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Thermo, Fisher Merger to Create Major Shift in Market; Are Other Transforming Deals Likely?

In a transaction that pairs two of the BCW Index's bigger players, Thermo Electron and Fisher Scientific will merge, creating a life sciences behemoth with $9 billion in annual revenues, 7,500 sales people, and 350,000 customers worldwide.

The tax-free, stock-for-stock exchange, worth $10.6 billion, will combine Fisher's strength in consumables and extensive distribution network with Thermo's focus on instrumentation for a wide variety of life sciences research applications. Expected to close in the fourth quarter, the merger also will undoubtedly shake up the research tools market and force many rivals in the Index to consider potential blockbuster deals if they hope to remain competitive against the new company, to be called Thermo Fisher Scientific.

The announcement comes two weeks after Millipore signed a deal to acquire Serologicals for $1.4 billion in cash (see BioCommerce Week 4/26/2006) — another major deal that will alter the playing field for the BCW Index companies. The acquisition will give Millipore's Bioscience Division, which includes tools for protein and DNA research, analytical sample preparation, and bioassay development, a larger presence in the drug-discovery products and services, antibodies, cell biology reagents, and stem cell research markets.

"We've had, over a fairly long period of time, discussions about combinations that I would characterize on a smaller basis, at the business unit level. Over time, [we] recognized the enormity of the potential of the combination of the two parent companies. This was the time we managed to put it all together."

"We've had a long-standing relationship with Thermo," said Paul Meister, vice chairman of Fisher, who will become chairman of Thermo Fisher, during a conference call this week. "We've had, over a fairly long period of time, discussions about combinations that I would characterize on a smaller basis, at the business unit level. Over time, [we] recognized the enormity of the potential of the combination of the two parent companies. This was the time we managed to put it all together."

"This is going to be a very different competitive landscape," said Panna Sharma, CEO and managing partner of life sciences advisory firm TSG Partners, in an interview this week. "These aren't the kind of tuck-in acquisitions people were expecting to happen this year. These are really transforming the industry, in terms of how people buy, how people are looking at their portfolios in terms of cost structure of the industry, et cetera."

To put into perspective the size of Thermo Fisher, only GE Healthcare, with revenues of just over $15 billion in 2005, will be bigger among the BCW Index companies. After Thermo Fisher, the next biggest player by sales is Beckman Coulter, which anticipates 2006 revenue of $2.5 billion.

Thermo Fisher management also did not rule out the possibility of further acquisitions in the near-term. Although the current focus is on integrating the two businesses, said Thermo President and CEO Marijn Dekkers, there will be significant growth opportunities through acquisition.

"Both companies have always had their eye on smaller, tuck-in acquisitions, and if it comes to fruition before the closing, we'll talk about them and do it if it makes sense," said Dekkers, who will become president and CEO of the new company.

Complementary Portfolios, Common Goal

The merger will combine Thermo's broad portfolio of mass spectrometers, chromatographs, sample prep instruments, and other lab equipment with Fisher's biochemicals, cell-culture media, RNAi, and diagnostic products, as well as its pharma services and global lab distribution network. The firms believe that the combination will provide research customers with the end-to-end integrated workflows that they crave.

"Both companies have had a similar approach to the customers," Dekkers said during the call. "It's clear that [customers] are really demanding from a supplier base to do things so that they can save money, [and] they can be more productive. Through this combination we can only do it better."

Lab customers are looking for optimized workflows, while the purchasing department is dealing with fragmented suppliers, said Dekkers. "This combination better serves both of those sets of customers at big pharma and big biotech than we could do individually before," he said. "The emphasis here is on complementary capabilities, and we both have tremendous momentum in our top-line growth."

Thermo's organic revenues have grown an average of 7 percent per quarter over the past 12 months, according to Dekkers. He noted that Fisher has been hitting organic growth rates on the high end of a 4-percent to 8-percent range, and he expects growth to be higher as a combined company.

Thermo Fisher will have 7,500 sales and marketing staff worldwide serving 350,000 customers. "No one in the industry has the global reach in sales that the combined company has," boasted Dekkers. "The combination with Fisher … will help the Thermo technology to reach customers so much easier than we could ever do it on our own."

