Going for growth

Thermo Fisher's $3.5 billion acquisition of Phadia should position it well in high-growth, high-margin specialty diagnostics market

Jeffrey Bouley
WALTHAM, Mass.—With one of the primary aims being to enhanceits position in high-growth, high-margin specialty diagnostics, Thermo FisherScientific Inc. has signed a definitive agreement to acquire Uppsala,Sweden-based Phadia AB, described as "the global leader in allergy and aEuropean leader in autoimmunity diagnostics," from European private equity firmCinven.
 
 
The acquisition, totaling approximately $3.5 billion incash, is expected to be immediately accretive to Thermo Fisher's adjustedearnings per share and accretive by 26 cents to 30 cents per share in 2012, andthe parties expect to complete the transaction in the fourth quarter of thisyear.
 
Phadia presented an attractive picture to Thermo in partbecause of a three-year compounded annual growth rate of 10 percent on aconstant currency basis and total 2010 sales of about $525 million.
 
The company's in-vitro blood-test systems forclinical diagnosis and monitoring of disease revolve around two brands:ImmunoCAP for allergy tests, which accounts for 85 percent of revenues, andEliA for autoimmunity tests, which accounts for the remaining 15 percent of revenue.Phadia reportedly supplies more than seven out of 10 allergy laboratory testsworldwide and four out of 10 autoimmunity tests to laboratories throughoutEurope.
 
 
Addressing the media and investors May 19, Marc N. Casper,president and CEO of Thermo Fisher, said he was "really excited" about thistransaction "because it really enhances our leadership position in specialtydiagnostics, which is one of our key growth platforms. The addition of Phadiais a major step forward in our strategy to build on our depth of capabilitieshere and it significantly increases our presence in this high-growth market."
 
 
But it is the allergy testing in particular that ThermoFisher wants, with Casper describing allergy testing as an attractive,high-growth market and noting that in-vitro allergy testing is growingsome 9 percent annually worldwide. Roughly one in five people in North Americaand Europe suffer from allergies, and he says the in-vitro allergytesting market has significant untapped potential for growth, particularly inthe United States, where such testing is in the early stages of adoption.
 
 
"There is a huge opportunity in emerging markets such asChina and India where, at this point, little testing for allergy is done atall," Casper adds. "The demand for allergy testing is also expected to increaseas new therapeutic treatments come to market. This will provide Phadia, and nowThermo Fisher, with a significant growth opportunity."
 
But while is may be a relatively small part of Phadia'sbusiness, the autoimmunity testing is also a draw, as it is a growing segmentof healthcare, with Thermo Fisher noting that more than 100 million peopleworldwide suffer from autoimmune disorders, including celiac disease,rheumatoid arthritis and connective tissue diseases.
  
Currently, Europe accounts for 47 percent of Phadia'sbusiness, the United States for 23 percent, Japan for 18 percent and otherareas of the world for the remaining 12 percent. So there is plenty of room togrow in the emerging market arena, as Casper envisions, as well as globally ingeneral.
 
 
"Today, Phadia has over 5,000 systems installed in more than3,000 laboratories in 60 countries around the world," he says. "This largeinstall base provides a solid platform for future growth of a wide range ofdiagnostic tests."
 
 
Phadia has been around since 1967, and is credited withreleasing the first in-vitro allergy test more than 30 years ago. Thecompany, which boasts approximately 1,500 employees worldwide, will be part ofThermo Fisher's Specialty Diagnostics business within its AnalyticalTechnologies Segment.
 
"Our key capabilities fall into three categories: anatomicalpathology, where we focus on workflow solutions for tissue-based cancerdiagnostics; microbiology technologies for detecting pathogens in food and arange of infectious diseases like MRSA; and specialty assays, includingdrugs-of-abuse testing and our biomarker business," Casper says. "These threebusinesses total $1.4 billion in revenues. With Phadia, our specialtydiagnostic business expands by about 35 percent to $1.9 billion in revenues."
 
"Thermo Fisher brings Phadia a significant opportunity togrow as part of the world leader in serving science," says Magnus Lundberg,Phadia's CEO. "We share a culture of innovation and a strong focus oncustomers, and I am confident that this is a winning combination for ouremployees and customers around the world."
 
The transaction is expected to generate a total of $35 millionof cost and revenue synergies in 2014, with $10 million generated in 2012. Thisincludes $15 million from cost-related synergies and $20 million of adjustedoperating income benefit from revenue-related synergies. The transaction isalso expected to result in greater tax efficiencies by leveraging ThermoFisher's global structure.
 
 
Zacks Investment Research notes that Thermo Fisher exitedthe first quarter of fiscal 2011 with $2.8 billion in cash and cashequivalents, compared to $917.1 million at the end of December 2010, "primarilydue to the funds raised to finance the Dionex acquisition and free cash flow,partially offset by share buybacks."
 
In addition, selling two laboratory-testing servicesbusinesses—Athena Diagnostics to Quest Diagnostics and Lancaster Laboratoriesto Belgium based Eurofins Scientific—brought in another $940 million to Thermo.
 
Looking at that financial snapshot and considering some ofthe company's current cost controls, Thermo Fisher's operating margins haveshown an improving trend, Zacks notes, adding, "The company's strong cashposition enables it to make suitable acquisitions, or repurchase shares,thereby improving the bottom line further. However, any kind of economicturbulence could negatively impact the company's sales based on financialconstraints and customers deferring their buying decisions."
 

 
Thermo Fisheracquires Sterilin 
 
SOUTH WALES, U.K.—Thermo Fisher Scientific Inc. alsoannounced last month its acquisition of Sterilin Ltd., a provider of single-useplastic products serving the microbiology, life sciences and clinical marketsand headquartered here.
 
Financial details of the acquisition were not disclosed. In2010, Sterilin reported full-year revenues of approximately $35 million.
 
Marc N. Casper, president and CEO of Thermo FisherScientific, said in a statement that the acquisition broadens the company'srange of innovative specialty laboratory products, and is consistent with thecompany's strategy to leverage its global sales and support organization togive its customers across Europe, Asia-Pacific and North America greater accessto these products.
 
 
Sterilin offers a broad portfolio of disposable plasticproducts used in sample collection, preservation and processing, including aleading line of tissue culture plastics that complement Thermo Fisher's line ofplastic consumable products used in laboratories worldwide. The business willbe integrated into Thermo Fisher's Laboratory Products and Services segment.
 
 
Sterilin also supplies the life-sciences industry with arange of Iwaki tissue culture plastics, from standard flasks and dishes to themore advanced glass based products, for live cell imaging. The company offers arange of regular bottles in HDPE, LDPE, or PP from 30ml to 2000ml withstandard, dispensing, child-resistant and tamper-evident closure options.
 
 
Sterilin also manufacturers a range of molded and extrudedsilicone products from medical grade tubing to silicone discs. The company hasapproximately 270 employees.

Jeffrey Bouley

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