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Recent Deals Suggest Proteomics, Life-Science Markets May be Poised to Renew M&A Activity

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This story originally ran on Sept. 21.

By Tony Fong

Are proteomics and other life-science firms ready to shop again?

Earlier this month Danaher announced plans to purchase the Applied Biosystems/MDS mass spectrometry joint venture and MDS' Analytical Technologies division for $1.1 billion, creating a new alpha male in the proteomics and life-science space.

The deal, expected to close during the fourth quarter, was the second major acquisition in the proteomics space this summer, following Agilent's bid to purchase Varian for $1.5 billion, and the latest in a recent string of purchases in life sciences.

Both deals suggest that vendors could be exhibiting a renewed openness to M&As.

After the financial markets imploded a year ago, the life-science M&A environment, like everything else, was left in disarray as access to the capital markets froze and companies looked for ways to scale down their costs.

But as the general economy begins to show signs of improvement, M&A deals, especially capital life-science deals, have begun picking up. Earlier this month, for instance, two acquisitions in the proteomics space were announced: technology developer Cell Biosciences said it had signed an agreement to purchase digital imaging and analysis system manufacturer Alpha Innotech for $17.9 million, and protein expression firm RiNA acquired Roche Applied Science's RTS Protein Expression portfolio for an undisclosed amount.

Last month, Thermo Fisher Scientific also said it planned to buy diagnostics outfit Brahms for $470 million, while PerkinElmer purchased Chinese diagnostic company Sym-Bio Lifescience for $63.7 million. That follows its acquisition in May of mass spectrometry company Analytica for an undisclosed amount.

And last week HPLC firm Dionex said it has entered into an agreement to purchase ESA Biosciences' HPLC-associated products, HPLC clinical assays, laboratory services, and assets for an undisclosed amount.

Towering over all of those deals, though, are Danaher's planned acquisition, which gives it a seat at the major life-science table, and Agilent’s impending Varian deal, which will give it greater mass in the space as well [See PM 07/30/09].

According to one analyst, it is no coincidence that substantial transactions are happening now. In an economy that is still in rehab, "there are two ways to get yourself out of this existing market situation and one of them is to make very strategic smart acquisitions at good valuation that, as the market starts to turn, give you the ability to step out there," said Harry Glorikian, managing partner at life-science consulting firm Scientia Advisors.

"There is the sense of, 'Oh my God, valuations may never be this low again; let me take the opportunity to fill out my portfolio, add something completely new, or diversify myself.'"

Marijn Dekkers, the departing president and CEO of Thermo Fisher, said during the firm's second-quarter earnings release in July that with continued stabilization of the markets, companies, particularly those looking to sell, would have incentives to pursue deals.

"What's happening now is that people are beginning to realize, 'OK, we had a significant retraction in values of the company,' and everybody was going to wait that out to some extent," Dekkers said. "I think companies are now probably becoming more open to [deals and] there will be more opportunities in the next six to 12 months than there were in the last six months."

Firms that were on the ledge financially before the economic downturn may also have been forced to review their businesses to determine "Which part of my portfolio do I need, and which parts do I not need, and do I want to take cash to use for something else?" Glorikian added.

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What Price Independence?

And for some firms, the decision came down to whether they would be able to stand on their own. In a proxy statement, Varian's board outlined challenges that it faced — and probably other similar small and mid-sized firms are facing — as an independent firm as factors in its decision to sell the company to Agilent.

These included declining revenues due to the economy; an inability to compete in the market because of a lack of scale; and the current credit crunch that "could make it difficult for Varian to borrow sufficient amounts in order to fund significant or transformative acquisitions," it said in its proxy.

Still, though it may be a buyer's market, the large mass-spec vendors have been careful in their M&A approach. In May, during a conference call accompanying Agilent's fiscal second-quarter earnings release, CFO Adrian Dillon said one stumbling block to acquisitions had been an over-inflated sense of value on the part of potential sellers.

"What is a valuation of these companies when the 52-week high is in … everyone's memory?" he said. "As the 52-week high fades [from] memory, I think that you could see more acquisition activity in this industry."

It turns out he was describing Agilent's own experience. While Agilent is paying $52 per share for Varian's stock, its original bid to Varian last fall was for $60 per share, Varian said in its proxy statement to shareholders. Soon after the offer was made, though, the economy cratered and Agilent lowered its bid to $55 per share.

Varian said no.

In the months that followed, however, Varian's stock price rode a roller coaster from $42.56 on Oct. 2, 2008, when Agilent made its $60 per share offer, to as low as $19.83 in March. Finally, in early May 2009, Varian decided to sell, and decided on Agilent as the buyer after inquiring with three other firms about a possible purchase.

