Siemens Acquires Dade, Builds IVD Powerhouse

When deal closes, Siemens claims crown as the global colossus in in vitro & in vivo diagnostics

CEO SUMMARY: In just 15 months, Siemens AG has pulled out its checkbook three times to spend more than $14 billion to acquire major in vitro diagnostics (IVD) companies. When it closes the purchase of Dade Behring, Siemens will be in the first rank of global IVD manufacturers. It has also declared that it is now the world’s largest diagnostics company because of its combined market share in imaging and clinical lab testing.

THIS YEAR’S HOTTEST STORY is consolidation in the in vitro diagnostics (IVD) industry, and the latest stunner is the pending acquisition of Dade Behring, Inc., by Siemens AG. In a deal announced July 25, 2007, Siemens will pay approximately $7 billion to purchase Dade Behring, of Deerfield, Illinois.

The deal is expected to close within 90 to 180 days. When it does, this acquisition will trigger significant changes in the lab industry, for at least five reasons.

First, it removes another first-rank IVD manufacturer from the market as an independent company. That directly reduces the choices available to clinical laboratory buyers, since there will be one fewer independent competitor.

Second, upon closing the purchase of Dade Behring, Siemens vaults into the ranks of the largest IVD companies. In recent years, Roche Holdings and Abbott Laboratories, Inc., have been the world’s number one and number two largest IVD manufacturers.

Third, many financial experts believe that Siemens’ acquisition of Dade Behring will trigger further consolidation in the IVD market. Other players in the IVD industry are likely to respond with additional acquisitions as a way to expand their product portfolios, to gain market share, and to prevent competing IVD companies from acquiring those assets.

Fourth, as Siemens continues to invest heavily to build its capabilities in in vitro diagnostics, it creates additional pressure on competitors General Electric Corp. and Philips Electronics N.V. to develop a strategy for in vitro diagnostic testing that supports these companies’ existing in vivo/imaging businesses.

Fifth, the premium price that Siemens will pay to acquire Dade Behring reinforces the higher valuations paid for IVD companies and clinical lab firms during the past 24 months. Such prices are a market demonstration of investor conviction that advances in molecular diagnostics and genetic medicine will fuel substantial growth in diagnostic testing in the coming years.

High Value For Dade Behring

Siemens will pay $77 in cash for each share of Dade Behring. That’s a 38% premium over Dade’s prior day closing share price of $55.91. Some analysts in Europe were critical of the price Siemens will pay. “People obviously think that $7 billion for Dade Behring is far too much,” declared Thomas Radinger of Pioneer Investments in Munich, Germany. His firm has a $96 billion investment portfolio and holds Siemens’ stock.

On the other hand, Siemens was not the only bidder for Dade Behring, a company that has posted strong growth in revenue, operating profits, and earnings over the past several years. (See TDRs, October 28, 2002, and June 25, 2007.) Other firms were interested in buying Dade. Further, bidding for Dade Behring was unfolding during the same time that GE held an agreement to purchase the diagnostics business division of Abbott Laboratories, Inc., for a price of $8.13 billion.

Encouraged To Buy Again

Siemens’ willingness to move aggressively to purchase Dade Behring is also a sign of another corporate strategy. Among other things, it means that, after paying $1.86 billion to buy Diagnostics Products Corporation (DPC) (See TDR, May 22, 2006) and $5.21 billion to buy Bayer Diagnostics (See TDR, August 14, 2006), Siemens’ executives found few negatives to change their views about the short-term and long-term growth potential of clinical diagnostics. Armed with the confidence gained from the DPC and Bayer acquisitions, Siemens forged ahead to do a single IVD deal that would place the company among the world’s largest IVD firms.

Since announcing the acquisition agreement, executives from both companies have said little in public. At the time of the DPC and Bayer acquisitions, Siemens’ executives had continually stressed that Siemens did not want to have a presence in an industry unless it holds a market share that is number one or number two. They noted that the combined immunoassay business lines of DPC and Bayer gave them a number one position globally in that segment of IVD.

Siemens was probably attracted to Dade Behring for several reasons. One, Dade Behring has a large international presence, particularly in smaller and mid- sized laboratories. It serves approximately 25,000 customers in 36 countries and has an installed base of 41,400 instruments. Dade Behring’s diversified book of clients represents an opportunity for Siemens to cross sell product lines it acquired when it bought DPC and Bayer.

Marketplace Momentum

Two, and not to be underestimated, Dade Behring has momentum in the marketplace and is profitable. For the second quarter, it reported a 42% increase in earnings and an 8.2% increase in revenue. It is a dynamic organization positioned for additional growth.

