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BCW Winners Fatten Up Via Mergers, But Will Growth Last?

How have companies in the multiplatform molecular biology tools sector grown revenues for the three months ended Dec. 31? If you're one of the top performers listed on the 15-company BioCommerce Week Index, you have one thing in common: You're been acquisitive over the past six months.

With the macro-economic environment improving, companies in this space are accelerating revenue growth with acquisitions, and, at least in the short term, this strategy is fattening their top lines.

But can these companies continue to grow by acquisition, and can they sustain the growth that these purchases helped generate? Part of the answer lies in how successfully these shops can integrate their new businesses so that they not only feed the top line, but also keep expenses at bay and feed the bottom line.

In other words, these companies will have to put in place the organizational infrastructure to ensure that their acquisitions can drive long-term revenue growth.

Fantastic Four?

With the most recent round of financial reports completed, the core life science business divisions of the BCW companies reported total revenues of $5.9 billion in the quarter, a 16-percent improvement over $5.1 billion in the year-ago period.

Excluding General Electric, which entered the molecular biology tools business with the $10 billion acquisition of Amersham in April, Molecular Devices, Invitrogen, Stratagene, and Bio-Rad reported $640.3 million in revenues, up 24 percent over revenues of $517.85 million in the year-ago period.

Completing its first quarter after closing its $140-million acquisition of Axon, MDCC reported a 43-percent increase in revenues for the three months ended Dec. 31, 2004, reporting $47.5 million in sales, compared to $33.25 million in the year-ago period (see BCW 2/17/2005).

Invitrogen, which has assumed the pacesetter position in this growth-by-acquisition market with some 10 buy-outs since its $500 million purchase of BioReliance in December 2003, grew its revenues by 26 percent during the fourth quarter, reporting $262.20 million compared to $207.70 million a year ago.

Next is Stratagene, whose revenues grew by 20 percent year over year with $22.7 million, compared to $18.9 million a year ago, after acquiring Hycor Biomedical in a stock-based transaction valued at $45 million. Formerly a privately held company, Stratagene on June 2 closed its acquisition of Hycor and began trading on the Nasdaq national market the following day.

Fourth-quarter revenues at Bio-Rad Laboratories, which trailed Stratagene, grew 19 percent from $307.9 million compared to $258 million a year ago in its first quarter after adding MJ GeneWorks last August.

While the revenue growth numbers are noteworthy, investors apparently aren't impressed: For the six months since Sept. 8, when the BCW Index began tracking its 15 companies, shares in Molecular Devices, Bio-Rad, and Stratagene have been the worst performers among the 15 BCW index companies (see BCW 3/17/2005). Invitrogen, on the other hand, is the Index leader. Its stock grew by almost half during the same 6-month period.

Molecular Devices

While the acquisition of Axon Instruments helped expand Molecular Devices' fourth-quarter revenues by some $14.6 million, or 43 percent, year over year, the company also improved its net income by 38 percent during the same period.

To help it sustain its long-term revenue growth, the company has integrated the Axon product into both parts of its division structure — life sciences and drug discovery — and plans additional acquisitions.

Tim Harkness, Molecular Devices' CFO, told BioCommerce Week that the company is comfortable with an acquisition pace of one or two a year. "I've been watching this industry for seven years and there has always been a consistent consolidation trend," he said. "We are much broader today than we were seven years ago and we are a lot more focused. We have eight or nine product lines in life sciences and drug discovery, where we had two or three a few years ago — on both sides of the house."

The winners in the market, Harkness said, are the companies that put out the most innovative products the quickest. For Molecular Devices, the sales staff took to the new product lines acquired from Axon with enthusiasm — in fact, to the point where the Axon products outperformed the legacy products in the first quarter the two companies were combined (see BCW 11/4/2004).

In the just-reported quarter, Harkness said the company is happy with the progress made in terms of sales of the combined product lines.

The integration effort for Axon included combining administrative structure and eliminating duplications. In this case, Axon managers were moved from Union City, Calif., to Molecular Devices offices in Sunnyvale. Engineering and sales groups from the companies were also combined.

What is Invitrogen Doing Right?

In the fourth quarter, Invitrogen grew its revenues to $262 million from $207 million a year ago. At the same time, the company improved its net income to $30.4 million from $12.6 million in the year-ago period.

To help it sustain its long-term revenue growth, Invitrogen has actively sought to broaden the portfolio of products it offers and to create more diverse markets for its two lines of business — BioProduction and BioDiscovery.

Essentially, Invitrogen has used M&A to boost R&D, which the company said lagged from 2001-2003 following the acquisition in 2000 of Life Technologies, and Invitrogen's decision to centralize all of its R&D facilities in Carlsbad, Calif., in 2002.

In September, Greg Lucier, Invitrogen's CEO, called that decision a "self-inflicted wound" that led to "flattish" growth (see BCW 9/30/2004). "Basically, we developed little new technology over the last few years," Lucier said.

The company has kept its R&D in Carlsbad, and has said that it is increasing its funding.

