Second Annual Biopharma End Market Survey

Cowen surveyed 50 biopharma CFOs/budget managers to assess biopharma endmarket (~25% of total Tools sales) demand. Our survey suggests 2018 biopharma end maket revenue growth will be ~4-5%; growth across all major product categories will moderate but by no more than what we believe is embedded into Street estimates. The survey suggests TMO and A are best positioned to beat Street growth expectations.

Biopharma ~25% of LS&DT Revenue; 2017 Cowen Survey Highly Concordant With Results
Across the Tools group, ~25% of total revenue is generated from the biopharma end market. This end market hasaccounted for a disproportionately larger percentage to overall organic revenue growth over the past 5 years. As examples, we note that biopharma accounted for >70% of total organic revenue growth for both TMO and WAT in 2016 and is expected to account for >50% of total organic revenue growth in 2017. Strong biopharma demand has helped Tools stocks outperform the market over the past several years; accordingly, assessing the outlook for this end market is a key area of focus for investors. This is the second year we conducted this survey. Last year’s survey conclusions/predictions ultimately proved to be highly concordant with actual biopharmaceutical end market revenue growth rates in 2017.

Biopharma End Market Revenue Likely To Grow ~4-5% In 2018
Based on our survey, we estimate that the biopharma end market will grow ~4-5% Y/Y in 2018. While this is a moderation in growth relative to the past several years, we do not find this result all that surprising given difficult multiyear comparisons. Additionally, we believe most investors expect mid-single digit (~MSD) growth in this end market for 2018. We arrived at our biopharma growth estimate based on instrument revenue growth of LSD; large molecule-related R&D and production growth of ~MSD/HSD, and consumables/services growth of LSD/MSD. Similar to last year, APAC (particularly China and India) markets are not well represented in our survey. Accordingly, we adjusted our estimates slightly upward to account for these regions – our biopharma growth estimate of ~4-5% assumes ~HSD APAC growth, a slight moderation from >10% growth in 2017.

Instrument Revenue Growth Likely To Moderate Vs. 2017, But Will Still Grow
Survey results suggest that 2018 biopharmaceutical end market instrument revenue growth is likely to further moderate below 2017 levels. The good news is that instrument revenue is unlikely to drop off a cliff, but growth will likely be in the ~1-3% range. Under our coverage, A and WAT have the highest mix of instrument revenue among larger market cap Diversified Tools companies with >10% biopharma exposure.

Consumables and Services (Recurring Revenue) Growth Also Likely To Moderate
Survey results suggest that 2018 biopharmaceutical end market consumables revenue growth is likely to moderate well below 2017 levels. We expect LSD (2-3% Y/Y) consumables revenue growth via this end market for Tools companies in 2018; services could skew overall recurring revenue a smidge higher from these levels. Under our coverage, DHR and TMO have the highest mix of recurring revenue (consumables & services).

Outsourced Laboratory Services – Growth Likely Faster OUS
Survey results suggest that outsourced service revenue growth could moderate to LSD levels (1-2% Y/Y); we believe growth will likely be closer to 4-5% Y/Y given OUS demand (under-indexed and growing rapidly) and interest from recently funded biopharmaceutical companies. That said, this is still a moderation in growth vs. 2017. Under our coverage, A, PKI, and TMO have the highest exposure to the outsourced laboratory services market.

Biologics-Related Demand Slightly Lower In 2018 But Still Expected To Be Robust
Survey results suggest that bioproduction/bioprocessing revenue growth will remain at MSD+ levels. We believe expectations for 6-8% revenue growth are reasonable – Danaher’s recent commentary on Pall trends supports this outlook. Encouragingly, our survey suggests that large molecule patent expirations are only expected to have a limited impact on bioproduction spending. Under our coverage, A, DHR, TMO, and WAT have the highest revenue exposure to the large molecule R&D and production market.

Contract Manufacturing And Development Services – MSD+ Growth Expected
Survey results suggest that overall CDMO (contract development and manufacturing) revenue growth will approximate MSD levels (~4%). We believe growth is likely to be a bit higher than this (MSD/HSD = 5-6%+) given OUS demand and further adoption dynamics that are not captured in our survey. Specific to TMO/Patheon, we expect cross-selling opportunities will position TMO for share gains – this likely supports MSD/HSD growth as an expectation for TMO/Patheon in 2018 and beyond.

Amazon (AMZN; Outperform, Blackledge) Not Likely To Have A Material Impact On Thermo Fisher’s Channel Business|Importantly, the vast majority of survey respondents do not expect to use Amazon at all for laboratory product purchases. Among survey respondents who are/plan to use Amazon for laboratory product purchases, the types of products are largely limited to basic lab supplies and less complex products; these respondents also expect to move only a small percentage of purchases over to Amazon. Based on our survey, we believe Amazon is likely to have a very limited financial impact on Thermo Fisher (only company under our coverage with significant exposure to distribution market), if any. We continue to believe that investor concerns about Thermo Fisher losing significant share to Amazon are overblown.

Survey Top Picks (full page company snapshots on pages 7-12)
Under our coverage, Larger Cap Diversified Tools companies with ~10%+ revenue exposure to the biopharma end market include: A, DHR, PKI, QGEN, TMO, and WAT. Based on our assessment of consensus estimates and results from our survey, we believe TMO and A are best positioned to exceed 2018 organic revenue growth expectations based on our biopharma end market growth survey. That said, we believe most Diversified Tools companies are in a solid position to at least meet 2018 organic revenue growth expectations. Ultimately, our survey results build confidence that demand in a major end market for Tools companies is likely to hold up in 2018.

For more information, contact your Cowen sales representative.