Three, Dade Behring has a corporate culture and a customer focus that sets it apart from many of its IVD competitors. These attributes were likely to be a good fit with Siemens’ existing IVD units. For example, DPC was a highly respected, family-led enterprise while Bayer Diagnostics was part of a German-owned corporation. It is probable that Dade Behring’s successes in developing what its CEO, Jim Reid-Anderson, likes to describe as a “customer-facing organization” played a role in Siemens’ decision to acquire Dade Behring.

Four, Dade Behring has a strong position in technology and a thriving research and development program. Its new Dimension Vista® instrument is in the early phases of launch and attracting positive attention. These resources would compliment Siemens’ existing IVD assets.

More Consolidation Ahead

THE DARK REPORT observes that there is nothing extraordinary about Siemens’ decision to invest $14 billion to literally buy itself a front row seat in clinical laboratory testing. As the table presented in the sidebar on the previous page demonstrates, investor interest in the IVD industry is at fever pitch. In the past 15 months, five of the world’s 15 largest IVD companies have entered into agreements to be acquired!

That pace of transformation is remarkable. Moreover, the IVD industry is prepared for even more consolidation. General Electric is the one example that validates this point. Although the General Electric–Abbott Laboratories agreement collapsed last month, popular wisdom is that General Electric will definitely make a major move into in vitro diagnostics.

A Future Oligopoly?

Viewed against Siemens’ willingness to spend $14 billion to become one of the world’s largest IVD companies, one can assume that General Electric would be equally willing to make a comparable investment to buy any IVD firm or clinical laboratory that captures its interest and is deemed to be a strategic fit.

Further consolidation in the IVD industry would bring the clinical laboratory marketplace closer to the day when it becomes an oligopoly, both in the United States and worldwide. Having a limited number of suppliers would then change the way clinical laboratories select lab testing technology and vendors.

More IVD Consolidation: Which Firm Is Next?

EXPECT MORE CONSOLIDATION in the in vitro diagnostics (IVD) industry. That’s a safe prediction for a simple reason. In the past 15 months, five of the world’s largest IVD manufacturers have signed agreements to be acquired!

That’s a major acquisition, on average, every three months. Of course, General Electric’s agreement to acquire the diagnostics business of Abbott Laboratories has been dissolved. But the other four major acquisitions are proceeding to a closing without anticipated difficulties.

The table below, which ranks the world’s 15 largest IVD companies, provides compelling evidence of how rapidly consolidation is changing the face of the IVD industry. It is a trend that will continue. For example, in the day’s following the announcement that Siemens would acquire Dade Behring, Reuters News Service published a story that identified likely IVD consolidation candidates by name, listing these firms: Beckman Coulter, Abbott Laboratories’ diagnostics businesses, Johnson & Johnson’s Ortho-Clinical Diagnostics division, Gen-Probe, Cepheid, Quidel, Luminex Corp., and Hologic (itself in the process of acquiring Cytyc Corporation–see table below).

Concentration of ownership within the IVD industry is steadily reducing the number of independent companies competing for clinical laboratory business.

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Roche Continues to Pursue Ventana Medical Systems

THERE’S ANOTHER IN VITRO DIAGNOSTICS (IVD) CONSOLIDATION STORY PLAYING OUT as of press time. Roche Holdings is in the midst of a hostile tender offer for all the outstanding stock of Tucson, Arizona-based Ventana Medical Systems, Inc.

It was June 25 when Roche announced that it would pay $75 per share for Ventana shares. This was a 44% premium over the previous day’s closing price of $51.95 and represented a total cash purchase price of about $3 billion for Ventana. In 2006, Ventana reported annual sales of $238.2 million.

By offering a price that was at a hefty premium to Ventana’s current share price—and more than 12 times annual revenue—Roche must have felt confident Ventana shareholders would respond favorably by tendering their shares to Roche.

Meanwhile, Ventana’s executive team criticized the hostile take-over offer. Its board issued a statement advising shareholders not to accept Roche’s tender offer.

Then, on July 25, Roche announced that it would extend the tender offer for another four weeks. The offer will now expire at 5 p.m. EDT on August 23, 2007. As part of this announcement, Roche stated that owners of Ventana stock representing a total of 10,000 shares had signed commitments to sell under terms of the tender offer.

Because Ventana’s outstanding number of shares exceeds 34 million, this does not appear to be an encouraging sign for Roche. It is unusual for smaller companies to resist acquisition, particularly when the buyer is a much larger company and offers a significant premium over the current market value for the outstanding shares of the takeover candidate.

Roche is interested in Ventana Medical Systems because it believes Ventana’s anatomic pathology products and technology pipeline would complement its own products.

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