Issue Date: November 28, 2011
Repeat Sales For Stable Revenues
Build it and they will come—again and again. Having sold a big-ticket piece of equipment, laboratory instrumentation manufacturers hope customers will return repeatedly for the consumable products they’ll need to run it.
In the instrumentation business, consumables typically include anything beyond the instrument itself, which industry managers like to call “the box.” Ranging from sample-prep items and chromatography columns to life sciences reagents and assays, these high-margin repeat-sale products can be a steady revenue source.
In 2011, worldwide sales of consumables are expected to reach roughly $8.5 billion, or about 20% of instrument industry sales, and are to grow by 4% over 2010, according to Strategic Directions International (SDI), a Los Angeles-based research firm.
Each instrumentation firm approaches the market differently, with consumables that mirror its instrument types and customer needs. Life sciences research, for example, uses large quantities of reagents, assays, and test kits. Mass spectrometry (MS) consumes less, because samples are usually processed beforehand via chromatography, which requires columns and sample extraction methods. Some suppliers offer products that work only with their own equipment, whereas others provide generic consumables.
Although strategies vary, instrument makers consider consumables a strategic business. In tough economic times, repeat-sale products can help sustain an instrument supplier’s business. Customers need consumables “no matter what” to run their existing instruments, even though their capital purchases may fluctuate, says Franco Spoldi, director for consumable products and business development at PerkinElmer. “In general, the number of samples that customers are running is only increasing.”
Economic conditions in some of instrumentation’s biggest markets are dampening sales of both equipment and consumables. Stock analysts point out that spending by the pharmaceutical and biotech industries, which accounts for about 30% of the life sciences tools market, has been declining. In the government and academic arenas, which make up another 30% of the market, budgets are at best uncertain, if not down, and economic stimulus monies are running out.
Not surprisingly, high-end equipment and infrastructure are the most likely laggards along with basic lab equipment, all down 3–4%, says Peter Lawson, executive director at investment firm Mizuho Securities USA, about academic spending plans over the next 12 months. “Reagents appear better positioned,” he adds, “but still down approximately 2%.” In Mizuho’s academic spending survey, 25–30% of respondents think purchases of consumables will be down, compared with 42% who say spending on instruments will drop.
Lawson reports similar trends in the market for gene sequencing, with funding expected to be down and 29% of genomics labs cutting back. These large-volume users have been delaying purchases of both instruments and consumables. When reporting third-quarter sales and earnings, Illumina, which leads in this market, highlighted negative factors that it expects to continue at least through 2011.
“We saw what we believe to be an unprecedented slowdown in purchasing due to uncertainties in research funding and overall economic conditions, as well as a temporary excess of sequencing capacity in the market,” Illumina Chief Executive Officer Jay T. Flatley said when reporting results in October. The excess capacity has decreased the consumables revenue per instrument owing to fewer runs.
Overall, consumables continue to fare better than boxes. “Companies with high consumables flow, such as Qiagen and Life Technologies, appear more insulated versus more instrumentation-exposed companies like Bruker and Waters,” Lawson says.
Lawson ranks Thermo Fisher Scientific among relatively well positioned firms, with a product mix skewed toward consumables, service, and lower cost instruments. About $5.8 billion, or more than half, of its annual sales are in lab supplies and consumables. Within its $4.6 billion analytical technologies segment, 44% of sales are in consumables, 41% in instruments, and the rest in services.
The creation of Thermo Fisher in 2006 was one of several recent mergers motivated at least in part by the desire to strike a good balance between instruments and consumables. The nearly $13 billion deal combined Thermo’s strength in lab equipment and instruments with Fisher’s broad range of reagents, consumables, and services. One expected result was more overlap in R&D between the hardware and consumables sides of the company.
Similarly, with its recent $2.1 billion acquisition of Dionex, Thermo anticipates linking its MS and lab information software systems with chromatography units and consumables from Dionex, rather than those from other vendors. In 2011, Thermo’s combined chromatography business will have $650 million in sales, with 27% in consumables and 50% in instruments.
In another big consumables deal, Merck KGaA, of Germany, acquired Millipore in 2010 for $7.0 billion. The resulting Merck Millipore division, which is called EMD Millipore in North America, is on track to have about $3.2 billion in sales this year. Targeting bioresearch and bioproduction markets, the division has three business units: bioscience, lab solutions, and process solutions.
