Reeling from a shrunken market, sales missteps, and a restructuring that has not translated into the expected results, Harvard Bioscience has decided to sell its capital equipment business.
The decision to divest the business, which includes the struggling Genomic Solutions subsidiary, comes less than two months after Harvard Bio announced that it would split out financial information for the two major components of the company: the capital equipment business, which has been volatile and unpredictable, and the apparatus and instrumentation business, which has provided more consistent results (see BioCommerce Week 6/9/2005).
Harvard Bio last week said that financial results in the most recent quarter for the capital equipment business fell short of expectations, and as a result, it would record significant impairment charges related to its assets and also would take significant charges related to previous restructuring activities.
In addition, the firm postponed the July 28 release date for its second-quarter financials to examine whether the capital equipment business met the criteria of "held for sale" for accounting purposes. It now plans to release its second-quarter results after the close of the market on Aug. 8.
Harvard Bio "probably [is] in pretty advanced discussions here and probably [has] the purchaser narrowed down to two or three different possibilities, and hope that they can get a transaction done in the very short term."
The company has not revealed much information about the planned divestiture — other than saying that it was in the process of hiring an investment bank to assist the firm in the sale of the business — and did not return calls from BioCommerce Week. But the decision to exit the capital equipment business is not a surprise to those familiar with the company and its recent struggles.
"The move is not surprising," said Adam Chazan, an analyst who covers Harvard Bio for Pacific Growth Equities. "It is what investors have been clamoring for. Folks were basically losing patience, and there were shareholders who said this is the path that you should really go down as opposed to continuing to expend resources trying to resurrect this business."
Although investors may agree with the decision to divest, their reaction to the news was subdued. The day after announcing the decision, shares of Harvard Bio dropped 2.1 percent. However, they have since recovered and are trading up 4.9 percent since the day of the announcement.
Genomic Solutions supplies instruments, software, and consumables, including the Cartesian Dispensing high-throughput screening products, Gene Machines and BioRobotics microarray technologies, and Investigator proteomics technology. Its products for DNA, RNA, and protein analysis are distributed by much larger players in the molecular biology tools space, including GE Healthcare, PerkinElmer, and Fisher Scientific.
The unit, which Harvard Bio purchased in 2002 for $26 million, was built around enabling the home-brew microarray market, selling technology platforms that would allow researchers to manufacture their own chips. But the market for such products declined as mass-manufactured arrays displaced these systems, and Genomic Solutions struggled.
Harvard Bio President David Green also said last year that he believed Genomic Solutions' difficulties were partially the result of sales people who were specialists in one product line being asked to sell a "very different and broad line of products across many different applications."
Although the timing may seem curious, given Harvard Bio's decision in June to provide investors with a more clear picture of the revenue and income of its two business segments, it is likely that management had already been involved in at least the early stages of a divestiture process, according to Matthew Arens, vice president and senior research analyst with Kopp Investment Advisors — a firm that holds nearly 3 million shares of Harvard Bio stock.
"My speculation would be that they were hesitant to be more open about" their divestiture plans, he told BioCommerce Week. "If you announce that in a public forum you'd have to be pretty far down the aisle because you're going to get your employees all panicky, wondering if they're going to be let go. I guess the fact that they made an announcement at this point would indicate to me that they probably are in pretty advanced discussions here and probably have the purchaser narrowed down to two or three different possibilities, and hope that they can get a transaction done in the very short term."
According to an 8-K filing with the US Securities and Exchange Commission this week, Harvard Bio said it "expects to substantially complete the divestiture as soon as reasonably practicable, but in any event within one year."
Unwelcome Surprises Versus Predictability
During a June conference call and webcast, Harvard Bio CEO Chane Graziano said, "It has been the volatility of the capital equipment business segment that has given us the biggest surprises in our financial results. Therefore, we feel at this time we need to provide separate financial information on these two segments, so our investors can better understand these dynamics."
In addition to the Genomic Solutions business, the COPAS flow cytometer and MEAS automated microscope, which are part of the capital equipment business, also struggled last year.
Revenue for the capital equipment segment increased to $35.2 million in 2003 from $2.8 million in 2001, primarily driven by the acquisitions of Union Biometrica — which makes the COPAS and MEAS product lines — and Genomic Solutions (see chart). But as sales fell off in 2004, operating margin for the segment suffered, going to a loss of $1.7 million in 2004 from a contribution of $2.8 million in 2003.
Those struggles led Harvard Bio to restructure Genomic Solutions in the second quarter of 2004. As part of that restructuring, the firm slashed costs by $3.6 million a year by closing one of the unit's three factories, closing its sales office in Japan, laying off 36 employees, and splitting the Genomic Solutions unit in two.
The firm believed those moves were paying off, with Green saying during the June call, "We believe we've turned the corner with this business, and look forward to getting that back to good operating margins. The first quarter of '05 showed order growth over the first quarter of '04."
It appears that positive momentum did not carry over to the second quarter, and the company is unwilling to invest further in the business.
Following the divestiture, Harvard Bio would be expected to provide investors with more consistent results. "By breaking apart the business and basically throwing in the towel on Genomic Solutions, they are going to allow investors to really invest in the business that is the more attractive of the two, has the better prospects of the two, and that really fits their strategy, which is organic growth augmented by small tuck-in [acquisitions]," Chazan said in an interview this week.
The business Chazan is referring to is Harvard Bio's apparatus and instrumentation business, which sells syringe pumps, ventilators, amino acid analyzers, and electroporation instruments, among other products. Revenue growth for that segment has been strong since 1997, driven by both organic growth and acquisitions, according to the firm. And while the capital equipment business has struggled, the apparatus and instrumentation business has continued to post solid revenue gains.
"If you look at the non-capital equipment side of their business — if you just factor in that part — they would have a nice predictable steady business," Arens said. "And they would be able, I think, to generate consistent results. They wouldn't come in with all of these negative surprises, and it wouldn't come down to the last week of the quarter as to whether they have a couple of big deals closed."
Arens, who during the June call strongly pressed management about Harvard Bio's continued presence in the capital equipment market, said he believes the capital equipment business is better suited to a larger organization that has "attractive products, good margins, and they're large enough that they can swallow the lumpiness of a business" that provides inconsistent returns.
Although he declined to provide the names of any potential suitors, Arens said he believes there will be parties interested in the assets. "They should be able to find a purchaser, and I think they should be able to get it done on reasonable terms," he said.
Chazan, on the other hand, was not quite as certain. "Some of the other instrument providers might be interested in some of these platforms," he said. "There might be a [venture capitalist] or two out there who might have some interest. We've seen some of these guys step in and buy chunks of companies that are being spun off."
He added, "It has some decent brands, but quite frankly it was in a space [in which] those kinds of platforms had limited utility. In our view, the market was shifting to more commercial solutions, like Affy, like Illumina, and [Harvard Bio] never saw the opportunities in proteins materializing. So, the big push there was folks that were spotting their own arrays, either DNA or protein, and it was a dwindling piece of the market."
Arens suggested that the firm may try to sell potential buyers on what appears to be an improving capital equipment market, adding that he expects pharma spending to pick up in the second half of the year.
"I think the consensus thinking out there is that the environment is certainly improving for these types of purchases," he said.
— Edward Winnick ([email protected])