Despite suffering from bottom-line indigestion relating to the acquisition of MJ GeneWorks in August, Bio-Rad Laboratories has negotiated a $200 million line of credit to go after even more acquisitions, the company said in a conference call last week after the release of its fourth-quarter financials.
In the quarter, which ended Dec. 31, the company sold $200 million of 6.125-percent senior subordinated notes due 2014 in a private offering.
Bio-Rad CEO Norman Schwartz told analysts in last week's conference call that the funds are primarily for the purpose of acquisition.
"We don't have anything specific right away," he said. "But we know that there are opportunities to invest and we will pursue those as the year goes on. We have teams that are actively looking at technologies and opportunities, but nothing that is going to happen in a day or two. This was purely an opportunity to balance that against the ability to have those favorable long-term rates. We thought it was a good bet."
Last year, in addition to purchasing MJ, Bio-Rad spent $17 million to purchase the assets of Hematronix, a Plano, Texas-based maker of quality control products. The deal closed in the quarter ending March 31.
Bio-Rad last week reported that its fourth-quarter revenues grew 19 percent year-over year, but an 11-percent drop in earnings for the quarter led one investment bank to smack the Hercules, Calif., molecular biology toolmaker with a downgrade.
On Friday, Aaron Geist, an analyst with Robert W. Baird, dropped the company's stock to "neutral," after raising Bio-Rad to "outperform" in November 2003, citing the earnings shortfall in a research note.
"We are significantly reducing our 2005 EPS estimates and see few near-term catalysts for the stock," the research note said. "We now anticipate that BIO will face another transition year filled with challenges of improving margins in the acquired MJ Research business and more infrastructure spending in Europe. We are disappointed to see 2005 as another 'transition' year for spending."
The fourth quarter ending Dec. 31 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 and helped Bio-Rad push to nearly $1.1 billion in total revenues for the year, compared to $980 million last year. But, MJ's lower margins and the addition of its costs also made a big impact on Bio-Rad's bottom line.
"It does have a bigger impact," Christine Tsingos, the company's chief financial officer, told analysts in the conference call following the earnings release. She said Brad Crutchfield, the company's vice president of life science, would be addressing that in 2005.
"Brad has a lot of good plans that he will be executing on in '05 to improve [MJ] manufacturing and hopefully, we will get real benefits to offset the non-cash costs," Tsingos said.
Ron Hutton, Bio-Rad's treasurer, told BioCommerce Week that there are no specific plans to improve MJ's performance, just the general planning that is a part of any integration.
For the quarter, Bio-Rad had total revenues of $308 million, a 19-percent increase including a 5-percent currency-exchange benefit over net sales of $258 million in the fourth quarter of 2003. The company declined to disclose MJ's contribution to Q4 total revenues, but said overall growth was attributable to both organic growth in its product lines, and from MJ.
The company attributed the earnings shortfall to $14 million in one-time charges $6 million for the MJ deal, $3 million for Sarbanes Oxley compliance, and $4 million in currency exchange losses and higher SG&A spending.
Quarterly SG&A expenses of $111 million 36 percent of revenues for the period were up 27 percent over $87 million for the year-ago quarter.
"Our target is to get [SG&A] hopefully back down to 30 percent as a percentage of revenue," Tsingos said. "We're going to make some progress in 2005, but we are not going to get to those targets in the near term. There is a new permanent level of spending with the acquisition."
Bio-Rad's fourth-quarter R&D spend was up 24 percent to $32 million representing 10.4 percent of revenues for the period from $26 million a year ago.
Tsingos said the company expects $5 million to $7 million of expenses relating to the MJ acquisition in 2005, primarily reflected in SG&A.
In the fourth quarter, the company set aside $50 million in a contingency settlement fund for legal issues it assumed from the acquisition of MJ. In April, a jury said that MJ Research was responsible for $19.8 million in damages to Applied Biosystems and Roche Molecular Systems for infringing a number of PCR-related patents.
"We continue to have discussions and dialogue regarding the settlement of that contingent liability," Tsingos told analysts. In January, CEO Norman Schwartz told BioCommerce Week that the company was optimistic about settlement discussions (see BCW 01/13/2005)
David Schwartz, who co-founded the company in 1957 with his wife, said that Bio-Rad is fully capable of absorbing the costs of any settlement as opposed to MJ, which was facing bankruptcy proceedings prior to being acquired by Bio-Rad.
"They were not large enough to come up with whatever it takes to settle this, whether it's $40 million or $60 million, we really don't know," he said. "It's not a big stretch for us."
In other legal matters for the quarter, Waterloo, Ontario-based Virtek Vision International settled a claim filed in April 2004 by Bio-Rad, which had purchased the assets of Virtek's Biotech Instrument business for $7.1 million on June 28, 2002. In the settlement, Virtek will pay Bio-Rad approximately $140,000, and release claims to $350,000 held in escrow from the original sale agreement. Additionally, Virtek will transfer the rights to the company's remaining biotech intellectual property, FONA (fiber-optic nucleic acid) detection technology, to Bio-Rad, Virtek said in a statement.
Life Sciences Segment
Quarterly revenues for Bio-Rad's life science business segment increased 22 percent with a 5.2 percent currency-exchange benefit to $148.5 million from $130.2 million in the same period last year.
The company attributed growth in the segment results to MJ GeneWorks and increased sales of multiplex array technology and amplification reagents.
The life science segment's results were impacted by price erosion in sales of its bovine spongiform encephalopathy product line, which was partially offset by a continued expansion in unit volume, the company said. Bio-Rad has an estimated 65 percent market share in the global BSE assay market.
In the quarter, the segment rolled out the Experion automated electrophoresis system, a microfluidics-based electrophoresis technology developed with Caliper.
The company's clinical diagnostics group improved revenues 17 percent with a 5.2 percent currency-exchange benefit with total sales of $156.7 million for the quarter, compared to $134 million in the year-ago period.
The company attributed the segment's results in part to growth in blood virus, diabetes monitoring, and quality-controls product lines.
During the quarter, the company received FDA marketing clearance for its new BioPlex2200 system, an immunoassay platform that employs Luminex beads to analyze multiple disease states from single patient samples. The company has yet to place the new product, and has previously said that it does not expect significant revenues in 2005 from the product, which is installed in clients' lab, at no cost, and will depend on the sale of assays and reagents for income.
Bio-Rad also received FDA approval for its new Multispot HIV-1/HIV-2 Rapid Test, a single-use assay for the detection and differentiation of HIV-1 and HIV-2 antibodies. Also during the quarter, the clinical diagnostics group earned a one-year agreement to supply HIV and hepatitis blood-screening products to an undisclosed Russian blood bank.
The company is continuing to restructure its Brazilian unit, in the continuation of a year-long process, said Hutton. The company took a charge of $1 million for inventory in Brazil, partially related to obsolescence, Hutton said, and is hiring new managers for the country, Norman Schwartz said.
In Europe, the company is consolidating its European distribution and installing Baan enterprise software in a process that will stretch over two years. Tsingos said the company might incur facility [closing] costs as part of that consolidation.
"We aren't changing our business model," Hutton said. "But because of the European Union, a lot of companies are consolidating. It used to be that you needed to have a warehouse in every country, but now that is not necessary."
In Japan, the company is seeing a leveling of the academic market, which was roiled by a restructuring in how government science research funds were distributed.
"That created an upheaval with our customers in terms of reluctance of spending their budgets not being sure where it's going to come in the future," Crutchfield said. "It's been a change and softened the whole Japanese market."
Mo Krochmal ([email protected])