Note to Readers: More details to come; changes are highlighted. Except where noted and highlighted, no other section of this report has been updated.
Reason for Report: Flash Update: Beckman to be acquired by Danaher
Prev. Ed: November 23, 2010: 3Q10 Earnings Update (brokers’ material considered till November 3)
Note: The tables below for Revenue, Margins, and Earnings per Share contain fewer brokers’ material than the brokers’ material used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Flash Update
On February 7, 2011, Beckman Coulter announced that Danaher Corporation (DHR) has decided to acquire it for $83.50 per share in cash. The offer price represents a 45% premium over the closing price of the stock on December 9, 2010, before rumors of an acquisition broke out. The deal is expected to be completed in 1H11, subsequent to which, Beckman Coulter would be a part of Danaher's Life Sciences & Diagnostics segment.
Details, other news update and broker comments will be provided in the next edition.
Portfolio Manager Executive Summary
Beckman Coulter (BEC) designs, manufactures, and markets systems that consist of instruments, chemistries, software, and supplies that meet a variety of requirements of biomedical laboratories. The company's product lines include virtually all routine diagnostic blood tests performed in hospital and research laboratories.
Of the eleven firms covering the stock, two firms provided positive ratings (18.2%), eight firms assigned neutral ratings (72.7%), and one firm (9.1%) rendered a negative rating on the stock.
Cautious (Neutral or Negative or equivalent outlook) (9/11): Target prices range from $47.00-$56.00. The analysts remain concerned about the lack of visibility on near-term operational improvement, notably margin expansion. In fact, higher investment in R&D and integration of Olympus will reduce operating leverage and upside in EPS. With a still difficult environment for clinical labs, these analysts are cautious about Beckman’s ability to perform. They believe that cost containment efforts of laboratories will pressure new instrument sales and reagent pricing. The downward revision on guidance has further augmented their concerns. The analysts view limited opportunity for multiple expansion, and some risk of further negative earnings revisions, given share loss in the core chemistry and immunoassay markets, new product delays in the Cellular Analysis business and uncertainty in the Life Sciences Business.
Bulls (Positive or equivalent outlook) (2/11): Target price is $62.00. The bullish analysts believe that the company's recurring-revenue model and growing free cash flow provide it with stability and visibility, both rare in the current environment. These analysts believe that Beckman has one of the most productive new product pipelines in the industry and a strong track record of consistent and frequent new product launches. However, the analysts view that the company currently faces several headwinds such as slower new product approvals, a slowdown in the life sciences market, and a lack of strength to capture new business from competitors in immunochemistry. Despite these challenges, the analysts believe that shares of Beckman should recover as the company hits milestones for Troponin approval and adds further new products. The analysts view that the company has grown faster than the market in recent years due to share gains in immunoassay, new product approval (DxH 300 in October 2010) and efforts to expand its business in emerging markets such as China. The analysts expect these efforts to continue, supplemented by cross-selling opportunities enabled by the recent Olympus acquisition as well as the planned launch of molecular diagnostics products in 2012.
Long-Term Outlook: Overall, the analysts have a positive long-term outlook on Beckman. The firms believe the company’s investments in new immunoassay instruments, and continued investment in its molecular diagnostics segment will help the company in expanding its clinical diagnostic product offering over the next few years.
Overview
Based in Fullerton, California, Beckman Coulter, Inc. (BEC) designs, manufactures, and markets products consisting of instruments, chemistries, software, and supplies to meet a variety of laboratory needs. Its products are used in a range of applications from medical research and drug discovery instruments to hospital and physicians’ office diagnostic tools. Additional information is available online at www.beckmancoulter.com.
Brokerage firms identified the following factors for evaluating the investment merits of BEC:
Key Positive Arguments / Key Negative ArgumentsBeckman has a diversified source of revenue, on a geographical basis, with overseas sales accounting for about half of the revenue.
Beckman has an impressive array of new products, which are expected to contribute to its growth in the coming years.
The analysts believe that BEC is relatively more adaptable to macro headwinds, as approximately 80% of its revenue is from recurring sales.
The acquisition of Olympus increases product offering and provides cost synergy / Beckman earnings are likely to be negatively affected by multiple macro headwinds during FY10, like pension amortization, unfavorable foreign exchange, pressure on life science and automation spending.
Beckman must maintain high-quality standards to get approval form government for its new products.
Beckman faces increased pricing pressure from competitors within the immunochemistry and automation markets, and from chronically budget-constrained hospital customers.
