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Helen Han

TMO AT A GLANCE

P/E ► 21.0 AVG EV/EBITDA ► 12.3 AVG ROA ► 4.6% AVG ROE ► 5.7% AVG Debt to Equity ► 0.391 AVG Current Ratio ► 3.01 AVG Interest Coverage Ratio ► 9.03 AVG

 

 

 

 

 

 

Thermo Fisher Scientific (NYSE:TMO) is a one-stop supplier for research labs around the world. Fisher Scientific's 100-year-old business as the top seller of core laboratory consumable products which are crucial to every research lab complements Thermo Electron's sales of high-tech bioanalytic instruments, which are an expensive one-time purchase but require consumables to operate.

Its diverse portfolio of products also partially shields TMO from dependence on the spending patterns of its customers and their public and private funders. The sales of core lab consumables (unlike bioanalytic equipment) do not depend on fluctuating research budgets.

TMO is seeking to expand further in emerging markets such as China and India, purchasing India's largest consumable supply company and signing a contract with a major Chinese petrochemicals producer in 2007. Demand from new environmental and pharmaceutical research institutions for its products is high. TMO published a new catalog in Chinese in April 2008, tailored to the needs of the research labs in China.

Business Financials

Thermo Fisher Scientific is the result of a 2006 merger between Thermo Electron and Fisher Scientific. TMO's business is now divided into two main segments:

• Analytical Technologies: This segment sells lab instruments, diagnostic devices, software and services to pharmaceutical, biotechnology, and academic laboratories. This segment has continued the business of Thermo Electron before the merger. In addition, TMO develops and sells high-tech detection equipment for uses in air quality monitoring, radiation detection, as well as equipment used in safety monitoring at airports and border patrols for the prevention of terrorism. ^[1]

• Laboratory Products and Services: This segment sells consumables that are disposable commodities used in the everyday operations of labs. This segment has continued the core business of Fisher Scientific before the merger and still maintains a separate website to maintain customer loyalty. The Fisher Scientific catalog has been published for over 100 years and is the largest provider of core laboratory equipment and services to research labs around the world. ^[2]

In the following chart and graph, a breakdown of TMO's sales revenues by segment is shown.

^[3]

^[4]

^[5]

Results of 2006 Merger

The company believes that the merger of Thermo Electron and Fisher Scientific has resulted in several benefits in its continued growth:

• Enlarged Product Diversity: With the merging of the two segments, analytical technologies and laboratory products, TMO can sell to the same customers in both segments but provide for different product needs. The laboratory products division sells low-tech consumable core laboratory equipment such as containers, cell cultures, etc., while the analytic technologies division provides high-tech instruments for experimental analysis. ^[6]

• Protection from Client Spending Patterns: TMO's clients are reliant on research grants to fund in their purchases of laboratory equipment. However, TMO's consumable laboratory products division shields the impact of the capital spending patterns of its research clients. Tighter research grant budgets mainly affect the clients' ability to purchase high-end equipment, while consumable products such as containers and reagents are largely unaffected due to their omnipresence in labs. ^[7]

• One-Stop Shop: The merging of the two segments makes TMO a one-stop shop for scientific laboratories, able to provide for most crucial needs of the lab through its core consumable products as well as more high-tech needs for analysis equipment. Instead of having to search for consumable products and high-tech equipment in different catalogs, laboratories may now potentially save time by fulfilling both needs with TMO product offerings. ^[8]

Expansion into Emerging Markets

Thermo Fisher is expanding into emerging markets such as China and India to take advantage of the rising demand for laboratory equipment and consumables in the developing countries' newly established environmental and pharmaceutical research institutions. 35% of TMO's sales in 2007 came from international markets, and TMO plans to increase this percentage, particularly through expansion and greater presence in emerging markets. In September 2007, the acquisition of Qualigens Fine Chemicals, a division of GlaxoSmithKline (GSK) located in India, was finalized for the purchase price of $59 million. Before this acquisition, Qualigens was India's largest laboratory chemicals and consumables supplier. The acquisition allowed TMO's Laboratory Products and Services segment to serve customers in India and South Asia in a variety of industries, including pharmaceutical, petrochemical, and environmental. ^[9]

Furthermore, TMO has been preparing for entry into the promising emerging market in China, where laboratory equipment and consumable demand is high due to the development of new research institutions. In April 2007, TMO announced that it would be the sole supplier of laboratory measurement instruments to China's largest petrochemical and oil producer, SINOPEC Shangai Petrochemical Company (SHI). In April 2008, TMO also published a newly translated catalog for China, available both in Mandarin and Cantonese. The new Chinese catalog is tailored to the needs of the customers in research, testing and processing facilities in China. ^[10]

