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Eyeing Sera Space With JRH Buy, Sigma Needs $200M More; Where s the Value?

Sigma-Aldrich plans to spend $370 million to acquire JRH Biosciences of Lenaxa, Kan., a 400-employee sera and cell-culture product manufacturing firm with $150 million in sales in 2004, the company said Tuesday.

With $134 million in cash on hand at the end of the quarter ending Sept. 30, Sigma will need some $200 million in additional cash to pay for the acquisition. The company will take out short-term and three-year term debt to finance the acquisition, Sigma said in a statement.

The acquisition, which is subject to regulatory approval, would be the Sigma’s largest acquisition ever, Mike Hogan, Sigma’s CFO, told BioCommerce Week.

“It was a large, complicated deal,” Hogan said. “It fits our acquisition criteria, it’s growing faster than 10 percent a year, and it’s profitable. There aren’t that many of these around.”

Because of SEC regulations, Hogan said he was limited in what details he could provide on the deal.

Sigma-Aldrich is a growing presence in the molecular biology tools sector, primarily as a maker of synthetic DNA, and a distributor of other chemicals used in genomic and proteomic research. The company operates three business units — scientific research, fine chemicals, and biotechnology.

The biotechnology unit’s Q3 sales were essentially flat when adjusted for benefits from currency exchange rates. The company attributed this to lower demand from academic customers for animal-source serum products and synthetic DNA, and to the fact that it is not “basic in serum, nor in serum collection, [and] hasn’t had a chance to grow that sector,” CEO David Harvey said in a conference call in October 2004.

Broadening Market Scope

“[JRH] is very strong, and is a highly regarded source for cell culture media and products,” Hogan said. “We are in that market in a distant way.”

Sigma sells cell-culture products to research customers, who use it in small quantities, Hogan said. JRH manufactures its products at greater scale, and targets the biopharmaceutical market.

“[The acquisition], assuming it is approved, will allow customers ranging from lab-bench researchers to biopharma to purchase these products,” Hogan said. “It allows us to get involved with the whole spectrum of customers, and that is a positive.”

Hogan said Sigma regards the purchase price for JRH as “reasonable.”

“It is a very complementary acquisition,” he said. “We have a plant, and they have demand. We have a large underutilized manufacturing facility [and] this will help the combined business [and] bring them capacity to handle future growth. This should drive down overall product cost.

“We have never been primary in the collection of sera and they are, so customers of the company should have a more secure supply of serumbased products, for research or industrial applications,” he added.

Hogan said Sigma has a team that will manage the integration of the acquisition once the deal closes.

“[SEC] rules don’t allow you to sit down [with an acquisition] and plan,” he said. “So there [are] a lot of people sitting down and doing a lot of what-ifs. But, immediately after the deal closes, they get to work to figure out how they get integrated well and keep their strengths and overcome all weaknesses.”

JRH is constructing a 52,000-square-foot, $13.5 million expansion for its Lenaxa manufacturing facilities to make dry-powder cell culture media. The expansion was funded through $17 million in industrial revenue bonds, according to a report in The Business Journal of Kansas City.

Potential Benefits

Sigma, which has a debt-to-equity ratio of 24 percent, expects to remain within its targeted debt-to-capital ratio of 30 percent to 35 percent after the transaction, Sigma said. The company’s debt ratio, with includes $66 million in notes payable and long-term debt, ranks fifth in the wholesale chemicals and allied products sector, its industrial grouping as determined by the US Department of Labor.

JRH, which was incorporated in 1971 as KC Biological, supplies cell culture and sera products to the biopharmaceutical industry and expects revenue growth of 10 percent in 2005.

The company was acquired by Corning Glass Works in 1983, and by Hazelton in 1986. It was merged with JR Scientific after Porton International (UK) purchased Hazelton in 1989. CSL Limited of Parkville, Victoria, Australia, acquired JRH Biosciences, then operating at a loss, in 1994 for $20 million, according to a report in the Sydney Morning Herald newspaper.

“To ensure JRH’s continuing success and maximize its value to CSL we have decided to divest the business,” CSL managing director Brian McNamee told the Morning Herald.

CSL manufactures human vaccines, plasma products, and pharmaceuticals and is traded on the Australian Stock Exchange.

The transaction is expected to close in the first quarter of 2005 and has been approved by the boards of directors of both companies, Sigma said.

As much as 10 months of JRH’s operating results may be added to Sigma-Aldrich’s performance in 2005 — depending on the closing date for the transaction. The acquisition is expected to be accretive to earnings after 2005 and to make a positive contribution to cash flow in 2005 and after, Sigma said.

“The acquisition of JRH should benefit both customers and shareholders,” Harvey said in a statement. “It strengthens Sigma-Aldrich’s ability to meet customers’ needs in supplying cell culture products to the fast growing biopharmaceutical production market and enhances our overall position in the broad life science research market.

“With JRH’s history of profitable sales growth, its addition is expected to help us meet or exceed our long-term growth and return goals,” he added.

JRH has manufacturing facilities in the United States, Europe, and Australia, and serum-collection and -processing centers in the United States and Australia. The company’s product lines include sera, cell culture media used in the production of therapeutic proteins, reagent growth factors, and biological material containers.

In announcing the proposed acquisition, Sigma reaffirmed its 2004 full-year estimate of diluted earnings per share to range from $3.30 to $3.35.

For 2005, diluted earnings per share are expected to be $3.45 to $3.55, including dilution from the acquisition of approximately $.10 per share due largely to a charge of approximately $.18 per share to increase acquired inventory to its fair value. This estimated range also assumes that exchange rates remain at Dec. 31, 2004, levels throughout 2005 and a 2005 effective tax rate of approximately 29 percent.

Sigma-Aldrich will release its Q4 FY ‘04 financials on Feb. 8.

Sigma-Aldrich reported net sales of $341 million for the quarter ending Sept. 30, up from $314 million for the same period last year.

The company reported a gross profit of $182 million for the period, compared to $164 million for the year-ago quarter (see BCW, 10/28/2004)

— Mo Krochmal ([email protected])

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