The issue of troponin test kits along with a recall related to sodium testing on DxC chemistry systems and other quality and compliance matters have affected the topline and have forced Beckman to conduct a detailed assessment of the quality system.
Note: The company’s fiscal year ends on December 31.
November 23, 2010
November 23, 2010
Long-Term Growth
Three firms covering Beckman published three-to-five-year growth rates. The Zacks Digest average long-term growth rate is 9.7%. Long-term growth rates for the company range within 9% (Leerink Swann) to 10% (Piper Jaffray, William Blair).
The company has an extensive lineup of new product releases, which are expected to provide it with the ability to sustain growth and improve its competitive position. Further, the company intends to continue to grow consumable sales by adding new, high-value tests and by employing a disease management approach.
Moreover, several acquisitions added important technology to the product portfolio of Beckman. The Olympus, Dako, NexGen, and Lumingen acquisitions are expected to secure the company’s access to critical reagent components for its immunoassay platforms and also expand its gross margin by bringing in-house the development and manufacturing of high-margin consumable products. The acquisitions also provided the company access to R&D capabilities for the development of highly-sensitive assays.
The company considers its revenue from emerging markets (India, China etc.) as a potential growth driver going forward. Beckman has a longstanding presence in China and is expected to post revenues of more than $300 million there this year. In 3Q10, revenues in China were up 31%, and are expected to continue to be very strong for quite some time as the Chinese government looks to expand and modernize its healthcare system. Either of these goals would require the sale and use of basic technology, such as biomedical testing equipment and reagents. Given the company’s leadership position in the country already, the analysts believe they will continue to be a major beneficiary of these trends.
Emerging market revenue is growing rapidly at about 30% y/y. The growth drivers in the emerging markets are as follows:
• Demographics: The growing population, including increases in the aging population, would increase the expansion rate of hospitals.
• Menu expansion: Beckman sees rapid growth opportunities particularly in regions in which the installed base and menu offering are both growing at a fast pace.
• Growing test volumes: Growth in developing countries is likely to enhance the access to healthcare, which Beckman believes will lead to increased test volumes and higher reagent sales.
• Investment in lab infrastructure: As labs invest in infrastructure to support these growing volumes, they are expected to expand their automated instrument base.
November 23, 2010
Target Price/Valuation
Rating DistributionPositive / 18.2%↑
Neutral / 72.7%↓
Negative / 9.1%↑
Avg. Target Price / $53.13 ↓
Median Price Target / $51.00 ↓
Maximum Target / $62.00 ↔
Minimum Target / $47.00 ↓
No. Of analysts with Target Price/Total Analyst / 8/11↓
Upside from current / -1.1%
Maximum Upside from current / 15.5%
Minimum upside from current / -12.5%
The primary risks to target price and valuation includes the overhang from quality issues negatively impacting both customer attrition rates and ability to win new customers; changes in healthcare utilization; execution risk following management turnover; and tightening research budgets. Other risks include the prolonged or expanded impact from the recent Troponin quality issues, in particular around additional products and competitive share losses; further increases to pricing pressure among competitors within the immunochemistry and automation markets and from chronically budget-constrained hospital customers; and a more prolonged and severe downturn in emerging markets, which have been meaningful driver of recent growth.
Recent Events
On October 27, 2010, Beckman released its 3Q10 earnings report. Highlights are as follows:
Ø Revenue was $893.8 million (including $112.2 million from the 2009 Olympus Diagnostics acquisition), up 8.6% y/y or 9.8% in constant currency. The Zacks Digest average estimate for 3Q10 revenue was $880.9 million.
Ø Adjusted net earnings (excluding Olympus intangibles amortization) were $70.5 million, or $1.00 per diluted share, an increase of 14.1% and 12.4% y/y, respectively. The Zacks Digest average estimate for 3Q10 pro-forma EPS was $0.89.
Ø The company said it continues to see FY10 revenue of $3.65 billion to $3.70 billion, including $480 to $500 million from Olympus products. Pro-forma EPS for the period is still expected to be in the range of $3.90 to $4.00 per share.
Revenue
Revenue was $893.8 million in 3Q10, up 8.6% y/y (9.8% in constant currency), including $112.2 from the 2009 Olympus acquisition and a significant increase in Cellular placements. Total revenue constitutes recurring revenue and cash instruments sales. Recurring revenue increased 6.9% to $723.0 million, while cash instrument sales increased 16.4% y/y to $170.8 million in 3Q10. On a constant currency basis, recurring revenue increased 8.3% y/y or 4.2% excluding the impact of Olympus. The Zacks Digest average total revenue in 3Q10 was in line with the company’s report.
