Dear Shareholders
A Message From Scott Garrett
President and Chief Executive Officer
Steady Progress at Beckman Coulter Beckman Coulter has been transforming laboratory practice and patient care and, at the same time, making some fundamental changes in our own company. In 2005, my first year as CEO, we embarked on a series of purposeful and deliberate transitions aimed at enhancing our competitiveness and preparing us to fully capitalize on significant opportunities. Our results and trends in 2007 demonstrate our progress and the positive effects of the changes we’ve made to our organization and business model. It’s clear from our trends that we are on the right course.
Importantly, the momentum we’ve gained is sustainable, and our
vision of biomedical testing leadership is achievable.
Context for Change: Large and Growing Markets We see no shortage of opportunities for the highly capable products and services Beckman Coulter provides. Biomedical testing guides nearly every decision in health care, whether at the patient bedside or in a research laboratory. More and more experts are coming to recognize that biomedical testing provides great value at a reasonable cost. They acknowledge that comprehensive laboratory testing lowers the overall cost of patient management. Further, an efficient, highly-automated laboratory is a primary driver of overall hospital efficiency and cost effectiveness.
About 80% of Beckman Coulter’s revenue comes from sales in the $35 billion clinical diagnostics market, which is growing at about 5% per year. Because laboratory testing is a relatively inexpensive way for clinicians to diagnose and manage patients, the lab’s cost-effective contribution to better patient outcomes is driving increases in testing volumes. New tests are reaching the market faster every year, fueled by the rapid expansion of biological understanding. These factors, along with the positive demographics of an aging population in developed markets and rapid adoption of testing in emerging markets, create a very positive market environment.
Life science markets, on the other hand, are cyclical, with growth tied closely to the research and development spending of the pharmaceutical industry and government funding of academic research. The growth of this $15 billion market has been modest over the past five years, although some emerging markets like China offer opportunities as their scientific infrastructure develops rapidly.
Embracing Change: Organization and Business Model In 2005, we fundamentally altered our organization and business model to provide a robust platform for growth and value creation.
We transitioned people into new roles and recruited highly qualified individuals for key positions; 80% of our top 100 executives are either new to Beckman Coulter or in new roles in the last two years. These changes have energized the company with fresh perspectives, while establishing depth and skills throughout our management team. A heightened focus on succession planning and employee development in our talent management process has yielded a more adaptable and capable organization. Entering the fourth annual cycle of a disciplined talent review process, we are in a position to promote from within with confidence; likewise, we can identify talent gaps best filled from outside the company. The organization has benefited from our 2005 restructuring. As ‘One Company,’ we are able to redeploy resources as needed and act swiftly when opportunities arise. In this way, we create and capture value, which in turn maximizes value for our customers and shareholders. For instance, development of our molecular diagnostics system is progressing rapidly, due, in large part, to rapid redeployment of technical expertise from our genomics business and central research function. In utilizing the skill sets of our employees without regard for internal departmental structures, we have successfully and organically grown revenue at above market rates without adding to our staff.
We also implemented significant changes to our business model and processes when we transitioned to an operating-type lease model. This model meets the needs of our customers and emphasizes the robust recurring revenue stream derived from our large and growing installed base of instruments. Similarly, changes to incentives and metrics maintain our focus on increasing profitability and help management and investors assess the health and vitality of our company.
We are also working to improve operating margins in a climate of continuing price pressure by applying the tools of Lean and Six Sigma. Careful examination of our processes throughout our supply chain and business operations identified a series of initiatives to reduce the size and number of facilities, decrease product costs and advance our industry-leading levels of quality. We are building a “Lean” culture, constantly on the lookout for incremental changes that can drive consistent improvement in operations and margins. After the first year, Lean initiatives have allowed us to consolidate several operations and exit some buildings – freeing 100,000 square feet of space. This is just the beginning of continuous improvements to boost the productivity of our assets and employees.
Benefits of Change: Current and Future 2007 marked a turning point for many of our key performance indicators, reflecting the cumulative effect of all these changes. We reported total revenue growth of more than 9%, and achieved diagnostics growth at two times the market rate. Our unrivaled core competency of understanding and improving customer processes contributed to the strong performance: a third straight year of record placements of autochemistry systems, Immunoassay growth at nearly three times the market rate, and Clinical Automation growth of nearly 70%.
