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Thermo Fisher Rivals Say the Giant Can Get as Big As It Likes. We re Happy Being Focused, Thank You

Thermo Fisher Scientific's smaller rivals will soon get the chance to test their theory that focus can challenge diversity.

When Thermo and Fisher merge at the end of the year, they will create a life sciences behemoth with $9 billion in annual revenues, 7,500 sales people, and 350,000 customers worldwide. The $10.6 billion deal is the biggest in the life-science tool segment on record; the next-biggest in size is GE Healthcare's $9.5 billion acquisition of Amersham in 2004.

Expected to close in the fourth quarter, the Thermo-Fisher merger also will undoubtedly shake up the research tools market and force many rivals, especially those in the high-growth proteomics segment and emerging high-content screening market, to consider steps, including M&A, to remain competitive.

In the 10 days since Thermo and Fisher announced their plans, some of their rivals, especially in the booming mass spectrometry and emerging high-content screening segments, have had a chance to digest the news and anticipate how the new company might affect their markets.

Thermo, known as an instrument company, and Fisher, a reagents and consumables giant, each recognized that to grow their top lines they needed to expand into each other's markets. Fisher, the bigger of the two companies with $5.6 billion in 2005 revenues (Thermo recorded around $2.6 billion for that period), underscored this belief when it acquired high-content screening vendor Cellomics in September [see 9/15/2006 BioCommerce Week].

"The two things we have to count on for us — because certainly on a size basis and a one-stop-shop basis we're not going to compete against Thermo Fisher — is that we have to compete with the fact that we're more focused in supplying the kinds of tools that we provide, and that [those tools] will be more innovative."

In fact, Fisher CEO Paul Montrone, who will step down and remain an advisor when the merger closes, said during the Robert W. Baird Growth Stock Conference in Chicago last week that one challenge Cellomics faced when trying to grow its business as a standalone company was "cranking up" the reagent portion of its product.

A combined Thermo-Fisher, then, has the potential to "crank up" even more the interplay between high-content screening instruments and their reagents. One rival in this space, Molecular Devices, recognizes the potential threat from Thermo Fisher but isn't particularly anxious.

In the short term, Molecular Devices CEO Joe Keegan said he doesn't expect the market to notice Thermo Fisher very much because he expects it will take "some time to sort out all the pieces." Keegan told BioCommerce Week that he saw this phenomenon soon after GE Healthcare acquired Amersham. Amersham sold high-content imaging products that competed with Molecular Devices, "and if anything, I'd say it slowed their progress in that area for a substantial period of time," he said.

Keegan also said he's not too concerned about Thermo Fisher's Cellomics play. Rather, "the area where we worry about Thermo, and where greater distribution [by] Fisher [would be a benefit to the combined company], is in our core reader market," he said. This business includes Molecular Devices' microplate readers and fluorometric imaging readers, which are considered the gold standard in the market today.

"When you go outside North America, their footprint is going to be more substantial than ours." However, Molecular Devices has infrastructure "throughout Asia and Latin America," and a "substantial" business in Europe, including offices in London and Munich, Keegan said.

"The two things we have to count on for us — because certainly on a size basis and a one-stop-shop basis we're not going to compete against Thermo Fisher — is that we have to compete with the fact that we're more focused in supplying the kinds of tools that we provide, and that [those tools] will be more innovative," he added.

Thermo Fisher's ability to nurture new customers in faraway markets is one thing, but using its mass to lure existing customers away from its competitors is another. Is Molecular Devices, which generated around $181 million in revenue last year, concerned with this possibility, especially in the emerging high-content screening instrument and reagent segment where the company currently enjoys a leadership position? Keegan would only say that the merger is "a significant event in the industry" and that for those companies that are competing on size "it has changed the stakes." He said it has "created an entity that is substantial and has to be watched closely."

"If we have to compete against size, we're worried," said Keegan. "If we have to compete on product leadership … and focus, that's where we expect to be successful."

Another Thermo Fisher rival is Waters, with which it competes in the mass-spectrometry market. Gene Cassis, Waters' vice president of investor relations, reckons that because this market will account for a significantly smaller piece of Thermo Fisher's revenue pie than it did under Thermo alone, Waters does not fear the merger.

"If we have to compete against size, we're worried. If we have to compete on product leadership … and focus, that's where we expect to be successful."

Thermo does not break out receipts by market segment, but Cassis estimates that mass spec sales amount to between 20 percent and 25 percent of the company's overall revenue. But when Thermo marries Fisher, that slice of the revenue pie will likely shrink to 10 percent or so, Cassis said.

In a fourth-quarter conference call in February, Thermo CEO Marijn Dekkers said he believes Thermo gained market share throughout 2005 in the mass spectrometry field.

"I think it's been kind of interesting that Thermo has been able to talk about their [mass spec] business, and they certainly concentrate on mass spectrometry," Cassis told BioCommerce Week. "But 80 percent of their business is not mass spectrometry. Just looking at how much is spoken about those [non-mass spec] products is interesting to me."

Cassis estimates that the competitive overlap between Waters and Thermo Fisher is around 10 percent. Asked whether Waters, which generated around $1.6 billion in revenue last year, has formulated a strategy to counteract the effects Thermo Fisher may have on the life sciences market, Cassis said no. "We have a business strategy. … We're very comfortable with our strategy."

Whereas Thermo markets itself as a kind of one-stop shop for a variety of life science disciplines, Waters, like Molecular Devices, has said that it "will focus narrowly on select technologies," which are liquid chromatography, mass spectrometry, and thermal analysis.

In fact, Waters and Thermo are marketing partners. In March, Waters, aiming to retain its place at the top of the liquid chromatography market, inked a collaboration to integrate its Acquity UPLC system with Thermo's mass spectrometry products. That alliance follows a similar earlier collaboration between the firms on HPLC/MS.

The consensus among vendors, equities analysts, and the mainstream news media is that the Thermo-Fisher deal will trigger additional big mergers and acquisitions between large tool vendors. Asked whether Waters plans to participate in such a trend, if one should emerge, Cassis said Waters is "actively looking for businesses to add into our franchise."

When asked whether these will be the smaller tuck-in buys that have helped shape the current life sciences space, or bigger deals akin to Thermo-Fisher or Millipore's $1.4 billion acquisition of Serologicals [ see 4/26/2006 BioCommerce Week], Cassis said Thermo and Waters are two very different companies with two distinct growth and acquisition strategies.

Cassis also said he believes Thermo Fisher's size will become a drag on its top-line growth. "Think about a future where you have a monopoly in the laboratory, and one company is supplying everything," said Cassis. "Then that company is going to grow with the overall laboratory market growth rate. You go back over the last couple of decades, you're looking at a company that is going to grow maybe 2 or 4 percent."

Molecular Devices' Keegan agreed, saying Thermo "has struggled to achieve" that growth, "and that [the need to attain greater revenue growth] is one of the reasons they would be an acquirer."

Thermo's total revenue in 2005 grew 19 percent to $2.63 billion year over year, but acquisitions, net of divestitures, accounted for 15 percent of that growth, the company said in a statement.

Cassis said Waters' strategy "is based on the belief that a person working in a laboratory is going to base their decision on instrument purchases based on the performance of the instrument and the quality of the service they get for that instrument. Rather than have the transaction being executed through one company being the top priority, we think a higher priority is to have the latest technology and have sort of technological or service differentiation. And that's the strategy we're going to follow."

— Kirell Lakhman ([email protected])

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