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Q2 operating profit decline for Life Science Index.

With all 20 companies in IBO's Life Science Sales Index having reported their calendar year 2006 half-year results, the Index grew 5.3% in the second quarter to $1,893 million. However, operating profits struggled, slipping 4.6% to $249 million, leading operating margin to fall 130 basis points to 13.2% of sales. Operating profits were negatively impacted by new expenses attributed to the Sarbones-Oxley Act, particularly for Waters and Invitrogen, as well as by a very difficult quarter for Affymetrix (see IBO 8/31/06) and minimal operating improvement from a number of Index companies.

Becton Dickinson's BD Biosciences segment reported fiscal third quarter revenue growth of 9.2% to $218.8 million, which was negatively impacted by approximately 1% in unfavorable currency effects and accounted for approximately 15% of total Becton Dickinson sales (see page 12). Adjusted operating profit jumped 15.0% to $50.6 million, leading operating margin to improve 110 basis points to 23.1% of sales, due to improved sales and lower R&D expenses. Within the BD Biosciences segment, Immunocytometry Systems sales grew 11.8% to $124.0 million, Discovery Labware sales gained 4.6% to $55.5 million and Pharmingen sales improved 7.9% to $39.3 million. The segment reported a 5.8% increase in US sales to account for 45% of total sales, while international sales climbed 12.2% to make up 55%.

Biotage AB reported a 51% jump in first-half revenues to SEK 249.0 million ($32.8 million = SEK 7.59 = $1) from SEK 165.4 million ($23.2 million = SEK 7.12 = $1) (see page 12). However, excluding the acquisition of Argonaut (see IBO 2/28/ 05), first-half sales improved 11% on a currency-neutral basis. The company trimmed its half-year adjusted operating loss by two-thirds to a loss of just SEK 13.1 million ($1.7 million). Six-month Discovery Chemistry product sales rose 59%, up 7% organically, to SEK 207.8 million ($27.4 million), while segment operating income improved to a profit of SEK 5.3 million ($0.7 million) from a loss of SEK 11.2 million ($1.6 million). First-half Biosystems sales rose 18.4% to SEK 41.2 million ($5.4 million) and the operating loss improved from a loss of SEK 21.9 million ($3.1 million) to just SEK 0.8 million ($0.1 million). For the half-year, US sales accounted for 44% of total sales, European sales represented 42% and the rest of the world made up 14%.

Ciphergen Biosystems' sales continued to decline, falling 24.1% in the second quarter to $5.3 million, but operating income improved slightly to a loss of $7.2 million. Operating income benefited from a 21% reduction in R&D expenses and a 22% drop in SG&A expenses to 55% and 127% of sales, respectively. Product revenue tumbled 34.6% to make up 61% of total sales, while Services revenue inched up 1.0% to make up 39%. The primary reason for the drop in product sales was a 33% decline in ProteinChip Systems revenue and a 37% drop in revenue from arrays and consumables. Ciphergen experienced lower sales across all regions, particularly in the US and Asia, where revenue dropped 22% and 44% to account for 29% and 24% of total sales, respectively. European sales slipped 9.0% to make up 43% of sales, while Canadian revenue fell 15.9% to represent just 5%.

Gene Logic reported a 67% drop in Genomics Services revenue to $4.7 million during the second quarter, to account for 41% of total company sales. The significant drop in sales led operating income to fall to a loss of $4.8 million from a profit of $1.7 million in the previous second quarter. Segment revenue was negatively impacted by declining subscription revenue, the absence of anticipated sales of perpetual licenses, as well as slower than anticipated sales growth for microarray data generation and analysis services. Lower Pacific Rim sales were caused by terminated or reduced Genomics Services contracts. After very disappointing second quarter results, the company now anticipates full-year Genomics Services revenue to be much lower than previously forecasted, as well as below 2005 revenues. Gene Logic has already announced headcount reductions in order to stabilize its operating performance.

