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Thermo Fisher Sees Acquisition Opportunities in 'Fragmented' Market; R&D Focused on Integration

Though Thermo Fisher just completed a $10.6 billion merger creating a life sciences behemoth, the firm’s CEO said last week that he sees plenty of opportunities to continue growing the firm through acquisitions.
 
The comments from Marijn Dekkers came one day before the firm bought Cohesive Technologies, a small acquisition that it believes will beef up its sample-preparation offerings for its liquid chromatography and mass spectrometry products.
 
Dekkers’ view that the life science tools market is highly fragmented and ripe for M&A activity could also put pressure on the firm’s competitors to make a move sooner rather than later.
 
Dekkers also said the firm is focusing its R&D activity on integrating Thermo’s instruments with Fisher’s reagents. He added that new platforms could be introduced within the next year or two.
 
“There is still a very fragmented industry in front of us, and it is becoming harder in our industry to be a smaller player and serve a much more global customer base than it was in the past,” Dekkers said during a meeting with analysts last week in New York. “We’ll have about a billion dollars of free cash flow every year. So we have ample financial capability to do acquisitions — and quite honestly we see tremendous opportunity out there to grow through acquisitions.”
 
Dekkers said that the firm’s track record shows that it has been relatively conservative in its M&A strategy and has spent its money carefully. “I think the combination with Fisher is a combination financially that hasn’t strained anybody, in terms of the premiums,” he said.
 
“In the past we’ve done acquisitions like Kendro, which was a major acquisition for us,” said Dekkers. “We don’t think we overpaid for that. We’ve mostly bought private companies, [and] I think we’ve been very disciplined in how we spend our money and how we look at the payback for acquisitions.”
 
He said there are many opportunities for bolt-on acquisitions as smaller firms look to gain a global reach for their products. “There are always going to be companies that are better off being part of us because we can get their products more efficiently to the customer than they could themselves.”
 
The day after the analysts’ meeting, Thermo acquired Cohesive Technologies, a privately held manufacturer of sample prep technologies for mass spec and liquid chromatography applications, for an undisclosed amount. Thermo said that Cohesive’s primary technology, called TurboFlow, will improve sample throughput and increase detection limits in mass spec and LC experiments.
 
Dekkers also said that as a combined entity, Thermo Fisher has “some new avenues now that might be interesting in terms of acquisitions. For instance, molecular diagnostics, [which was] somewhat harder to get to for the two individual companies, but in this combination can be very interesting for us.”
 
Prior to the merger, Fisher distributed thermal cyclers made by Thermo Electron, which could play a role, along with Thermo’s mass spec technologies, in the development of molecular diagnostic products. Fisher also distributes molecular diagnostic assay components from Eppendorf and Promega.
 
Focusing Sales, R&D Efforts
 
Fisher’s large healthcare salesforce, which sells products such as clinical and molecular diagnostic products to hospital labs and other providers, is viewed as a major benefit as Thermo Fisher goes about developing new integrated products, according to Dekkers. He noted that Fisher was already taking in roughly $2 billion in revenue from sales to these customers.
 
The firm also is targeting a greater presence in India and China. “The position needs to be built up, and we’re going to do that very quickly,” said Dekkers. “We’ve actually already started it, and I think there is an opportunity for a lot more sales for the legacy Fisher [products] in those countries.”
 
He noted that Fisher had not been as focused as Thermo in growing its business in the emerging Asian markets. According to the presentation made to analysts, roughly 9 percent of Thermo Fisher’s revenues come from the Asian market, which includes a Japanese market that has slowed considerably over the past couple of years.
 
He also noted that there has not been any significant turnover of employees from either firm since the merger was announced last spring (see BioCommerce Week 5/10/2006). “The changes for the salesforce are minimal, almost nonexistent,” said Dekkers. He also said that the firm intends to build up its marketing capabilities to support sales of integrated products.
 
The firm plans to focus its R&D spending on integrating Thermo’s broad portfolio of instruments with Fisher’s reagents. Dekkers cited proteomics research as an area where the firm will be working on developing new integrated packages, and “optimizing that whole sample preparation process for proteomics.” He also said biomarker discovery tools is a primary area of interest for the firm’s R&D activity.
 
According to Dekkers, some new products from these efforts will be released 12 months to 2 years from now, depending on how much development is required. “We are focused on some high-growth … applications that are very new, where customers don’t have an installed base,” said Dekkers.
 
Those new products would be housed in the firm’s Analytical Technologies unit, one of the two new reporting units. The Analytical Technologies unit accounts for about 40 percent of the firm’s total revenue and contains all of the firm’s “highly technical, solutions-oriented products,” such as scientific instruments and laboratory informatics products from Thermo and bioscience reagents from Fisher, as well as the diagnostic capabilities of both firms, said Dekkers.
 

“We’ll have about a billion dollars of free cash flow every year. So we have ample financial capability to do acquisitions — and quite honestly we see tremendous opportunity out there to grow through acquisitions.”

The other unit, Lab Products and Services, contains routine lab instruments and biopharma outsourcing services, and brings in about 60 percent of Thermo Fisher’s total revenues.
 
According to Dekkers, approximately 56 percent of the firm’s revenue comes from sales of consumables, 28 percent from equipment sales, and 16 percent from software and services.
 
Will Customers Prefer One-Stop Shopping?
 
One question hanging over Thermo Fisher, and the life science tools industry as a whole, is whether customers truly prefer a one-stop shopping experience. The firm — which has $9 billion in annual revenues, 7,500 sales people, and 350,000 customers worldwide — is betting that its massive portfolio of instruments and reagents and integrated packages of products will win over customers.
 
 “In our industry, I would say people still go to different stores to buy a knife in one store and a fork in another, even though really they should be combined as a purchase,” said Dekkers. “That’s how rudimentary it still is in our industry, where there is incredibly fragmented buying going on. We don’t have to convince the whole world to buy everything that they would ever buy for the lab from us, but we can make tremendous gains as a company by just moving the needle a little bit.”
 
The firm’s success in taking market share from other large multi-tool providers may largely determine whether other industry-transforming M&A deals, which have yet to materialize, will take place in the near future — even while some industry analysts and insiders question the benefits of scale. In the wake of the Thermo Fisher deal, officials from several other life science tool vendors have said that they will remain narrowly focused.
 
In an interview earlier this year, Gene Cassis, vice president of investor relations for Waters, a Thermo Fisher rival in the mass spec and liquid chromatography fields, said he believes Thermo Fisher's size will become a drag on its top-line growth (see BioCommerce Week 5/17/2006).
 
"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."
 
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."

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