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Bennett Meier

SIAL AT A GLANCE

P/E ► 19.7 AVG EV/EBITDA ► 12.7 AVG ROA ► 13.3% HIGH ROE ► 21.5% HIGH Debt to Equity ► 0.636 AVG Current Ratio ► 1.85 AVG Interest Coverage Ratio ► 41.3 VERY HIGH

 

 

 

 

 

 

Sigma-Aldrich Corp. (NASDAQ: SIAL) sells over 100,000 chemicals, 46,000 of which it manufactures internally.^[1] Most of the company's 80,000 customers^[2] are scientific research institutions that purchase basic lab chemicals. However, the company also sells chemicals in large quantities to pharmaceutical companies who use them to manufacture drugs on a large scale. No single account provided more than 2% of Sigma-Aldrich's total sales in 2007.^[3].

Many of S-A’s products are generic and available from many competing firms. Sigma-Aldrich differentiates itself from its competitors with its same-day shipping policy. 95% of all Research-segment orders are shipped the same day they are received^[4] and the company reports a backlog of less than 2%. ^[5] This policy comes at the cost, however, of larger-than-normal inventories; S-A reported 2007 inventories valued at 32% of yearly revenue, compared to the industry average of about 16%. ^{[6] [7]} High inventories can sometimes prove problematic in hard economic times because they reduce the company's cash-on-hand, though Sigma-Aldrich reported no problems with liquidity in 2007.

Business Description and Financials

Income Statement for FY 2005-2007

^[8]

Sigma-Aldrich has four business units each catering to a separate class of customer and product.

• Research Essentials (19% of total sales in 2007) sells common lab chemicals and supplies such as biological buffers, cell culture reagents, biochemicals, solvents, reagents and other lab kits to customers in all sectors. ^[10]
• Research Specialties (37% of total sales) sells organic chemicals, biochemicals, analytical reagents, chromatography consumables, reference materials and high-purity products.^[11]
• Research Biochemicals (15% of total sales) provides "first to market products" to high end biotech labs,^[12] selling immunochemical, molecular biology, cell signaling and neuroscience biochemicals.^[13]
• Fine Chemicals (SAFC) (29% of total sales) fills large-scale orders of organic chemicals and biochemicals used for production in the pharmaceutical, biotechnology, and the high-tech electronics industry.^[14]

Total Sales Breakdown by Business Unit

(In millions of dollars)

^[15]

Sigma-Aldrich has seen sales growth across all business units as it continues to expand its international presence in Europe, Asia, and Latin America. With the acquisition of British chemical supplier Epichem in 2007, the company's industrial supply unit SAFC posted double digit revenue growth in Europe and the aggregated region it calls CAPLA (Canada, Asia-Pacific, and Latin America.) ^[17] In September 2007, the company announced it is building a new manufacturing hub just northwest of Shanghai, China, to support the growth of its SAFC unit in the region. This move is consistent with CEO Jai Nagarkatti's goal that 25% of S-A's total revenue would come from sales in CAPLA by 2010.^[18] 2007 sales revenue in the Research Specialties unit also grew by double digits (13.6%) due to an uptick in orders from pharmaceutical and academic labs in the US, Europe and CAPLA.

Geographic Revenue Origination

Sigma-Aldrich organizes its sales data geographically based upon the location from which the order shipped. More specific data on international shipments are not made available to the public.

^[19]

Net Sales to Unaffiliated Customers

Trends and Forces

Variable Government Funding for Research

Nearly 71% of Sigma-Aldrich's total sales revenue comes from small to medium-scale orders from biotechnology research labs in universities, hospitals, and independent facilities.^[21] Many of these organizations rely on government grants for funding and support for their research. The level of government funding for these entities varies from year to year, however, depending on tax revenue, pressing expenditures on the military and social relief programs, the party in power, and public support for research programs. This volatility can have a positive or negative effect on research laboratories' funding and, by extension, their ability to make new purchases from Sigma-Aldrich. While the company is somewhat insulated from this volatility by the breadth of its laboratory customer base and its sales relationships with larger, non-government manufacturers, an across-the-board cut in government research spending would have a definite negative impact on the company's overall sales. The United States Office of Management and Budget (OMB) has released the president's proposed budget for 2009. In it, the president proposes increasing the research budget of the National Science Foundation (the agency responsible for a large percentage of the government's research grants) by 16% in 2009 to a total of $5.59 Billion. The NSF's research budget for 2008 stands at $4.8 Billion, up 2.8% from 2007. ^[22]

Continued Profitability of Prescription Drugs

In 2007, 36% of Sigma-Aldrich's total sales came from the pharmaceutical and biotechnology companies alone (not including university and government supported labs).^[23] While large-scale chemical orders for scaled-up drug manufacturing account for much of SAFC's sales, pharmaceutical companies' research and development departments make purchases across S-A's three Research business units as well. As a percentage of total costs, R&D expenditures across the Pharmaceutical industry were five times the average in other manufacturing industries.^[24] In 2003 alone, US Pharmaceutical companies spent over $17 Billion researching and developing new drugs. ^[25] R&D spending, however, depends heavily on the continued profitability of new drugs. If the economic returns from new drug production decreases, R&D expenditures on those drugs will diminish or disappear altogether. Such a reduction in expenditures would have a negative effect on sales growth across all of Sigma-Aldrich's Research business units.

