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Acquiring Molecular Devices, MDS Sees Major Opportunity for Sciex's Nascent Cell Analysis Biz

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Seeking to bolster its efforts in the cell analysis field, Canadian life sciences research products firm MDS said this week that it would acquire Molecular Devices for $615 million in cash.
 
The acquisition, which is expected to close in the first half of 2007, provides MDS unit MDS Sciex with a well-established line of products for the high-end cell analysis market and a sizeable sales force that it hopes will boost sales of its CellKey secondary screening tool. The deal also will place MDS Sciex in direct competition with some industry heavyweights including GE Healthcare, BD Biosciences, Fisher unit Cellomics, and PerkinElmer’s recently acquired Evotec Technologies business.
 
“This acquisition transforms Sciex from what is today a category killer in mass spectrometry into a much broader platform for growth,” said Stephen DeFalco, president and CEO of MDS. “Over the last year we have looked at a number of companies, but we think this one is perfectly positioned in something MDS has had an interest in for some time.”
 
Molecular Devices “opens up our market opportunity in that they play in a market that’s about $2.2 billion in size, with high-single-digit organic growth,” he said during a conference call announcing the deal. “They have a great track record of product innovation … [with] an attractive mix of hardware, reagents, and software. Most importantly, they bring access to a direct sales and support team of over 230 people, who are positioned in the most attractive life sciences markets around the world.”
 
MDS will pay $35.50 per share for all of the outstanding stock of Molecular Devices for a total of roughly $585 million. It also will pay about $30 million to acquire outstanding options. MDS said that funding for the deal would come from cash holdings, its revolving credit facility, and proceeds from the sale of its diagnostics business, which is expected to close in February.
 
MDS said it expects to realize cost synergies in the range of $10 million to $12 million through the elimination of Molecular Devices’ public company costs and related corporate infrastructure.
 
In the first year of ownership, MDS expects Molecular Devices to add $190 million in revenue and $45 million to $50 million in EBITDA. DeFalco said the deal would be modestly accretive in 2007 and strongly accretive beyond this year.
 
The acquisition takes MDS to about $1.2 billion in pro forma revenue, and increases the firm’s employee base to 6,200, he said. In addition, the acquisition will increase MDS Sciex’s revenue contribution to MDS from 26 percent to 38 percent of total revenue.
 
MDS plans to create a new business unit that will combine Molecular Devices’ operations with MDS Sciex. While the firms will integrate some back-end operations and mix R&D resources, “sales and marketing will be largely left untouched,” said DeFalco.
 
“Mostly what we’re going to do to Molecular Devices’ sales and marketing infrastructure is make sure we keep it strong and [make] investments in the areas that drive growth,” said DeFalco.
 
He said MDS Sciex will not sell its mass spec products through Molecular Devices’ sales and distribution channels, because those products are tied to its two joint venture partners, Applied Biosystems and PerkinElmer, whom he said “serve that market very well.”
 
He said, however, that there will be opportunities for the respective R&D staffs to work together to bring new products to market that would be sold through Molecular Devices’ existing sales and distribution force.
 
“Greater Reach at Lower Cost”
 
Molecular Devices serves a very similar customer base as MDS Sciex, noted DeFalco. “One of the most exciting parts of this deal is access to the high-content screening market,” which he estimated at $300 million and said is “the fastest growing part” of the cell screening market.
 
According to DeFalco, Molecular Devices’ relatively large sales and distribution force will enable MDS Sciex to have more intimate sales relationships with customers. He said that it also would make MDS Sciex more attractive to potential marketing partners or acquisition candidates.
 
In particular, the firm’s CellKey instrument will benefit greatly and become better established with customers due to Molecular Devices’ market reach and customer relationships, said DeFalco. “It’s going to be a better penetration [and] greater reach at lower cost” than building out MDS’ own sales and distribution capabilities, he said.
 