In the most-recent quarter Invitrogen's BioProduction unit, which sells sera, reagents, and cell and tissue culture media, grew revenues by 44 percent, recording $113 million in total receipts for the period compared to $68.7 million in the year-ago period. The division's growth, the company said, was aided by the performance of BioReliance, a Rockville, Md.-based contract service organization that was acquired for $403 million in an all-cash deal in February 2003.

At the same time, revenues for the company's BioDiscovery unit, which offers tools for gene cloning, gene expression, and gene analysis, grew by 10 percent to $149 million in the fourth quarter from $139 million a year ago, propelled, the company said, by "higher-value, proprietary product offerings."

And the company is still on the prowl for new technologies (see BCW 2/10/2005), which will help it sustain long-term revenue growth.

The company did not respond to requests for comment before publication deadline.


After the summer's $45-million reverse merger with Hycor capped a year-long courtship, Stratagene added $3.8 million to its top line in the most recent quarter. The company also improved its net income to $1.87 million from $230,000 in the year-ago period.

To help it sustain its revenue growth long-term, the company has embarked on a molecular diagnostics strategy (see BCW 3/17/2005) that builds on Hycor's FDA-approved diagnostics. The firm also plans to redirect some of the cash it expects to save once Roche's core PCR patents expire next week towards future molecular diagnostics products.

In the short term, however, this strategy calls for Stratagene to invest R&D dollars into its life sciences business and on alliances with Beckman-Coulter and Bayer that will begin in the second half of 2004, Reg Jones, Stratagene's CFO, told BioCommerce Week.

Stratagene is developing diagnostic autoimmune reagents as additions for use on the Bayer and Beckman-Coulter's immunoanalyzer instrument platforms, a potential installed base of some 7,000 systems. Stratagene said it has completed developing the reagents, which are now being tested by the partners for rollout in 2005.

"We have a major effort going on to develop products," Jones said.

The company is also eyeing more acquisitions for its life-sciences business — more than for its molecular diagnostics segment, in fact, Jones said. "In life sciences, you are really being forced to acquire; you have to add to your portfolio," he said. "But not so much so in molecular diagnostics, which has gone through some consolidation."

He said Stratagene is considering small acquisitions that would create more work for its Austin, Texas-based manufacturing facility. "We would love to acquire new products that we can make there," he said. "We have lots of capacity and we are looking at some smaller acquisitions that don't show up on the radar screens for Bio-Rad and Invitrogen."

Jones said the company has completed its integration of Hycor, a project that he said was essentially planned during the due-diligence phase of the transaction. "There weren't huge overlaps between the companies," he said. "The plants and facilities were not related and there was no consolidation in terms of plants. And, in terms of sales, Hycor products are sold through distribution while Stratagene is sold by a direct sales force that calls on academia and pharma, but not on clinical labs."

Jones, who was the CFO at Hycor, said savings were made on eliminating redundancies in administrative positions, but that was minimal. He said further cuts are not planned.

Bio-Rad Laboratories

While revenue growth of 19 percent for the just-completed quarter was enough to propel Bio-Rad to the top tier of BCW index companies, an 11-percent slide in year-over year earnings was enough to put the company in one analyst's dog house: Last month, Aaron Geist, who covers Bio-Rad for Robert W. Baird, dropped the company's stock to "neutral" from "outperform."

Bio-Rad lost some $153 million, or 10 percent, in market capitalization as its shares dropped from $57.90 at market close on Feb. 17, when it released its fourth-quarter results, to $51.99 on Feb. 18. Shares closed at $48.00 Tuesday afternoon.

The fourth quarter marked Bio-Rad's first full quarterly period that included revenues from the $32 million all-cash acquisition of MJ Research, which closed in August. MJ's lower margins and the addition of its costs also made a big impact on its bottom line as net income fell to $17.10 million, from $19.10 million in the year-ago period.

How will Bio-Rad sustain its revenue growth long-term and revive its earnings? Christine Tsingos, Bio-Rad's CFO, told BioCommerce Week that integrating the MJ acquisition is a work in progress, and that the fourth-quarter numbers were based on having the acquisition for a short period of time. She said Bio-Rad's results also included a number of non-cash charges that are not unusual in an acquisition.

"MJ has a large and loyal customer base, and Bio-Rad has a large and loyal base, too," she said. "We want to have that MJ brand equity, backed up by 50 years of the proven quality experience of Bio-Rad."

She said Bio-Rad has a history of successful acquisitions, and cited as an example the $210 million purchase of Pasteur Sanofi Diagnostics in 1999.

"We bought a company that was not growing in terms of the top line," she said. "Bio-Rad successfully integrated it into the family and turned it around. Now, its products" — [BSE test, blood-borne virus and infectious disease tests] — "are some of our most successful products."

Tsingos said Bio-Rad is not about to go on an acquisitions binge, but will be flexible and opportunistic and look at "all the angles." She said the company is a value buyer and intends to remain that way, despite a highly competitive market space.

"It's hard to compete against other companies in this space who are willing to spend four or five times revenue," she said, "but we want to make sure that we get payback to the bottom line."

— Mo Krochmal ([email protected])

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