Trends and Forces

TMO's Bioanalytic instruments face are becoming outdated:

TMO's bioanalytic technologies division faces significant competition from many other firms that specialize in producing innovative bioanalytic instruments. Specifically, key competitor Agilent Technologies (A) has actively produced new mass spectrometry technologies, while TMO has focused on developing new chromatography equipment while maintaining its current technology for mass spectrometry analytic instruments. If the firm cannot develop a suitable competitor to Agilon's product, TMO may see a loss of sales revenue in the analytic technologies division as potential customers opt for the newer technology. ^[11]

Core lab consumables face commoditization and increased competition:

Fisher Scientific's laboratory consumables catalog has been published for over 100 years, and its products before the TMO merger had a loyal following in research institutions around the world. The merger with Thermo Electron placed pressure on this brand reputation, while the low costs of producing these products invites increasing competition. Specifically its main competitor VWR International threatens to take market share. Customer loyalty is very important in the laboratory consumables business, where the products are essentially commodities that differ only in brand name.^[12]

TMO's sensitive detection equipment is exposed to liability issues:

TMO currently provides detection equipment in various airports, embassies, border crossings, etc., for protection against explosives and prevention of terrorist acts . ^[13] Malfunction of this equipment could cause such restricted materials to pass through undetected and incur liability claims against TMO. TMO's current liability insurance does not cover against such claims; additionally, TMO may lose a large part of their clientele if such a product malfunction were to become publicized. ^[14]

TMO revenues will fluctuate according to capital spending patterns of customers:

TMO's customers often stock up on lab consumables and equipment at the end of the year, when funding is abundant (NIH funding is distributed to labs towards the end of the calendar year). TMO's revenues thus fluctuate throughout the year and are strongest in the last quarter of the calendar year. NIH funding is not completely stable, either - economic pressures may result in a stagnation of NIH funding, which has been growing at 2-3% in the past few years but is not expected to increase in the near future. ^[15] TMO's customers from academic and government research labs are directly affected by the limitations of NIH grant funding; a lack of funding results in fewer laboratory product and equipment purchases and adversely affects TMO's sales revenues. ^[16]

Competition and Market Share

TMO's two main product divisions, analytic technologies and consumable laboratory products, are in direct competition with many other companies in the industry. In particular, its portfolio of bioanalytic instruments faces stiff competition. However, it is the top seller in consumable laboratory equipment, with only one other significant competitor.

Notes

1. ↑ TMO and Homeland Security
2. ↑ TMO 2007 SEC Filing 10-K, Item 1, Pg. 15
3. ↑ TMO 2007 SEC Filing 10-K, Item 7, Pg. 36
4. ↑ TMO 2007 SEC Filing 10-K, Item 7, Pg. 36
5. ↑ TMO 2007 SEC Filing 10-K, Item 6, Pg. 34
6. ↑ TMO merger creates the leading provider of products and services in the high-growth life, laboratory and health sciences industry
7. ↑ TMO 2007 SEC Filing 10-K, Item 1, Pg. 15
8. ↑ Thermo Fisher Scientific Positioned as One-Stop Shop for Products and Services
9. ↑ TMO to Acquire Qualigens, Extends Reach into India
10. ↑ TMO Press Release - New Catalog for China
11. ↑ Agilent 2007 SEC Filing 10-K, Item 1, Pg. 28
12. ↑ Agilent 2007 SEC Filing 10-K, Item 1, Pg. 28
13. ↑ TMO Provides High-tech Detection Equipment in Homeland Security
14. ↑ TMO 2007 SEC Filing 10-K, Item 1A, Pg. 27
15. ↑ NIH Funding to Stagnate
16. ↑ TMO 2007 SEC Filing 10-K, Item 1, Pg. 20
17. ↑ TMO 2007 SEC Filing 10-K, Item 7, Pg. 42
18. ↑ Agilent 2007 SEC Filing 10-K, Item 7, Pg. 55
19. ↑ BDX 2007 SEC Filing 10-K, Item 7, Pg. 38
20. ↑ BEC 2007 SEC Filing 10-K, Item 7, Pg. 49
21. ↑ ABI 2007 SEC Filing, Item 7, Pg. 48
22. ↑ WAT 2007 SEC Filing 10-K, Item 7, PG. 39
23. ↑ PKI 2007 SEC Filing 10-K, Item 1, Pg. 13
24. ↑ TMO 2007 SEC Filing 10-K, Item 7, Pg. 43
25. ↑ VWR 2006 SEC Filing 10-K, Item 1, Pg. 27