MDS Sciex has fewer than 20 sales reps for its CellKey product, said DeFalco. That staff currently resides at a facility near Molecular Devices’ facilities in California, and DeFalco said that they would be moved to Molecular Devices’ building there.
 
CellKey is a label-free cellular analysis platform based on a technique called cellular dielectric spectroscopy, in which cells are grown on electrodes embedded in microwell plates and exposed to a constant low-level voltage. The instrument, which was launched in September 2005, senses electrical impedance flux resulting from changes in cell morphology, confluence, adherence, and interactions.
 
The platform has numerous potential applications, according to the company, but MDS Sciex seems to be focusing its attention on using the platform for secondary screening of GPCR drug targets in living cells.
 
Molecular Devices’ FLIPR platform is the market leader for screening GPCRs, one of the most prominent targets in drug discovery, along with kinases and ion channel cell lines. According to industry estimates, GPCRs comprise more than 40 percent of drug screening programs and are targets for more than 50 percent of currently marketed pharmaceuticals.
 
“We see [the product lines] as being very complementary,” said Andy Boorn, president of MDS Sciex, during the conference call. “They have got a higher level of automation and they’re migrating into clearly being the front-line primary screening tools there.
 
“CellKey is lower throughput at this point and is used for secondary screening … more in-depth second-level studies,” he said. “I think the labeled approaches [of] Molecular Devices and the label-free approach that we’ve pursued here are going to find complementary positions in the marketplace.”
 

“I think the labeled approaches [of] Molecular Devices and the label-free approach that we’ve pursued here are going to find complementary positions in the marketplace.”

MDS’ contract research organization, MDS Pharma Services, which is a major component of its business, is currently a customer of Molecular Devices. “That helped us a lot in the diligence process, because we had first-hand knowledge of their products and capabilities,” said DeFalco. “I’m sure those teams will find areas to work together going forward.”
 
Molecular Devices also serves a number of MDS Pharma Services’ competitors in the CRO space and will continue to do so, said DeFalco.
 
In addition to FLIPR, Molecular Devices sells the ImageXpress cell-imaging product line, the PatchXpress system for ion channel analysis, and scanners for DNA and protein arrays — all of which were gained through the firm’s $140 million acquisition of Axon Instruments in July 2004. It also sells a laser capture microdissection instrument that it acquired through the $10 million purchase of Arcturus Bioscience last year (see BioCommerce Week 4/5/2007).
 
All told, Molecular Devices has an installed base of roughly 100,000 instruments, according to DeFalco. He also noted that over 64 percent of Molecular Devices’ revenue in 2006 came from products introduced in the last three years.
 
That fact did not erase concerns voiced by analysts on the conference call about Molecular Devices’ recent struggles in selling to large pharma accounts (see BioCommerce Week 10/4/2006). Since Molecular Devices will be releasing its fourth-quarter results soon, officials from both companies declined to provide clarity on whether the firm’s sales to pharmaceutical accounts rebounded from its second- and third-quarter slump.
 
“Pharma tends to be cyclical among the individual pharmaceutical companies,” said Molecular Devices President and CEO Joe Keegan. “Going forward into 2007 almost every product category we have — [and] we have new products coming on board — I would expect those products to be well-received by the pharmaceutical industry.
 
“In some ways, this is really no surprise,” he said of the recent difficulties. “We did have a bit of a pause in 2006, but historically the way we’ve driven growth at Molecular is by a very aggressive cycle time in terms of new products. In 2007, there’s a nice pipeline to be delivered.”
 
For example, Keegan noted that the firm is working on a new version of FLIPR that it expects to launch in the near future.
 
DeFalco also noted that Molecular Devices has a larger component of recurring revenue from services, consumables, reagents, and software than MDS. In 2005, Molecular Devices derived roughly 67 percent of its $181.2 million in revenue from instrument sales, 16 percent from consumables, 10 percent from services, and 7 percent from software.

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