M&A Flurry Amidst Rising Valuations

Notwithstanding the blockbuster deals experienced in each of the past three years, merger and acquisition (M&A) activity in the analytical instrument and laboratory product–related industry remained robust in 2016. Despite certain limitations on the size of their M&A transactions due to deleveraging plans by Thermo Fisher Scientific and Danaher, both companies maintained their growth via acquisition strategies, and each topped the list of this year’s biggest spenders with combined transactions valued at roughly $10 billion. Other companies, such as Bio-Techne and Sartorius, similarly followed through with M&A strategies to diversify product offerings. Also evident this year was greater M&A activity in laboratory-related markets from larger diversified companies.

While transactions were mostly driven by continued consolidation, M&A deals were further motivated by new market entries, diversification of product lines and faster growth opportunities, especially in the cell analysis and sequencing markets. However, given the primary focus on higher growth opportunities and competitive bidding, M&A deals reached higher-than-normal valuation and premium levels in 2016 compared to M&A deals covered by IBO in previous years.

IBO’s annual summary of M&A in the analytical instrument and lab product–related markets is comprised of deals announced in IBO between November 30, 2015, and November 15, 2016. The article and tables are based on publicly available information.

Following relatively restrained M&A capital deployment in 2015 (see IBO 11/15/15), Thermo Fisher resumed its aggressive buying tactics this year, spending a total of $5.4 billion year to date, primarily for the acquisitions of Affymetrix (see IBO 1/15/16) and FEI (see IBO 5/31/16). While providing different market opportunities, both companies’ acquisitions offer financial benefits, including cost and revenue synergies, as well as EPS accretion.

Aside from the projected $0.30 in adjusted EPS contribution in the first year, FEI adds electron microscopy to the company’s portfolio, and offers potential revenue synergies in various life sciences and materials science markets. Especially attractive for Thermo Fisher is the prospect to expand sales of FEI’s Cryo-EM systems in the fast growing structural biology market. Furthermore, FEI’s presence in the Czech Republic fits well with Thermo Fisher’s lower-cost manufacturing strategy. The acquisition, however, increases Thermo Fisher’s exposure to the cyclical semiconductor market and offers fewer cost synergies compared to its previous purchases, including Affymetrix.

Affymetrix, which expands Thermo Fisher’s recurring revenue base in the fast growing flow cytometry market, benefits from the expanded commercial and supply channel provided by Thermo Fisher, especially for the biopharmaceutical markets and China. The acquisition should also produce new growth opportunities for Thermo Fisher’s genetic analysis portfolio in clinical and agbio markets. However, in spite of the potential synergies, Thermo Fisher will need to address Affymetrix’s declining gene expression business, which has muted overall sales growth. Other Affymetrix suitors, including a group of former Affymetrix executives (see IBO 3/31/16) and Bio-Techne (according to Bio-Techne’s third quarter conference call), challenged the transaction but could not match the potential synergies. Thermo Fisher has already projected $11 million in synergies by the end of this year and $70 million by the third year, including $55 million in cost savings and $15 million in revenue.

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With the first major acquisitions following the spinoff of its industrial-focused business (see IBO 7/31/16), Danaher spent a little under $5 billion combined for Cepheid (see IBO 9/15/16) and Phenomenex (see IBO 10/15/16 ), which bolsters its exposure to the molecular diagnostics and lab consumables markets, respectively. Given the competitive M&A environment, Danaher paid a significantly higher premium for Cepheid compared to its past acquisitions. Assuming strong double-digit sales growth and an enterprise valuation of $4 billion for Cephied, Danaher paid around 6.4 times projected 2016 revenue growth. Furthermore, Cepheid operated at a net loss, partly due to its strong R&D investment in clinical applications.

Despite only modestly adjusted EPS accretion of $0.05 in the first year, the purchase of Cepheid offers longer-term financial opportunities, including strong top line growth, higher margin contributions and significant synergies. In a proxy statement, Cepheid’s management projected double-digit annual revenue growth through 2025. Meanwhile, Danaher has identified $200 million in synergies, including $100 million in cost and revenue synergies each within a five-year period. While the company has a persuasive track record of accelerating operating efficiencies and leveraging its distribution channels, Danaher will need to balance future R&D investments against cost savings measures, as well as withstand any potential price erosion in the molecular diagnostics market.

Compared to Cepheid, Danaher’s acquisition of Phenomenex is expected to produce a quicker return on investment. Danaher estimates a double-digit rate of return on invested capital in less than five years as a result of the more attractive valuation price. Motivated primarily by the strategic opportunities, Phenomenex will benefit from greater R&D resources, as well as product and geographic opportunities.

Increased M&A activity from larger diversified companies, such as AMETEK and Mettler-Toledo, is also notable this year. Mettler-Toledo made its first major laboratory-related purchase in several years, buying Henry Troemner for nearly $100 million to expand its service, weighing and lab equipment businesses (see IBO 7/31/16).

After a quiet 2015 for analytical instrument purchases, AMETEK strengthened its laboratory instrumentation business in 2016, especially for QC applications, with the purchase of Brookfield Engineering (see IBO 2/15/16), which is now a unit of its Instrumentation and Specialty Controls division. The company provides AMETEK entry into the laboratory rheometer and viscometer market. Enhancing existing product lines, this year, AMETEK also purchased the ICP-MS firm Nu Instruments (see IBO  8/15/16) and HS Foils, which provides radiation detector components (see IBO 8/15/16).

