Issue Date: June 25, 2012
Despite Economy, Bruker CEO Is Optimistic About 2012
While other scientific instrument makers worry about the impact faltering European economies will have on government science funding, Bruker Corp. is unperturbed. At the firm’s inaugural analyst day in New York City earlier this month, Frank H. Laukien, chief executive officer, outlined the reasons he remains optimistic about Europe. He also described why his firm is sticking to its prediction of 7–10% sales growth in 2012.
The economic news from Europe would imply that most if not all government spending on research and analytical instruments is grinding to a halt, Laukien told the gathering of about 100 analysts and investors. However, the situation is not nearly as bleak as many observers claim, he argued. “All sorts of additional funding pockets with a specific focus often pop up.”
One major country in Europe, he said, has “a big funding focus” on matrix-assisted laser desorption/ionization (MALDI) imaging, a high-end mass spectrometry (MS) technology for which Bruker is well-known. Another major European country is making a big push in preclinical imaging, Laukien said. And one Mediterranean country will be enhancing its lab infrastructure with support from the European Union.
Laukien suggested that the prospects for government and academic funding may be better than many people expect. Speaking to an analyst during a break in the presentations, he pointed out that although China’s economy may be slowing, the country has a long-term plan to increase research spending as a percentage of gross domestic product. Even a small rise in government spending would benefit instrument makers such as Bruker, he said.
In his presentation to the group, Laukien also noted strong demand from drug firms for high-end instruments to drive research on proteomics, biomarkers, biologic drugs, and membrane proteins. Government and industry still need explosives detection devices, he pointed out.
And customers in the electronics industry need sophisticated equipment to push development of ever-smaller semiconductors. Such growth drivers, he said, “are far more important than whether Mediterranean Europe is weak or whether the National Institutes of Health budget is flat or goes down 3% or goes up 1.5%.”
Competitors appear to be more worried about the economic environment and its impact on instrument sales. William P. Sullivan, CEO of Agilent Technologies, told shareholders at the firm’s annual meeting at the end of March that he is concerned about the anemic global economy’s impact on instrument sales. He cited a struggling U.S. economy, a Europe “technically” in recession, and a slowing Chinese economy.
“My own personal belief is that 2012 will be a muddle-through year,” Sullivan said. Agilent is still optimistic about the prospects for its life sciences and chemical analysis business and expects sales for the fiscal year ending in October to grow 7%. In C&EN’s ranking of the Top 25 instrument firms, Agilent comes in at number three, and Bruker ranks number seven (C&EN, April 30, page 12).
Number-two-ranked Thermo Fisher Scientific recently projected 4–5% revenue growth for 2012. In remarks at the end of April after the release of first-quarter results, CEO Mark N. Casper told analysts that spending on new instruments by governments and academia “continues to be constrained as our customers are choosing to delay their larger purchases.” Industrial and pharmaceutical markets remain strong, he said.
Stock analysts are taking note of Bruker’s relative optimism. “Bruker continues to be an outlier, posting above-peer organic growth with optimistic commentary despite woes from peers about academia and Europe,” Peter R. Lawson, an analyst with Mizuho Securities USA, wrote to clients after attending the meeting. Although Bruker might be unperturbed over the situation in Europe, Mizuho still worries about it, the analyst said.
Daniel L. Leonard, an analyst with Leerink Swann, said discussions at the Bruker meeting about incremental product improvements and expanded applications for existing products support his view that “Bruker can achieve high single-digit revenue growth, even in a constrained funding environment.”
Among the improvements Laukien discussed were Bruker’s MALDI Biotyper software. The firm, he said, recently developed an aftermarket kit to identify bacteria, including Mycobacterium tuberculosis, as an adjunct to the firm’s existing Biotyper platform. On the product side, the firm introduced an upgraded MALDI time-of-flight analyzer called the ultrafleXtreme.
MALDI technology is blossoming in the medical research arena, Laukien noted. “It provides the type of special proteomic information that a pathologist can use. And it is really a way to get biological and pathological insights,” he said. “I think it is one of the key trends that will take proteomics to the next level.”
Developing instruments based on MALDI and other high-end technology requires heavy spending on research, Laukien noted. Bruker’s R&D spending rose 25.3% in 2011 to $177 million. Five years ago the firm spent a little more than $100 million on R&D.
But Laukien pointed out that R&D spending as a percentage of sales has declined from a recent high of 12.1% in 2008 to 10.7% in 2011. Bruker’s R&D spending in the future, he said, will slide to 9–10% of sales, where he predicted it will remain for the foreseeable future.
This spending level will allow the firm to achieve a balance between product innovation and profit margin improvement, Laukien reasoned. The spending level will also keep Bruker comfortably ahead of competitors, which spend on average about 6.5% of sales on R&D, he said.
When spending slips to the mid-single-digit range, companies inevitably have to make acquisitions to stay competitive, Laukien said. “These acquisitions are expensive and have a very low return on invested capital,” he asserted.
But Bruker isn’t averse to attractively priced bolt-on acquisitions, Laukien said, particularly when they help complete the firm’s product line and take advantage of its distribution network. Such was the case with Bruker’s purchase of three Varian businesses in May 2010 after Agilent spent $1.5 billion to purchase the bulk of Varian, including its nuclear magnetic resonance business.
What Bruker bought were businesses in inductively coupled MS, laboratory gas chromatography (GC), and GC triple-quadrupole MS. Those product lines put Bruker into food, energy, and environmental testing markets where it had few offerings before, said Collin J. D’Silva, president of the firm’s two-year-old chemical and applied markets (CAM) division.
Since the $38 million acquisition, Bruker has consolidated factory operations and developed new instruments and software, D’Silva told analyst day attendees. The division had about $80 million in sales last year, and it lost money. D’Silva expects to break even next year and reach sales of $250 million by 2016. “With the projection of accumulated operating losses, we expect that we will have a total investment to break-even of a little more than $70 million,” he said.
The crown jewel of the new business’s product line is its triple-quadrupole mass spectrometer, D’Silva said. Among the new products the division has developed since the acquisition are GC single-quadrupole and triple-quadrupole spectrometers under the SCION trade name.
More than half of the CAM division’s new sales this year will come from products launched since the Varian acquisition, D’Silva said. And by 2013, he said, more than 90% of sales will come from products developed since the acquisition.
Laukien pointed out that what the division is doing “goes way beyond what Varian did originally when we acquired those product lines” and is an example of the value Bruker can add by leveraging its research capabilities. “We want to create long-term value,” he said, “with a goal of creating the leading player in our industry of life sciences tools and scientific instrumentation.”
When Bruker went public in 2000, it had a little more than $100 million in sales and was just breaking even, Laukien pointed out. Within the next two years, he predicted, Bruker will be “a $2 billion company with an 18% profit margin.”
The products Bruker offers have grown and changed over the past 12 years, Laukien said, but the themes that have guided the firm’s success have not. Bruker, he said, is still “very much focused on high-performance instrumentation.”
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