Invitrogen’s plan to acquire Applied Biosystems will propel the combined company to the top of the mass-spectrometry instrument business, but for how long will it get to enjoy the view?
As the dust settles from last week’s announcement of Invitrogen’s bid to acquire ABI for $6.7 billion, questions continue to swirl around Invitrogen’s rationale for keeping ABI’s mass spec business, and whether the company has plans to quickly jettison the segment.
While ABI is the current industry leader in mass spec sales, it is in the midst of a sharp slowdown that has raised concern about ABI’s ability to turn the unit around, particularly as competitors such as Thermo Fisher Scientific and Waters move to take the lead in technological innovation and Agilent Technologies takes market share away with its continuing push into the space.
During last week’s conference call announcing the proposed deal, Invitrogen CEO Greg Lucier was opaque when discussing plans for the new company’s mass-spec business. When asked whether he was open to selling it if the opportunity was there, he declined to comment on that possibility and said, “We’re going to run that business. We’re going to run it for success with our partner, and it is business as usual.”
After completion of the purchase, subject to regulatory and shareholder approval, the combined business would have about $3.5 billion annually in sales, 12 percent of that from mass-spec systems. At 74 percent of total sales, the consumables/service business would have the lion’s share.
Lucier said that while 90 percent of the acquisition is “an absolutely perfect fit,” mass specs are not. The ideal situation, he said, would be a sales flow in which customers would need to buy large amounts of reagents for use on the newly acquired instruments. Only, “a mass spec instrument doesn’t quite fit that description,“ Lucier said. “So my comment was 90 percent of [the deal] is a perfect fit, and the 10 percent [remaining] is still a very good business, and we intend to run it,” Lucier said.
That has done little to quell Wall Street’s worries that ABI’s flagging mass-spec business could hurt the deal. Peter McDonald, an analyst at Wall Street Access, told ProteoMonitor this week that the lack of any new meaningful mass spec platform from ABI in recent years is a particular concern for investors.
“Everyone’s been waiting for a new instrument and they haven’t had anything in the near term,” he said.
Aware of this, ABI plans to replenish its instrument portfolio and recently company officials said new mass specs will be hitting the market in coming months [See PM 05/08/08 and 06/05/08]. During last week’s conference call, Mark Stevenson, president and COO of Applied Biosystems, said that those plans will proceed.
Plateauing mass-spec sales in recent quarters have also been bad news for ABI. For the past six consecutive quarters, sales growth for the instruments has steadily declined, and in the last completed quarter, ending March 31 – ABI’s fiscal third quarter – mass spec sales grew less than 1 percent [See PM 05/01/08].
“They had a couple of difficult [comparisons to year-ago figures], but still, it hasn’t really rebounded and it doesn’t look like it’s going to anytime soon,” McDonald said. “They’re still seen as the leading position, but the other guys have a lot to offer and I think customers are taking a look at that.
“Overall the market seems to be expanding fairly rapidly,” he said. “If you talk to the other players, [contract research organizations] are still buying [and], the applied markets are still looking at upgrading instrumentation and the like. So [the slowdown] seems to be ABI specific.”
“As you look at mass spec within the new [company] it’s a clear standout that does not fit. And it really has no complementary pieces with the rest of the Invitrogen/ABI combination.”
Ross Muken, an analyst with Deutsche Bank, wrote in a research note that the key reason for Invitrogen’s interest in ABI is to acquire its SOLiD sequencing platform and gain access to the next-generation sequencing market.
Invitrogen’s desire to keep the mass-spec business, however, is “a head-scratcher,” Muken wrote.
“As you look at mass spec within the new [company] it’s a clear standout that does not fit,” Muken said to ProteoMonitor. “And it really has no complementary pieces with the rest of the Invitrogen/ABI combination.”
While Invitrogen has a portofolio of reagents and consumables for mass specs, it does not make the instrument. Its proteomics tools include Novex gels, stains, and standards, including a protein standard mixture co-developed with the Human Proteome Organization, and iBlot Dry Blotting System for Western blotting.
Invitrogen is also limited in its ability to improve ABI’s mass-spec business, Muken added, because ABI has a joint-venture agreement with MDS Analytical Technologies on the instruments and depends on the Canadian firm for mass spec R&D.
