More Drugmaker Growth Without the FDA

Having freed myself from a life of sitting at a bench doing experiments, I now continue my list of laboratory supply companies that should grow as the health-care sector grows. They've got potential to grow as fast as the health-care sector without having to deal with clinical trial results.

Earlier this week I wrote an article that discussed companies that provide valuable research supplies to laboratories. In today's article I'll concentrate on those that supply equipment to the labs. As with the last group, this is a list of companies to check out because they're providing good equipment that I know scientists buy, but it's not a ringing endorsement to buy the stocks. I'll leave the due diligence up to you.

One theme you'll see is that, in addition to selling equipment, the companies also sell the consumables, which are used up and need to be bought again and again, that work in their machines. In some cases -- like PCR machines -- consumables are readily available from multiple sources, but in many cases the companies have designed the equipment to work only with their consumables. That means that placement of machines drives consumable product sales, and investors just need to keep track of placement rates to get an idea of where future sales are headed.

Sales reps
Just like drug companies that have sales reps that hand out literature and free samples to doctors to encourage them to write prescriptions, lab supply companies have sales reps that try to sell their products to scientists. I've worked at four different institutions in different parts of the country and in each lab I've known my Bio-Rad Laboratories (AMEX:BIO) sales rep better than any other sales rep. They were never overly pushy, but always seemed to be around trying to get us to try out the new products. Since I saw this behavior in half a dozen reps over more than a decade, I'm willing to bet that the company's culture encourages this behavior and that it pays off in increased sales.

Bio-Rad makes a wide range of equipment from small instruments that cost $100 to larger ones that cost tens of thousands of dollars, many of which take Bio-Rad specific consumables. Scientists aren't generally style conscious -- T-shirts and jeans are the uniform of choice after all -- but almost all of the Bio-Rad equipment I've seen has this sleek look to it. I'm sure it's a subconscious branding tool that works quite well. I could put a new piece of equipment in the lab without the Bio-Rad label and I'll bet nine out of 10 scientists could guess that it was a Bio-Rad product.

Chip makers
But what about all those "No eating in the lab" signs? No, it's not that kind of chips. We're talking about genomic chips. They're small silicon chips with DNA markers stuck onto them. An experimental sample is labeled and put over the chip. Sequences in the sample that are complementary to the markers stick to the chip. A machine then reads the label that's stuck to the chip for each marker. The chips essentially provide a way for scientists to measure the abundance of hundreds of thousands of markers in a single experiment -- something that would have taken a scientist's entire lifetime before the invention of gene chips.

The two largest chip makers, Affymetrix (NASDAQ:AFFX) and Illumina (NASDAQ:ILMN) are in a constant battle to design the chip with the largest number of markers on it. Affymetrix currently holds the lead with its newest chip, although readers have told me that the quality of Illumina's markers are better.

The placement of machines is especially important for chip makers because the machines that read the chips tend to be quite expensive. The high cost results in scientists keeping the machines around for a long time before they change brands. That gives the company that made the initial equipment sale lots of time to sell chips before the machine is retired.

A hybrid of sorts
When I heard that Fisher Scientific and Thermo Electron were merging into what is now Thermo Fisher Scientific (NYSE:TMO) I kind of thought they were crazy. Don't get me wrong; they're both great companies. But Fisher sells products that mostly fit into either the consumables or small-equipment category. With a catalog so big that it could be used as a paperweight for War and Peace, Fisher was kind of the "go to" company for scientists. Thermo Electron, on the other hand, was a fairly specialized company selling mostly large, very expensive equipment. Except for selling equipment, the companies didn't have too much in common.

The lack of similarity is probably what has made the merger so successful so far -- its stock is up 17% since the merger closed last November. Fisher's sales reps are ubiquitous. At the university where I did my graduate work, the sales rep had a desk on campus. Because laboratories might make one or two purchases of major equipment per year, sales reps for companies like Thermo Electron rarely walked through our lab. With the merger in place, the ever-present Fisher sales reps can now try to steer purchases of large equipment that might have previously gone to Beckman Coulter (NYSE:BEC) or Applied Biosystems (NYSE:ABI) toward the Thermo Scientific brand.

I hope this short series has given you some ideas of companies to investigate further. If you're a scientist and you think I've missed a company or two, feel free to email them along. Perhaps the series will continue.

Affymetrix is a pick of the Fool's market-beating Rule Breakers newsletter; sign up for a free 30-day trial and check the past issues to find out why we recommended it.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool's disclosure policy is considerably shorter than War and Peace.