Following the announcement last week that Invitrogen plans to acquire Applied Biosystems for approximately $6.7 billion in cash and stock, executives from both shops stressed that together their companies could improve front-end workflows and optimize reagents for ABI’s SOLiD sequencing system.
They also disclosed, for the first time, that Invitrogen has been working internally on a “third-generation” sequencing system.
“This transaction really creates, I think, a dynamo in sequencing technology, now and well into the future,” Invitrogen Chairman, President, and CEO Greg Lucier said during a joint conference call the companies held last week to discuss the planned transaction.
The deal will create a company with annual revenues of approximately $3.5 billion, combining ABI’s instrument, reagent, and services business, which focuses in the areas of DNA sequencing, PCR and real-time PCR, and mass spectrometry; and Invitrogen’s business, which mainly consists of consumable kits and reagents for cell culture, labeling and detection, and molecular biology.
Building the Third Generation
During the call Invitrogen disclosed for the first time that it has been quietly working on a new, “third generation” sequencing technology, though it offered no details about its nature, or how far in development it is.
During his firm’s first-quarter earnings call in April, Lucier had hinted that Invitrogen plans to be a “key player” in next-generation sequencing in the next few years.
Last week, he said that the company “very confidentially had a very large team developing next-next-generation sequencing technology. The combination of these two companies now is going to accelerate that work, and continue to build upon this great platform of [ABI’s] SOLiD well into the future.”
ABI will play a key role in bringing this new system to market. According to Stevenson, Invitrogen “would have been required to spend considerable resources to commercialize a system independently. By combining our efforts in this area, the new company can accelerate these efforts and drive the cost of sequencing down towards the $1,000 genome, enabling new applications across research and applied markets.”
It is possible that ABI scientists might get involved in developing the system sooner rather than later. Following the acquisition, the company plans to leave ABI’s instrument business largely as a stand-alone concern “with the exception of joint R&D projects that we already have our sights on,” Lucier said. He did not name specific R&D projects.
DNA sequencing has been an important part of ABI’s business, although its contribution to the company’s overall revenues has been shrinking over the last few years (see In Sequence 1/30/2007). The company’s new high-throughput SOLiD platform, in particular, was apparently of special interest to Invitrogen.
“One of the areas of due diligence that we did an incredible amount of work on was the SOLiD platform,” Lucier said during the call. “[The platform], we believe, is a real winner and is going to be demonstrated over the next couple of years here.”
He tried to assure investors and analysts that the acquisition will not disrupt service and support for SOLiD customers. “That whole business is going to be really untouched in this whole integration planning,” he said. “So it is business as usual, as you say, and let’s keep the momentum going.”
During fiscal year 2007, which ended June 30 of last year, ABI’s sequencing business generated $557.6 million in revenue, or 27 percent of the company’s $2.1 billion total revenues. The previous year, it generated $539.9 million, or 29 percent, of $1.91 billion total revenues.
“This transaction really creates, I think, a dynamo in sequencing technology, now and well into the future.”
In ABI’s third fiscal quarter of 2008, sequencing contributed $146.4 million, or 27 percent, to the company’s total revenues of $552.6 million. The SOLiD sequencer generated revenues for the first time during that quarter. During the same quarter the previous year, sequencing contributed $140.7 million, or 27 percent, to total revenues of $529.9 million.
Together, the companies plan to improve sequencing reagents and sample-prep workflows for several SOLiD applications, Stevenson said.
Invitrogen already supplies ABI with reagents for the SOLiD platform. According to Stevenson, both beads and dyes used with the system “use technologies that come from Invitrogen.”
“As we further develop the SOLiD platform with walkaway automation and dramatically reduce the turnaround time, we can combine this focus with Invitrogen’s expertise and capabilities in labeling and molecular biology to develop optimized reagents and applications workflows,” he said. This will include both sequencing and gene-expression applications.
Sample preparation for next-gen sequencing in particular is “really suited for Invitrogen’s competencies,” according to Lucier, who added that “such collaboration would not have been possible without this combination.”
Invitrogen, however, has also been supplying at least one other second-generation sequencing vendor with reagents for its system.
In June 2006, Solexa, which developed the Genome Analyzer now sold by Illumina, said that Invitrogen was supplying it with “standard reagents” for its sequencing kits under an OEM agreement (see In Sequence’s sister publication, GenomeWeb Daily News, 6/19/2006). Illumina did not confirm before deadline whether this agreement is still in place.
Spokespersons for Invitrogen and 454 Life Sciences declined to say whether Invitrogen also provides reagents for the 454 Genome Sequencer FLX.