Damien Tuleu, head of biomonitoring for the company’s R&D group says the biomonitoring business model “is to design and develop instruments which can be used only with our consumables.” When a customer buys a piece of equipment, “it means you are going to capture the stream of consumables,” he adds.
Weighted toward consumables, the biomonitoring group focuses on kits, systems, and services for quality control and assurance. Its products are used to detect microbial contaminants in pharmaceutical samples or pathogens in food and beverages. The group falls within Merck’s lab solutions unit, which provides reagents, solvents, chromatography products, and high-purity lab water systems.
Many of the biomonitoring group’s products are sold to regulated markets, where an instrument and the related consumables may be incorporated into an approved protocol. Because customers tend to be conservative about changes that would require revalidating methods, Tuleu explains, a supplier can retain consumables sales long after it sells a piece of equipment.
Without large amounts of consumables, biosciences instruments would be idle. About 80% of Life Technologies’ nearly $3.7 billion in annual sales are in consumables associated with its instruments. Even when its customers’ R&D budgets are shrinking, the company’s “consumables product mix is positioned to grow faster than the market,” said Morgan Stanley stock analyst Marshall Urist in an early 2011 outlook report to clients. The company has a strong position in segments poised for growth, including the leading area of sample prep for RNA, DNA, and protein analysis.
Another growth area is real-time polymerase chain reaction technology, also called quantitative PCR. According to Urist, “qPCR’s growth looks set to continue with the second-highest growth indicator among consumables segments.” Life Technologies itself has predicted high-single- to low-double-digit growth for the qPCR market.
In October, the company launched the QuantStudio 12K Flex qPCR system. The high-end unit avoids the need for multiple PCR systems because it can conduct various postsequencing gene expression, genotyping, biomarker, pharmacogenomic, and other experiments. Users can also run digital PCR experiments using nanofluidic consumables and dedicated analysis software.
Because of the huge growth in next-generation sequencing, a lot of researchers are moving toward qPCR to confirm their sequencing results. The trend is leading to an uptick in both academic and commercial markets, says Larry Milocco, senior market development manager at Life Technologies.
Target users include time-crunched screening facilities, service providers, and contract research organizations that want high throughput and flexibility in the type and number of assays they can run. “We are trying to build products that are going to scale with the research needs,” Senior Product Manager Ricardo Mancebo says.
Consumables are integral to the system’s capabilities because the system can accommodate five interchangeable blocks—including OpenArray plates, TaqMan array cards, and multiwell plates—to match the size and type of experiment. “Consumables are key to our product strategy,” Mancebo says. In particular, he calls the nanofluidic OpenArray plates a “unique type of consumable” that can be run on only two Life Technologies instruments.
“A large part of our business was customer-configurable products,” Mancebo says, with customers specifying the assays they want in a given format for a specific application. “More recently we have been building fixed-content panels.” Drawing on more than 8 million collected assays, which Life Technologies manufactures itself, the company is developing panels with customer input.
Similarly, significant advances in another consumable segment, chromatography columns, have contributed to the emergence of the ultra-performance liquid chromatography (UPLC) business. These systems use stationary phases with particles of less than 2 μm in diameter for high resolution, speed, and sensitivity. “The science happens in the consumable,” says Michael Yelle, senior director for chemistry commercial operations at separations specialist Waters.
The company launched its first Acquity UPLC instrument in 2004. Innovations in the materials science and the hardware of the columns led to “a holistic instrumentation design,” Yelle says about the development process. The UPLC columns can be connected through an eCord chip that contains quality-control data and tracks use and performance.
Although designed to work with its own instruments, Waters’ columns can be used with other manufacturers’ equipment. In practice, however, the “attachment rate” is usually high in UPLC, with customers typically preferring to use columns and instruments from the same company.
The adoption of UPLC has helped drive growth at Waters, according to Morgan Stanley’s Urist. But the shift from HPLC to UPLC is expected to be “gradual rather than abrupt,” at least in research settings, he adds. Quality control and other regulated testing settings offer faster growth opportunities.
