Independent test and research: a burgeoning market.
The growth of laboratory outsourcing as well as the success of large independent testing firms such as Intertek Caleb Brett and SGS has reinforced the value of large-scale laboratory outsourcing operations. Additional factors such as a fragmented laboratory testing market, a stricter regulatory environment and growing testing requirements driven by global trade and harmonization has increased interest in the market. In 2004 and 2005, both new and established players have driven consolidation among testing laboratories, seeking to capitalize on the growing outsourcing market for laboratory testing and to benefit from economies of scale.
These broad-based testing labs are one segment of the category of end-users that can be classified as independent testing labs (a category that also includes environment testing labs, CROs and clinical labs). Independent testing labs accounted for approximately 10% of analytical instrument sales last year, or more than $2.5 billion. Thus, broad-based testing laboratories' growing business and consolidation among them can be expected to affect instrument companies as such firms become a larger, more concentrated customer base.
The consolidation among independent testing laboratories has affected all segments of the laboratory services market, from analytical testing, to materials testing, to inspection and compliance testing. No company has been a more aggressive acquirer of independent testing labs over the past year than British firm Bodycote. Bodycote specializes in metallurgical services, offering heat treatments, hot isostatic pressing, metallurgical coatings as well as materials testing to the metals industry. Bodycote began offering materials testing services in 1990. In fiscal 2004, its Materials Testing unit accounted for 14% of the company's 457.2 million [pounds sterling] ($846 million) in revenues. Fifty-three percent of Materials Testing revenues come from materials testing services, 25% from engineering and technology services, and 22% from testing for health sciences. Between December 2004 and September 2005, Bodycote Materials Testing acquired eight independent labs, including labs serving the food and pharmaceutical industries. For the 12 months ended June 30, acquisitions accounted for 9% of sales growth. Bodycote plans to continue to grow and diversify its lab testing business, particularly in health sciences and value-added services.
Established testing service companies have also been active this year in making acquisitions. Founded in 1987 and headquartered in Belgium, Eurofins Scientific SA has built one of the largest lab testing networks in Europe through a string of acquisitions. In 2004, company revenues totaled 175.5 million [euro] ($216.6 million). In 2005, following a two-years efficiency program that resulted in the closure of 10 facilities, Eurofins embarked on a new round of purchases, acquiring five labs with total revenues of more than 30 million [euro] ($36.6 million). Acquisitions included the purchase of SITA Netherlands' Envirolab operations, France-based LEM Laboratories and German firm ERGO. According to Eurofins, the purchase of ERGO now makes the company the largest dioxin testing lab in the world. The expansion also included new markets. In late 2004, the company acquired French lab ADME Bioanalyses, adding preclinical services to its offerings.
Private equity firms have also been acquiring laboratory testing firms with plans to grow the businesses through acquisitions. Last fall, European private equity firm Candover acquired Dutch food and environmental testing company ALcontrol. ALcontrol operates 26 laboratories in 10 countries and has annual revenues of more than 120 million [euro] ($148.1 million). At the time, Candover announced that it plans to expand the business with a focus on France, Germany and the UK. This year, it acquired the UK-based Opinion Group of companies, which provides food sensory testing and consulting services, and the environmental and oil analysis laboratories of Fugro-Robertson.
Private equity firms have also funded management buyouts. A September buyout of Evans Analytical Group, which provides microanalytical surface analysis and materials characterization services, for $37.5 million was funded by American Capital Strategies and Auriga Partners. The new company will consolidate the operations of Evans Analytical Group with Analytical Evans Last, Evans Texas and Cascade Scientific Labs. UK-based EcLipse Scientific, which last year was bought out by management, has already acquired four laboratories this year. The purchases suggest that smaller lab testing providers are building their operations in order to compete more effectively.
In addition, brand new companies are staking a claim in the market. Earlier this month, BSI Group announced the sale of its 98.4 million [pounds sterling] ($182.2 million) inspection business (Inspectorate), which includes inspection, certification and lab testing services, to newly formed Inspicio for 52 million [pounds sterling] ($92.9 million). Inspicio, which is run by the former management of Inspectorate, also plans to expand through acquisitions. In 2004, Inspectorate sales grew 13% in constant currency and the company opened new laboratories in Houston, the Netherlands, Azerbaijan, India and the Ukraine.
For more diversified service companies, such as Inspectorate, SGS and Intertek Caleb Brett, which provide a host of services ranging from product inspection and certification, to logistics support, to analytical testing, the commodities industries have become key markets. The commodities boom of recent years has driven project growth, for which commodities companies are increasingly outsourcing different types of services. To meet these needs, SGS and Intertek Calab Brett have diversified their service offerings and expanded their global presence through strategic acquisitions and the opening of new labs.
