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Danaher to Move into Mass Spec Market Via $1.1B Acquisition of ABI/MDS Sciex Joint Venture


This story originally ran on Sept. 2.

Danaher, a global technology firm that generated $12.7 billion in revenue in 2008, said today that it plans to enter the mass spectrometry market by picking up the Applied Biosystems/MDS Sciex joint venture as part of an acquisition agreement worth $1.1 billion that is slated to close before the end of the year.

Under the terms of the agreement with MDS, Danaher will pay $650 million in cash to acquire the company's Analytical Technologies division, which includes a 50 percent ownership position in the AB Sciex mass spec joint venture, and a 100 percent ownership position in the former Molecular Devices business, which MDS acquired in 2007 for $615 million in cash.

In a separate transaction, Danaher will pay $450 million in cash to acquire the remaining 50 percent ownership position in AB Sciex from Life Technologies.

The deal caps months of speculation about Life Tech's plans for the mass spec business following the merger of Invitrogen and ABI last November to create the firm. At the time the merger was first announced, Greg Lucier, CEO of Life Tech, acknowledged that while the mass spec business was a "very good" one, it was not a good fit for the combined company's strategy to focus on instrument sales in order to drive consumables sales.

During a conference call this morning, Lucier reiterated that statement and acknowledged that the mass spec joint venture was not a strategic fit.

"I'm sure news of this divestiture is not surprising to many of our investors, given our focus on biological reagents, and the associated instruments that consume those reagents," said Lucier. "Mass spectrometry systems just don't have that consumable trail."

While the joint venture "was once the right structure to combine corporate capabilities and launch this business, it is no longer the best approach to win in a more mature and competitive mass spec industry," he said. "We believe one entity needs to control the entire value chain from R&D, to manufacturing and sales and service."

In a statement issued today, Mark Stevenson, president and chief operating officer of Life Tech, said that the company is "confident" that the transition of the mass spec business to Danaher "will go smoothly, as we plan to use the same rigor and process in this divestiture that we've been using for the Invitrogen and Applied Biosystems merger."

He added that "the same team that has handled the merger integration process will handle this divestiture."

Danaher today said that the MDS Analytical Technologies and AB Sciex mass spec businesses will add $650 million in annual revenues, of which around $525 million will be from the mass spec business. Danaher officials said during a conference call today that around 70 percent of the mass spec group's revenues are from instruments, while 30 percent are from services and "aftermarket" sales.

Daniel Comas, executive vice president and CFO of Danaher, said during the call that the company expects to see organic growth of "mid-single digits" for the mass spec business at first, but noted that the rate could increase, "depending on how the applied and clinical markets perform."

Danaher will operate the businesses within its Danaher Medical Technologies segment, which includes its Leica, Radiometer, Sybron, and KaVo businesses. In total, Danaher expects to bring in revenues of more than $2 billion per year from life sciences and diagnostics products in the Leica and Radiometer groups, approximately 16 percent of its total revenues.

Danaher's President and CEO, Lawrence Culp, said during today's call that the new businesses "represent a tremendous strategic addition to our Med Tech segment," and will expand the total annual revenue for that group to more than $4 billion.

The MDS Analytical Technologies business includes approximately 1,100 employees operating in 10 countries, while Danaher will pick up around 900 sales and services employees from Life Technologies.

During the call, Culp said that the AB Sciex joint venture had been hampered by "complicated ownership structures" at both MDS and Life Tech and noted that he expects the business to thrive under Danaher as a single business. " We want to make sure we get this business under one owner with one team running one playbook."

He noted that MDS has been undergoing a "significant" strategic review during most of the past year, while the emphasis at Life Technologies since the ABI/Invitrogen merger has been "elsewhere other than mass spec."

While the joint venture structure initially worked "pretty well," Culp said, "over the last year or two it has been wrestling with an ownership structure that at a minimum was not optimal."

Culp said that the purchase of the AB Sciex business offers the firm a "wonderful opportunity" to solidify its footprint in the life science market "because it's a leader in mass spec" — a market that he pegged at around $2 billion.

He noted that while the acquisition includes the Molecular Devices business, the key reason for the deal was the purchase of the mass spec business. "Our conversations were focused on AB Sciex," he said. "To have Molecular Devices come into that is a deal bonus for us."

For MDS, the divestiture of its Analytical Technologies business is part of a broader strategic positioning, in which the company will focus entirely on its MDS Nordion business, which provides medical isotopes for molecular and diagnostic imaging. In addition to selling MDS Analytical Technologies, the firm also is looking for a buyer for its MDS Pharma Services division.

MDS said that it plans to return around $400 million to $450 million of the proceeds from the sale to its shareholders by way of a share buyback. It expects to commence this action within 30 days following closure of the deal, which is expected in the fourth quarter of this year, pending shareholder and regulatory approvals.

Danaher is also in the midst of a broad restructuring in which it plans to shed 3,300 jobs and close 30 facilities in order to achieve annual cost savings of $220 million.