“Competition is as fierce as I have ever seen it in my nearly 30 years in the business,” one scientific instrument company executive says. “Business is tight, and mainstream companies are having to do things that we have never had to do before.” Along with competing aggressively on price, he says, they are working much harder and getting more creative to attract customers.
Although the overall scientific instrument market appears to be improving this year, customers are only slowly freeing up money to buy research equipment. In 2009, the economic downturn altered the environment for analytical and life sciences instrumentation providers. Combined sales for the 25 leading firms fell about 3% to $22 billion, according to C&EN’s inaugural survey of company results. In response, suppliers tightened their belts, while still trying to provide service and launch new products.
Of the 23 firms reporting comparable results for 2008 and 2009, only eight saw their sales increase in 2009, while the others all watched revenues fall, some by as much as 20%. Companies based in North America experienced the worst of it, with all but two of 13 reporting lower sales. Sales for four out of six Japanese suppliers were down as well. European firms fared much better, and all four that had comparable results saw some level of growth.
The top 25 companies account for about 60% of total instrumentation industry sales. According to Los Angeles-based research firm Strategic Directions International (SDI), the world analytical and life sciences instrumentation market was worth about $37 billion in 2009, a decline of more than 3%. “Compared with other industries, that’s not bad, but it is the first decline since 1983,” points out Lawrence S. Schmid, SDI’s chief executive. He’s predicting the market will grow 5.2% this year.
Taking the number one spot is industry newcomer Life Technologies, formed in late 2008 from the merger of Applied Biosystems and Invitrogen. Both firms, heavily focused on the life sciences, were previously among the top 12. In the second and third spots are Thermo Fisher Scientific, excluding its lab products business, and Agilent Technologies, respectively. But Life Technologies’ reported sales figures include a greater proportion of consumables and other noninstrument products than Thermo’s and Agilent’s figures do.
Year-to-year shifts among the rest of the top firms are related to market factors and financial performance rather than mergers and acquisitions. Companies with the biggest declines in sales typically dropped a notch or two, whereas those that posted modest or even no growth moved up.
In the future, two sizable deals will likely bring more changes among the top companies. Agilent is in the process of acquiring mid-sized instrument provider Varian in a soon-to-close $1.5 billion deal. The combined operation will likely move into the leading spot, even after Agilent sells some Varian product lines to Bruker to satisfy regulators.
At the same time, Life Technologies’ results will no longer include income from a mass spectrometry (MS) joint venture. In February, Danaher acquired Life Technologies’ 50% stake in the MS joint venture with MDS Sciex. Danaher also bought number- 22-ranked MDS Analytical Technologies, which gave it the other half of the venture. In February, Danaher then relaunched the former joint venture under the name AB Sciex. That business in turn bought Eksigent Technologies’ liquid chromatography (LC) line to cement its offering in integrated LC/MS systems.
More moves may be in the offing. Danaher has been aggressively building its instrumentation business, Schmid says. It entered the life sciences tools market in 2005 with the purchase of microscope maker Leica Microsystems and has since bought other businesses. Now with about $1 billion in annual instrument sales, Danaher has jumped into the top 10 and should move even higher when the results of all its acquisitions are fully consolidated.
Within the $2.3 billion-per-year MS market, the reshaped AB Sciex, Agilent, and Bruker will compete alongside Thermo, JEOL, and Waters. Domination of the MS market by a handful of companies is in contrast with the situation several years ago when the market was divided among 10 or more firms, notes Isaac Ro, senior analyst with the investment banking firm Leerink Swann.
Historically, the instrumentation industry has been very fragmented, which can lead to inefficiencies in sourcing and distribution, Ro adds. Now, multinational companies with a wealth of operational expertise are bringing together components and products from across well-regarded franchises. “There has been a significant consolidation in a couple of these markets, and you are going to see more of it,” he says. “Mergers and acquisitions are going to continue as the bigger companies try to create scale.”
Beyond economies of scale, mergers are giving companies greater breadth across product and application areas. For Agilent, the addition of Varian will bring new technologies and product lines into its core markets, says Mike McMullen, president of Agilent’s chemical analysis group. For example, the company will add a very large consumables business, as well as atomic, X-ray, and nuclear magnetic resonance (NMR) spectroscopy instruments.
Meanwhile, Thermo, Waters, and PerkinElmer have incorporated smaller, bolt-on acquisitions. “We look for acquisitions that are very strategic and clearly can provide long-term potential,” says Rohit Khanna, global marketing vice president at Waters. Fitting this bill was its purchase of Thar Instruments, a developer of supercritical fluid chromatography (SFC) systems.