Indeed, the effect of the proposed acquisition on ABI’s partnership with MDS is unclear. Neither Invitrogen nor ABI officials provided any insight on the matter during the conference call. Janet Ko, a spokeswoman for MDS, told ProteoMonitor in an e-mail that it will continue to do business as usual. MDS views the deal “as good news for our [joint-venture] partner [and] believes Invitrogen has an excellent management team, and we look forward to working with them to grow the ABI/MDS joint venture,” she said.
Meanwhile, speculation has begun that the new company, which will adopt the Applied Biosystems name, will eventually sell the mass spec business, perhaps as quickly as within 18 months. But with an estimated price tag of between $1.3 billion to $1.5 billion, the list of potential buyers is limited, Muken said.
“It’s an attractive asset but there’s not a long list of people who can afford it or would be in a position at this point to be able to do something to transact it,” he said.
The consensus view is that MDS appears to be the most likely bidder to buy out ABI if the combined company decides to divest its mass-spec business although MDS currently doesn’t have the resources to make such a purchase.
Earlier this month, MDS reported a 24-percent increase in revenues for the second quarter ending April 30, to $350 million which included $55 million in revenue generated by the company’s purchase of Molecular Devices. It said, however, that a soft pharmaceutical sales environment and a decision by Atomic Energy of Canada and the Canadian government to discontinue development of nuclear reactors could negatively impact business.
The company said it had $139 million in cash, cash equivalents, and short-term investments as of April 30.
“I don’t believe that given their current state that they’d be able to put enough leverage on the business to enable a purchase,” but MDS may be able to get a large capital infusion from a shareholder to finance a deal, Muken said.
Ko of MDS did not respond to questions asking whether there had been any discussions about the company buying out ABI.
Of the big-name players, Agilent may be a potential bidder. Missing from its mass-spec portfolio are the super high-end instruments, and acquiring ABI’s line of instruments “would give them critical mass at the high end,” McDonald said.
Thermo Fisher and Waters are not seen as potential buyers mainly due to potential antitrust issues.
Thermo Fisher CEO Marijn Dekkers recently said that his company may be on the lookout for a major acquisition, but McDonald said that the company is probably more interested in growing its diagnostics business, and MDS may not be amenable to selling the business to the mass spec space’s second-leading vendor.
A foreign company such as Hitachi or Shimadzu may also be interested given their recent stated interest in enlarging their presence in North America and a favorable exchange rate, analysts said.
Beast of a Deal
Under the terms of the cash and stock deal, Invitrogen will pay $38 per share of Applera-ABI stock with cash comprising 45 percent of the payment and stock making up 55 percent. The price depends on Invitrogen stock hitting certain targets leading up to the close of the deal, which has a $150 million breakup fee.
Upon completion, the new company will have a sales and service team of 3,000 worldwide and hold more than 3,600 patents and licenses. Officials from both companies said they expect the deal to be slightly accretive to Invitrogen’s earnings per share in the first year and “significantly” accretive in the second year.
Cost savings are expected to reach $125 million in the third year through “enhanced sourcing and logistics efficiencies; site rationalization to achieve production scale; research and development optimization; and overhead synergies,” the company said.
In a letter to employees at both firms, Lucier said that layoffs will be likely. “In the coming months, we will be reviewing the combined company’s workforce at both the operating and corporate levels …” he said.
“Given the similarity in size and the diversity of operations, we believe there will likely be some level of redundancy in combining the two companies, and a number of positions may be impacted by this transaction,” he added.
Lucier will become chairman and CEO of the combined company and Stevenson will be its president and COO. The company will be based in Carlsbad, Calif., the current home of Invitrogen.
The company’s new board will consist of 12 members, nine from Invitrogen and three from Applera. Tony White, chairman and CEO of Applera, will be an unpaid consultant for the new company for five years.
While the company will be called Applied Biosystems, the Invitrogen name will remain in place through its reagents and consumables business, Lucier said last week.
The future of specific sites, including those at ABI that do mass spec-specific research and services, has not been decided, Renaldo Juanso, a spokesman for ABI, said.
“I would reiterate that Applied Biosystems is and will continue to be in the mass-spectrometry business,” Juanso said.