At the UBS Global Life Sciences Conference, which began today in New York, Dan Comas, chief financial officer for Danaher, said that the biggest change in the [email protected] environment has been discussions around baseline earnings. Where potential buyers once may had had an unrealistic view of what those figures would be, they have, he said, become "much more rational."

But even if opportunities arise, acquisitions at any price are not necessarily a good strategy. During a conference call accompanying Waters' Q2 financial results in July, President and CEO Douglas Berthiaume said that after hitting rock bottom at the end of last year, valuations had "clearly come up" in the first six months of 2009. Waters is "absolutely convinced" that it can do "some accretive mergers that are larger than the mergers we typically do," he said, but he remained unconvinced that the firm would be able to grow a consolidated business any faster than it can grow its core company.

"So, that’s the conundrum: you can deploy more capital, but in the end you have to wake up in the morning and be happy with whom you’re living," Berthiaume. “And we’re not convinced that the larger ones that we have kicked the tires on satisfy those objectives." As a result, Waters would be more interested in smaller technology deals and bolt-ons, he added.

’Business of Lemmings’

Enrico Picozza, venture partner in HLM Ventures, a healthcare venture capital firm, said that in proteomics, the gradual progression of biomarkers discovered more than a decade ago to clinical relevance is making the field "more valuable."

Companies such as Abbott, LabCorp, and Quest Diagnostics no longer see mass specs as instruments for use only in an academic or research environment, he said, "so mass spec has moved from research into the clinic especially as it's become more robust and easier to use."

As a result, mass-spec vendors are looking at ways to translate the instruments to clinical applications when they approach possible M&A deals.

"I think for mass spec to get really heavily adopted in the clinic … you're probably going to have to build a new interface for it, and that interface is going to look different than what these people normally build," Picozza said. Mass-spec people have traditionally been "metal heads" — more concerned about the nuts and bolts that go into the machines than the data that comes out of them, he said. But as mass spectrometry moves into the clinic, the emphasis will have to shift toward ease-of-use and how the instruments fit into the workflow.

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"And for that to happen, you're going to need a different group of people to actually take it to that next level," Picozza said.

He added that the major mass-spec vendors are probably not looking to develop new innovations in their instruments as much as develop assays for them. "They're trying to look for utility and throughput," he said, but "if an opportunity to buy a new platform that enabled that new assay to go better and faster and cheaper, then sure," they would not hesitate to acquire it.

On the heels of the Agilent-Varian and Danaher-ABI/MDS agreements, other life-science firms may feel they have no choice but to pursue deals now.

"This is a business of lemmings," Picozza said. "The CEOs are stagnant in some cases, and they're thinking, 'I need to do something to revitalize my product line, my people, my board. … The business has grown 8 percent, big deal. How do I do double-digit growth? How do I get into these different markets?'"

Scientia's Glorikian said that for the big mass-spec vendors, the biggest opportunities are in emerging companies with "consumables opportunities — either sample prep, or disposable plates, or certain reagents standards — that would give them an ongoing consumables stream in the general analytical use of the instrument."

The applied markets are an obvious growth opportunity, and the biomarker discovery space remains another area with growth potential, Glorikian said. "There are some specific tools that you want to provide to biomarker discovery that enhance their capabilities and differentiate your system," he said.

For Agilent and Danaher, the Varian and ABI/MDS acquisitions may be the engine that drives other deals within those firms, as well.

Danaher's purchase of the ABI/MDS mass-spec joint venture would make it the world's largest mass spec vendor with an estimated 25 percent to 28 percent of the market share, estimated Isaac Ro, an analyst at Wall Street investment firm Leerink Swann.

And for Agilent, the Varian purchase is just the latest step in its transformation from a firm once known primarily as a semiconductor company to one that is increasingly building its business on life sciences. In fact, starting in November, it will be reporting Life Sciences as a separate segment, reflecting the growth of that business.

Both firms may decide to provide just the turnkey solution, "but turnkey may be a more advanced or sophisticated front-end chromatography system or something that provides a more disposable consumables stream," Glorikian said. "And I think there's an opportunity from a reagents perspective for mass spec."

Danaher, in particular, is a firm that was literally built by acquisitions, and M&A maintains an important role in its growth strategy. During the past three years alone, Danaher has acquired 40 businesses at a price tag of $6.9 billion. In the first half of 2009, it bought three businesses for $140 million [See PM 09/17/09].

Agilent also has not been "allergic to acquisitions," Glorikian said. "They've been willing to acquire things and fill holes as needed. And knowing some of the people who are running some of these groups, I think they'll sit back and draw themselves a map to say, 'What do I have? What can I leverage?'

"If they do find a gap, I think they'll take advantage of it and fill a hole," he said.

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