Beckman Initiated at Underperform

Recently, we initiated our coverage on Beckman Coulter Inc. (BEC) with an Underperform rating.

Beckman’s adjusted EPS of $0.84 was way below both the Zacks Consensus Estimate of $1.07 and $0.99 in the year-ago quarter. Revenues increased 19.2% to $902 million primarily banking on the acquisition of Olympus, which contributed $116.6 million.

The primary issue concerning us at present is the warning letter associated with the troponin test kits, a significant development for the company since it has a 40% market share in troponin in the US hospital market.

On June 21, 2010, Beckman received a warning letter from the US Food and Drug Administration (FDA) regarding troponin test kits. The agency claimed that the company has made certain modifications to its AccuTnI troponin test kits as used on UniCel DxI Immunoassay systems and Access Immunoassay systems without obtaining appropriate product clearances from the FDA.

Beckman’s compliance and quality-related issues in the US have had a higher-than- anticipated drag on revenue and led it to step up investments to enhance customer satisfaction and confidence. Increased investment related to these issues is expected to reduce 2010 EPS by $0.40 – $0.50, significantly higher than the earlier expectation of $0.15 – $0.25, provided in April. Since the remediation plan is expected to continue for the time being, expenses may rise in future if the FDA asks for additional measures.

Moreover, the troponin issue has affected new customer additions since the US sales force has primarily been deployed to focus on customer retention and satisfaction. To aggravate the scenario, the company’s CEO, Scott Garrett, abruptly resigned earlier in September. Based on these critical factors, we prefer to avoid Beckman for the time being until further visibility is available.

In addition, cash instrument sales were lower by 4% primarily due to a slowdown in life science spending in the developed countries. Hospitals continue to remain cautious with respect to capital spending in the current economic environment. Moreover, the company also witnessed reduced R&D initiatives within the pharmaceutical industry resulting from last year’s consolidation. Consequently, Beckman expects lower demand for Life Science products to reduce 2010 EPS by $0.15 – $0.20. The company had to lower its 2010 EPS outlook by another $0.15 – $0.20, a result of the delayed introduction of cellular analysis products and softness in the user markets.

BECKMAN COULTER (BEC): Free Stock Analysis Report

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