Bruker Offers Upside With Key Enabling Technologies For Future Bio-Pharma Research

 

Summary

• Life science tool companies have faced challenges in the post-pandemic adjustment process, but Bruker has fared better than many due to its leverage to research tools.
• Bruker's high exposure to potentially weaker academic and government end-markets presents challenges, but Bruker's tools address high-priority research areas in biology, pharmaceuticals, and semiconductors.
• Bruker is well-positioned for healthy revenue growth in 2024, with potential growth in the Chinese market and increasing interest in proteomics and spatial biology driving growth opportunities.
• Improving tool functionality and a growing ecosystem of complementary products could drive proteomics and spatial biology to a tipping point where Bruker's revenue really accelerates.
• Bruker is not conventionally cheap but offers growth at a reasonable price for investors who see upside in proteomics and spatial biology research activity/spending.

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The post-pandemic adjustment process has been a challenging one for many life science tool companies, as the bio-pharma end-market in particular pulled back significantly on capex in 2023 after overspending budgets during the pandemic to expand capacity for diagnostics, pharmaceuticals, and vaccines.

With far more leverage to research tools than “production tools”, Bruker (NASDAQ:BRKR) has fared better than many, declining modestly since my last update, while companies like Agilent (A), JEOL (6951.T) (OTCPK:JELLF), and Mettler-Toledo (MTD) have seen double-digit declines; Thermo Fisher (TMO) is one of relatively few comps to do better, and it has only modestly outperformed.

Bruker is no value stock, but I think there’s a growth-at-a-reasonable-price case to be made here, particularly as interest in proteomics and spatial biology grows and management continues to develop and refine tools for other markets like diagnostics, semiconductors, and so on.

Academic/Government Spending – Scary Headlines, But Likely Not Much Real World Impact

Bruker is unusual among its life science tools peers in its high exposure to academic and government (or A&G) end-markets. At about 40%, Bruker generates more than twice as much as the average peer from this market, and really only Illumina (ILMN) is in the same neighborhood (Bio-Techne (TECH) and Bio-Rad (BIO) are in the 20%).

Exposure to the A&G end-market has its challenges, as highlighted by the latest Congressional budget deal. NIH funding will be up only slightly this year (less than 1%), while the NSF saw an unexpected 8% cut to funding, and Horizon Europe is seeing a roughly 2% cut. None of that is helpful for Bruker, but I would note that there are other sources of funding that come into play, including foundations and university endowments, and given that Bruker’s tools enable research in some of the most exciting, innovative, and high-priority areas (like structural biology, semiconductors, and advanced energy technology), they often fare better than the headline trends would suggest.

All told, then, while I do expect the typical meaningful sequential decline in Bruker’s revenue for the upcoming first quarter report, I think Bruker is still well-placed for healthy revenue growth in 2024. I’d also note that demand in the bio-pharma space is still uncertain and 2023 saw a lot of surprising misses relative to initial guidance, suggesting that customer visibility in the tools space perhaps isn’t as good as advertised.

One bright spot worth noting is China. While demand for life sciences tools in China basically collapsed last year, Bruker didn’t see as much pain as others (again, the company’s tools are used in areas of research considered high priorities). With the Chinese government recently approving a stimulus package (a $70B relending program) targeting science and technology sectors, Bruker’s above-average exposure to China (17% of sales, half of which are A&G) and its focus on high-end instruments should serve it well here.

Proteomics And Spatial Biology – Increasingly Real And Likely To Drive Growth

Proteomics as a concept has been around for some time now (I believe the term was coined in the mid-90’s), but for much of that time it would be fair to say that there was more sizzle than steak. Researchers were intrigued by the insights that proteomics and spatial biology could provide for drug development, but actually generating meaningful data or achieving meaningful progress was hampered by a lack of tools, and what tools that existed were prohibitively expensive.

This is changing, helped in no small part by the growing use of Bruker’s ultra-high-field NMR (or UHF NMR) tools – very high-end instruments that can structurally resolve complex proteins and protein-protein interactions. While these tools (and others like timsTOF) are still quite expensive, the company has made significant strides in tool performance, ease of use, and so on and this has been driving increased interest in owning these tools.

There is a wide range of use cases for these tools. Understanding how proteins fold (or misfold) is crucial in understanding diseases like Alzheimer’s and understanding the three dimensional structure of proteins and how they change when they interact with other proteins unlocks a wealth of potential drug targets and/or more understanding of how to more effectively target disease-causing proteins. Likewise, detailed cell imaging can help assess how well antibodies bind to targets and how preclinical compounds influence protein expression.

