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Seeking to Expand Dx Footprint, Beckman Coulter Pays High Premium to Acquire Biosite

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Following through on a desire to expand its diagnostics presence into the near-patient testing market and capitalize on a consolidation trend in the diagnostics industry, Beckman Coulter this week said that it would pay $1.55 billion to acquire Biosite.
 
As research tool providers have sought to capitalize on the ever-growing convergence of the life science research and diagnostics markets, the acquisition is the most recent of a string of billion-dollar-plus diagnostic deals over the past year.
 
For Beckman, the acquisition not only expands its offerings in the diagnostics market but also increases the share of revenue it will realize from consumables sales and provides markers that could potentially be used in its new molecular diagnostics instrument.
 
The premium that Beckman has agreed to pay — roughly five times revenue — raised concerns among analysts and investors and caused a sharp drop in Beckman’s share price on Monday, the day after the deal was announced.
 
Beckman and Biosite have been partners for four years on a B-type natriuretic peptide test designed to diagnose, stratify risk, and assess heart failure. According to Beckman Coulter President and CEO Scott Garrett, the firms had been discussing a possible merger throughout the alliance.
 
“We’ve been talking with Biosite and working with Biosite for four years and the idea of an acquisition has been discussed on and off throughout that period,” said Garrett during a conference call following the announcement of the deal. “For many reasons we feel this is the right time to act.”
 
He said both companies could compete more effectively through a combination of their businesses rather than just through their collaboration. “We’ve been looking for … highly differentiated content for some time,” said Garrett. “We think Biosite is the most attractive company in the industry for content.”
 
He added, “We know that we have tremendous opportunities. It’s time to get on with it and achieve all the value that we can together, and not have to dance around each other in front of the customer the way we have the past couple of years.”
 
Biosite has been selling the Triage BNP test that runs on Beckman Coulter’s diagnostic instruments. The firm, which had 2006 revenue of $309 million, derives roughly 80 percent of its sales from cardiovascular tests. It also sells tests for bacterial and parasitic infections, drugs of abuse, and toxicology. Its development pipeline includes tests for acute coronary syndrome, acute kidney injury, and sepsis.
 
During the call, Garrett said the firm aims to launch the acute kidney injury and sepsis tests in the US in 2008.
 
In addition, Biosite has over 90 issued US patents covering proprietary diagnostic markers, Garrett noted. These markers, which are based on proteomic research, could come in handy as Beckman develops and eventually launches a new molecular diagnostics platform, which is currently scheduled to debut in 2010 (see BioCommerce Week 12/6/2006).
 
“We have the installed base,” said Garrett during the call. “They will bring new valuable tests [and] drive utilization and share expansion.” The deal will immediately increase revenue growth, improve profit margins, and be accretive to 2008 EPS, he said.
 
Beckman has a long-established presence in the hematology diagnostics market, where it is believed to be the market leader. It also is near the top of the market in routine chemistry and immunodiagnostic testing.
 
Though Beckman’s traditional customer has been the hospital lab, the Biosite acquisition will provide the firm with an entry into the point-of-care market. According to the firms, Biosite’s Triage point-of-care products are used in more than 70 percent of US hospitals.
 
Beckman also believes the acquisition will help it improve its operating margins, as 99 percent of Biosite’s revenue is derived from consumables.
 
“We expect the Biosite acquisition to improve our overall revenue mix of consumables to instruments and further accelerate the growth of consumables both in the near-term and in the future,” said Garrett. He noted that consumable sales are the best indicator of the company’s financial performance.
 
Paying a Hefty Premium
 
Under the terms of the acquisition, which is expected to close in the second quarter, Beckman will pay $85 per share in cash for Biosite’s outstanding stock. The deal is valued at $1.55 billion and will be financed through convertible and term debt, according to Beckman Coulter.
 
The premium Beckman will pay for Biosite — five times its annual revenue and 53.5 percent more than Biosite’s closing stock price of $55.38 on Friday — and the debt the firm will take on caused immediate concern among investors and analysts. Shares in Beckman dropped 7 percent to close at $62.51 on Monday, the day after the deal was announced, while Biosite’s shares soared 51 percent to close at $83.80.
 
Several analysts who cover Beckman issued research notes suggesting that the price seemed a little too high.
 

“It’s time to get on with it and achieve all the value that we can together, and not have to dance around each other in front of the customer the way we have the past couple of years.”

William Quirk, a Piper Jaffray analyst, downgraded the stock to “market perform” from “outperform” and noted that Biosite’s top-selling product, the BNP test, is expected to grow at a lower rate than those offered by competitors.
 
“We think we’re paying the right price for Biosite’s shareholders and the right price for Beckman Coulter’s shareholders,” said Garrett. “We’re very confident that it will be accretive in ’08.
 
“We feel that we’re able to buy this company at an attractive price given that it literally pays for itself without any assumptions for [Biosite’s] future products,” said Garrett. “And we think those future products represent a tremendous opportunity to differentiate everything that we’re doing at Beckman Coulter and really bring higher value tests to the market. I have a lot of confidence that this is a very reasonable deal for our shareholders,” he said.
 
Despite these assurances, analysts peppered Garrett with more questions about why Beckman was willing to pay what seems like an inflated price for Biosite. Garrett noted that Beckman was not the only firm bidding for Biosite.
 
“It’s immediately accretive to cash flow, [and] we’ll generate more new cash than it’s going to take us to service the new debt that we have,” he said. “I think those are pretty simple concepts, and I hope our investors understand how confident we are that this is going to work for us.”
 
He also was asked why Beckman would do the deal now, just as investors had been regaining confidence in the firm’s prospects following its shift in lease policy and recent restructuring efforts (see BioCommerce Week 12/13/2006).
 
“I think it’s the best possible time to do it,” Garrett answered.
 
The Biosite acquisition is the latest in a string of high-profile and expensive diagnostics acquisitions over the past year as several large medical equipment and tool providers seek to cash in on the growing convergence of the research, therapeutic, and diagnostics market.
 
Siemens, which had been a traditional medical imaging equipment manufacturer, last year purchased Diagnostic Products Corp. for nearly $2 billion and Bayer Diagnostics for $5.26 billion (see BioCommerce Week 7/5/2006).
 
Siemens rival GE Healthcare answered those moves earlier this year with an $8.13 billion deal to acquire Abbott’s diagnostics business, excluding the molecular diagnostics portion (see BioCommerce Week 1/24/2007).
 
While Siemens’ deals to acquire Bayer Diagnostics and DPC and GE Healthcare’s bid to acquire Abbott’s diagnostics business are more expensive than Beckman’s proposed acquisition of Biosite, the premiums those firms paid were much lower. Siemens paid three times sales for Bayer Diagnostics and nearly four times sales for DPC, while GE Healthcare is paying three times sales for Abbott’s diagnostics business.

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