Large companies, even when buffeted by steady winds, are hard to move. Between 2013 and 2014, the relative market positions of the world’s leading lab tool companies, as determined by their instrument sales, didn’t change. Size held them in place, as did trends that still hold sway.
In 2014, geographic and end markets offered no big impetus for change. The year also lacked the landscape-shifting megamergers of years past as companies focused instead on buying and selling small businesses. Much attention was paid to trying to control costs, especially as currency exchange rates began to pinch earnings during the year.
But that’s not to say business was bad in 2014. Combined instrument sales for the top 25 analytical and life sciences equipment companies rose 2.3% in 2014 to reach $28 billion. The firms in C&EN’s annual ranking had 2014 instrument sales ranging between $155 million and $4.4 billion. Of the group, 14 reported sales increases, seven had declines, and four saw no change.
Thermo Fisher Scientific’s 2014 acquisition of Life Technologies put the company in the top spot, with Agilent Technologies a close second. C&EN has always ranked Agilent by sales in its life sciences, diagnostics, and applied chemical markets businesses, and those remain its core following the late-2014 spin-off of Keysight Technologies, its electronic measurement unit.
After digesting its 2011 acquisition of Beckman Coulter, Danaher now provides data that allow it to be ranked on a more comparable basis with other instrument suppliers. Using figures for its life sciences tools segment, which also incorporates AB Sciex, Molecular Devices, and part of Leica Microsystems, C&EN ranks Danaher third. In previous surveys, the firm had ranked higher because its numbers included a diagnostics business that primarily sells consumables to hospitals and reference labs.
Not only have the top three companies retained their positions, but the ranking of the next eight firms is also unchanged. Combined sales of the 11 grew just 1% between 2013 and 2014, due largely to instrument sales declines at Agilent, Bruker, and PerkinElmer. Agilent and PerkinElmer increased their total sales, which also include consumables and services.
Farther down the list, Germany’s Eppendorf, which had placed 13th in last year’s ranking, did not report in time to make this year’s survey. Joining C&EN’s top 25 list are another German company, Analytik Jena, and Oxford Instruments, based in England. In September 2014, Analytik Jena acquired Bruker’s inductively coupled plasma mass spectrometry business.
Japan’s JEOL also had a 29% jump in sales because it bought back a nuclear magnetic resonance (NMR) unit that was partially spun off in 2011. While JEOL has been rebuilding, Agilent decided to close its lagging NMR business in 2014. Bruker, meanwhile, is struggling to turn around its NMR operations, Goldman Sachs stock analyst Isaac Ro said in a recent report to clients.
Compared with other companies on the list, Illumina stands out by having risen five positions to rank 15 in 2014. In 2009, the San Diego-based DNA-sequencing technology firm was 25th. The launch of its $10 million HiSeq X Ten system helped its 2014 instrument sales grow 50% to $558 million. “The response was dramatic, way beyond our expectations,” Illumina Chief Commercial Officer Christian Henry says.
The X Ten was a milestone, and Illumina launched several other instruments as well. But it and other companies faced some sluggishness in core academic and government research markets. To Illumina’s benefit, many government agencies have been shifting funding to include DNA sequencing. The company’s commercial sales—for lab and clinical work—also have been “growing faster than other parts of our business, and that is true on a global scale,” Henry says.
Although still sluggish, worldwide academic and government spending was better in 2014 than the year before, companies say. “Academic end markets are stabilizing,” says Brian Kim, life sciences and technology president at PerkinElmer. “While NIH funding is up 1.3% in the 2015 budget, it is trending down on an inflation-adjusted basis.” Views are mixed on Europe, where Agilent reported improving conditions and Thermo Fisher saw a muted market.
However, instrument company executives agree that life sciences markets, including a renewed strength in the pharmaceutical sector, helped business across all regions. Both North America and Europe stood out.
“It has been some years since we’ve seen that strength coming across those markets in the pharma industry,” says Rohit Khanna, vice president for marketing at Waters Corp., which ranks fourth on C&EN’s list. Waters also saw a lot of investment from small and midsized drug firms working with both small and large molecules, he adds.
Instrument makers are optimistic that the trend will continue, aided by good news from the U.S. Food & Drug Administration. “Signs indicate that pharma will experience growth after a long period of decline, as 2014 was a record year for FDA drug approvals,” PerkinElmer’s Kim says. “We find that pharma is now stabilizing as customers move back into development mode and away from restructuring.”
Most firms tell C&EN that global economic conditions improved moderately in 2014. The U.S. steadily recovered, and Europe experienced a mild pickup—at least until the second half when the Russian economy worsened and other countries cut spending. In Japan, signs of a recovery were evident, but government economic policies make the outlook uncertain. Meanwhile, the Indian market stabilized after midyear elections.
The nearly $50 billion market for life sciences and analytical instrumentation is divided across three major regions. About 35% of sales are in North America, one-third in Europe, and one-quarter in the Asia-Pacific area, with the remainder spread across the rest of the world. However, the emerging markets—including China, India, parts of Latin America, and Eastern Europe—are growing the fastest.
Each instrument company had different levels of activity in the various geographies, but few, if any, avoided negative currency exchange effects caused by an appreciating dollar. Despite strong underlying growth, leading firms saw their sales and earnings decline by 4–8% in 2014 as a result of foreign exchange (FX) effects, according to stock analyst Ro. “The adverse impact of FX on earnings per share has generally been worse than expected,” he said.
