Monday's Pfizer ( PFE - Get Report)- Pharmacia ( PHA) merger could spell even more trouble for the bloodied makers of drug research and testing equipment.

If Big Pharma looks more to mergers and cost-cutting to bolster its sagging bottom lines, there could be fewer customers for the testing equipment and genomics hardware sold by companies such as Applied Biosystems ( ABI), Waters ( WAT - Get Report), Qiagen ( QGENF) and Affymetrix ( AFFX), industry experts say.

"I've always thought the picks-and-shovels strategy of investing -- in this case buying the makers of tools that were supposed to boost the productivity of drug development -- has been a sucker's bet, and I'm being proven right," says Jim Fiore, fund manager at the Life Sciences Group, adding, "The Pfizer deal puts more negative pressure on the group." Fiore, at various times, has been short some of the above-mentioned names, although he has covered as prices have tumbled.

And tumble they have. At its Friday closing price of $15.73, Applied Biosystems had lost 60% this year. Qiagen, stung by an earning warning in early July, is also down 60% for the year. Affymetrix and Waters are not too far behind, respectively losing 57% and 43% of their stock market values since Jan. 1, based on their Friday closing prices.

As a group, drug-equipment makers are trading around 19 times 2002 earnings and 15 times 2003 earnings -- fairly inexpensive considering the lofty valuations afforded the stocks by investors in the genomic bubble years of late 1999 and 2000. But then again, there is increasing uncertainty about growth rates and future earnings that increases the valuation risk.

When the Pfizer deal was announced Monday morning, these stocks were hit again on fears that consolidation in the drug and biotech sectors reduces the need for capital expenditure spending. Big Pharma accounts for about 40% to 60% of revenue from companies in the so-called life sciences tools sector.

"The Pfizer deal underscores two big risks," says Rob Toth, fund manager with EGM Capital. "First, it suggests that capex spending and R&D as a percentage of revenue both continue to shrink as drug companies cut costs to maintain the bottom line growth that is being hurt by generic competition. Second, if we're about to see another wave of consolidation in the pharmaceutical and biotech space, then the cost-saving synergies of these deals are going to be felt by the equipment makers."

Pfizer said Monday that it expects the Pharmacia merger to create a combined company with compounded average annual earnings growth of 19% and revenue growth of 10% from 2002 to 2004. The merger will also result in cost savings of $1.4 billion in 2003, growing to $2.5 billion in 2005. While most of those savings will likely be wrung out of selling and general administrative expenses, the combined companies' $7 billion R&D budget could also be reduced if necessary, analysts say.

"Clearly, Pfizer and Pharmacia are important customers for most of all life sciences tools companies, but generally speaking, we believe neither account for over 5% of revenue for our companies," wrote Goldman Sachs drug-equipment analyst Carissa Marino, in a Monday research note. "However, to the extent that this transaction signals future consolidation among large pharma companies, the impact could be clearly larger."

Goldman has Waters on its recommended list, while it rates Applied Biosystems market performer. The firm has a banking relationship with Applied Biosystems.

On a roller-coaster day on Wall Street, Waters closed down $1.39, or 6%, to $20.90 per share. Affymetrix fell 37 cents, or 2%, to $15.94; Applied Biosystems lost 6 cents to $15.67, rallying from a 3% drop earlier in the day. Molecular Devices fell 77 cents, or almost 6%, to $12.20 per share.

Other equipment makers, including Qiagen and Invitrogen, closed Monday in positive territory.