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Investors May Get Their Wish with Applera Considering Split of ABI, Celera Groups

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Applera is considering splitting its Applied Biosystems and Celera groups, which are currently traded as tracking stocks under the parent company, into two independent publicly traded companies, the firm said last week.
 
Applera has hired investment bank Morgan Stanley to conduct a review and advise the company on its options for restructuring the groups. A split of the two has long been desired by investors, who would like more transparency and independence in the operations of ABI and Celera.
 
Applera also announced a $600 million extension to ABI’s share-repurchase program, and over the past two weeks company officials presented greater detail about their expectations for the next-generation sequencing market.
 
Last week, in a move that pleased investors and analysts alike, the firm announced that the time may be right to finally split ABI and Celera into two independent publicly traded firms, rather than retaining them as tracking stocks under Applera. 
 
Celera’s shares rose 9.2 percent since the announcement to close at $13.35 on Tuesday, while ABI’s shares had increased 6.6 percent to $34.50 before falling back to close at $33.06 on Tuesday.
 
"We regularly review Applera's corporate structure, and in view of Celera's continued strong financial progress, we believe the time is now right to explore alternatives to our tracking stock structure, including the possibility of creating two independent publicly traded companies in place of the two tracking stocks," Applera CEO, President, and Chairman Tony White said in a statement.
 
"While the tracking stock structure has facilitated the interests of both Celera and Applied Biosystems,” White added, “the evolution of our businesses makes it timely to explore the potential benefits of these businesses going their separate ways."
 
During an investors meeting this week at ABI’s offices in Framingham, Mass., Applera Executive Vice President Mark Stevenson said the firm has fielded a lot of questions from investors regarding when such a split would happen. “We felt the time was right for several factors coming forward, not least of which is Celera becoming profitable during this fiscal year,” he said.
 
He said it was too soon to say what recommendations Morgan Stanley will make or when a restructuring will take place. But, Stevenson said Applera is facing three basic options: “One would be take Celera into AB, one would be sell Celera, and one would be take Celera off into a separate company. There may be a fourth option we haven’t thought of, but those [are] the basic three options,” he said.
 
Stevenson said the most likely option would be to separate Celera into a separate organization, “but that is what Morgan Stanley will study. As soon as they come back with a recommendation and the timing then we’ll know,” he said.
 
ABI markets instruments, consumables, software, and services for the research and applied markets. Its primary technologies are DNA sequencers, PCR instruments and chemistries, gene expression and microRNA tools, and mass spectrometers, which it sells through a joint venture with MDS. ABI recently reported fiscal 2007 revenues of $2.09 billion, a roughly 10 percent increase over 2006 revenue of $1.91 billion.
 
Celera was originally formed to sequence the human genome but has evolved into a molecular diagnostics developer. The group recently reported a decline in fiscal 2007 revenues to $43.4 million from $46.2 million in 2006, but its net loss dropped sharply to $19.8 million from $62.7 million. Celera predicted that it will break even for fiscal 2008.
 
With both groups seeking a greater presence in the molecular diagnostics market, a key step in providing more clarity over diagnostic rights was achieved in early 2006 when ABI sold its 50-percent stake in Celera Diagnostics to Celera Genomics in exchange for the right to sell instruments to end-user diagnostic customers (see BioCommerce Week 1/11/2006).
 
When Celera Diagnostics was created in 2001 as a 50/50 joint venture between ABI and Celera Genomics, "all of ABI's intent in clinical diagnostics was through that venture," White said at that time. "Today, they are doing very well but are focused in a narrow area, and there's a much broader base out there."
 
In a research note to investors last week, Thomas Weisel Partners analyst Paul Knight said that splitting the two groups into independent firms would provide greater transparency into the financial health of ABI and Celera. The restructuring also would provide ABI with greater freedom in the molecular diagnostics market, he added.
 
Buyback Won’t Affect M&A Option
 
In addition to the restructuring study, Applera said last week that its board of directors has nearly doubled its share repurchase authorization for ABI’s stock to $1.2 billion, which represents around 20 percent of the company’s outstanding common stock.
 
Through that repurchase, Applera expects to buy $600 million shares either through a tender offer or an accelerated share repurchase, the company said. The balance of that buyback will come “from open market purchases or privately negotiated transactions” over the next year to year and a half, the company said.
 

“We felt the time was right for several factors coming forward, not least of which is Celera becoming profitable during this fiscal year.”

"The substantial increase and acceleration of the Applied Biosystems share repurchase program reflects our confidence in its business outlook and our belief that its shares continue to be undervalued in the market,” said White.
 
White also said ABI’s “strong cash position” makes the share-repurchase program “an effective way to return value to shareholders.”
 
However, the share buyback is not expected to curtail any merger and acquisition activity ABI may consider this year. “We continue to explore merger and acquisition opportunities, and we will do that even after having made the announcement last week that we intend to buy back more of our stock,” Stevenson said at the investors meeting.
 
Rapid Next-Gen Sequencing Growth
 
During that meeting, as well as last week at the Leerink Swann Emerging Products and Applications of Life Science Tools conference in New York, ABI officials said that they expect the market for next-generation sequencing technologies to more than triple over the next four years.
 
ABI expects the overall sequencing market, which includes both capillary electrophoresis and next-gen technologies, to grow from a current level of about $900 million to more than $1.4 billion by 2011. Company officials predicted that next-generation sequencing technologies alone will increase from $135 million to $450 million during that time.
 
ABI’s estimate of the next-generation sequencing market is much lower than that predicted by some other players, as the firm is cautious about the emerging market.
 
“We’re trying to … quantify a market that is so new and so exploding,” said Stevenson. “It’s a hard task to go and do that. I think that some of our competitors have taken the whole sequencing market and the whole gene-expression array market and put it together and you have a massive $2 billion market. I think we try to be more responsible,” he said.
 
Roche’s 454 Life Sciences subsidiary, Illumina, and Helicos are ABI’s primary competitors in the next-generation sequencing market, though a variety of start-ups are developing their own technologies. 454 and Illumina have already commercially launched their platforms, while ABI officials said recently that they have decided to move up the commercial launch date for the firm’s platform to October after getting positive feedback from early-access customers.

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