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Acquisition Strategies Still Top Investors’ Minds at UBS Life Sciences Conference

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
As has been the case over the past couple of years, investors at a major annual life sciences conference were most interested in the merger and acquisition plans of the tool vendors who presented at the conference.
 
Last week, several of the firms covered by BioCommerce Week made their pitch to investors at the UBS Global Life Sciences Conference in New York. Recurring topics of conversation in the various breakout sessions included the overall M&A market, valuations for acquisition candidates, and each firm’s plans for any acquisition activity over the next year.
 
Below is a snapshot of what officials from several BCW Index companies talked about during their presentations and ensuing question-and-answer sessions.
 
PerkinElmer: Eyeing Genetic Screening
 
While most of the firms asked about their acquisition plans were vague on details, PerkinElmer provided a fairly clear picture of its strategy.
 
Rob Friel, president and COO of PerkinElmer, said the firm remains interested in acquisitions. But following a string of acquisitions earlier this year in the cell-analysis and -screening market, Friel said there would be a pause in pursuing deals that would add to its biopharma portfolio.
 
According to Friel, the genetic screening market tops PerkinElmer’s acquisition priorities, followed by the medical imaging and environmental markets. His assertion was backed by the company’s announcement this week that it would expand its genetic screening business through the acquisition of ViaCell for approximately $300 million (see related article in this issue).
 
Friel also noted during a breakout session that valuations on acquisition candidates “are on the high side” right now — a claim made by several executives when asked about buying opportunities, particularly in the diagnostics market.
 
PerkinElmer derives 63 percent of its $1.7 billion in annual revenue from sales of its detection and analysis systems. Its diagnostics business brings in 20 percent of its revenue, while its photonics business accounts for 17 percent of its revenue.
 
While there is a heavy emphasis on sales for health sciences applications, like many other vendors covered by BioCommerce Week, PerkinElmer sees a major selling opportunity in the applied markets of food and water testing and environmental monitoring.
 
Friel said that while there has been “a significant increase in discussion” about food testing, it has had “little impact” on the firm’s revenue.
 
Invitrogen: Focus on Organic Growth
 
Still rebounding from the effects of an aggressive acquisition strategy a couple of years ago, Invitrogen is focusing on organic growth and introducing new products, CEO Greg Lucier told investors at the UBS conference. The firm made a couple of small acquisitions over the past year, but it is not eager to jump back into the strategy that saw it acquire eight companies for some $650 million in 2005.
 
“At this stage, we want to buy technology” not companies, said Lucier. He said M&A valuations “have gotten less crazy but are still expensive.” He added that there still are some “interesting” acquisitions the firm could make, but there are “no glaring gaps” in Invitrogen’s portfolio.
 
In addition to boosting its organic growth, Invitrogen’s focus this year has been on operating efficiencies, such as reducing infrastructure costs and implementing its global ERP system. The new system has enabled a “more sophisticated” response to customers, said Lucier, adding that the firm’s goal is to make customer service representatives “obsolete.”
 
He also said the firm continues to work on optimizing its selling mix between high-volume sales and higher-margin products. Lucier said during a breakout session following his presentation that the firm is about 30 percent of the way toward optimizing its sales mix. Sales staff are “being trained, but we have a long way to go,” he said.
 
Lucier also noted that Invitrogen is planning to release a series of smaller, low-cost, “semi-disposable” instruments, following the firm’s introduction last year of the iBlot Dry Blotting system and iPrep purification instrument. He said such instruments would all follow the razor/razor blade selling model.
 
After a difficult and transitional 2006, Invitrogen’s first-half 2007 revenues rose 11.5 percent. With the revenue gains the firm’s stock also has climbed steadily, up 45 percent through the first nine months of 2007.
 
Thermo Fisher Scientific: Still Hungry for Acquisitions
 
Ever since Thermo Electron and Fisher Scientific completed their $10.6 billion merger last November (see BioCommerce Week 11/15/2006), company executives have not shied away from saying the firm would do another big acquisition if the opportunity presented itself. Last week, that message remained the same.
 