Waters now can support customer needs ranging from traditional chromatography capabilities to more efficient SFC methods for lab-scale purifications and chiral separations, he says. While Waters expanded its SFC business, Agilent stepped up competition this year by introducing its own analytical SFC system in collaboration with Aurora SFC Systems, a California-based company founded in 2007 by SFC expert Terry A. Berger.
At Thermo, acquisitions serve a similar purpose by adding new technology. “In addition to funding internal R&D, our approach is to complement our technology with strategic acquisitions,” says Kevin Chance, president of Thermo’s scientific instruments division. Recent ones include Ahura Scientific, a maker of handheld detectors; NovaWave Technologies, which develops optical detection methods; and the miniaturized gas chromatography (GC) instrument firm C2V.
“Each technology has applicability from the lab to the line to the field,” Chance says. Thermo is seeing an increased need for detection not only in the laboratory, an area its legacy brands already address, but also in process and environmental monitoring. “The technology platforms are highly complementary to what we already market, and the leverage comes from bringing them into a company that has significant market access,” he says.
Bruker, meanwhile, took advantage of the opportunity to buy the Varian businesses for $38 million. All new to Bruker, the product lines—lab GC, inductively coupled plasma MS, and GC triple-quadrupole MS systems—will become the core offerings of a new chemical analysis division within its Daltonics subsidiary. Whereas Daltonics has focused on the life sciences, the new division will emphasize industrial accounts, Bruker marketing manager A. Haydar Kustu says.
Although companies continue to expand through acquisitions, many have been simultaneously tightening their belts to improve the bottom line. Most job reductions occurred on the production line, SDI’s Schmid says. “The actions taken helped companies protect their profitability,” he adds, pointing out that overall profits slipped just about 1% last year despite the industry’s larger drop in sales.
In early 2009, Agilent was among the first to take action when it underwent a major restructuring in its electronic measurement business, which serves electronic equipment and communications industries. On the life sciences and chemical analysis side of the company, by which C&EN ranks it, Agilent was able to keep its programs intact and even add personnel, McMullen says.
Likewise, Waters did not pull back on personnel, Khanna says, but it did look to manage expenses. JEOL USA, the Peabody, Mass.-based subsidiary of Japan’s JEOL, also avoided job cuts. Others, such as Shimadzu, did a small amount of downsizing while freezing hiring and pay raises. Bruker and PerkinElmer, meanwhile, underwent some slight restructuring, and Thermo reduced staff and consolidated some of its locations.
How companies responded and how their businesses performed last year were tied to their market exposure. Heavy hitters in life sciences areas serve what Ro calls “more economically defensive” markets, such as food, research, and health care. The pharmaceutical sector has been problematic, however, because drug companies have been consolidating and revamping their R&D operations and reducing their need for new instrumentation. At the same time, chemical, electronics, and materials markets were impacted more by the recession. Overall, sales of new instruments fell.
Diversification—whether it was by product line, application area, end user, or geography—was a significant factor for most companies. “Manufacturers that are really dependent on hardware sales suffered a little bit more than those that have a strong supplies and consumables stream of business,” says Chris Gaylor, vice president for sales at Shimadzu Scientific Instruments, a U.S.-based subsidiary of the Japanese company.
Industrial customers that halted capital purchasing often tried to make their existing instruments last longer. Many were “making do,” which helped services and relocation businesses, says J. Douglas Meinhart, vice president and analytical instruments director at JEOL USA. “If they were shutting down a lab, the instrumentation might be redistributed within the organization rather than being replaced.” He also saw a lot of activity in the used-equipment market.
Aftermarket sales, such as consumable goods and services, remained stable, most instrumentation suppliers tell C&EN. That said, the recession was severe enough that the impact was felt on what is usually a rock-solid business regardless of market conditions.
C&EN ranks instrumentation producers by sales of analytical and life sciences lab instruments and equipment. Not included, when possible, are sales of diagnostics instruments used primarily in health care settings or equipment used in industrial production. Instruments used largely for biologically related work, such as cell analysis and assay kits, are excluded when possible. Some revenues related to services and consumables, however, may still be incorporated in the figures.
C&EN does not usually restate prior year results and uses relevant exchange rates for currencies and time periods. The results are also not restated for the calendar year, which means the figures may represent slightly different 12-month fiscal-year spans. An exception is made for Japanese firms that report using a fiscal year ending in March. To make comparisons more timely, these figures may be restated for the most recent calendar year or given as estimates for the soon-to-be-reported fiscal year.
To compile the survey, C&EN uses, for the most part, official company documents such as annual reports and filings with the Securities & Exchange Commission. Other sources include company presentations and information provided to investors. More than half of the companies reported the bulk of their instrument sales as separately identifiable business segments, and, in these cases, operating profits are also presented.
