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Mass Spec Officials Talk M&A Progress, Strategies at UBS Conference

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This story originally ran on Sept. 22.

By Tony Fong

Mergers and acquisitions were thick in the thoughts of mass-spectrometry companies presenting at the UBS Global Life Sciences Conference in New York this week.

While there were no deals announced at the conference, the impending purchase of Varian by Agilent Technologies and Danaher's acquisition of the Applied Biosystems/MDS mass-spec joint venture colored the presentations of the top mass-spec vendors and the question-and-answer sessions that followed, where companies were asked about their M&A intentions.

Company officials also evaluated the year past. A year ago, the conference coincided with the start of the Wall Street collapse, which forced organizations to try to make sense of the fallout. This year, they said that the worst of the meltdown had passed and looked to improving balance sheets in 2010.

Below is a summary of what the each mass-spec firm had to say.

Life Tech: Mass Spec Better Off with Someone Else

By the year's end, Life Technologies expects to exit the mass-spec market with the completion of the sale to Danaher of its half of the mass-spec joint venture with MDS [See PM 09/10/09].

Speaking to attendees at the conference, Life Tech CEO Greg Lucier called the mass-spec division "a great business [for us], but it was a better business to be owned by another company."

Danaher will pay Life Tech $450 million for its half of the JV operated by Life Tech division ABI, and MDS $650 million for the other half as well as MDS Analytical Technologies. Life Tech will use its proceeds to pay down its debt and fund other activities, Lucier said. The sale of the mass-spec division completes any divestitures the company will make for the present time. "Now, our goal is to build on what we have," he said.

The company recently said that it had accelerated synergy cost savings to $95 million from an earlier projection of $80 million. In 2010, attention will be spent on ramping up savings on the manufacturing side, which will include the closing of some facilities, Lucier said.

On the M&A front, the company will target bolt-ons, rather than large acquisitions. Commenting on the recent consolidation within the industry, Lucier said that the life science market is looking increasingly like the cardiac medical industry where a few large companies dominate the space. "And in time, I think we'll be one of the larger companies," he said.

While some of Life Tech's competitors were bullish on seeing benefits from stimulus funds in the fourth quarter, Lucier was more cautious, saying that Q4 stimulus revenues would not reach levels that the company had expected. It still expects more than $100 million in incremental revenues resulting from US National Institutes of Health stimulus funding, but the bulk of the money won't reach Life Tech until 2010, which Lucier said will be "gangbusters" for such stimulus spending.

Though thousands in stimulus funding has been awarded by the NIH, the money has yet to reach the hands of the researcher to spend, he said.

For full-year 2009, Life Tech projected revenue growth in the mid-single digits and free cash flow of approximately $475 million.

Soft ABI/MDS MS Sales Opportune for Danaher

Awaiting the closing of its ABI/MDS deal, a Danaher official this week acknowledged that it had scooped up the mass-spec business at a discount.

While the ABI/MDS JV made it the world's top mass-spec supplier, the business has been stuck in a rut the past two years, and along with soft revenues, it has arguably lost its position as the technology leader to Thermo Fisher Scientific.

That, said Dan Comas, chief financial officer for Danaher, made it possible for the company to acquire the mass spec business at an attractive price. "We wouldn't have bought it for the price we did if it weren't performing the way it did," he said.

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The issue with the JV, he said, wasn't bad management but rather under-management and the inherent problems that come with having one partner in charge of the R&D and another conducting the marketing and sales side of the operations. Despite the under-performing results, Comas said that the business could be turned around since it isn't one with deeply embedded issues that has suffered on a multi-year basis.

There are "a lot of good foundations" that will now be managed under one roof, he said, and one thing that Danaher will look at addressing would be the R&D pipeline, which he identified as one area that had suffered under the JV.

He called the mass-spec business and MDS Analytical Technologies "outstanding businesses," and added that there were opportunities for the mass-spec business that had not been realized under its previous structure, such as services.

Agilent-Varian Deal on Track; Large Rx Switching to 1290 UHPLC

Last week, Varian disclosed in a document filed with the US Securities and Exchange Commission that the US Federal Trade Commission had asked it and Agilent for more information about the proposed $1.5 billion deal for Agilent to buy Varian [See PM 07/30/09], but did not elaborate. The request, it added, "extends the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 until 30 days after Agilent and Varian have substantially complied with the second request unless that period is extended voluntarily by the parties or terminated sooner by the FTC."

Agilent officials declined to provide further details at this week's meeting about the FTC request but said that the company still expects the transaction to close by the end of the year.

Starting Nov. 1, Agilent will break up the Bio-Analytical Measurement division and report Life Sciences and Chemical Analysis as separate segments, reflecting the growth of its life science business. While the company sees it as an emerging business, "operating profits have not been sterling," Nick Roelofs, senior vice president at Agilent and president of the Life Sciences Group, said at the conference.

Life science revenues comprise 22 percent of Agilent's total business, while chemical analysis makes up 25 percent of total revenues, general purpose applications generate 34 percent, and communications 19 percent.