Thermo Fisher, for example, has been aggressively managing its costs “to offset as much of the FX headwind as possible without damaging our future growth prospects,” Chief Executive Officer Marc N. Casper told analysts earlier this year when reporting earnings.
Ro pegs organic growth for the lab tools sector at about 4% for 2014 and about 5% for this year and next. “To be fair, this outlook does assume the EU (specifically the U.K., Germany, and Switzerland) remains stable and that China improves somewhat,” he told clients in a late-2014 report. The outlook will be more cautious “if the EU deteriorates and/or China fails to rebound,” he added.
China, a key market worth about $7.5 billion annually, has been a challenge. In 2014, growth, although still strong compared with other regions, slowed to single digits because of government reforms and reduced funding. As a result, instrument suppliers are readjusting their expectations.
Instrumentation firms “got spoiled” by double-digit growth rates out of China for years, Waters’s Khanna says. Having a diverse Chinese customer base across pharma and nonpharma areas, and among government, Western, and local firms, has helped Waters balance some of the negative trends.
Companies expect the growth rate in China to stabilize in the high-single- to low-double-digit range, but nowhere near the more-than-20%-per-year levels seen before 2014. Government spending is expected to return to support investment in food safety, environmental testing, and health care.
For companies with diagnostics products, China has been a source of rising demand for prenatal, newborn, and infectious disease screening. In 2014, PerkinElmer opened its Suzhou PerkinElmer Medical Laboratory to serve hospitals. The company also signed an agreement with the Chinese government to extend its newborn screening programs to 600 rural counties.
Earlier this year, Waters opened the Joint Open Laboratory, located at the Beijing Zhendong Guangming Drug Research Institute. Operated with the Chinese Pharmacopeia Commission, the analytical lab will focus on pharmacopoeia standards, development of testing methods, and training. Waters anticipates that the lab will play a role as a technical support center for Chinese pharmaceutical standards.
Relationships with government agencies are one way instrument firms bring their technologies into new regions. Although a company may invest significantly in supporting alliances and centers, these efforts don’t necessarily generate revenue directly. Instead, they can influence a company’s product development strategy and have a trickle-down effect on potential users.
“Especially in China, you see a tremendous follow-on effect” after a centralized government lab standardizes on a certain technology or protocol, Khanna says. “Decisions that come out of these labs permeate the rest of their market in what technologies the local labs will utilize.”
For about five years, Thermo Fisher has run a center in Shanghai that supports its R&D as well as programs specific to China, according to Daryl Belock, vice president of innovation and R&D collaboration for Thermo Fisher’s analytical instruments unit. “Like a lot of companies built up through acquisitions, our footprint historically has been in the European and Americas spaces, but of course a lot of our growth has been coming from the emerging markets, and we recognize the need to build scale there,” he says.
Starting up a greenfield R&D effort in an emerging country “in the long term is going to pay tremendous benefits because it will put us closer to customers,” Belock says. Proximity has become critical because “the science landscape is changing in emerging markets,” he adds. No longer just catching up to the West, they now are creating their own “science and technology industry.”
“There definitely have been unique opportunities identified from markets like China, India, Brazil, and to some extent Eastern Europe, relative to the products, the performance, the cost position, and what they’re willing to accept,” Belock says.
Among frequently mentioned customer requests is a desire for technology to be more accessible. For example, although drug discovery scientists are accustomed to using sophisticated equipment, pharma quality control and manufacturing operations want everyday machines that can provide similar analyses. Other times, suppliers say, making a technology simpler to use allows it to move into entirely new applications.
“It’s not just a matter of having great hardware and software but of having a complete workflow solution that also includes consumables, service, and support,” says Patrick Kaltenbach, president of Agilent’s life sciences and applied markets group. “In addition to technology advances, it is essential that we focus on workflow and overall method development improvements to make it easier or more seamless for scientists to use these technologies in their complex environments.”
Although informatics can help smooth the overall work process, the instruments themselves have to be smarter to simultaneously push technical limits and work intuitively during routine use. A lot of innovation is required around the complex workings inside that “simple box,” Khanna says, “because all of the capability that a specialist would handle in a research unit has to now be built into that instrument.”
However, more capable instruments need not be more expensive, Khanna says. Much of the increased complexity can be handled in the software. Although software doesn’t come cheap, “you have the benefit that you can go after a wider market opportunity—into segments that didn’t traditionally buy this technology—and amortize the development costs.”
Thermo Fisher’s Belock likes an R&D approach where engineering, marketing, and manufacturing capabilities come together. The goal is to find a “sweet spot,” he says, where engineering and technology can meet market needs along with manufacturing at the right cost. Innovation may come not only from technology but further on “down the value chain,” he adds, such as “being able to push the boundaries on what you might be able to manufacture at a radical new cost position to democratize the technology.”
Not everyone sees groundbreaking innovation in today’s instrumentation industry. “Companies are primarily focused on incremental share gains and growth opportunities rather than transformative product launches,” says Ro, the stock analyst.
Although executives admit the analytical instrument industry is maturing, they still see opportunity for breakthrough innovation. To achieve it, companies continue to invest a significant portion of their sales in R&D. Many also cultivate external collaborations with customers and leading researchers.
Among the top spenders, Illumina invested nearly 21% of its sales, or $388 million, in R&D in 2014. It has worked with external partners, acquired technology, and contributed groundbreaking advances in sequencing technology.
The company’s R&D strategy centers on creating faster, less expensive, more accurate sequencers but also on improving the entire workflow, Henry explains. “We listen to our customers carefully, and then we also have to have vision on where we think the world needs to go.”