First, it is in the early phases of trying to aggressively expand margins to industry average levels. The potential upside to earnings from operational improvements is large – the operating margin would double if it achieves margins in line with peers. However, a plan is still being developed so the timing and size is still somewhat uncertain.
Second, it has new products, mainly the MALDI Biotyper, that may not be fully priced into the shares. The potential for the technology, which more rapidly identifies pathogens, is exciting scientifically, but also to investors. Both of these, should drive above average earnings growth for the firm and make its company worth following and potentially owning at some point.
Bruker Corporation manufacturers scientific instruments and sells them around the world. Its products cover a wide range of end markets including: life science, pharmaceutical, biotechnology, clinical and molecular diagnostics research, and materials and chemical analysis. It is involved in MRI technologies, mass spectrometry, gas chematography, X-ray, spark-optical emission spectroscopy, atomic force microscopy and other things most of us in the investing world have a fringe understanding of at best or heard mentioned by that science nerd we know.
It is also involved in the detection of chemical, biological, radiological, nuclear and explosives (CBRNE). It has a history of acquiring companies, most recently SkyScan in 2012 and Prairie Technologies in 2013. Acquisitions can be accretive but also are at times dilutive to earnings over the near-term and are both a negative and positive risk to the share price depending on the details.
Bruker has a market cap of $3.42 billion and a total debt to equity ratio of 48%. Competitor and comparable firms are similarly levered. The company has around 80% of its employees in Europe. However, sales are split with roughly a third in the US, Europe and Asia/ROW, respectively.
MALDI Biotyper has Significant Potential
The MALDI Biotyper is a device that can quickly identify bacteria, organisms and viruses. It is a huge leap forward from current technology which requires bacteria to be cultured and then identified through various methods that require stains and microscopes. The current method is time consuming, requires the time of scientists and lab staff and is limited to organisms that grow on a culture plate.
The new device is more similar to a chemical spectrometer in approach. It can rapidly identify a of range organisms, not just bacteria. The turnaround time is measured in minutes instead of hours or often days in the old approach. Reports are that the average turnaround time decreases by over 48 hours and by as many as 96 hours. This allows the doctors to start the right treatments sooner, and decreases all kinds of critical metrics, mortality, length of stay, and total cost of treatment.
The Biotyper is awaiting FDA approval in the near-term and indications are approval should come as soon as late 2013. The initial market size is potentially every hospital in United States, plus governments around the world. It is already being sold outside the United States. Currently, Burker does have 800 Biotyper’s installed outside the US, largely in the EU. Management has stated the product will have a $275,000 price tag. Biomerieux Vitek MS has the remainder of the market and is also sold in Europe. It is also awaiting the FDA approval in the US.
Research from Goldman Sachs states that Bruker has a penetration rate of 5% into the European market four years after the Biotypers approval there. Goldman has modeled similar penetration in the US over the next five years. This results in revenue of $120-$300 million.
Based on the reduction in costs and lives saved with the product, there is potentially significant upside and adoption could be more rapid. The product will also continue to penetrate Europe further and expand to the rest of the world.
Margin Improvement – Potentially Increase Margins 2x
Management has indicated it plans to focus on expanding margins into at least the upper-teens to get more in line with peers like Water (NYSE: WAT), Danaher (NYSE: DHR), and Thermo Fisher (NYSE: TMO). Its current operating margin is around 10%, so it has a way to go but there is a large upside to earnings if the company has some success. Management will release its margin improvement plan in 2014 but has already reorganized certain portions of the business which should provide a start to the process.
The questions surrounding its margin improvement plans are two fold: first, what is the timing and second, how much will it cost. The company has not provided official guidance on these key areas and the stock may have priced in too much, too soon.
The upside potential and interest in the Biotyper is an under-appreciated part of the stock. Most investors remain focused on the margin improvement plans, which are key but there may be some additional upside to the shares when this product is approved. It will likely received additional attention and act as a catalyst for the stock.
What are your thoughts on Bruker and the potential for it's new Biotyper Device?