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SEQUENOM's second quarter revenues increased 15.0% to $7.1 million and the company trimmed its adjusted operating loss to $3.8 million from $5.8 million a year ago (see page 12). Sales growth was attributed to an 18.2% jump in Consumables revenue to $3.1 million and a 13.6% gain in Other Product-related sales to $3.9 million. Consumables revenue benefited from increased demand for the company's iPLEX assay, while Other Product-related revenue growth was attributed to a 22% increase in MassARRAY system hardware sales to $3.3 million. Operating profit benefited from increased sales, as well as a 15-point reduction in R&D expenses as a percentage of sales to 34.1%, and a nearly 20-point reduction in SG&A expenses to 76.6% of sales. The company anticipates 2006 annual revenue of at least $24 million, representing a minimum of 25% growth over 2005.

Stratagene announced a 6.0% decline in second quarter revenues to $23.4 million, which led operating income to slide 34% to $2.0 million. Research Supplies revenue dropped 7.3% to $17.2 million, while Medical Diagnostics revenue slipped 2.1% to $6.2 million. Sales of Research Supplies were negatively affected by lower average selling prices, and Medical Diagnostics revenue suffered from lower sales of urinalysis products that were partially offset by limited growth in autoimmune products. Sales of its QPCR instruments grew 3.5% and allergy diagnostic product sales gained 2.5%. Operating profit suffered from lower sales and a 50 basis point reduction in gross margin to 64.6% of sales, partially offset by a 0.5% reduction in operating expenses. Looking ahead, Stratagene lowered its full-year revenue guidance by $4 million, due to lower than expected Research Supplies revenue, to $94-$98 million.

Tripos reported a 33% drop in second quarter revenues to $8.9 million, which led operating income to drop to a loss of $1.5 million from a loss of just $0.1 million in the previous year. Sales were significantly lower due to an 86% drop in Discovery Research Products sales to $1.0 million. However, sales of Discovery Informatics Products improved 6.2% to $6.2 million, and sales of Discovery Informatics Services tripled to $1.7 million. Research Products sales a year ago included sales from a large contract with Pfizer, which ended in 2005. Operating income benefited from a 13-point improvement in gross margin to 61.9% of sales, which was overshadowed by the large drop in sales and 6.9% increase in operating expenses. North American sales jumped 54% to account for 53% of total sales, European sales fell 64% to make up 39% and sales to the Pacific Rim gained 20% to represent 7% of sales. Tripos completed another reduction in workforce to improve inefficiencies in hope of returning to positive cash flow over the second half of the year.
Life Science Index, Total

 2003 2004 2005 2006

Total Annual Revenues ($M) 6206 6692 7194 --
2nd Quarter Revenues ($M) 1549 1645 1798 1893
Annual Oper. Profits ($M) 771 939 1101 --
Annual Oper. Profits (%) 12.4% 14.0% 15.3% --
2nd Quarter Oper. Profits ($M) 192 224 261 249
2nd Quarter Oper. Profits (%) 12.4% 13.6% 14.5% 13.2%

 % Change

Life Science Index, Total 03/04 04/05 05/06

Total Annual Revenues ($M) 7.8% 7.5% --
2nd Quarter Revenues ($M) 6.2% 9.3% 5.3%
Annual Oper. Profits ($M) 21.8% 17.2% --
Annual Oper. Profits (%) -- -- --
2nd Quarter Oper. Profits ($M) 16.8% 16.6% -4.6%
2nd Quarter Oper. Profits (%) -- -- --

IBO Life Science Sales Index companies: Affymetrix; Applied Biosystems;
Becton, Dickinson & Company (BD Biosciences); Bio-Rad Laboratories
(Life Science); Biotage AB; Bruker BioSciences; Caliper Life Sciences;
Ciphergen Biosystems; Gene Logic (Genomics Services); Genetix;
Invitrogen; Luminex; Molecular Devices; QIAGEN NV; SEQUENOM;
Stratagene; Tecan Tripos; and Waters.
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Publication:Instrument Business Outlook
Geographic Code:4EUUK
Date:Oct 15, 2006
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