An Invitrogen spokeswoman also would not say whether the company intends to continue supplying reagents to competing sequencing vendors following the acquisition.
In addition to supplying reagents to certain sequencing manufacturers, Invitrogen has been working on its own DNA library prep reagent kits for use with high-throughput sequencing systems. Last month, it launched the first two such reagent kits. The kits — one for long-range PCR, the other for PCR product purification and normalization — are used to enrich regions of the genome for sequencing (see In Sequence 5/27/2008).
At the time, Invitrogen Director of R&D for Gene Regulation Peter Welch told In Sequence that the company is also interested in developing other genome enrichment methods, as well as sample prep methods for epigenetic studies and products for sequencing-based small RNA discovery and profiling.
Lucier confirmed that these product-development efforts will stay in place, even if they will benefit platforms other than the SOLiD. “From an Invitrogen standpoint, that brand, that philosophy of optimizing reagents for various instruments, and otherwise, is going to remain the strategy. So we will continue to be agnostic, in that regard, and sell technology to the benefit of everyone.”
He said that the company “had already started up a fairly large team to develop [reagents for] current-generation sequencing technology.”
Specifically, he said that several products are in development for “sample preparation [and to] optimize chemistries for the SOLiD platform and the Solexa platform for the benefit of customers.”
CE Here to Stay
During the call last week, ABI and Invitrogen did not talk much about ABI’s capillary electrophoresis sequencing business, which until the end of 2007 generated all of the company’s sequencing-related revenues.
Stevenson reiterated that ABI continues to see strong use of its CE instruments in forensics and other applied markets. He also mentioned that “there are some interesting opportunities for applications [for CE] as we combine the two companies in the applied markets” but did not talk about specifics.
Invitrogen, he said, recently conducted a capillary electrophoresis market survey, as a result of which “we updated our point of view about just the number of applications that these will be continued to be used for as we go into the diagnostic space.”
Earlier this year, Celera President Kathy Ordoñez said at a conference that Celera is working on an instrument for diagnostic sequencing that is based on ABI’s technology (see In Sequence 1/8/2008). It was not immediately clear whether that project will continue following the Invitrogen acquisition.
The Buy, by the Numbers
Invitrogen currently employs around 4,700 people, had annual revenues of $1.3 billion last year, and owns about 1,200 patents and licenses. ABI, the larger partner in the deal, employs around 5,000 people, generated $2.1 billion in annual revenues during its last fiscal year, and holds about 2,400 patents and licenses.
For the acquisition, expected to close this fall pending regulatory and shareholder approval, Invitrogen will acquire all outstanding ABI shares for $38 per share in a combination of its own cash and stock.
The combined company will be called Applied Biosystems and will retain Invitrogen’s headquarters in Carlsbad, Calif. Both the Invitrogen and ABI brand names will remain for the firms’ respective products.
Greg Lucier, Invitrogen’s chairman, president, and CEO, will become chief executive of the new company, while Mark Stevenson, president and chief operating officer of ABI, will retain that role in the new company.
The new company’s board will consist of nine Invitrogen directors and three directors from ABI parent Applera.
Following the acquisition, the new company plans to cut costs by at least $125 million annually by the third year, achieving most of these savings by the end of the second year.
According to Invitrogen CFO David Hoffmeister, cost cuts will come from savings from raw materials, cutting duplicated overheads, “rationalizing” facilities, and increasing R&D efficiency and effectiveness.
“We would expect the raw material synergies will be some of the first savings to be achieved, followed quickly by the overhead savings,” he said. Closing of facilities and savings in “other areas” will happen in the second and third year, he added.
The combined company also plans to boost annual revenues by at least $50 million by the third year by cross-selling products in existing and new markets, and by offering new joint products. According to Hoffmeister, these additional revenues will likely “not really kick in until years two and three.”
In 2009 alone, the company plans to gain $60 million from either cost cutting or revenue synergies, but “the vast majority of this would be cost synergies,” he said.
Applera Chairman and CEO Tony White, who plans to be an unpaid consultant to the combined firm for five years, shed some light during the call on how the deal came about. Following its decision to spin off Celera, the company’s board asked Morgan Stanley in January to assess strategic options for Applied Biosystems “with an eye towards looking for a specific transaction that would be a sale of the company,” he said.
The company then had discussions “with a number of parties very directly to consider whether or not this was a good thing for us to do with those individuals, and try to gauge their level of interest,” he said, but declined to mention these parties by name.
Less than two months ago, he said, “we narrowed it down to this option,” a deal with Invitrogen.