Though M&A Deals in H1 '06 Flat with Last Year, Size of Recent Pacts Could Trigger More Activity

BioCommerce Week Index companies spent at least $13 billion on 13 M&A deals during the first half of 2006 (see table) — compared with at least $2 billion on 13 deals in last year's first half. But the size and expected upshot of a couple of these transactions on the broader life sciences market are expected to push others to follow suit.

Still, some tool vendors say such deals will help them to further distinguish themselves as specialty shops disinterested in the one-stop model.

Two major deals — Millipore's pending acquisition of Serologicals for $1.4 billion and the $10.6-billion merger of Fisher Scientific with Thermo Electron — will transform the competitive landscape for multi-platform tool providers, industry observers agree, while other large players may swing major deals to keep up (see BioCommerce Week 4/26/2006 and 5/10/2006).

The Thermo-Fisher merger is "a major move that has the potential of substantially changing the critical mass and the scale of economies of technologies on the life sciences industry," said Kevin Hrusovsky, CEO of Caliper Life Sciences, which is not part of the BCW Index but competes with many of the tool firms in the Index.

"Particularly, what's intriguing about Fisher and Thermo is that their company isn't based just on critical mass: they also have a lot of innovation. It will make it much more difficult for companies that don't have critical mass and a class position to compete against them, [particularly] if they don't have patent-protected, differentiated technologies," he told BioCommerce Week.

"My sense is that it's already created a lot of thinking, and a lot of people are already being impacted by this move."

Hrusovsky said he expects another transaction on the scale of Thermo-Fisher to happen this year in the research tools space. He said firms such as PerkinElmer, Beckman Coulter, Waters, Bio-Rad Laboratories, and Applied Biosystems — all part of the BCW Index — are looking at the Thermo-Fisher deal and are probably feeling pressure from their shareholders.

That kind of thinking could lead to another major deal, he said. "There is much more potential now [for large acquisitions] than there was before this deal was done," said Hrusovsky.

But he also said the M&A market is ripe for smaller players, who may need a larger partner to help give them the critical mass needed to compete against both larger rivals and niche players. Companies that do not have strong patent positions but do have products on the market are probably the most likely companies that will seek to be acquired, he said.

"I think you can look around and see companies that are smaller than $200 million in revenue that don't have a lot of patents and have stagnated growth. These are the companies that probably fit that profile," said Hrusovsky.

Caliper, which generated around $87 million in total revenue last year, is in the process of acquiring small-animal imaging firm Xenogen for about $80 million. The deal, which Hrusovsky said will close in August, provides Caliper with a gateway to incorporate other types of imaging platforms, such as high-content screening — a tool it doesn't currently have.

He said that once the acquisition is complete, Caliper, which also makes robotics, liquid handlers, and microfluidic chips, will be competing against molecular imaging technologies made by giants such as GE Healthcare, Phillips, and Siemens — which announced last week that it would acquire Bayer's diagnostics division for €4.2 billion ($5.26 billion). (see related article)

Others see deals like Thermo-Fisher and Millipore-Serologicals as a way to distinguish themselves from the one-stop shop model.

"The industry definitely is consolidating," Peer Schatz, CEO of Qiagen, told BioCommerce Week. "It's separating into different areas, with consolidators going for their one-stop shop thing, [but] that's not our mission," he said.

Qiagen has not been aggressive thus far this year in the M&A market. After acquiring eight businesses last year, the firm has acquired just one this year — the $38-million acquisition of Gentra Systems in May. But that doesn't mean the firm is straying from its plans of adding niche businesses that further its offerings in the preanalytical and molecular diagnostics spaces.

"I wouldn't read too much into that," Schatz said. "We didn't do any deals through May last year, and then the majority came in the second half. That's a pretty typical calendar that you see," he said. "I don't expect us to have any change in acquisition aggressiveness."

Invitrogen also was extremely active in the M&A market last year, spending nearly $650 million to acquire eight companies. But the firm has yet to pull the trigger on a deal this year — other than acquiring a cell line evolution service from Morphotek in January for an undisclosed amount.

Invitrogen officials were not available to respond to this article by press time, but Chairman and CEO Greg Lucier said during a late April conference call that the firm still intends to spend roughly $500 million on acquisitions in 2006 (see BioCommerce Week 5/3/2006).

Meanwhile, ABI, after staying out of the M&A market for a few years, announced two acquisitions in the first half of this year — acquiring Ambion's research products division for $273 million (see BioCommerce Week 1/4/2006) and recently inking a deal to acquire Agencourt Personal Genomics from Beckman for $120 million (see BioCommerce Week 5/31/2006).

Why now?

The Thermo-Fisher merger is the biggest combination in the life sciences tools space since GE Healthcare acquired Amersham for $9.5 billion in April 2004. Though the M&A market was fairly strong among the BCW Index companies in 2005, with 22 deals completed at a value of roughly $2.4 billion, industry participants and observers expect the trend of bigger deals signed already this year to continue throughout 2006.

At the time the Thermo-Fisher merger was announced in May, Panna Sharma, CEO and managing partner of life sciences advisory firm TSG Partners, speculated, "I think the industry as a whole is beginning to mature. Right now, there 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" (see BioCommerce Week 5/10/2006).

"I think that it's probably triggered by the markets not being as robust as they've historically been in certain pockets," said Caliper's Hrusovsky last week. "As a result, I think there's a lack of organic growth that has caused a lot of companies to seemingly have to acquire to create some shareholder value. It's been fairly challenging for some of the companies who built themselves through acquisitions to appropriately integrate them and create organic growth, and as a result they've had to go off and continue acquiring."

He said that with the [Nasdaq] Biotech Index pulling back some over the past few months, there probably has been some improvement in valuations from a buyer's perspective. Conversely, from a seller's standpoint, the market is not as lucrative as it was four or five months ago.

But Qiagen's Schatz is not so sure that the lull among biotech stocks is causing any of the M&A activity.

The bigger acquisitions that have been made already this year "were more indicative of … companies looking for the next step to grow, looking for larger transactions," he said. "You saw it in the multiples paid and the types of businesses that were being integrated.

"There's not really an IPO market for a tools company, but on the other side there aren't a lot of companies that are IPO-able. I'm not sure if the capital market window is catalyzing M&A in any way. I think it is more buyers looking at adding growth through acquisitions," said Schatz.

Whatever the reasons are for these larger deals taking place now, Schatz said he believes that "acquisitions are focused on far too much. It's only one ingredient, and I'd say it's far down on the list of the good ingredients for a company to grow in this space."

— Edward Winnick ([email protected])