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Insight & Intelligence : Jan 18, 2011
Reporting from J.P. Morgan on Tool and Service Providers
2011 is expected to be the year of recovery.!--h2>
Tool developers attending J.P. Morgan’s "29th Annual Healthcare Conference" at San Francisco’s Westin St. Francis Hotel were almost universally optimistic about the year ahead. The positive buzz stems from evidence that customers are beginning to replace equipment after years of deferring orders. Recent passage of the FDA Food Safety Modernization Act was cited repeatedly as a benefit because it causes small and medium suppliers, in particular, to invest in new monitoring equipment.
Despite a global slowdown in investments in 2010, the large equipment developers reported continued growth albeit at a slightly slower rate than desired. That financial constraint is rapidly accelerating the relocation of manufacturing and R&D facilities to regions with perceived lower costs. CEOs and CFOs spoke repeatedly about expanding their footprints in Asian markets, focusing on India and China but also expressing interest in Korea despite some notable challenges. Ireland was also mentioned by a few as a desirable destination as it has one of the lowest corporate tax rates in Europe.
Broad Trends and Business Concepts
Here are some points mentioned repeatedly by presenting companies:
1. Executives agree the industry is recovering.
2. Companies are developing their service base as a stable revenue stream and to stimulate international growth.
3. Offshoring, particularly to Asia, is accelerating.
4. Outsourced lab services are increasing.
5. Consolidated platforms are letting labs do more with one instrument.
6. Consumables are gaining visibility and providing a steady cash flow.
7. Informatics and software are areas of focus.
8. There is an uptick of interest in newborn screening.
9. Forensics is becoming more attractive as key patents become available.
10. Translational medicine is growing.
Agilent Technologies reported 2010 revenues of $2.8 billion with the life science division bringing in $1.5 billion. Operating margins were up 15% due to the company shedding nonperforming businesses and focusing more on R&D and less on volatile markets. The Asian markets constitute 37% of Agilent’s sales. The company also said that its debt has been prioritized using cash to buy back shares and invest in organic and inorganic growth.
Agilent said that it is expanding as a result of the development of new biologic entities, through new geographic locations, and by exploiting off-patent opportunities. 2011 priorities are to grow organically, capture emerging market opportunities, and unlock the value of recently acquired Varian, according to Nick Roelofs, president of Agilent’s life science group.
Asuragen, a private company, announced that it received notices of allowance from the USPTO for claims related to the use of mir-21 and mir-30a as diagnostics in lung cancer. This extends its presence in the miRNA space, which was established before splitting off Ambion and reforming under its current name in 2006. “The company has rights to 318 of the 700 patents filed globally in the miRNA space, giving it control of both sequence and function information,” Matt Winkler, chairman and CEO said.
He sees Asuragen as primarily a molecular diagnostics company but noted that the firm has a robust pharmacogenomics services division that boasts capabilities in biomarker development, bioinformatics, and companion diagnostics. Last year it added K-ras, BRAF, and thyroid cancer marker panels with 21 known markers to its product list. These strengths combined with its own CLIA lab form the foundation of its growth strategy. The aim is to drive adoption of molecular diagnostics in the U.S. and Europe, to develop or license miRNA-based diagnostic products, to convert the pharmacogenomics business into a companion diagnostics business, and to stay in front of next-generation DNA sequencing technology.
Covance, with $2 billion in revenue, is focused on helping its clients determine safety profiles for new medicines and taking them to clinical trials, according to Joe Herring, chairman and CEO. The firm noted service deals with Eli Lilly for $1.6 billion over 10 years and sanofi-aventis for $1.85 billion over 10 years. Those alliances are expected to boost EPS, which was $1.59 as of last September, by an additional $0.75 per share in 2011.
Clinical development and early-stage discovery comprises about 60% of Covance’s business. Given industry-wide spends of $75 billion for development, $40 billion for R&D, and $40 billion for biopharmaceutical research, Covance anticipates major growth opportunities. Covance is taking advantage of the industry’s “high sense of urgency to make fixed costs more variable,” Herring remarked.