The continuing build up of lease payments and highly profitable consumables sales drove a 12% gain in recurring revenue – signaling improved predictability and sustainability of growth. Recurring revenue reached $2.16 billion in 2007 and constitutes approximately 78% of total revenue.
With disciplined cost management, we delivered an increase of 13% in adjusted net earnings. Cash flow improved substantially; free cash flow, temporarily suppressed by the leasing policy change, increased by more than $100 million, clearly affirming the benefits of the change in our business model.
Our core strengths and the ongoing changes at Beckman Coulter position us well for the future as we target sustained above market revenue and earnings growth through:
1. Building on leadership positions and thereby increasing market share.
2. Developing new tests and improving the utilization and value of our installed base of systems,
3. Acquiring and deploying new technologies that will further differentiate our products, enhance quality and enable entry into adjacent markets, and
4. Gaining customers in faster-growing emerging markets.
Rapid product introductions continue with the release of a next generation hematology analyzer and the addition of four new chemistry-immunoassay work cells in 2008. Recent investments in licenses, acquisitions and internal development programs sustain a promising pipeline of new tests; adding these new tests across our large and growing installed base fortifies our growth over the next five years.
We are leveraging our systems integration expertise, hospital customer relationships, genomics knowledge and expanded investment capacity to enter the Molecular Diagnostics field. We expect to be among the first with a “sample-to-result” molecular diagnostics system for the hospital market. Industry experts expect this $2 billion market to generate 25% of the total growth in diagnostics markets over the long term.
As rapid economic growth enables expanded access to health care in promising emerging markets, such as China and India, Beckman Coulter’s capable management team and responsive organizations allow us to capitalize on these opportunities.
The changes needed to achieve our vision of biomedical testing leadership are almost complete, the opportunities before us are clear and the organization is prepared to act. Strength in clinical systems, assay development, work cell solutions and automation, combined with our comprehensive approach to simplifying, automating and innovating laboratory processes, positions us for success.
We continue to be focused on creating shareholder value through growth, quality and operating excellence. Our dedication to improving patient health and reducing the cost of care keeps us on the right side of the health care cost debate at all times and in every region of the world.
Thank you for your interest and trust in Beckman Coulter. We look forward to reporting our progress in 2008 and beyond.
Context for Change: Large and Growing Markets We see no shortage of opportunities for the highly capable products and services Beckman Coulter provides. Biomedical testing guides nearly every decision in health care, whether at the patient bedside or in a research laboratory. More and more experts are coming to recognize that biomedical testing provides great value at a reasonable cost. They acknowledge that comprehensive laboratory testing lowers the overall cost of patient management. Further, an efficient, highly-automated laboratory is a primary driver of overall hospital efficiency and cost effectiveness.
About 80% of Beckman Coulter’s revenue comes from sales in the $35 billion clinical diagnostics market, which is growing at about 5% per year. Because laboratory testing is a relatively inexpensive way for clinicians to diagnose and manage patients, the lab’s cost-effective contribution to better patient outcomes is driving increases in testing volumes. New tests are reaching the market faster every year, fueled by the rapid expansion of biological understanding. These factors, along with the positive demographics of an aging population in developed markets and rapid adoption of testing in emerging markets, create a very positive market environment.
Life science markets, on the other hand, are cyclical, with growth tied closely to the research and development spending of the pharmaceutical industry and government funding of academic research. The growth of this $15 billion market has been modest over the past five years, although some emerging markets like China offer opportunities as their scientific infrastructure develops rapidly.
Embracing Change: Organization and Business Model In 2005, we fundamentally altered our organization and business model to provide a robust platform for growth and value creation.
