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Bio-Rad Presses to Diversify Portfolio at a Bargain Price

Is Bio-Rad trying to replicate in 2005 the success it had in 1999 when it bought Sanofi Diagnostics Pasteur for $210 million?

With $200 million in credit lined up, Bio-Rad said it is very willing to spend almost half of it to acquire reagent company BioSource of Camarillo, Calif. Trouble is, BioSource is having none of it, and has rebuffed Bio-Rad at every turn.

Last week, Bio-Rad announced an $82-million proposal for BioSource, offering $8.50 a share for the publicly held reagent company.

On Monday, BioSource said its board of directors unanimously spurned the offer, which it called "grossly inadequate." Additionally, BioSource said it retained UBS and the law firm of Weil, Gotshal & Manges to help it evaluate "strategic alternatives," including a possible sale.

John Porter, managing director of Arabella Securities of Austin, Texas, told BioCommerce Week that while BioSource has long appeared to be "getting dressed up for a sale," Bio-Rad's offer might have advanced the timetable for consideration of a sale.

"By getting UBS in, they are probably looking to see who else might be interested," said Porter, a former director of business development at Luminex and the co-founder of Arabella, an investment firm that tracks the molecular biology tools industry.

Meantime, BioSource's share price spiked by more than 40 percent during the five-day period ending Tuesday. BIOI shares closed at $9.91 Tuesday, giving the company a market capitalization of $96 million.

Bio-Rad ended the five-day period down a fraction of a percent (see BCW Index).

While acquisitions have been the hallmark of the BCW companies in the recent months, this is the first time in this period that one of the 15 molecular biology tools companies has expressed its interest in a target — and been refused — in such a public fashion.

For Bio-Rad, which had $1 billion in revenues last year, the acquisition of BioSource, which generated $44.4 million in revenue last year, would hardly be transformational. But the acquisition, if it ever gets off the ground, could add new products that might help bring recurring revenues to Bio-Rad's diverse installed base of instrumentation.

The offering had at least one short-term upshot: Goldman Sachs analysts returned to Bio-Rad's conference call for the first time in almost a year (see BCW 11/11/2004).

What Does BioSource Mean to Bio-Rad?

If Bio-Rad ends up acquiring BioSource, Bio-Rad would be acquiring content, Ron Hutton, Bio-Rad's treasurer told BioCommerce Week. "We are better known in the platforms area, and they are stronger in the content area," he said.

When it acquired Pasteur Sanofi Diagnostics in 1999, Bio-Rad received assets in the form of content that now are among its most successful products — including a BSE test that now has nearly 70 percent share of the world testing market, as well as blood-borne virus and infectious disease tests (see BCW 3/24/2005).

BioSource lists some 3,600 products grouped into three lines: assays; biologicals (antibodies, bioactive proteins and peptides, and oligonucleotides); and serum, buffers, and media. In January, the company divested its Hopkinton, Mass.-based custom antibody and peptide business.

In addition, the company in January launched a multiplex protein microarray to measure multiple phosphorylated proteins in one sample.

"Being basic in antibodies makes a lot of sense to us," Brad Crutchfield, Bio-Rad's vice president for life sciences, told analysts in a conference call last week, referring to the potential acquisition. BioSource's "oligo facilities make sense, too. And, their signal-transduction cellular assays, which is the fastest growing part of their business, dovetails into our business. Both multiplex cellular analysis and protein analysis are growing areas. We have a strong position in the market and we see a strong synergy."

Christine Tsingos, Bio-Rad's CFO, described Bio-Rad as a value investor, not willing to pay four or five times annual revenue for an acquisition (see BCW 3/24/2005). The company's last acquisition was the $32 million play for MJ Research in August.

BioSource earned $44.4 million in total revenues for 2004, up 8 percent over 2003 revenues, valuing Bio-Rad's offer just below twice its annual revenue. In 2004, BioSource, which had $4.2 million in cash on hand and 239 employees at the end of the year, netted 44 percent of its revenues from assays, and 25 percent from biologicals.

"From what we know from the public data, $8.50 is a fair price," Hutton said. Bio-Rad based its offer on stock market valuations over the last three years, when shares in BioSource averaged $6.50.

Hutton said the increase in BioSource's share price since Bio-Rad's overture didn't reflect "any seismic move in their fundamentals. We're offering a fairly sized premium above that [three-year share-price average], but I don't know what is in the mind of their investors." Hutton said.

Porter of Arabella Securities said that he would compare Bio-Rad's potential acquisition of BioSource to Serologicals' $205 million acquisition of Upstate Group (see BCW 9/16/2004).

"If you look at Upstate's original business, they are very comparable companies," said Porter. "BioSource could get a premium smaller than Upstate, maybe two times or three times revenues."

"Bio-Rad's bid is a little more aggressive than they have been historically," Porter said. "But, they have always been looking for very good deals, and not paying enormous premiums for them."

He said Bio-Rad's Sanofi acquisition helped the company vault from $400 million in annual sales to $1 billion in a short period, and the company likely sees parallels in BioSource.

"[BioSource] would be a nice little business for them," Porter said.

However, he added that other potential suitors for BioSouce could include three distinct groups of operatives — reagent companies like Serologicals and Invitrogen, who could buy BioSource for additional market share and product-line expansion; instrument players like PerkinElmer; or a Fisher or a Sigma-Aldrich behemoth that would simply gobble up the comparatively tiny shop.

The instrument group would probably be the best in terms of creating value for everyone down the road, Porter said. "There would be lots of synergies between the companies and not a lot of overlap between products."

Bio-Bad

BioSource's largest investors quickly let Bio-Rad know their thoughts.

"BioSource has been informed by Genstar Capital Partners II LP, its largest stockholder, that the proposed price is significantly below Genstar's view of BioSource's inherent value," the company said in a statement on April 7. The company did not respond to BioCommerce Week's requests for comment before deadline.

Genstar is a San Francisco-based private-equity firm managing some $900 million in capital. The firm owns around 30 percent of BioSource, which went public in 1996. Genstar has invested $9.8 million in BioSource in four traunches since 2000 when it made an initial $6 million infusion that brought with it two seats on the BioSource board.

When it first aligned with BioSource, Genstar said its investment would be used to relieve BioSource's acquisition indebtedness and to position it for future acquisitions.

Jean-Pierre Conte, chairman and managing director of Genstar, is also chairman of BioSource. The 40-year-old Conte is a Harvard MBA who worked in corporate finance and mergers and acquisitions at Drexel Burnham Lambert and Chase Manhattan Bank before moving to private equity.

Terrance Bieker, BioSource's president and CEO, has served as a director and in his executive positions since November 2003. Previously, he was chairman, CEO, and president of Sanofi Diagnostics Pasteur, leaving in 1997 — two years before the outfit was bought by Bio-Rad.

BioSource has anti-takeover provisions, including a stockholder rights plan, which could significantly dilute ownership of any entity that engages in an unsolicited attempt to take over ownership; and a provision that would allow directors to issue additional shares of preferred stock in case of a takeover attempt, according to SEC filings.

In June, BioSource announced that warrants issued to Genstar Capital in 2000 and due to expire in February 2005 were extended to February 2007 with a new exercise price of $9 per share over the previous price of $7.

— Mo Krochmal ([email protected])

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