While Beckman derived 47% of its revenues from the US market ($423.2 million), its growth was lowest at 5.2%. Europe with revenues of $178.7 million and Asia Pacific with $155.5 million of revenues recorded growth rates of 6.5% and 22.2%, respectively. Revenues derived from the Other region (Canada and Latin America) increased 9.3% to $56.2 million.
Although Beckman recorded robust growth in Asia-Pacific and emerging markets, revenues derived from the developed countries were lower due to soft demand. Revenues from the US market will continue to see pressure until the quality challenges are resolved. The company is currently focused on increasing customer satisfaction, which is expected to drive revenue growth in future. The quality control initiatives and implementation is currently ongoing with some projects continuing through 2011. With customer satisfaction and retention as the primary focus, Beckman has shifted some research and development resources from future products to current products until it resolves the quality issues.
Olympus Diagnostics (ODS) acquired in August 2009 significantly extended Beckman’s geographic reach. Management stated that Olympus gives the company the ultra high chemistry offering it lacked previously.
Beckman reported that net US Clinical Diagnostics customer retention was down 1 percentage points from 2Q10. Attrition of customers was greater in Immunoassay and especially Chemistry. The analysts in the Digest group note that while attrition rates could increase in coming quarters, switching costs are high.
Provided below is a summary of revenue as compiled by Zacks Digest:
($ in million) / 3Q09A / 2009A / 2Q10A / 3Q10A / 4Q10E / 2010E / 2011E / 2012E / 2013EDigest High / $823.0 / $3,261.0 / $902.0 / $893.8 ↓ / $1,013.1↓ / $3,689.9↑ / $3,878.5↓ / $4,091.5↓ / $4,247.6
Digest Low / $822.8 / $3,260.5 / $902.0 / $893.7↑ / $995.1↑ / $3,672.0 ↑ / $3,784.8↑ / $4,038.5↑ / $4,247.6
Digest Average / $822.8 / $3,260.7 / $902.0 / $893.8 ↑ / $1,002.3 ↑ / $3,679.6 ↑ / $3,848.2↑ / $4,058.8↑ / $4,247.6
YoY growth / 8.4% / 5.2% / 19.2% / 8.6%↑ / 1.3%↑ / 12.8%↑ / 4.6%↓ / 5.5%↔ / 4.7%
Outlook: Beckman reiterated its FY10 revenue guidance range of $3.65–$3.70 billion. Moreover, recurring revenue growth, (excluding Olympus acquisition) in constant currency is expected to be 5%, comprising of about 1% growth in the US and around 9% growth in International markets. Olympus is expected to contribute $480–$500 million in 2010, unchanged from the earlier guidance.
SEGMENTS
The company’s reporting segments are Clinical Diagnostics and Life Sciences.
Clinical Diagnostics
Clinical Diagnostics (88.1% of total 3Q10 revenue)
The major fields that comprise clinical diagnostics are clinical chemistry, immunoassay, microbiology, hematology and cellular, with molecular diagnostics emerging as the new and expanding part of the clinical diagnostics testing market. The company has a significant market position in the three largest fields: Chemistry and Clinical automation, Cellular Analysis and Immunoassay and Molecular Diagnostics. Beckman has a significant market position in the three largest fields: clinical chemistry (25% US; 17% worldwide), immunoassay (13% US; 7% worldwide) and hematology (48% US; 28% worldwide).
Revenues in the Clinical Diagnostics segment were $787.6 million, an increase of 10.8% y/y (11.9% in constant currency). Clinical Diagnostics revenue, excluding Olympus, increased 4.6% or 5.5% y/y in constant currency, led by 20% or 18% y/y in constant currency, growth in Asia Pacific and Emerging Markets, respectively. The Zacks Digest average revenue in 3Q10 was in line with the company’s report.
Chemistry & Clinical Automation (41% of total segment’s revenue): The segment includes Protein and rapid tests product and Clinical Automation. In chemistry, Beckman maintains a leadership position (#1 in the US and #2 in Europe) worldwide. Revenues in the Chemistry & Clinical Automation segment were $323.2 million, an increase of 14.3% y/y (16.0% in constant currency).
Cellular Systems/Analysis (31% of total segment’s revenue): This segment includes hematology, coagulation, and flow cytometry and related products. Revenues in the Cellular segment were $244.2 million, an increase of 6.7% y/y (6.9% in constant currency).