Dekkers also said the combined firm would be able to capitalize on the convergence of life sciences research with healthcare. "It's entirely obvious that this combination of capabilities between R&D and diagnostics is a future trend, and we're very well positioned in the combination to address this."

He also pointed to the "very strong focus on the emerging markets in Asia" that both companies have shown. During the call, company officials did not break out sales to individual countries, but according to an accompanying presentation, North American sales will account for 66 percent of Thermo Fisher's revenue, while sales to Europe will account for 25 percent, and Asia and the rest of the world will bring in 9 percent of its revenue.

"We both have manufacturing capabilities [in China], and are both expanding our capabilities" there, Dekkers said. Together, the firms currently have 800 employees based in the country.

Thermo and Fisher also said that the merger will generate $200 million of synergies, with $150 million coming from cost-related savings and a further $50 million coming from revenue synergies, over the next three years. Thermo Fisher is expecting benefits of at least $75 million next year, driven largely by the combined firm's purchasing power, according to Dekkers.

"We view each company's product offerings as very complementary and believe that as customers continue to focus on consolidating vendors, this combination makes a ton of sense," Deutsche Bank analyst Ross Muken wrote in a research report.

The transaction was not a complete surprise to TSG's Sharma. "Thermo's been looking around for a broad-based consumables play, and either some of these companies were too expensive or they didn't move the needle enough," said Sharma.

However, he said, "What is interesting is what will they do with their portfolio? There are going to be a lot of pieces that don't necessarily make sense there. You've already seen Thermo do a couple of interesting things. They divested their rapid point-of-care diagnostics last year," he noted.

Putting Pressure on the Competition

The Thermo and Fisher merger will put the heat on other larger research tool vendors and their efforts to keep up. Customers and investors alike will be eyeing firms, such as Invitrogen, Qiagen, PerkinElmer, and Applied Biosystems, to see whether they pull the trigger on a similar, transforming deal.

"I think the industry as a whole is beginning to mature," said Sharma. "Right now, there's seems to be an appetite on Wall Street and an appetite among management that transformative deals are the only way to really move the needle. I think once you see one or two of them, that makes other companies feel a lot more comfortable."

He said the Thermo-Fisher deal, along with Millipore's purchase of Serologicals, will put more pressure on the stand-alone, high-value consumable players to come up with synergies, and be more aggressive in looking at the potential of entering into the world of instrumentation.

"It also makes these stand-alone instrumentation companies think more aggressively about what else is remaining out there," said Sharma. "You've got players like Beckman, ABI, Waters, PerkinElmer, and from the instrumentation side they've probably all got to react in some way to what's going on. On the consumables side you've got Invitrogen, Qiagen, and Techne R&D probably all thinking about where they're headed."

The top instrument and consumables companies have "got to be thinking, 'What will this do to our competitive situation?' All of these companies had deals with Fisher as a distributor or collaborator," he said. "It will be very interesting to see how that shakes out."

Sharma also said he believes that next wave of acquisitions will include a large deal between a diagnostics firm and a discovery company. "That seems to be the thing people are looking out for now."

— Edward Winnick ([email protected])

Terms of the Merger

Under the terms of the deal announced Monday, Fisher shareholders will receive two shares of Thermo common stock for each share of Fisher held. Based on Thermo's closing price of $39.45 per share on May 5, the deal values Fisher's stock at $78.90, a 7-percent premium to Fisher's closing price of $73.73 on that day.

Upon consummation of the deal, which is being structured as a reverse merger by Thermo, Thermo shareholders will own about 39 percent of the new company and Fisher shareholders will own the remaining 61 percent. The deal is expected to close in the fourth quarter.

The companies said that the merger will be accretive to earnings, and Thermo expects 2007 adjusted earnings per share of the combined company to be in the range of $2.27 to $2.37, reflecting accretion of approximately 18 percent to Thermo's consensus 2007 adjusted earnings per share. Additionally, the deal is expected to result in a 20-percent compound annual growth rate in adjusted earnings per share over three years.

Thermo Fisher Scientific will be headquartered in Waltham, Mass., and will continue to have an office in Hampton, NH. Paul Montrone, chairman and CEO of Fisher, will remain as an advisor to the combined company, and Thermo Chairman Jim Manzi will serve on the board of directors.

— EW

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