Waters has a new line of columns, called XP, that can be used on both HPLC and UPLC systems. “If customers have an installed base of HPLC, they can develop methodology and run it on HPLC, and in the future when they migrate to UPLC they can use the same physical columns,” Yelle says.
Consumables are about a $300 million business for Waters, or about 18% of its overall sales. “We regard the consumable products as being key differentiators and drivers of performance, and so the research and development of these products takes a lot of focus,” Yelle says. “One thing that differentiates us in the consumables space is our grounding in basic materials science.”
Besides making the materials, Waters designs hardware and assembles columns. Controlling the synthesis and being vertically integrated is “all-around optimizing performance and maintaining quality and consistency,” Yelle says. These aspects, he adds, are important to the company’s customers in regulated markets, such as pharmaceuticals, where LC columns are frequently needed for the life span of a drug.
“Once we have launched a product and it is used in a regulated method, we will continue to manufacture and support our customers that are using it,” Yelle says. And these long product life cycles can help even out the peaks and valleys in demand, he adds.
Consumables for sample preparation is another long-standing market for most firms. Even though this business is mature, it touches almost all analytical work and continues to grow.
For example, Waters’ solid-phase extraction products (SPE) are widely used for bioanalytical sample prep, Yelle says. Its SPE devices and vials can be used in front of most analyses. The move toward lower analytical detection limits has led to advances such as vials with optimized surface chemistry to prevent interference with samples.
As instrumentation has advanced with faster processing times and greater sensitivity, “sample prep has become the bottleneck,” says Rebecca Duguid, segment manager for analytical sample preparation in Millipore’s biosciences group. For the HPLC market, Millipore recently introduced the Samplicity filtration system, which simultaneously prepares eight samples.
PerkinElmer’s Spoldi calls sample prep a “major pain point” for customers. In some of the company’s focus markets, such as environmental and food analysis, up to 60% of a lab’s workload can be consumed by sample preparation. In addition to greater efficiency, these customers want consistency, reliability, and ease of use.
“Without great sample preparation, you can certainly compromise your results and analysis,” says Brian J. Kerslake, director of aftermarket solutions at PerkinElmer. The company also sells consumables for a variety of chromatographic and spectroscopic methods. Its strategy is to “follow the path of the sample,” he says, from collection and preparation to analysis on the instrument and ultimately to data handling.
Consumables are part of PerkinElmer’s broader aftermarket business, which includes anything other than the box, such as parts, accessories, and services. Although the company doesn’t report its consumables sales, Spoldi says its business is “in line with the industry.” PerkinElmer also offers a service and equipment management program called OneSource that covers any vendor’s instruments in a customer’s lab.
“We have been keen on trying to create a relationship with customers, not only at the acquisition of the box, but also with what comes after the acquisition,” he says. “We have a multivendor approach to all our accessories and consumables, and we would like to be instrument agnostic in our development of new products.”
So even as the company develops complete systems around its own product offerings, it also provides protocols and methods to allow customers to operate seamlessly on whatever instrument platform they are using, Kerslake explains. Customers “don’t want to be tied into a whole work flow from one supplier when they can look at the best of breed, even if they already have a competitor’s box or instrument in the lab.”
To offer the range of products that it does, PerkinElmer conducts product development and manufacturing in-house or through partners. And it invests substantially “in new consumables and newer technologies, whether it’s advanced materials, different lamp sources, or other pieces that allow an instrument to perform to the detection limits required,” Kerslake says.
Similarly, Agilent Technologies is looking to consumables to help expand business, not only with existing customers, but also with users of non-Agilent instruments. In March, the company launched its CrossLab supplies program for gas chromatography, which supplies consumables for several companies’ GC systems.
The firm’s strategy is to sell products across work flows, explained Life Sciences Group President Nick H. Roelofs in a September presentation for analysts. In addition to GC supplies, Agilent’s other consumables include lab reagents and microarrays, as well as LC and sample-prep products. Consumables make up about 20% of $1.3 billion in combined sales for Agilent’s chemical analysis and life sciences groups and grew 22% for the 12 months ending on Oct. 31.
“It is a really nice renewable revenue stream,” Roelofs said. “With our new moves and portfolio expansions from recent acquisitions, we are seeing a lot of opportunity here.”
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