Life Technologies, with $3.3 billion 2009 sales, just announced a $500 million share repurchase program. It is targeting Brazil, China, and India as key growth markets in 2011. “Because genetic work in those countries tends to be conducted by individual researchers, new products are smaller than those for western markets,” explains Mark Stevenson, president and COO.
Life Tech’s recently introduced Ion 316 Semiconductor Sequencing Chip offers 100 Mb of data throughput—10 times that of the original Ion 314 chip. Additionally, the FDA just approved the firm’s real-time PCR-based detection kit to test for Salmonella enteritidis in poultry eggs. It is reportedly the first PCR-based test of its kind to gain clearance. It provides results in 27 hours versus the 10 days traditionally required.
Luminex, with 2010 revenues of $100.4 million, is focused on life science research and diagnostics. It is set up with a razor and razorblades business model that provides the analytic instrument as well as the assay, Patrick J. Belthrop, president and CEO, explained. That approach is expected to help Luminex maintain its annual growth rate at over 20% for the next several years.
Its xMAP technology to analyze proteins and nucleic acids has a 7,400 installed instrument base. Luminex recently added the FlexMAP 3D® 500-plex analyzer and the MAGPIX® 50-plex analyzer to this family of products. To drive growth Luminex plans to extend its product lines, assays, and markets. A survey conducted by the company indicates that 30% of Luminex’ ELISA customers are interested in multiplexing within the next 12 months. Luminex also reported that it has a leading position in the U.S. government’s biothreats initiative but couldn’t divulge details.
PerkinElmer’s two divisions, human health and environmental health, each contribute equally to the overall revenue of $1.7 billion, according to Robert Friel, chairman and CEO. About 30% of that is in diagnostics, which is among PerkinElmer’s highest priorities. It is launching a chip around oncology in 2011 and is growing its lab service business. PerkinElmer noted that the cord blood business is good for sustainability and said that informatics is becoming increasingly important as the emphasis shifts from how to acquire data to what to do with the data.
Although earnings per share were flat in 2009, the company is optimistic for the current year and reports strong growth. Regarding deals, PerkinElmer has focused on agreements worth up to $50 million but is interested in larger arrangements. Acquisitions are expected to have margins in the high teens and a double-digit ROI within three years. PerkinElmer also reported that it is in the midst of relocating a lab to Asia.
Qiagen reported $1 billion in sales and earnings per share of $0.93 for 2009. It is shifting its interest from biology toward molecular biology, focusing upon creating novel testing solutions to diagnose disease more accurately, screen patients for early detection, develop companion diagnostics, as well as develop solutions for food safety and forensics.
Peer Schatz, CEO, announced that Qiagen had taken a stake in Alacris Theranostics, which gives it access to biomarkers discovered by Alacris. This year the firm also expects to focus on methods to process samples that have been compromised by time, environmental conditions, and other factors that degrade quality.
Additionally, it will leverage its platform technology to build complete, automated, molecular workflows. Qiagen said that it is working on a companion diagnostic with one to two targets that would work with the QIAsymphony, which it launched last autumn in Europe and is about to launch in the U.S.
Waters’ biochemical analysis unit earned $4.5 billion in 2009 revenues. ROI for 2009 was about 24%. Services have the greatest profitability, but instrumentation has the fastest growth and accounts for about 53% of revenues.
“Manufacturing facilities in the U.S., U.K., Ireland, and Singapore ensure effective after-tax earnings that attempt to balance non-U.S. sales with non-U.S. manufacturing costs,” noted CEO Doug Berthiaume. Synapt G2 HDMS for proteomics studies contributed significantly to 2010 earnings, along with the Xevo TQ-S and Xevo QTof. Now a little brother has been added, the Xevo QT. The Acquity H Class HPCL also was very successful and helped Waters transition accounts to ultra-performance HPLC. New products will launch this summer.
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