2008 forecast: growth rate increased.

Despite the economic downturn, sales of analytical and life science instruments and related aftermarket products and service have remained healthy. Steady industrial end-markets, demand from Asia, and robust biotech and contract research organization (CRO) sales have offset cautious spending by big pharma and a mixed academic market. As the table on page 3 shows, first-half calendar year sales for eight major suppliers rose a weighted average of 13%. Excluding currency effects and acquisitions, revenues rose 6%.

In fact, the first half of 2008 has performed better than IBO initially expected when we forecasted overall industry growth of 6.4% for 2008 (see IBO 1/15/08). Although the macroeconomic situation has worsened since the beginning of the year, sales for major companies have remained steady. Thus, as a result of the strong first half, IBO is raising its 2008 full-year forecast to 7.5%.

In the first half of the year, the subprime mortgage crisis and inflation crippled growth in major developed economies. In its revised forecast released in July, the International Monetary Fund (IMF) estimated that world economic growth will slow to 4.1% this year, down from 5.0% in 2007. US GDP grew a meager 0.9% annually in the first quarter and a disappointing 1.9% in the second quarter, according to the US government. The IMF forecasts US GDP to rise just 1.3% this year.

Eurostat reported that GDP for the Euro Area 15 rose 2.1% and increased 2.3% for the EU 27 on an annualized basis in the first quarter. Second-quarter figures were not available. Germany, the UK and France posted first-quarter growth of 2.6%, 2.3% and 2.0%, respectively. Indicators for all three countries suggest slower growth in the second quarter due to inflation and falling exports. For 2008, the IMF forecasts Germany to grow 2.0%, the UK to grow 1.8%, France to grow 1.6% and the Euro Area in total to grow 1.7%.

Like the EU, Japan's first-quarter growth was strong. Calendar year first-quarter GDP rose 4.0%, according to the country's Cabinet Office. But like the EU economies, second-quarter growth is expected to show a decline, which prompted the government to lower its fiscal 2009 forecast (for the year ending March 31, 2009) this month to 1.3% due to lower US exports and business spending. IMF estimates put the country's GDP growth at 1.5% for the calendar year.

GDP growth in China and India has held up so far this year, but is expected to decelerate as the year progresses. China's National Bureau of Statistics estimates that the country's GDP increased 10.4% in the first half of 2008, as first-quarter GDP came in at 10.6% and second-quarter GDP was 10.1%. However, the news triggered cuts in the full-year forecast for China due to the slowing from the first quarter. Goldman Sachs lowered its 2008 forecast from 10.5% to 10.1% and predicted single-digit growth for 2009. The IMF's 2008 forecast for China is 9.7% growth, compared to 11.9% last year.

India's GDP number for the first half of the year were unavailable at press time, but rising inflation is expected to curb 2008 growth. The IMF forecasts India to grow 8.0% in 2008, down from 9.3% last year. Like China, forecasts for the country's current fiscal year ending in March 2009 have recently been trimmed. Due to inflation concerns, UBS now expects growth of 7.1%, compared to an earlier forecast of 7.7%. Goldman Sachs maintained its fiscal 2008 forecast for of 7.8% growth for the country, but lowered its fiscal 2009 forecast from 8.2% to 7.2%.

As IBO noted in its forecast issue, macroeconomic issues, in general, have a limited effect on instrument industry sales. The results of the first half of 2008 confirmed this, as companies experienced solid sales growth in a worsening economic environment. However, several factors indicate that growth in the second half of the year could slow compared to the second half of 2007. First, worsening economic sentiment is likely to constrain business spending and crimp demand in more vulnerable industries. Secondly, government spending, and by extension, academic spending, could be affected by rising inflation and worsening economic conditions, as governments try to limit debt. In the US, specifically, a delay in passage of the US budget, similar to last year, would limit any planned R&D increases. Third, as the situation for large pharma continues to deteriorate, the likelihood of recovery of the sector, even in the seasonally strong fourth quarter, fades. As Waters Chairman, President and CEO Douglas A. Berthiaume stated, speaking about the second haft of the year, in the company's conference call, "we're not expecting a robust improvement in the pharmaceutical world."

However, such factors, while slowing sales growth in the second haft of the year, will not have an overall destabilizing effect on instrument sales. Due to the strength of the Asian market, demand from food testing and other applied markets, as well as stable biotech and pharma markets, outside of big pharma, instrument and related product sales should maintain steady growth. In addition, new products and acquisitions will add to the momentum.

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Clearly, larger companies are the most immune from macroeconomic uncertainties and slowing demand, as their worldwide presence and diversification provide balance against slower growing markets. Sales growth for the eight major instrument suppliers in the table above is expected to rise 10% in the second half of the year. However, the slower growth expected in the second half of the year will put greater strain on medium- and smaller-sized companies, depending on their end-user markets and competitive position overseas. In addition, a weak US dollar will continue to benefit US companies.

As the graph above shows, IBO is slightly increasing its previous 2008 sales growth forecasts provided in the January 15 issue for eight of the nine segments of the analytical and life science instrument markets, reflecting the particularly strong growth in the first half of the year. MS, portions of the life science market and LC remain the growth drivers for 2008.

                                      1H      Est.
                          1H CY08    CY08    2H CY08
Company                   Growth    Org. %   Growth    Forecast

Affymetrix                 -1.3%    -4.8%     -1.5%      -1%
Agilent (BAM)              17.1%     4.1%     15.0%    14%-16%
Applied Biosystems         9.5%      5.0%     1.6%      5%-6%
Bruker                     23.3%    13.3%     17.5%    18%-22%
PerkinElmer (LAS)          20.4%     8.4%     13.9%    15%-18%
Thermo Fisher Sci. (AT)    11.9%     5.9%     7.3%      9%-10%
Varian (Sci. Instr.)       7.4%      7.2%     10.1%     8%-9%
Waters                     12.7%     6.7%     11.4%    11%-13%

Overall Average            13.4%     6.1%     9.5%      11.3%