Invitrogen and Applied Biosystems Merge

In the second multibillion dollar deal in the analytical instrument industry in less than two years, Invitrogen and Applied Biosystems announced on June 12 a $6.7 billion merger agreement (see page 2). The merger will create the industry’s largest company and the dominant supplier for life science research. The deal brings together the industry’s largest life science instrument company, Applied Biosytems (ABI), with the industry’s largest life science consumables maker, Invitrogen, to create a company with estimated annual revenues of $3,496 million and more than 9,000 employees.

Similar to Thermo Electron’s $10.6 billion purchase of Fisher Scientific (see IBO 5/15/06), the deal combines a major laboratory instrument company with a leading consumables supplier, resulting in critical mass, a diversified product portfolio and customer base, the ability to create integrated workflows, and a sizable recurring business of consumables and service. The new company’s revenues would be made up of 74% consumables and service, 14% “instrument reagent systems” and 12% MS instruments, according to the companies’ conference call presentation. The academic and government end-markets would account for 50% of revenues, the pharmaceutical and biotech industries would represent 30%, and industry and other markets would account for 20% of sales. As Invitrogen Chairman and CEO Gregory T. Lucier put it, “Together, we’ll have the ability to drive further growth in markets we could not have gone alone.”

On the conference call, the companies specified three markets in which they expect to have a leading edge: cell biology, applied markets and next-generation sequencing. Citing a cell biology market share of 63%, Invitrogen stated that ABI would bring systems expertise and enable the creation of integrated workflows. In addition, ABI has its Ambion product line of RNAi reagents. “Between our companies, we will be able to capture increasing market share of this $6 billion market, providing a substantial material platform to grow the top line of our company at over 10% in this segment,” commented ABI President and COO Mark P. Stevenson, who will serve as president of the new company. In the estimated $9 billion applied market, where ABI has a sizable presence in forensics, the companies cited opportunities in food, water, bioproduction, animal testing and histology. Invitrogen has a presence in many of these markets.

In next-generation sequencing, an estimated $200 million opportunity, according to the companies, both Invitrogen and ABI also have a notable presence. ABI supplies capillary electrophoresis and next-generation DNA sequencing systems. Invitrogen supplies sequencing reagents to Illumina (see IBO 8/15/06) and, last month, introduced the PCR-based SequalPrep System for DNA sequencing sample preparation. The company also disclosed on the conference call that it is developing third-generation sequencing technology. “We are well positioned to benefit from this explosion of genetic discovery via our combined positions in scientific validation, application and commercialization,” said Mr. Lucier. For current next-generation systems, the companies highlighted that together they will be able to develop new front-end solutions as well as optimized reagents.

The ability to develop optimized workflows was stressed by the companies as one of the merger’s benefits. “The promise of this combination [of the companies] is that, when joined, we are the best positioned company in the industry to achieve reagent-instrument optimization across many of the key workflows in the laboratory,” commented Mr. Lucier. In addition, he cited ABI and Invitrogen’s respective experience in sample preparation and analysis as contributing to market insight. Invitrogen estimates the new company will generate at least $50 million in annual operating income from revenue synergies by the third year, citing cross-selling opportunities, access to new markets and jointly developed product. The new company is estimated to have an R&D budget of $300 million and a staff of one thousand scientists. It will also control more than 3,600 patents and licenses, which Mr. Lucier stated it plans to defend, as well as “proactively monetize.”

ABI and Invitrogen also highlighted the new company’s advantages in terms of scale. In particular, they cited the benefits for international expansion for the future. The company’s largest revenue base will remain the US, at 44%, followed by Europe, with 34% of sales, and Asia-Pacific with 16%. The combined resources will enable faster expansion in Asia and emerging nations, according to Mr. Stevenson, who said, “we believe these fast-growing geographies will increasingly be where our customers, suppliers and employees are located.”

Together, the companies will have 3,000 sales and service staff. In addition, Mr. Stevenson and Mr. Lucier noted that the companies’ extensive commercial networks are complimentary. Invitrogen’s strengths include relationships with the bench scientist, e-commerce and supply centers. In contrast, ABI’s sales of capital equipment depend on relationships with higher level staff and service and support. In fact, the companies plan to keep the reagent and instrument’s sales forces and channels separate. Mr. Lucier explained that the Invitrogen sale force will sell some ABI-branded products, such as the Ambion products, in addition to traditional Invitrogen-branded products and partners’ products, regardless of platform. The ABI sales force will remain focused on ABI-branded instruments and associated reagents. When asked about ABI’s MS product line, he commented that it will be “business as usual” for the MS business.

The critical mass created by the new company also creates cost-savings opportunities and increased profitability. For the twelve months ended March 31, the companies had an estimate proforma EBITDA of $859 million, 25% of revenues, and an operating cash flow of $803 million, 23% of revenues. In 2009, the new company forecasts revenue growth in the mid single digits and EPS of $2.60, with double-digit EPS growth starting in 2010. The new company is aiming for operating margins in the high 20% range in the next several years. Synergies of $125 million are expected by the third year following the closing of the merger and will come from lower raw material, R&D, facility and employee costs. Invitrogen will take on $2 billion in new debt to fund the transaction for a total of $3.5 billion in debt, which it plans to start repaying as soon as the deal closes.

Some analysts and commentators noted that the proposed 16% premium for ABI stock is relatively low compared to similar acquisitions. In response to the suggestion, The Guardian newspaper quoted Tony L. White, chairman and CEO of Applera, ABI’s parent company, as saying, “[ABI shareholders] are almost an equal partner in the upside of this transaction. If we were doing an all-cash deal, we probably wouldn’t have thought it was a good deal.” The company’s sale was urged by at least one ABI shareholder, who is represented on its Board. The Wall Street Journal reported that earlier this year SAC Capital, which owns 5.1% of ABI, asked the company to explore the option of a sale.

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