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Better Economy, Growing Cash Positions Point to M&A Recovery for Life Science Tools Firms

By Tony Fong

NEW YORK (GenomeWeb News) – Merger and acquisition opportunities in the life science tools space bounced back in 2010 with several large buys signaling a potential uptick in deals in 2011.

The recovery comes amid a slowly improving economy and growing cash reserves at many companies. Among the larger deals this past year were Merck KGaA's $7.2 billion buy of Millipore, Laboratory Corporation of America's purchase of Genzyme's genetics testing business for $925 million, and GE Healthcare's acquisition of Clarient for $580 million.

In addition, Thermo Fisher Scientific recently announced a $2.1 billion bid for Dionex. And already, one large potential deal is rumored heading into 2011: Beckman Coulter reportedly is shopping for a buyer and estimates are that it could fetch $5 billion in a deal.

While most of the deals in 2010 were done to fortify markets in which the acquirer was already strong, in some instances, the transactions created completely new markets for the buyers or significantly increased their footprint in markets where they had only a minor presence. For example, Thermo Fisher has had a minor presence in the chromatography space, especially liquid chromatography. With its purchase of Dionex, expected to close in the first quarter of 2011, and to a lesser extent its tuck-in purchase of Proxeon in April, Thermo Fisher has moved several steps up the ladder.

When the Dionex deal was announced, Thermo Fisher officials said that about half of its mass spectrometers were being sold with a Thermo Fisher chromatograph, and the Dionex acquisition would increase that figure.

AB Sciex's acquisition of the LC business of Eksigent in February for an undisclosed amount, meanwhile, launches that company into a new technology space that AB Sciex — which itself was an acquisition completed early in the year through Danaher's purchase of the mass spec business of Life Technologies — had not been in before.

Another major player in the life science tools space, Illumina, also entered virgin territory with its purchase of PCR firm Helixis for up to $105 million.

And in GE's case, the purchase of molecular diagnostics and imaging company Clarient by its Healthcare division suggests that it may be looking to make a play again in molecular diagnostics, three years after its $8.1 billion deal to purchase two of Abbott's diagnostics divisions disintegrated, one expert said.

"GE Healthcare is making a big bet going after a more clinically focused lab services business, so you can bet that they're going to use that to build a platform," said Gary Kurtzman, managing director for life sciences at private equity and venture capital firm Safeguard Scientifics, which owned 26 percent of Clarient's shares.

Jumping Into New Markets

According to Peter Lawson, an analyst at investment firm Mizuho, while M&A activity was flat in 2010 compared to 2009 in the diagnostics space, it picked up noticeably in the life science tools space where companies such as Thermo Fisher, Life Technologies, and Illumina have been pursuing a strategy for several years of diversifying their offerings and establishing a foothold in newer markets, such as food testing.

And while M&A deals may have been flat in the diagnostics industry, it still played a role in the acquisition strategies of such large life science tool shops, he added. Such firms don't typically buy diagnostic firms, but they do make deals that may lead to diagnostic development work later. One example of such a deal this past year is Life Technologies' acquisition of Ion Torrent.

"For a number of years, life science companies have been [moving] away from just being niche focused and pure play … to more reagent-focused and moving away from this kind of cyclicality of the industrial end markets," Lawson told GenomeWeb Daily News. The life science tools shops "really have been broadening their product portfolio and their end-market exposure, and diagnostics is one of the [ways] we've seen [them] do that."

Another way to has been to target specific geographies, such as China and India, where life science research has exploded in recent years. When Thermo Fisher announced its plan to buy Dionex, the company noted Dionex's footprint in Asia-Pacific and other emerging markets, where it generates 35 percent of its total revenues.

"It just increases the value of its current distribution channel and its existing products … so it can push those through to slightly different market places. We'd expect Thermo to maintain that active M&A strategy going forward focusing mostly on smaller acquisitions [and] maybe novel technologies," Lawson said.

If the recession that began in 2008 can be blamed for the tougher M&A landscape in 2009, a slowly improving economy can take some of the credit for renewed activity, said Steven Gullans, managing director of Boston-based Excel Venture Management. People now want to get in on the ground floor of a promising company "before there's an uptick in valuations on the heels of the IPO market beginning to open up," he said.

"It's almost as if people have noticed that the economy is coming back. There's a lot of cash sitting on the sidelines inside these larger companies and now is a good time to buy something," Gullans told GWDN.

In fact, the cash positions of the life science tools firms are on the upswing. Net cash is improving for the entire industry, Lawson said, while debt-to-equity ratios are approaching historical lows. The priority for the companies for several years has been to conserve cash or to use it for stock buybacks, but starting in 2010, the focus has been shifting toward acquisitions.

In particular, next-generation sequencing technology is attracting interest from potential buyers as improvements in the technology have led to lower costs and higher expectations.

A case in point is the Life Tech-Ion Torrent transaction, which was based on Life Tech's belief that Ion Torrent's chip-based sequencing technology would eventually bring sequencing capabilities to laboratories and other settings that, otherwise, would not have access to such technology.

Ion Torrent's Personal Genome Machine was launched only a few weeks ago, and at the time of the merger, the company had never generated any revenues. Still, at an investors conference in September, Life Tech CEO Greg Lucier said that Ion Torrent's platform would "revolutionize the whole genetic testing market … [by] democratizing sequencing."

A number of small sequencing firms, such as GnuBio and DNA Electronics, are developing their own next-gen sequencing technology, though their systems may be too untested and the companies may be too far from commercialization to be acquisition targets.

But with interest in next-gen technology continually building, any company with complementary technologies, such as for sample preparation and analysis of the data, could attract attention from a potential buyer.

"Now that you have all this sequencing capacity, how you fill a pipeline and what you do after you get the data," will be questions that next-gen vendors will need to address, Gullans said.

He also pointed to synthetic biology as a market attracting interest on the heels of work by J. Craig Venter and colleagues that resulted in the first functional bacterial cells controlled by a synthetic genome.

Synthetic Biology Heats Up

While most synthetic biology work has been relegated to the research laboratory, a handful of deals during the past year suggest interest is brewing among commercial players as well. During the summer, Origene Technologies acquired gene synthesis company Blue Heron. Before that, Life Tech acquired a majority stake in synthetic gene shop Geneart for $47 million, and then a month later made a $10 million investment in Synthetic Genomics, the firm that was behind Venter's work that produced a functional, self-replicating cells closely resembling natural M. mycoides cells.

As a business, synthetic biology has taken a hit in recent years as a number of firms, such as Codon Devices, went out of business. That Boston firm synthesized DNA and other genetic material, but the problem has been that many synthetic biology companies sold commodities, "and it was all about diminishing costs for the" user, Gullans said. "Now we're going to start to see very creative use of genomics tools to make useful bacterial and agricultural functioning units," although most of the applications still reside in research laboratories, he noted.

As 2011 unfolds, Gullans and others predicted that M&A activity in the life science tools space would continue to increase. Lawson said that in the current environment, pure-play firms such as Waters, Gen-Probe, and Cepheid could benefit the most and pointed to the sales of Millipore and Dionex, as well as a possible sale of Beckman Coulter, as an indication that such firms are seen as hot commodities.

"The market is too fragmented, and there is increasing cash on the sidelines and there's increasing willingness to use that cash," he said.

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