The Dollar's Performance against Foreign Currency

As with any global corporation, much of Sigma-Aldrich's revenue is affected by fluctuations on the international capital markets. In 2007, a full 60% of the company's total sales came from outside of the United States.^[26] Many of these sales were conducted in currencies other than dollars and the resulting exchange into dollars alone accounted for a 4.8% increase in the dollar value of sales in 2007. This was up significantly from the corresponding sales boost in 2006 of 0.4%. ^[27] Though some of this increase has resulted simply from a higher percentage of total sales being made in foreign currencies, it can also be attributed to the consistent decline of the dollar against many of the other world currencies.

Competition

Primary competitors by business unit:

• Research Essentials shares the market for common lab reagents and equipment with Invitrogen (IVGN), Thermo Fisher Scientific (TMO), and VWR Industries.
• Research Specialties competes with GE Healthcare and Thermo Fisher Scientific (TMO) in the market for specialized analytical reagents and high-purity products.
• Research Biotech encounters competition in the specialized biochemical sector from Applied Biosystems (acquired by Invitrogen in 2008), GE Healthcare, Invitrogen (IVGN), Millipore (MIL), and Qiagen N.V. (QGEN).
• SAFC faces competition from BASF SE (BASFY), Covidien Ltd (COV), Koninklijke DSM N.V. (RDSMY), Evonik Degussa Corp., and Lonza Group for large-scale chemical orders from high-tech electronics and pharmaceutical manufacturers.

References

1. ↑ SIAL, FY 2007 10-K, Item 1: Business, pp. 4
2. ↑ SIAL, FY 2007 10-K, Item 1: Business, pp. 3
3. ↑ SIAL, FY 2007 10-K, Item 1: Business, pp. 3
4. ↑ Sigma-Aldrich 2007 Annual Report pp. 5
5. ↑ SIAL, FY 2007 10-K, Item 1: Business, pp. 4
6. ↑ SIAL, FY 2007 10-K, Financial Report, pp. 19, 31
7. ↑ See footnotes 29-31
8. ↑ SIAL FY 2007 10-K, Note 13: Company Operations by Business Unit, pp. 44
9. ↑ SIAL, FY 2007 10-K, Item 7: Management's Discussion and Analysis, pp. 30
10. ↑ Reuters Sigma-Aldrich Profile
11. ↑ Reuters Sigma-Aldrich Profile
12. ↑ SIAL, FY 2007 10-K, Item 7: Management's Discussion and Analysis, pp. 21
13. ↑ Reuters Sigma-Aldrich Profile
14. ↑ Reuters Sigma-Aldrich Profile
15. ↑ SIAL FY 2007 10-K, Note 13: Company Operations by Business Unit, pp. 44
16. ↑ SIAL FY 2007 10-K, Note 13: Company Operations by Business Unit, pp. 44
17. ↑ SIAL, FY 2007 10-K, Management's Discussion and Analysis, pp. 25
18. ↑ Sigma-Aldrich Expansion in Republic of China to Support Sales Growth
19. ↑ SIAL, FY 2007 10-K, Note 13: Company Operations by Business Unit, pp. 44
20. ↑ SIAL, FY 2007 10-K, Note 13: Company Operations by Business Unit, pp. 44
21. ↑ SIAL, FY 2007 10-K, Item 1: Business, pp. 3
22. ↑ United States Budget, FY 2009
23. ↑ Sigma-Aldrich 2007 Annual Report, pp. 2
24. ↑ Congressional Budget Office Report: Research And Development in the Pharmaceutical Industry, pp. 19
25. ↑ Congressional Budget Office Report: Research And Development in the Pharmaceutical Industry, pp. 17
26. ↑ SIAL, FY 2007 10-K, Item 1A: Risk Factors, pp. 14
27. ↑ SIAL, FY 2007 10-K, Item 1A: Risk Factors, pp. 14
28. ↑ SIAL, FY 2007 10-K, Financial Report, pp. 19, 31
29. ↑ Google Finance: IVGN, FY 2007 Financial report
30. ↑ TMO, FY 2007 10-K, pp. 34, F-4
31. ↑ GE, FY 2007 10-K, pp. 46
32. ↑ Google Finance: API, FY 2007 Financial Report
33. ↑ Google Finance: MIL, FY 2007 Financial Report
34. ↑ Google Finance: QGEN, FY 2007 Financial report
35. ↑ Google Finance: BASFY, FY 2007 Financial Report
36. ↑ Google Finance: COV, FY 2007 Financial report
37. ↑ Google Finance: DSM, FY 2007 Financial report
38. ↑ Google Finance: RDSMY, FY 2007 Financial report
39. ↑ Evonik, FY 2007 Annual Report, pp. 43, 45
40. ↑ Lonza Group, FY 2007 Annual Report, pp. 14-15