Aside from Thermo Fisher and Danaher, both Bio-Techne and Sartorius pursued active M&A strategies motivated by product diversification. Bio-Techne expanded its portfolio, entering the genomics research and diagnostics markets with the purchase of Advanced Cell Diagnostics (ACD), which offers proprietary consumables for the detection of RNA at the cellular level (see IBO 715/16). Given the strong growth prospects and innovative technology, the acquisition price of $250 million came at a steep premium of 10 times sales, and may also include up to an additional $75 million based on certain milestones. Bio-Techne also added single-cell capabilities to its western product line via the acquisition of Zephyrus Biosciences (see IBO 3/31/16). According to an SEC filing, Bio-Techne paid $8.0 million, net of cash acquired and up to $3.5 million in contingency payments for the company, according to an SEC filing.

Also targeting cellular analysis, Sartorius purchased IntelliCyt, a maker of cell screening systems (see IBO 6/30/16) in 2016. While Sartorius has recently focused its acquisition activity on its bioprocess business, this purchase, as well as the acquisition of ViroCyt, which sells virus quantification technology (see IBO 7/15/16), expands the company’s Lab Products & Services Division, adding life science instrumentation. The two companies are expected to add approximately $20 million to Sartorius’ combined annual sales on a pro forma basis.3 highest values

Like Bio-Techne and Sartorius, other companies also focused on the cell analysis market. Adding to its portfolio of cell biology products, Bio-Rad Laboratories made another technology purchase from Propel Labs (IBO 3/15/16), buying an analytical flow cytometer platform for fair value consideration of $38.8 million, including $29.3 million in contingency payments. When the product is commercialized, it will mark Bio-Rad’s entry into that market. From the same firm, Bio-Rad previously purchased cell sorter technology (see IBO 10/31/12). Also adding to its existing cellular analysis business, which consist of consumables and kits, was Takara Bio. It announced the purchase of WaferGen Bio-systems (see IBO 5/15/16), which gives it microfluidic systems for the single-cell RNA sequencing market.

As in past years, the NGS market, from instrumentation to sample preparation to informatics, remains a highly dynamic and focused M&A area. Agilent Technologies joined the list of companies targeting complete clinical sequencing workflow solutions as it invested in early development firm LaserGen (see IBO 3/15/16). Despite a strong conviction in the sequencing technology, Agilent acquired only a 48% stake in the company but has the ability to purchase the remaining shares for roughly $105 million before March 2018. Although the development requires additional R&D resources, the purchase structure limits Agilent’s initial capital risk. However, with an expected commercial launch three to four years away, Agilent could face an already established and competitive market.

PerkinElmer added to its NGS offering with the purchase of Bioo Scientific, which offers NGS library preparation and multiplexing kits (see IBO 8/15/16), for $61 million, net of cash aquired, according to an SEC filing. These kits are currently used with PerkinElmer’s automated liquid handling benchtop systems, as well as with Illumina and Thermo Fisher NGS platforms. The acquisition also adds consumables products for food testing. The food testing area was additionally targeted by the company via its purchase of Delta Instruments (see IBO 2/29/16).

Private equity participation in analytical instrument and lab product M&A decelerated this year following a stronger presence a year ago. However, two notable purchases enhanced two firms’ lab market presence. Major private equity firm KKR, which has invested in numerous health care companies, made its first transaction into the laboratory product market with the purchase of LGC, a provider of life sciences and laboratory testing products (see IBO 12/15/15). With additional financial backing, LGC later strengthened its high-throughput PCR offering via a majority share purchase in Douglas Scientific (see IBO 4/15/16).

Another private equity firm building a lab product franchise is One Equity Partners. Following the 2014 purchase of Duran (see IBO 12/15/14) and the 2015 acquisition of Wheaton (see IBO 9/15/15), this year One Equity announced the purchase of Kimble Chase Life Science & Research Products, a joint venture co-owned by Gerresheimer and Chase Scientific Glass (see IBO 9/15/16).

For the second consecutive year, Chinese firms invested in Western lab product companies to expand their product offerings and geographic reach. Jilin Zixin Pharmaceutical Industrial, a publicly held Chinese firm, invested in life science instrumentation, acquiring a 67% share of genome mapping firm Nabsys (see IBO 7/31/16). Another publicly held Chinese firm, analytical instrument provider Jinan Hanon Instruments, purchased the majority of European firm IMSPEX Diagnostics (see IBO 10/15/16).

A number of companies also chose to step away from certain businesses this year. In some cases, as with Analytik Jena’s (Endress+Hauser’s) sale of its Optics business unit to NOBLEX (see IBO 6/15/16), this meant an increased focus on analytical instrument and lab product offerings. In other cases, it meant a complete exit from the laboratory products market altogether, as with W. R. Grace’s divested flash chromatography and LC detector product lines (see IBO 4/15/16) and the Gerresheimer transaction.

Other companies shed smaller, underperforming businesses, such as Oxford Instruments, which divested its Austin division (see IBO 1/15/16). Interestingly, such divestments included two testing services businesses: PerkinElmer’s US prenatal screening laboratory services business (see IBO 4/30/16), and Beckman Coulter’s genomics services business (see IBO 12/31/15). As such, Beckman’s partners for this business included Affymetrix and Life Technologies, both of which are now a part of Thermo Fisher, a significant provider of genomics workflow solutions.

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