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No M&A Activity as ABI Reports 1-Percent Rise in Q3 05 Revenues

Four months after Applera chairman Tony White said that Applied Biosystems would be "keeping its powder dry" on acquisitions, the company is still sitting on the sidelines as its competitors knock off small and large acquisitions.

"We have cash, and we're open to ideas," said White, who has maintained that stance since an appearance early in the year at the JP Morgan Healthcare Conference in San Francisco.

The company apparently is doing its homework.

Cathy Burzik, president of ABI, said ABI has identified 35 companies that have "alternative" sequencing technologies. She did not say who the companies were, or if the ABI was in active negotiations to acquire any of them. ABI classes technologies alternative to its core capillary electrophoresis-based methods for DNA sequencing as 1) single-molecule efforts, and 2) DNA clustering efforts, with a five-year development window for the former and the latter "not going to hit the market in a real way in the next couple of years," Burzik said.

In a research note, Adam Chazan, an analyst with Pacific Growth Equities, said the technologies being developed by the companies 454 and Solexa, if successful, could be acquisition candidates for ABI.

ABI additionally announced that it would extend its PCR licensing program with Roche to include real-time PCR reagents. ABI, which has the exclusive license for the research market, will grant real-time PCR instrument licenses on a case-by-case basis, the company said.

Celera Genomics, ABI's sister company, announced that it will contribute DNA sequence information for certain human, mouse, and rat genomes to the public domain through the National Center for Biotechnology Information after July 1 and will exit its online/information business.

Celera said the contribution "should increase stimulate more experimentation among academic and commercial research, which should, in turn, increase demand for Applied Biosystems products.

It is unclear how this contribution will affect products such as ABI's Expression Analysis System, which differentiates itself from competitors by bundling access to Celera's formerly proprietary DNA sequence data.

Revenue Growth

ABI, which is the DNA sequencing leader, this week announced a foreign-exchange aided 3-percent increase in revenues of $455 million for the quarter ending March 31, an increase in sales for its slowing DNA sequencing business and its rising RT-PCR segment, a dip in mass spectrometry sales, and still no announcement of any type of acquisition as its trove of cash and short-term investments grew to $676 million.

This lack of activity in a booming segment for M&A is not because the company is sprucing itself up for a sale, if White's comments are accurate. When asked Tuesday in a conference call with analysts to describe the company's critieria for mergers and acquistions, White found his way to an answer by eliminating the things he wasn't going to answer.

"It's about what we might buy, not what we are not going to sell, because we don't have much activity there," White said.

And, yes, the company is looking, White said.

ABI's revenues from the once cash-cow DNA sequencing business ended a 7-quarter decline with a 3-percent increase in revenues for that unit, which equaled the year-ago quarter's contribution of 31 percent of ABI's sales. Burzik said the increase in sales for the quarter did not reflect a turnaround for the market.

RT-PCR unit sales increased 20 percent to $133.5 million and grew to 29 percent of ABI's revenues, compared to 25 percent in the year-ago quarter.

Mass-spec sales fell 4-percent year-over-year to $105 million, a loss that was attributable, Burzik said, to sales volume in the year-ago quarter when the company cleared an order backlog after the introduction of a new mass spec instrument. Mass spec contribution to total sales fell 2 percent to 23 percent of ABI's sales.

Revenues for the company's PCR and DNA synthesis product lines fell 1 percent to $9.8 million and were 11 percent of ABI sales, compared to 12 percent a year ago as the core US PCR patents expired in March.

While the company recently told investors that it is increasing its emphasis on selling consumables, Burzik said that ABI faces competitive "pricing challenges" in the RT-PCR and PCR markets.

The company realized a 2-percent overall currency exchange benefit with sales in Europe benefiting 4 percent, and Asia-Pacific region sales benefitting 2 percent, including a 3-percent benefit in Japan sales.

ABI's research and development expense was $50.9 million, down from $52 million in the year-ago period as the company reported net income of $55.5 million, over $46.0 million a year-ago.

— Mo Krochmal ([email protected])

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