Analogies can be misleading in cases like this, but maybe one way to think about it is going fishing with a hook, line, and worm, picking a spot on the shore, and hoping for the best versus having a detailed analysis of the population of the lake, what the fish want to eat at various times of the day, and exactly where they are at specific times of the day.

All told, I believe Bruker’s addressable market here is in the neighborhood of $3B to $4B and growing. Bruker does not serve all potential addressable markets within proteomics and spatial biology, but the company has continued to develop tools internally and acquire technologies and tools through bolt-on M&A that have expanded the proportion of the market that the company serves.

Moreover, I believe Bruker is setting up a virtuous cycle here. As their tool offerings become more feature rich and capable, as well as easier to use, more researchers will use them. As more researchers target proteomics and spatial biology, more discoveries will be made, and more labs and companies will want to expand their own efforts in these areas. To use another analogy – the availability of easy-to-use and affordable (relatively speaking) genomics tools like those offered by Illumina led to tremendous expansion of interest in genomics research, and the same could happen in proteomics and spatial biology.

Bruker Management Isn’t Betting The Farm On One Area

Although I find protetomics and spatial biology to be the most interest areas that Bruker is targeting, they’re far from the only growth opportunities here.

As semiconductor designs shrink ever more, Bruker’s tools are seeing increased use in areas like research and metrology for quality assurance/quality control. As chip architectures dive below 3nm, many older approaches simply won’t work anymore and technologies like UHF NMR can be used to resolve structures and flaws that are below the detection sensitivity of alternatives like X-ray diffraction. The semiconductor industry already makes up about 10% of Bruker’s sales, and I look for this to grow over time.

Bruker has also continued to build up its capabilities in areas like diagnostics. The MALDI Biotyper offers faster, more efficient identification of bacteria and fungi through “proteomic fingerprinting” and the company has continued to expand its complementary PCR-based assays and testing panels, taking advantage of multibillion-dollar opportunities in molecular diagnostics, resistance testing, and viral testing.

Last and not least are more speculative opportunities in areas like energy technology. Bruker Nano offers a range of X-ray-based tools that are invaluable in analytics and metrology for applications like battery production, while the Energy and Superconducting Technologies business has ongoing research efforts in areas like low-temperature superconductors and magnetic confinement fusion.

The Outlook

I do believe that the next decade is going to see a major step forward in the profile and importance of proteomics and spatial biology, and I believe Bruker is well-placed as a provider-of-choice in UHF NMR (I’d recommend Another Mountain’s Rock Investing’s article comparing Bruker and JEOL for more thoughts on the NMR market). I also think Bruker has under-appreciated opportunities in areas like semiconductor research/production and molecular diagnostics that will emerge more meaningfully over the next five years, while the advanced energy opportunities are more of a wild card.

I’m expecting around 8% annualized revenue growth over the next five years (versus around 6% over the trailing decade) on the basis of those expectations. Longer term, I believe 6% to 7% growth is sustainable, and that should set Bruker apart from the life sciences tools space, which I expect to grow around 5%.

Expanded interest in UHF NMR, timsTOF, and other tools should unlock meaningful scale benefits, and I expect EBITDA margins to accelerate toward 30% over the next 10 years, while operating margin moves from the mid/high-teens range into the low-to-mid-20%’s. With that, I believe free cash flow margins can improve from a historical average in the high single-digits to the mid-teens, with perhaps still some upside longer term, driving mid-teens FCF growth.

Valuation is never easy with life sciences tools companies, and Bruker is no exception. Discounted cash flow suggests a mid-to-high single-digit long-term annualized return, which is low for companies in most industries, but honestly pretty good relative to historical norms in life sciences. I also use approaches like margin/growth-driven EV/revenue and EV/EBITDA, which gives some insight based on what the market has historically been willing to pay for similar growth and margins.

On this basis, I think a mid-$90’s price is fair today (4.5x revenue, 22x EBITDA), with some upside above $100 if the market gets more bullish on the space again.

The Bottom Line

Investing in a stock like Bruker means getting comfortable with high multiples and making the assumption that above-average growth and improving margins will be rewarded by the market in the years to come. I think that’s a credible expectation, and helped by Bruker’s strong share in what I believe will increasingly be seen as must-have research tools for biological/pharmaceutical and advanced semiconductor research. With that, I think these shares are worth consideration today as a longer-term holding.