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The revised IBO 2004 industry forecast.

At the beginning of 2004, when Instrument Business Outlook published its annual analytical and life science instrument industry forecast (see IBO 1/15/04), the state of the global economy was decidedly mixed. Continued weakness in the US dollar, paired with high energy prices and widespread company cost reductions, painted a less than rosy financial picture for the instrument industry, but many people believed the worst of the bad news was over, or at least nearing an end.

The positive global GDP outlooks from Asia Pacific and North America, and hopes for a turnaround in Latin America, were seen as encouraging developments, especially when held up against the tepid growth of the past few years. In addition, instrument sales to the semiconductor, pharmaceutical and environmental markets were on the upswing, by most accounts. Still, uncertainty remained as mixed results for some instrument and market segments dampened an aggressively optimistic outlook. The lukewarm promotion of "cautious optimism" was warranted, perhaps, but not very satisfying nonetheless.

In January, IBO predicted that the instrument industry would grow 6.9% in 2004, an estimate that, midway through the year, still seems on track for the most part. In "The 8th Global Assessment Report," an instrument market study published last month by Strategic Directions International, the publisher of IBO, 2004 growth, taking into account financial reports for the first quarter of the year and other market intelligence, is forecasted at 6.6%.

Although this midyear estimate is only a small downward revision, it reflects the view that growth in the second half of the year is expected to be much less vibrant than in first half of 2004. Without doubt, the first six months of 2004 were strong, with estimated analytical and life science instrument revenue growth of about 8%. In the last part of the year, which is typically a stronger period for instrument companies, growth is expected to be approximately 6%.

Changes in regional and market expectations have impacted IBO's initial forecast. In the US, an increase in capital spending in the second quarter boded well for instrument companies, but decreases in government spending offset some of this good news. Year-over-year US GDP growth slowed in the second quarter of 2004 to 3%, down from 4.5% in the first quarter, leading to renewed uncertainty. US GDP is expected to gain 4.0% in the second half of the year. Forecasters surveyed by The Economist magazine expect the US to grow 4.6% in 2004 and 3.6% in 2005.

Europe also has had difficulty rebounding from its economic slump. Earlier this month, the European Union Commission lowered its third quarter growth forecast for the euro-zone from between 0.4% and 0.8% to between 0.3% and 0.7%. The International Monetary Fund estimates the Euro-region of 12 countries will grow 2% in 2004.

The standout region has been Asia Pacific. Japan's cabinet office recently doubled its GDP growth estimate for the fiscal year ending March 2005 to 3.5%, from a 1.8% forecast made in January. China's National Bureau of Statistics said first half growth was 9.7% and forecasts 2004 growth at around 7%, a figure much lower than other consensus estimates. Many economists continue to express concern that a slowing of the country's robust growth is overdue. For the 10 countries that make up East Asia, the Asian Development Bank's latest forecast estimates growth of 7.3% for 2004.

Most instrument end-user markets are taking part in the global recovery. Instrument company reports for the first half of 2004 indicate that demand from pharmaceutical and most industrial markets have met expectations overall. However, spending by the chemical industry and the government and academic markets is less assured. With the budget process for the coming fiscal year still ongoing, expectations for US, European and Japanese government expenditures are conservative. In addition, the outcome of the US elections, new terrorist threats and volatile oil prices continue to undermine worldwide economic stability.

The Wall Street Journal reported earlier this month that CFOs surveyed by Duke's business school expect their companies' capital spending to rise 4.3% on average over the 12 months starting in June. But, as many instrument companies have reported, delayed capital and R&D spending last year led to pent up demand that has been relieved this year.

IBO has finetuned its forecasts for instrument categories. Spurred by impressive strength in sales of mass spectrometry systems (MS), IBO has revised its growth forecast for the technique to 9.3% from 8.7%. As a result, MS is now expected to surpass bioinstrumentation as the fastest-growing instrument segment in 2004 among the segments listed in the graph above. Although the bioinstrumentation market remains strong, and is the largest market, some faltering in sales of sequencers and PCR systems have hurt the sector.

After anxieties about the market for liquid phase instruments following discouraging signs in 2003, the technique, buoyed by good LC/MS sales, is expected to improve from the original forecast of 6.3% to 7.0%. However, the gas phase market continues to perform under its potential. Although the revised IBO forecast bumps its growth up slightly to 3.1% from 2.9%, disappointing initial system sales continue to hamper the sector. The growth rate for molecular spectroscopy has also been revised downward in light of slower growth for certain techniques.

The updated forecast for lab automation nudges growth up slightly, from 6.6% to 6.8%. Expectations for surface science market growth in 2004 remain at 8%. Physical property techniques are forecasted to continue growing at 5.1% for the year. Also unchanged from the original forecast, the atomic spectroscopy market is expected to see moderate growth of 4.7%.

Among the larger instrument companies, the outlook remains bright. Waters Chairman, President and CEO Douglas Berthiaume noted in the company's most recent conference call that feedback from customers indicates "continued favorable business conditions." But for some younger, smaller companies, which are more vulnerable to changing market conditions, the rest of the 2004 could prove more challenging. Biacore AB, Ciphergen Biosystems and SEQUENOM have experienced mixed results and have been the subject of increasing investor scrutiny lately. Even some larger companies have made adjustments. Invitrogen lowered its 2004 revenue forecast. while other companies chose not to issue specific forecast numbers.

 1H CY04 vs. Est. Growth
 1H CY04 1H CY03 % Excluding CY04
Company Rev. ($M) Growth Acquisitions Forecast

Affymetrix $122.8 27.9% 12% 11%-13%
Agilent (LSCA) $646.0 14.9% * 12% 12%
 Biosystems $897.8 6.9% 5% 3%-7%
Beckman Coulter
 Research) $317.7 6.9% 5% 4%-6%
Dionex $140.0 23.7% 8% 6%-10% **
Molecular Devices $59.5 12.2% 12% 27%-31%
PerkinElmer (Life
 & Analytical
 Sciences) $507.1 6.0% 6% 6%
Thermo Electron
 (Life &
 Sciences) $735.3 19.7% 5% 23%
Varian (Scientific
 Instruments) $299.1 10.4% 8% 7%-9%
Waters $515.6 13.9% 10% 15%-17%

Overall Average $434.0 11.3% 7.4% 12.4%

* 1H FY04 ended Apr.

([dagger]) FY04 ending Oct.

([double dagger]) FY05 est. low to mid-single digit growth

** FY05

([dagger dagger]) FY04 ending Sept. est. high single-digit growth
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Publication:Instrument Business Outlook
Geographic Code:1USA
Date:Jul 31, 2004
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