Beckman Coulter Inc. seems to have caught something at the hospital.
Shares of the Fullerton-based maker of medical testing equipment and supplies were off about 40% last week since September on a market value of $3 billion.
Beckman makes in-struments and supplies used by hospitals, testing laboratories and medical researchers. It has been hit by concerns about hospitals,Beckman’s largest customers,putting off big purchases.
While usually recession-proof, hospitals are nervous in the current downturn because of tougher financing, lost investment income from Wall Street’s downturn and the risk of treating more patients who don’t have insurance because of layoffs.
At an investor conference last week, Beckman Chief Executive Scott Garrett downplayed concerns, citing the company’s recession-tested business model, which he called “a wonderful model in times like this.”
Beckman has some 200,000 machines in place at hospitals, laboratories, universities and other sites. It gets 80% of its $3.1 billion in yearly revenue from recurring sales of chemicals used to run tests on its machines as well as from lease and service payments.
“The recurring revenue model is far more attractive to us,” Garrett said at a J.P. Morgan healthcare conference in San Francisco last week.
Recurring revenue comes from what Garrett called Beckman’s “sticky” customers.
“Once we have a customer and they’ve trained their staff, there are significant switching costs” to go to a competitor, he said.
Rivals include Siemens AG, Roche Holding Ltd. and Abbott Laboratories.
Beckman customers typically sign five-year leases. Once a lease is up, 80% to 95% stay with Beckman, Garrett said.
“Everyone is aware that there’s been a lot of discussion and concern around the hospital spending environment,” J.P. Morgan medical device analyst Tycho Peterson said in introducing Garrett at the conference. “The companies that are going to be best-positioned in that regard are those with nice consumable streams, a broad installed instrument base and, importantly, an evolving pipeline.”
Along with new tests for existing machines, every few years Beckman looks to a new offering to drive growth.
Last month, the Food and Drug Administration approved Beckman’s latest machine for analyzing blood cells. The UniCel DxH 800 is the most recent in Beckman’s workhorse UniCel line.
For 2009, Beckman said it expects to grow profits 10% on cost controls and a shift toward more profitable products, including the UniCel DxH 800.
But the machine, which sells for $220,000, stands to test the willingness of hospitals to spend on big-ticket items.
Garrett was undeterred last week.
“In times of growing hospital admissions or declining hospital admissions, in times of rising or falling unemployment, our industry has steadily achieved mid-single digit to high-single digit growth rates,” he said.
Beckman hopes to sell hospitals on the UniCel as a way to boost productivity and lower labor costs. The machine largely automates testing, even piercing through caps on test tubes.
The company also touts its machines as a way to bring in additional business for hospitals.
Extending Labs
Many hospitals have started offering testing services to outside doctors as a way to get more money out of their labs. This is known as outreach testing.
“Hospitals have begun marketing these services more effectively,” Garrett said. “Literally 85% of hospitals report that they are holding or gaining share in outreach testing.”
Down the road, Beckman is looking to bring advanced genetic testing to everyday laboratories as a way to boost business.
The company expects to get into what’s known as molecular diagnostics,or genetic testing to identify a disease or a predisposition for a disease,in 2010 or 2011.
“We’re going to take what’s currently a complex, labor-intensive process and simplify and automate it as we’ve done in many other areas over the years,” Garrett said.
A potential risk now for Beckman, according to Garrett, is the 20% or so of customers who pay cash for Beckman equipment.
“That’s the part of the business that’s most likely to be affected in a downturn,” he said.
Still, that could bring opportunity for Beck-man to convert cash customers to leases, which are more profitable for the company as the deals lock in sales of Beckman supplies.
“It’s very attractive for us to go to a customer that’s had a habit of paying cash to tell him how he can finance that purchase,” Garrett said.
Beckman’s fourth-quarter and 2008 results are due Feb. 9.
The company has said it expects to make $222.5 million to $228.7 million on a 12% revenue rise to about $3.1 billion for 2008.
Analysts on average expect Beckman to post a profit of $224.3 million on $3.1 billion in 2008 sales.
For 2009, Wall Street sees Beckman’s profits growing 9% and sales rising 3%.
