CEO SUMMARY: As expected, consolidation within the diagnostics industry continues. This time it is Bayer, spending $1.1 billion to acquire Chiron’s diagnostics business. Once completed, Bayer will be the fourth-largest diagnostics company in the world. Laboratory customers of both firms will see many changes during the 18 months following the merger.
ONCE AGAIN THE DIAGNOSTICS industry is about to undergo a major consolidation. This time Bayer Group has announced that it will acquire Chiron Diagnostics.
Bayer will pay Chiron $1.1 billion to purchase outright the diagnostics division of Chiron Corporation. The deal was made public on September 17.
“Bayer will gain about $600 million in revenues from the Chiron acquisition,” stated Ashok Shah, Vice President of the Diagnostics Group at IMV, Ltd. “Added to its current revenue base of $1.1 billion, it will make Bayer the fourth largest diagnostics company in the world.”
For clinical laboratory executives, this news reinforces the fact that consolidation of healthcare continues. The same pressures causing laboratory consolidation are also forcing diagnostics companies to consolidate.
“There are a number of interesting things about the Bayer-Chiron deal,” said Shah. “First, this is a statement by Bayer that they are fully committed to be a major player in diagnostics.
“Second, Chiron’s products fill an existing gap in Bayer’s product line,” he continued. “Now Bayer is better able to offer bundled instrument packages to customers such as integrated healthcare systems and the national buying consortiums like Premiere and AmeriNet.
“Third, the size of this acquisition keeps Bayer in the top rank of diagnostics’ largest companies,” said Shah, “This is important, because it provides Bayer the clout and economies of scale to continue as a tough player in an extremely competitive market.”
“What Bayer is buying is the largest company in the blood gas analyzer market,” noted Andrew Schmidt, Principal at the Kellan Group in Alpharetta, Georgia. “Chiron currently holds at least a third of the blood gas analyzer business. Radiometer and Instrumentation Laboratories rank second and third, with market shares of approximately 25% and 22%, respectively.”
“For Bayer, this is definitely a bundling strategy,” Shah said. “It now has instruments for chemistry, immunochemistry, urine chemistry, and blood gas. Further, it is an important statement by Bayer that it intends to remain a strong player in diagnostics.
“Chiron’s diagnostics group was number one in the blood gas market, but it is a market segment generally comprised of smaller companies.”
Vice President, Diagnostics, IMV, Ltd.
“In recent years, it seemed that Bayer lacked direction in its diagnostics division,” he continued. “Many of us were wondering whether there was commitment at the highest levels of Bayer to remain in the diagnostics business.
“Acquiring Chiron’s diagnostics group certainly dispels that notion,” stated Shah. “Particularly since Bayer made a strong showing with its exhibits at the AACC and CLMA conventions this summer. At both shows Bayer’s exhibit was definitely among the two or three most impressive booths. Many observers consider it a sign that Bayer corporate believes diagnostics is an important growth vehicle for the company.”
Chiron Corporation announced its intent to sell the diagnostic group late in 1997. Chiron is primarily a biotech company. It had originally purchased this group (formerly Ciba Corning) from Ciba Geigy (now Novartis) in 1995. Bayer is not only getting the blood gas instrument line, but is licensing nucleic acid diagnostic technology from Chiron that involves hepatitis C (HIC) and the HIV virus.
“Bayer was one of the three logical buyers for Chiron Diagnostics,” observed Schmidt. “The other two would have been Abbott and Beckman Coulter. Each of these companies could have used Chiron’s blood gas analyzers to fill out their own product line and create new cross-selling opportunities.”
“I consider Abbott to be the most dominant player in the immunochemistry market,” stated Shah. “I think Chiron realized that, to compete in immunochemistry against Abbott and similar huge corporations, it needed a well-funded war chest and that was money they didn’t have.
“Another factor in Chiron’s decision to exit the business might be that the blood gas market is not as profitable as other segments,” he continued. “Blood gas instruments don’t use large quantities of reagents, and reagents are generally the largest source of operating margins for diagnostics companies.”
More Consolidation Ahead?
Will there be more consolidation among the diagnostics companies? “I believe the answer is yes,” replied Schmidt. “The Bayer-Chiron deal is in response to Beckman’s purchase of Coulter and Roche’s acquisition of Corange (Boehringer Mannheim).
“Smaller diagnostics companies need both size and huge amounts of capital to
maintain market share and keep new products in the development pipeline,” concluded Schmidt. “There are some surprising marriages yet to occur among the remaining diagnostics companies.”