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Thermo Fisher Bullish on Ion Torrent Future as It Agrees to Buy Life Tech for $13.6B

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After months of rumors and speculation, Thermo Fisher Scientific this week announced its plans to buy Life Technologies for $13.6 billion in a deal expected to be completed in early 2014.

Speaking on a conference call immediately after the agreement was announced, Thermo Fisher officials said they expect the next-generation sequencing business to be a primary growth driver for Life Tech and exceed the growth rate for the rest of the acquired company.

While those officials didn't provide many details about Thermo Fisher's plans for Life Tech's Ion Torrent technology moving ahead, Life Tech Chairman and CEO Greg Lucier said on a conference call that "Thermo Fisher intends to fuel our expansion in this technology."

Brandon Couillard, an analyst at investment bank Jefferies, wrote in a research note that while Thermo Fisher's plans for the Ion Torrent business remain opaque, "we view a rationalization of substantial R&D-related resources (30 percent of Life's annual R&D) dedicated to the program as likely."

Thermo Fisher President and CEO Marc Casper acknowledged that while his firm has been regularly questioned in recent years about NGS technology and any plans it had for that market, Thermo Fisher thought it was a part of the industry best-served by the two market leaders, Illumina and Life Tech. In the meantime, Thermo Fisher has limited itself to supplying reagents for that part of the market.

He added that Life Tech currently trails Illumina in the NGS space, "but … it has been gaining shares recently and has a very exciting technology pipeline." In addition to the Ion Torrent business, which Life Tech acquired in 2010 for up to $725 million (IS 8/24/2010), Life Tech's genetic analysis portfolio as a whole "is well-positioned for a good future," Casper said.

Jon Groberg, an analyst at Macquarie Research, estimated in a recent research report that Life Tech has a 22 percent market share and trails Illumina, which has a 64 percent share, in the $1.1 billion NGS market in the US.

The importance of the Ion Torrent business to Life Tech was underscored recently in a research report from investment bank Cowen & Co. In that report, analyst Doug Schenkel said that Ion Torrent accounted for almost half of Life Tech's revenue growth in 2011 and 2012, and is expected to do so again in 2013, as In Sequence sister publication GenomeWeb Daily News reported at the time.

"Put differently, Life Technologies does not appear to be a growth asset without Ion Torrent," Schenkel said.

On the conference call Monday, Casper provided few details about Thermo Fisher's assumptions regarding Ion Torrent's core growth, but he said that it is anticipated to grow "at a rate much faster" than the 3 percent organic growth being modeled for Life Tech as a whole.

"From a profitability perspective, profitability will continue to improve over time," Casper said of the Ion Torrent business. "Obviously, it's in the aggressive growth phase, so there [are] significant investments to fuel that growth, but we expect that there will be a nice return over time."

Asked about his view on the use of NGS in the clinical diagnostics arena, Casper replied that there are opportunities in the near-term, adding that "there's no better combination" than NGS technology coupled with Thermo Fisher's $2.5 billion specialty diagnostics business, with its extensive channels into that market, as well as a "strong track record of commercializing new tests [and] new methodologies."

Though Casper was enthusiastic about the prospect of adding the Ion Torrent technologies to Thermo Fisher's portfolio, at least one Wall Street analyst speculated that the firm may eventually consider whether sequencing is a fit with the overall business.

Credit Suisse analyst Vamil Divan wrote in a research note that he sees "significant technical and commercial risk to the business as it attempts to compete with [Illumina]. Internal distractions due to this deal or loss of important personnel could prove devastating to the franchise at this critical stage of its life cycle."

He added that he expects Thermo Fisher to fully integrate Life Tech, though there could be some minor divestitures for regulatory reasons, "but then spend the following 12-18 months deciding whether sequencing fits into their long-term corporate strategy."

Deal Details

Thermo Fisher said that it will pay $76 per share to acquire Life Tech, valuing the deal at $13.6 billion. In addition, it will assume $2.2 billion in Life Tech debt.

Thermo Fisher said that it has obtained committed bridge financing from JP Morgan and Barclays to help fund the deal. It expects to pay for Life Tech through a combination of $9.5 billion to $10 billion in cash and debt and up to $4 billion in equity.

The firms said that they expect $275 million of adjusted operating income synergies in the third year following close of the deal, consisting of $250 million in cost synergies and $25 million in revenue synergies. Thermo Fisher also said that it expects the deal to be "significantly and immediately accretive" to its adjusted EPS.

Asked on the call whether there were parts of Life Tech that would be considered non-core and could potentially be monetized, Casper said, "We like the portfolio Life Technologies brings, and the intention is to focus on growing it and integrating it smoothly. So, at this point there's no intention for pruning the portfolio."

The companies did not say what role, if any, Lucier will have with Thermo Fisher after the firms are integrated. However, Mark Stevenson, president and COO of Life Tech, will have a "significant leadership role" in the combined firm, they said. Lucier added on the call that there are programs in place to retain Life Tech talent after the close of the deal, but he did not provide additional details.

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