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Thumbs Up All Around for Danaher Purchase of Life Tech, MDS' Mass Spec Business

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By Tony Fong

The prevailing view from Wall Street is that the sale of the ABI/MDS mass spectrometry business could provide a boost for all parties concerned.

Last week, Danaher announced its plan to buy the Applied Biosystems and MDS mass spectrometry joint venture as well as MDS Analytical Technologies for $1.1 billion, launching the Washington medical and industrial technologies firm into the mass spec space [See related story this issue].

The sale by ABI, a division of Life Technologies, of its mass-spec business had been widely anticipated from the moment ABI merged with Invitrogen in June 2008 to form Life Tech [see PM 06/12/08 and 06/19/08]. Meanwhile, MDS had been trying to find ways to lift its stock price, which had fallen by as much as 67 percent during the past year, leaving the future of its participation in the JV open to speculation.

Amid such uncertainty, the shedding of the business to Danaher has been viewed with optimism by the investor community.

Since the announcement of the deal on Sept. 2, Life Tech stocks have inched up about 3 percent. In an analyst note, Jon Groberg of Macquarie Securities rated the deal positively, saying it allows Life Tech to "more quickly de-lever its balance sheet" and to focus on "biological reagents and the systems that consume them" while removing a "more volatile business from its portfolio."

In another analyst note, Isaac Ro of Leerink Swann said the transaction "resolves an area of uncertainty in Life's portfolio and helps shore up the balance sheet." In an interview with ProteoMonitor, Ro added that had Life Tech kept the business, it would have remained an unprofitable venture because the company owned only the sales and services part of the JV while MDS had possession of the intellectual property.

"Those services and related assets carry a fair amount of overhead," which was one reason Life Tech changed its accounting for the mass-spec business earlier this year, recognizing only operating profits but not the revenues, Ro said.

In the meantime, the deal, set to close in the fourth quarter of 2009, would create a new life science instrument technology heavyweight in Danaher. Because Danaher has no mass spec franchise currently, it was looking to make a "turn-key" entry into the space, "and for a company like Danaher, you're going to want to enter, typically, with a number one kind of a franchise," Ro said. Despite softness in its mass-spec business during the past two years, the ABI/MDS joint venture continues to remain at the top of the food chain with about 25 to 28 percent of the total mass-spec market, Ro estimated.

The total mass spec space is about $1.6 billion with an annual growth rate of about 7 percent, he added.

Danaher is undergoing a major restructuring of its own, and the same day it said it plans to buy the ABI/MDS mass-spec JV and MDS Analytical Technologies, it also announced its plans to accelerate its restructuring activities with the elimination of 3,300 jobs and 30 facilities. The changes are expected to save the company approximately $220 million annually, Danaher said in a statement.

Those efforts are not expected to materially affect the mass-spec purchase or how Danaher will run the business, however, and Ro said that he believes last week's proposed deal will be the basis for additional acquisitions around its mass specs during the next few years.

"I think what you'll see over the next two or three years is Danaher acquiring further assets around this business in life sciences" in the form of capital equipment and consumables, he said.

Not for Life

For a business whose future had been an ongoing question mark for the past year, last week's announcement was a surprise only in that the purchaser is a company with only a limited footprint in the life-science market.

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When the ABI/Invitrogen merger was announced, Greg Lucier, CEO of Life Tech, called the mass-spec business "a very good" one, but also admitted that it was one that did not fit with the firm's overall business model built on instrument sales driving consumable sales because mass specs don't require a lot of consumables.

In the months that followed, speculation ran rampant that the mass-spec business was fated for sale. Then three months after the ABI/Invitrogen merger was announced, Stephen DeFalco, president and CEO of MDS, further fanned speculation when he said at an investor conference that his company was considering all options as it was evaluating its JV with ABI in light of the merger, including buying ABI's share of the business, dissolving the JV, or renewing the agreement [See PM 09/25/08].

For Life Tech's part, Lucier's mantra for the past year had been that the company would run the mass-spec business for success, and company officials steadfastly maintained the business was, is, and would remain in Life Tech's future.

Last week, Lucier acknowledged that mass specs never really were in Life Tech's plans. "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," Lucier said during a conference call. "Mass spectrometry systems just don't have that consumable trail."

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

Macquarie's Groberg agreed, saying that over time the JV agreement between two companies headquartered in two countries on opposite sides of a continent was hurting business.

Under the JV, MDS had the responsibility for R&D of the instruments, while ABI was responsible for marketing, sales, and service of the machines.

