of the market,” Glorikian added. “We don’t think many middle of the market labs will upgrade that quickly. These groups are very much stuck, and we are going to see rationalization both on building out additional capacity and potentially even consolidating capacity.”
Tellingly, Illumina’s third-quarter instrument revenues fell $16 million, or 18%, over the year-ago quarter, from $87.8 million to $71.8 million. By contrast, consumables revenue rose 9% for the quarter, to $144.9 million from $133 million in Q3 2010. Revenues for services jumped 20.6%, to $15.2 million from $12.6 million.
Balancing Instrumentaion, Consumables, and Services
For many vendors installation of new systems is a primary source of revenue, Jonathan Witonsky, industry manager, life science research tools & in vitro diagnostics with Frost & Sullivan, pointed out to GEN. “While fewer installations will hurt short-term numbers, the resulting loss of consumables purchases could affect longer-term revenues.
“At the same time, there are market niches that are opening up, new opportunities that are more robust,” Witonsky noted. “Service providers are expected to see continued growth over the next couple of years.” Last month, Frost & Sullivan issued a report concluding that the global contract research organization (CRO) market resumed its growth trajectory last year and is expected to grow at a compound annual growth rate (CAGR) of 10.5% until 2017.
“The companies that perform strongly throughout this type of downturn are those that have a broader product portfolio, especially those with more of the consumable type businesses,” said Witonsky. “Those that rely on more of an instrumentation placement, that’s where you’re going to see more of an impact. And that’s similar to what we saw a year and a half to two years ago.”
Illumina CFO Christian O. Henry told analysts that this year’s Q3 numbers suffered compared to last year’s because in 2010, unlike this year, the company was in the midst of a program to upgrade customers from Genome Analyzers to newer HiSeq systems that “drove significant instrument volume.”
Also performing strongly, Glorikian said, were companies focused on workflow automation. One such company, Caliper, showed double-digit year-over-year sales gains during Q3 for its LabChip (48%), research (42%), automation (32%), and imaging (12%) products. Overall revenues rose 24% year-over-year, from $29.7 million to $36.9 million.
Will firms focused on instrumentation survive the slowdown in demand through consolidation?
Pinning Academia's Budget to Sector's Success
Commenting on demand from the academic sector, Witonsky remarked, “It seems that tough times are ahead for this end-user segment.” He said some of those vendors who are not having as strong a Q3 and who may not fare better in Q4 are heavily tied to academic biomedical research. “The market had a substantial rebound in 2010, and the first half of 2011 looked fairly robust and healthy. Now we’ve been seeing a lot of deterioration in the past couple of months.
“The combination of a reduced 2011 NIH budget, the potential 1% reduction to NCI and the NHGRI for 2012, the recent 20% reduction to select genome centers for 2012, the roll-off of stimulus, the one-year no-penalty extension of error grants, and the uncertainty regarding future budgets were in combination a major impact on our incoming order rate,” Illumina CEO Jay Flatley told analysts at an October 25 conference call.
“What cannot be determined at this point is the relative contribution of these factors or how the 2012 or 2013 NIH budgets will ultimately resolve.” He did add, though, “Overall, we continue to believe that funding allocations globally are increasingly favoring genetic analysis tools and in particular, next-generation sequencing.”
In fiscal 2011, NIH was approved for $30.7 billion, 1% below its FY 2010 budget. NIH’s funding in 2010 was boosted by the American Recovery and Reinvestment Act. NIH numbers for FY 2012 won’t be known until the House of Representatives and Senate agree to a spending plan for the Health and Human Services department.
President Obama has proposed that for FY 2012 NIH’s budget should get a 3% boost to reach $31.7 billion. The House Appropriations committee also proposed $31.7 billion. This budget, however, is tied to awarding at least 9,150 new and competing grants and maintaining a 90–10% split between funding for its extramural and intramural research programs. These stipulations have been opposed by NIH’s Capitol Hill backers. The Senate would slice NIH’s budget to $30.5 billion.
“For the most part, vendors are planning for very low growth or perhaps even no growth in 2012 or maybe as far out as 2013,” Witonsky said. And with the deficit supercommittee under pressure to chop at least $1.5 trillion in spending over 10 years, NIH’s ability to grow beyond current levels is uncertain at best. Flat or reduced, NIH spending from FY 2013 onward will force tool and service providers to look even more toward the industry, especially CROs and firms overseas, for more sustainable long-term growth.