PerkinElmer Sacrifices Short-Term Profit to Preserve R&D, Buy Technologies on the Cheap
Not many CEOs of publicly traded companies tell Wall Street that they are willing to sacrifice profits for the next few quarters to preserve the long-term health of their R&D operations. So I was eager to hear Rob Friel, CEO of Waltham, MA-based PerkinElmer, explain why he thinks this strategy makes sense for his company, a giant maker of fancy picks and shovels for biomedical researchers.
The main reason is that years of investing in R&D has put his company in a better position than a lot of people realize, Friel says. Most investors see, for example, that PerkinElmer (NYSE: PKI) has made a lot of money in the past selling a machine called Opera, a sophisticated cell-analysis tool for biotech, pharmaceutical, and academic researchers that prices out at $750,000. In an economic downturn, that’s not a great business.
But thanks to PerkinElmer’s previous investment in continued R&D on the technology underlying the Opera system, Friel says, the company is already in the process of switching over customers to the next-generation tool it calls Operetta. This newer version is faster, better at archiving data from reams of cell analysis experiments, and, at $150,000 to $200,000, much cheaper than Opera. Friel’s confident the new system stacks up well with competitors like Thermo Fisher Scientific’s Cellomics machine, and General Electric’s IN CELL Analyzer.
And if PerkinElmer, a seven-decade old company, can catch a lucky break—like President Obama boosting the National Institutes of Health budget as part of an economic stimulus—then its strategy of continuing to invest in such advanced life sciences research tools might just end up being farsighted. What’s more, because it’s sitting on a relatively comfortable pile of $179 million in cash, PerkinElmer may be able to scoop up cutting-edge technologies from distressed small companies for thrift-shop prices.
“We are taking the approach that we should continue to invest in the long-term, even though it may be difficult for some time,” Friel says.
Naturally, this long-term emphasis is unpopular with Wall Street. PerkinElmer stock has fallen to a five-year low, dipping to $14.11 at Friday’s close. The company now trades at a bargain price-earnings ratio of about 13, below the industry average of about 15, according to data on competitors compiled by Yahoo Finance.
This is at least partly a direct response to a grim financial outlook from the company itself. PerkinElmer says it expects revenue in 2009 to be flat or down by a “mid-single digit” percentage. Instead of making drastic cuts to R&D or administrative spending, the company is going to go ahead and let that weakening revenue stream take a toll on its profits. The company expects its all-important earnings per share to fall by a “mid-single digits to mid-teen” percentage for 2009.
In a company that generated about $1.9 billion last year in revenue, PerkinElmer maintains an R&D budget of about $120 million, or about 6 to 7 percent of total revenues, Friel says. The company has about 9,000 employees around the world, including 800 at its Massachusetts headquarters, and about 800 scientists and engineers spread globally. (The R&D group in Waltham works mostly on tools for genetic screening which can make for more precise diagnostic tests, Friel says.)
PerkinElmer is looking for growth to come out of two primary groups—diagnostics and environmental detection/food safety, Friel says. Better understanding of the human genome is leading to more predictive diagnostic tests, especially in prenatal screening, Friel says. The second area is promising because of the move toward a globalized supply chain for food and personal products that gives a lot of people the willies—remember the tainted toothpaste from China? The tainted peanut butter? Such episodes are creating demand from companies like Wal-Mart who want tools to help them determine what’s really safe to put on the shelves, and what to take off, Friel says. To keep gaining momentum in these divisions, the company’s business development team will be on the lookout to acquire “great opportunities” and is willing to pay a premium for the ones that are proven and have cleared most of the risky hurdles in R&D, Friel says.
The company’s strategy makes one important assumption—that the downturn is going to last something like 12 to 18 months, and not for years and years. It will be interesting to see this year if PerkinElmer can hold to its strategy if the economic headlines coming out New York and Washington keep getting worse and worse. “We want to invest through the downturn, so that when we come out of it, we’ll be in a strong position,” Friel says.