“Opportunities for larger acquisitions [are] on the analytical side,” said Thermo Fisher Scientific CEO Marijn Dekkers. “It’s still a very fragmented industry.”
 
He said there are 15 companies he could name as potential acquisition targets for Thermo Fisher, before declining to name any of them, which elicited laughs from the majority of investors in the breakout session.
 
Dekkers acknowledged that the diagnostics market is “hot” for M&A activity right now. He said Thermo Fisher “would love to have owned Digene or Biosite” but not at the prices paid by Qiagen and Inverness Medical Innovations, respectively. Qiagen paid $1.6 billion for Digene this summer, while Inverness outbid Beckman Coulter and paid $1.7 billion for Biosite (see BioCommerce Week 6/6/2007  and 5/16/2007).
 
Dekkers also said he believes Thermo Fisher continues to take market share in the high-end mass spec market with its OrbiTrap and triple quad instruments, in particular.
 
The firm hopes to boost sales of Fisher’s routine lab products in China through the introduction later this year of its product catalog in Mandarin Chinese. Up until now, the catalog was only available there in English.
 
Waters: Sustained Rebound
 
Officials from Waters must be accustomed to getting questions about the spending patterns of big pharmaceutical customers. The firm struggled in 2005 and the beginning of 2006 as some of its bigger accounts cut back on buying capital equipment. Since then, Waters’ revenues have rebounded as it launched new instruments, and company officials predicted at the conference last week that its revenues would rise 14 percent for fiscal 2007.
 

Thermo Fisher “would love to have owned Digene or Biosite” but not at the prices paid by Qiagen and Inverness Medical Innovations, respectively.

Asked again during Waters’ breakout session about the current state of pharma spending, CFO John Ornell said the rebound in spending “feels sustainable.” He added that only two of the top 15 pharmaceutical firms in the world are still having financial difficulties that have kept them from returning to normal spending patterns.

 
Ornell also said Waters is upbeat on the acquisition front. The firm’s M&A strategy will remain focused on tuck-ins, he said, noting that it sees a few small opportunities right now and could close a deal in the near future.
 
The firm has purchased roughly a third of its outstanding shares through buyback programs over the past four years as its stock had sagged. But, with strong revenue growth over the past four quarters, Waters’ shares have risen 49 percent over the past 12 months. As a result, Ornell said the firm has not been as aggressive in buying back shares lately.
 
Cepheid: MRSA Market Heats Up
 
Cepheid was one of very few firms at the conference that were not quizzed about M&A strategy. Instead, investors focused on the company’s recently launched molecular test for methicillin-resistant Staphylococcus aureus and its head-to-head competition in the market with Becton Dickinson.
 
Cepheid officials are confident that they are winning the battle with BD in the MRSA diagnostics market. Both firms have US Food and Drug Administration-approved molecular diagnostics and have targeted sales to the Veterans Administration, which has an active MRSA surveillance program for its network of hospitals.
 
Cepheid has signed up 66 VA hospitals thus far to do the MRSA testing with its assays and GeneXpert instrument. The company added more than 20 VA hospitals to its sales accounts in the second quarter alone. Meanwhile, David Persing, Cepheid’s chief medical and technology officer, told conference attendees that he believes BD added only one VA account during that same time.
 
Persing also pointed to the growing number of states introducing legislation for reporting MRSA cases as a potential growth driver. “Mandatory reporting is a stepping stone to mandatory surveillance,” he said.
 
The firm has assays for other hospital-acquired infections including Clostridium difficile and vancomycin-resistant Enterococcus, and is planning to develop a variety of tests for infectious diseases. Last week, Cepheid exclusively licensed rights to a family of human papillomavirus patents from Quantovir and plans to develop a molecular test to challenge Qiagen’s test, which is currently the only molecular diagnostic for the disease that is cleared for marketing in both the US and Europe (see BioCommerce Week 9/26/2006).
 
After targeting the VA network, Cepheid will target sales to larger hospital systems and purchasing groups, said Persing. He said the firm’s sales strategy would have to be changed once it starts trying to win accounts at smaller hospitals.
 
Cepheid posted 2006 revenue of $86 million and is predicting 2007 sales of between $117 million and $123 million.

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