"As you can imagine, some of the problems that the structure had revolved around the fact that often times the two businesses' interests were not completely aligned," he told ProteoMonitor. When the JV was first established in 1986, mass specs were still not widely used in the life sciences. But in a growing and increasingly competitive market, the JV became a hindrance to product development and customer service. Indeed, until the launch of the AB Sciex Triple Quad 5500 and the AB Sciex QTrap 5500 last fall, it had been three years since the two firms had introduced a meaningful mass spec platform.

Meanwhile, competitors filled the technology gap with launches of the Orbitrap technology by Thermo Fisher Scientific and the Synapt HDMS by Waters, and Agilent Technologies rose to become a major mass spec player with instrument introductions of its own.

"There are just elements that make a joint venture more difficult, and I think being under one roof and one owner, you're not beholden to two different masters, you hopefully have one goal, you work much more closely as a team, you're compensated in a similar way," Groberg said. "All those things align the interests and should allow them to be competitive in the market."

While it became a guessing game in the immediate months following the ABI/Invitrogen merger who could or would buy Life Tech's mass spec interest, there was never any speculation that Life Tech would buy MDS' share of the JV.

"Certainly, [Life Tech] had no interest in owning the whole thing," said Leerink Swann's Ro. "They're not really looking to get bigger in capital equipment per se."

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In the near term, Groberg said, Danaher will need to figure out how to go about integrating employees from one company with those of another company into a third firm, itself. While that will not be an easy process, he said that Danaher has a "very good reputation for being able to really effectively compete in the markets, with the businesses that they have.

"They have what's become almost a cultish-like appreciation for" the Danaher Business System, a set of processes to ensure that its businesses realize substantial returns on investments, Groberg said. Based on the Toyota Production System, DBS calls for every employee to find ways on a daily basis to improve productivity and cut waste.

The investment community has already given Danaher the thumbs up on the ABI/MDS mass-spec and MDS Analytical Technologies deals. The company's share price has risen 9 percent since it was announced.

In an investment note, Barclays Capital analyst Robert Cornell said the acquisition represents "incremental positives" for Danaher in 2010. FBR Capital Markets analyst Deane Dray added in a note that the pending acquisition "fits a best-case scenario that, we believe, could energize the growth story for Danaher."

In 2008, the company posted revenues of $12.7 billion, a 15 percent increase from $11 billion in 2007.

Going forward, if the deal is approved by regulators and shareholders, the big question will be whether Danaher will be interested in cutting costs in the short term in order to receive a higher return on their investment, or whether it will concentrate on innovation and driving new products, Groberg said.

"And my guess is that in the near term, you'll see more of a focus on the first part in terms of just getting the business in order, but then over time you'll see them make a much more concerted effort to get the right products out in the marketplace," Groberg said, pointing out that that was the route Danaher took after purchasing Tektronix in 2007. Tektronix manufactures measurement and monitoring instruments such as oscilloscopes, logic analyzers, and signal generators.

Danaher's purchase of the mass-spec business is not expected to substantially change the mass-spec landscape as it essentially transfers assets intact from ABI/MDS to Danaher. In the short term, companies such as Thermo Fisher and Agilent may move to take advantage of any disruption to pick up market share.

The last meaningful product launches from ABI/MDS — the AB Sciex Triple Quad 5500 and the AB Sciex QTrap 5500 — were nearly a year ago, and it will be at least another six months to a year before "a next-gen product from that franchise can emerge post the Danaher deal," Ro said. "So you've got a several-quarters window for these guys to take a little market share."

Thermo Fisher is best positioned to do so, he added, due to the launches of the LTQ Velos and LTQ Orbitrap Velos in June, which have already been creating a buzz in the research community. In his analyst note, Ro said the Danaher deal is a "slight negative" for the number four player in the mass spec space, Waters, and the number five vendor, Bruker.

The ABI/MDS mass spec business has been consistently been sliding since mid-2007, and recently Life Tech reported that revenues in the second quarter for its mass specs fell 12 percent year over year to $129 million.

Today, MDS said its Analytical Technologies business, which houses its mass specs, saw a 10 percent drop in revenues year over year to $94 million in its fiscal third quarter, ended July 31.

In spite of the recent softness, Danaher can turn it around, Groberg said.

"This business has struggled a bit recently, [but it's] still the market leader, has very good scientists, very good technology," he said." You have to think that they're going to make a run of it."

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