Like other company officials here this week, Roelofs said that Agilent believes that the bottom of the economic cycle has been reached, and that it, along with the rest of the industry, is headed for an upturn. The company is starting to see orders returning, with sales particularly strong in Asia and North America beginning a comeback. Europe has been the slowest to rebound, he added.

Agilent's academic/government business was down 2 percent in the third quarter from a year ago, primarily due to customers in that sector "waiting for the next wave of stimulus funding" to start flowing, Roelofs said. With that starting to happen in the US, that part of its business is "on track" to meet company expectations in the fourth quarter, he said.

Roelofs also said that during the past week, Agilent had received word from a "large" unidentified pharmaceutical client that it would be replacing its current LC system with Agilent's 1290 UHPLC platform. The complete replacement process is expected to last between 18 and 24 months, he said.

Launched in April as a direct competitor to Waters' Acquity UPLC system [See PM 04/30/09], the platform delivers the industry's largest analytical power range, according to Agilent.

"We feel we're positioned to take market share with this product," Roelofs said.

Waters Won't Come Cheap

With the air ripe with the scent of M&A, would Waters be open to being acquired?

Only for someone with deep pockets, Waters Chief Financial Officer John Ornell said. Responding to a question, Ornell said that while any company can be had for the right price, several factors make an acquisition of Waters less than a "slam dunk." Because Waters is focused strictly on three technologies — mass specs, liquid chromatographs, and thermal analysis instruments — achieving synergies may not be simple.

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As a top-five mass-spec vendor, Waters has been the subject of never-ending speculation regarding a possible buyout, and with the recent acquisitions in the space and the company's soft earnings, some are once again wondering when the "For Sale" sign will be posted on Waters front lawn.

But according Ornell, Waters remains a "relatively expensive" company based on a multiple of earnings before interest, taxes, depreciation, and amortization, or EDITDA, a measurement of a company's operating cash flow. For any interested party, "you're going to have to pay top dollar," he said, and the market is not ready to pay such an amount, at least not yet. In 2008, Waters' EBITDA was $368.1 million

Of its own purchasing strategy, he said Waters' focus is on smaller acquisitions that augment the firm's three core technologies and achieve high top-line growth. Responding to another question, he added that Waters has looked at Dionex "on a frequent basis" as a possible M&A partner but ultimately declined to pursue any deal because of a lack of synergies and a belief that one combined company would not be able to achieve better returns for shareholders than two independent firms.

On the mass-spec front, Gene Cassis, vice president of investor relations at Waters, said that because of the stimulus funding the instruments "will be a larger component of Waters as we go into 2010."

In addition to new platforms launched recently, including the second-generation Synapt, the Synapt G2, introduced at the American Society for Mass Spectrometry annual conference in the spring, the company plans to launch "significant" new mass specs in 2010 as part of a strategy to recapture lost market share, Cassis said. Once Waters had a market share in the 20-percent range, but has more recently fallen into the mid-teens.

Further on R&D, he said new column chemistry for the Acquity UPLC will become available next year and the instrument will be engineered so that it will become segment specific.

He also said that Agilent's introduction of the 1290 UHPLC platform could help Acquity by converting more HPLC users to the newer technology. Customers had expressed some concern that Waters had been the sole provider of the technology, limiting their access to consumables and equipment.

But Agilent's entry into the space, though, provides researchers with an alternative vendor for consumables for the platform, Cassis said.

Thermo Fisher: Cap Equipment is Bottomed Out

Making his first public outing since being named to succeed Marijn Dekkers as CEO of Thermo Fisher Scientific last week, Marc Casper reiterated others' sentiment that the capital-equipment market had bottomed out and was heading for improvement through the rest of the year.

"The severe liquidity crisis" where no one was spending money on anything "has subsided," Casper said.

At the end of the first quarter, the company said that it expected to see between $100 million and $200 million in incremental revenue from stimulus funding. This week, Casper said Thermo Fisher is standing by that estimate and that the company expects to see funds trickling in during the fourth quarter.

Its mass-spec business, he added, could be a major benefactor from the stimulus funding, particularly with new platform launches made recently, including the LTQ Orbitrap Velos, introduced at ASMS.

As two of its competitors in the mass-spec space — Life Technologies' ABI division and Agilent — await the closing of pending acquisitions, Casper said that its own M&A activity would be "oriented" toward its Analytical Technologies segment, which includes its mass-spec business, simply "because there are more opportunities there."

Thermo Fisher's M&A strategy is focused on two factors, he said: Whether a deal would translate to improvements for customers and whether the company could generate a strong shareholder return from the investment.

Commenting on the two impending acquisitions in the market, he added that he doesn't expect either one to significantly change the landscape. Casper called the move by Danaher into the mass-spec market "not surprising." While Danaher is inheriting the top mass-spec business, it doesn't have complementary technologies, so its overall effect on the market would be minor, he said.

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