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Calling Joe Jackson – Reflections on an Unexpected Pairing in the Life Science Tools Sector

I read with great interest the recent news that Merck KGaA is going to acquire Millipore after reports that a fellow Massachusetts company, Thermo Fisher had made a bid. My initial (and admittedly weird) reaction was to start singing to myself that great Joe Jackson song, “Is She Really Going Out with Him?”. Let me try to explain why. For those of you not familiar with Millipore, the company is a leading provider of lab gear and supplies including filtration products (its legacy business), products for manufacturing of biological drugs, as well as reagents, kits and other consumables for life science/drug discovery research. At first glance, Thermo would be a logical acquirer of Millpore given that they sell products in many of the same markets; however, Thermo’s offering of products used in the manufacture of biologics drug (a rapidly growing segment of the drug market) is relatively small. So on the surface a marriage of Millipore and Thermo makes sense to me. In contrast, Merck KGaA is probably better known for its pharmaceutical business and the acquisition of Serono. Merck KGaA sells biological drugs, including Erbitux for colorectal cancer and Rebif for treatment of multiple sclerosis, but also has its Chemicals division that includes EMD Biosciences, a supplier of research reagents, kits and other consumables for life science research. So what drove Merck KGaA to make the decision to by Millipore? I think it’s fair to say that having products for biological drug manufacturing is a good thing considering the growth in such drugs is robust, not only in terms of new drugs but also in anticipation of generic biologics (so-called “biosimilars”). Some have speculated that it gives Merck KGaA access to this rapidly growing market while mitigating the risk of developing biologics themselves. Others that are more skeptical suggest that Merck KGaA must be seeing less than rosy growth prospects for its pharmaceutical business and therefore needed to find other business with healthier growth outlooks.

Regardless of the reason, what this transaction demonstrates is further consolidation in the research tools market. Over the past 18 months, we’ve seen some of the industry’s biggest players tie the knot, including: Invitrogen and ABI (to form Life Technologies) in a deal valued at $6.7 billion; and Agilent’s proposed acquisition of Varian, Inc. for $1.5 billion. In addition to these deals, Danaher has emerged as a major player in the life sciences tools space with recent acquisitions of AB SCIEX and Molecular Devices for an aggregate $1.1 billion. For those of us who work with emerging companies that possess life sciences tools and reagents, this consolidation could impact such companies in a number of ways. First, any wave of consolidation creates fewer buyers. Second, large transactions often take time to digest and therefore buyers that have just made such an acquisition may be on the sidelines during the integration process. Third, these transactions will probably push smaller and medium-sized players to be more aggressive in order to effectively compete with behemoths such as Life Tech. In my view, the latter will result in an active M&A market for smaller and medium sized life science tools and reagents companies especially if multiples remain attractive. If not, there’s always that hungry $20 billion market cap company in Waltham…

Dave Wood is a Vice President at Covington Associates. He can be reached at 617-314-3950 or ibankerblog@covllc.com.

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Culture Club on the Vineyard

I recently returned from a couple of beautiful days on the island of Martha’s Vineyard, the site of this year’s Convergence Forum – The Life Sciences Leaders Forum – where I was a speaker on the panel “Exit Scenarios: Considering the Options”  for my first YouTube appearance). The forum provided a great chance to catch up with life sciences CEOs, investors and other thought leaders while enjoying fresh lobsters at The Black Dog Tavern (for those of you unfamiliar with the Vineyard, The Black Dog Store is where President Clinton purchased a T-shirt for his favorite intern).  There was plenty of talk about the future of big pharma and what the industry is going to look like in the next few years when several more blockbuster drugs come off patent (can you say fewer and fewer).  In addition, there was the usual talk about valuations and the like.  However, what was most surprising (to a financial toad such as myself) was the continued mentioning of the importance of culture for the success of a business. 

Don’t get me wrong, I like culture but I have always viewed it as one of those softer areas which is nice but not critical.  Maybe it wasn’t as prevalent as I thought but just seemed so since it was unexpected.  The interesting thing that I heard repeatedly is much of the success from companies came not just from the big idea but from the ability of leaders to instill and maintain a culture that not only enabled but encouraged their highly skilled teams to go above and beyond. Successful leaders also recognized (and subsequently dealt with) threats to their culture from partnerships, new hires and board members.  Serial entrepreneurs were able to highlight a number of their successes and failures that were due to culture.  This conversation raised the interesting dilemma faced by convergence companies (companies who have combination products that straddle the worlds of pharma and med device where there exist major cultural differences). 

My head was spinning from all of this talk about culture (or possibly the drinks) and I longed for a return to my world of multiples, M&A, private placements and IPOs.  One of the purposes of events such as these is to give you new perspectives on things – this year’s Convergence Forum certainly did that. If you can wrangle an invite, the conference is a good take.   

Ben Dunn is a Managing Director at Covington Associates.  He can be reached at 617-314-3950 or ibankerblog@covllc.com. 

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