We transitioned people into new roles and recruited highly qualified individuals for key positions; 80% of our top 100 executives are either new to Beckman Coulter or in new roles in the last two years. These changes have energized the company with fresh perspectives, while establishing depth and skills throughout our management team. A heightened focus on succession planning and employee development in our talent management process has yielded a more adaptable and capable organization. Entering the fourth annual cycle of a disciplined talent review process, we are in a position to promote from within with confidence; likewise, we can identify talent gaps best filled from outside the company. The organization has benefited from our 2005 restructuring. As ‘One Company,’ we are able to redeploy resources as needed and act swiftly when opportunities arise. In this way, we create and capture value, which in turn maximizes value for our customers and shareholders. For instance, development of our molecular diagnostics system is progressing rapidly, due, in large part, to rapid redeployment of technical expertise from our genomics business and central research function. In utilizing the skill sets of our employees without regard for internal departmental structures, we have successfully and organically grown revenue at above market rates without adding to our staff.
We also implemented significant changes to our business model and processes when we transitioned to an operating-type lease model. This model meets the needs of our customers and emphasizes the robust recurring revenue stream derived from our large and growing installed base of instruments. Similarly, changes to incentives and metrics maintain our focus on increasing profitability and help management and investors assess the health and vitality of our company.
We are also working to improve operating margins in a climate of continuing price pressure by applying the tools of Lean and Six Sigma. Careful examination of our processes throughout our supply chain and business operations identified a series of initiatives to reduce the size and number of facilities, decrease product costs and advance our industry-leading levels of quality. We are building a “Lean” culture, constantly on the lookout for incremental changes that can drive consistent improvement in operations and margins. After the first year, Lean initiatives have allowed us to consolidate several operations and exit some buildings – freeing 100,000 square feet of space. This is just the beginning of continuous improvements to boost the productivity of our assets and employees.
Benefits of Change: Current and Future 2007 marked a turning point for many of our key performance indicators, reflecting the cumulative effect of all these changes. We reported total revenue growth of more than 9%, and achieved diagnostics growth at two times the market rate. Our unrivaled core competency of understanding and improving customer processes contributed to the strong performance: a third straight year of record placements of autochemistry systems, Immunoassay growth at nearly three times the market rate, and Clinical Automation growth of nearly 70%.
The continuing build up of lease payments and highly profitable consumables sales drove a 12% gain in recurring revenue – signaling improved predictability and sustainability of growth. Recurring revenue reached $2.16 billion in 2007 and constitutes approximately 78% of total revenue.
With disciplined cost management, we delivered an increase of 13% in adjusted net earnings. Cash flow improved substantially; free cash flow, temporarily suppressed by the leasing policy change, increased by more than $100 million, clearly affirming the benefits of the change in our business model.
Our core strengths and the ongoing changes at Beckman Coulter position us well for the future as we target sustained above market revenue and earnings growth through:
1. Building on leadership positions and thereby increasing market share.
2. Developing new tests and improving the utilization and value of our installed base of systems,
3. Acquiring and deploying new technologies that will further differentiate our products, enhance quality and enable entry into adjacent markets, and
4. Gaining customers in faster-growing emerging markets.
Rapid product introductions continue with the release of a next generation hematology analyzer and the addition of four new chemistry-immunoassay work cells in 2008. Recent investments in licenses, acquisitions and internal development programs sustain a promising pipeline of new tests; adding these new tests across our large and growing installed base fortifies our growth over the next five years.
We are leveraging our systems integration expertise, hospital customer relationships, genomics knowledge and expanded investment capacity to enter the Molecular Diagnostics field. We expect to be among the first with a “sample-to-result” molecular diagnostics system for the hospital market. Industry experts expect this $2 billion market to generate 25% of the total growth in diagnostics markets over the long term.
As rapid economic growth enables expanded access to health care in promising emerging markets, such as China and India, Beckman Coulter’s capable management team and responsive organizations allow us to capitalize on these opportunities.
The changes needed to achieve our vision of biomedical testing leadership are almost complete, the opportunities before us are clear and the organization is prepared to act. Strength in clinical systems, assay development, work cell solutions and automation, combined with our comprehensive approach to simplifying, automating and innovating laboratory processes, positions us for success.
We continue to be focused on creating shareholder value through growth, quality and operating excellence. Our dedication to improving patient health and reducing the cost of care keeps us on the right side of the health care cost debate at all times and in every region of the world.
Thank you for your interest and trust in Beckman Coulter. We look forward to reporting our progress in 2008 and beyond.