SGS and Intertek are among the world's largest providers of services for the oil and gas industry. Besides analytical testing services, their offerings also include inspection and logistics services. In 2005, SGS revenues from its Oil, Gas and Chemicals unit rose 30.9% to 574.6 million [pounds sterling] ($1.1 billion), with outsourcing accounting for more than 30% of sales. For the first half of 2005, Oil, Gas and Chemicals revenues rose 6.9% to 302.0 million [pounds sterling] ($539.3 million). In June, Shell Exploration and Production Europe awarded SGS a five-year contract worth 1 million [pounds sterling] annually for onshore and offshore analytical services in the UK and the Netherlands. The contract covers services previously provided under multiple contracts.
Intertek division Caleb Brett, 33% of whose revenues come from Analytical Services, won a similar single-source deal last year, when it was awarded a three-year contract, valued at 1.5 million [pounds sterling] annually, to provide onshore and offshore analytical services to BP's North Sea and Norweigan operations. Over the past year, Caleb Brett has sought to expand its service offerings for the oil industry through the acquisition of Kelley Completion Services, which provides offshore measurement and metering services, PARC Technical Services, whose offerings include refinery process development services, and Halliburton's Westport Technology Center, which provides upstream technical services.
Last year, SGS' Mineral Services unit, which includes 65 geochemical labs, reported a 14.1% increase in revenue to 319.5 million [pounds sterling] ($591.7 million) and six new outsourcing contracts. In the first half of this year, Mineral Services revenue increased 17.3% to 176.8 million [pounds sterling] ($315.7 million). In June, SGS acquired Casco Australia, which owns seven labs providing testing and other services to a variety of markets, including the coal industry.
In the mining sector, one of SGS' major competitors is the Laboratory Services (ALS) business of Australia's Campbell Brothers. The ALS Group consists of three main companies, ALS Chemex, ALS Environmental, ALS Wear Check, as well as labs for food and electronics testing. ALS posted 2004 revenues of AUD $159.2 million ($124.2 million). In 2004, it acquired Swedish Geochem Services AB and a 51% share in Taiwan Hyogo Environmental Analysis. The company has announced plans to expand in Europe and the US through acquisitions and to increase its presence in new end-user markets. It has also restructured operations to reflect a regional organization.
For both more diversified service providers, such as ALS, as well as companies specializing in analytical testing services, such as Eurofins, life sciences, food and agriculture remain key markets, particularly in Europe where new food and feed regulations have increased testing volume. Eurofins specializes in GMO testing, while SGS and Inspectorate provide quality control testing for food and agricultural exports from developing nations.
But it is health science services, including drug development and diagnostic testing, that remain the most competitive business segment. New business opportunities in Phase I clinical testing, quality control and Asia have attracted broadbased testing companies to this segment. SGS' Life Sciences business grew 80.2% in 2004 to 106.5 million [pounds sterling] ($197.2 million). Eurofins has positioned itself for growth in this market with new DNA testing services and has expanded internationally through a partnership with Japanese CRO SBS.
As consolidation continues among broad-based laboratory testing companies, instrument companies may benefit but will also have to adapt to these changes. On one hand, the consolidation among braod-based testing labs will create more stable demand as well as increase standardization, leading to a greater need for lab automation and software. Also, large-scale lab testing firms will have greater resources to purchase new instruments and will be required to offer advanced techniques in order to differentiate their service offerings. On the other hand, consolidation will be accomplished through cost controls as companies seek to extract savings from their acquisitions. The result could be a reliance on fewer suppliers and pressure to contain costs.
FY2004 (M) Broad-Based Testing Sales % Chg. Op. Profit % Chg. Companies Intertek (Caleb Brett) 177.3 12.3% 15.5 30.3% 218 analytical testing [pounds [pounds labs and 370 sterling] sterling] offices Eurofins Scientific AG 175.5 4.0% 15.0 80.7% 50 laboratories in 15 [euro] [euro] countries with 2,800 staff Campbell Brothers AUD 28.4% AUD 35.6 65.6% (Lab Services) * 159.2 49 laboratories in 21 countries Bodycote (Testing) 65.6 7.2% 12.4 8.8% 53 testing labs in [pounds [pounds 12 countries (2004) sterling] sterling] LGC * 64.0 14.0% 5.8 52.6% Over 400 employees [pounds [pounds sterling] sterling] First-Half FY2005 (M) Broad-Based Testing Sales % Chg. Op. Profit % Chg. Companies Intertek (Caleb Brett) 100.0 17.9% 8.9 20.3% 218 analytical testing [pounds [pounds labs and 370 sterling] sterling] offices Eurofins Scientific AG 101.0 23.5% 10.0 56.3% 50 laboratories in 15 [euro] [euro] countries with 2,800 staff Campbell Brothers N/A (Lab Services) * 49 laboratories in 21 countries Bodycote (Testing) 37.0 21.3% 6.5 22.6% 53 testing labs in [pounds [pounds 12 countries (2004) sterling] sterling] LGC * N/A Over 400 employees * Fiscal year ended March 2005.
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|Publication:||Instrument Business Outlook|
|Article Type:||Company Profile|
|Date:||Oct 31, 2005|
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