“Customers even had to pull back on their consumable and service purchases,” Waters’ Khanna says. “Not to the point of negative growth, but instead of the high-single-digit growth that the industry has become accustomed to, we saw low- or mid-single-digit growth.”
Some spots were brighter than others. Instrumentation makers uniformly point to the Asia-Pacific region, specifically China, as a source of revenue growth. “The region is significant for us from an organic growth standpoint,” says Dusty Tenney, president of analytical sciences and laboratory services at PerkinElmer. On a commensurate basis, he says, the company has invested heavily there in people, facilities, and acquisitions.
Growth in Asia has been driven in large part by countries investing in infrastructure for food and environmental testing, Agilent’s McMullen says. In both Agilent’s life sciences and chemical analysis units, “academia has been another real bright spot,” he adds.
Similarly, more than 60% of Bruker’s business is with academic and nonprofit organizations, Kustu says, and this remained one of the few areas where spending continued. And Shimadzu’s Gaylor notes that by the first half of 2009, his company increased its focus on university researchers.
By the second half of 2009, the promise of stimulus money emerged, to the delight of researchers in government and academic settings. Most of the money is expected to go for big-ticket purchases of large systems and high-end equipment. There were some early benefits, when stimulus money first hit the market in places such as Japan and China.
So far in the U.S., grants are starting to be awarded, but the actual money is mostly yet to be disbursed. Company results for 2009 saw only a modest, if any, boost from stimulus-backed purchases late in the year. “Every company will tell you they have backlogs and order interest, but the checks haven’t been cut and handed out yet,” Ro says. “Hopefully, that is going to change in the next couple of months or weeks.”
In 2009, Thermo booked about $50 million in revenue from global stimulus funds, and this year it anticipates $50 million to $150 million in sales derived from such programs. Bruker reported that it received $70 million in orders from global programs last year. Life Technologies, according to SDI, booked about $50 million in the second half of 2009 and anticipates a total of $100 million in stimulus orders.
Although the pace of spending is expected to rise, the stimulus money will have come and gone by 2011, leaving the question of whether growth can be sustained. Despite the downturn, most companies have tried to maintain their investment in R&D and continue to launch new products. Some companies, such as Agilent and Bruker, say 2009 was one of their biggest years for new product introductions.
“Investing in innovation is critical for long-term success,” Thermo’s Chance maintains. The company spent $250 million on R&D in 2009 and intends to increase the figure to about $280 million this year. Thermo has also started targeting R&D spending at more routine analytical applications, such as HPLC and GC/MS, in addition to high-end MS products. “We see this as a real growth opportunity, and we are committing more and more of our research efforts to growing our share in the routine space,” Chance says.
Bruker has taken a similar tack to bring more products within customers’ reach. Although the company has the highest-field NMR system on the market—at a cost of $16 million per instrument—earlier this year, it launched a compact 300-MHz system at about one-hundredth the cost. It also debuted a more affordable version of one of its MS lines. “There still are a lot of people who are very price sensitive,” Kustu says. “Having more affordable products in our portfolio will help us gain market share, especially in industrial accounts.”
PerkinElmer had a goal of overweighting its investment in R&D in 2009 and spending more as a percentage of sales, Tenney explains. “We didn’t want to give up the momentum that we had in regard to both R&D and the selling and marketing functions within our business.” The idea was to reinforce areas of the company to better position it for 2010.
Recently, PerkinElmer launched an LC technology platform that allows users to move from a standard high-performance LC (HPLC) setup into an ultra-high-performance, high-pressure range with one piece of equipment. UHPLC systems are attractive because they offer high sample throughput and increased productivity, Tenney explains. This year, Shimadzu also brought out a new UHPLC system designed for robustness and the highest-pressure operation, says Terry Adams, Shimadzu’s life sciences business unit manager.
The main competitor in this space is Waters with its ultraperformance LC (UPLC) systems, which have been on the market since 2004. The firm says they are not just modified HPLC, but new technology. “We have a very reliable, proven technology and now a whole family of UPLC systems,” Khanna says. At about $3.5 billion in annual sales, HPLC still dominates the liquid chromatography market, vendors say, but the UPLC/UHPLC segment is growing faster.
With the benefit of somewhat better clarity about their businesses, instrument suppliers generally describe themselves as cautiously optimistic that growth will move into the single digits in 2010. Starting in the fourth quarter of 2009 and into the first quarter of this year, it’s been easy to see improvement in companies’ fortunes. But it doesn’t take much for things to look better, Schmid points out, because the comparable year-earlier periods were so abysmal.