More IVD Consolidation: DPC Sells to Siemens

Siemens Medical Solutions decides its time to enter the in vitro diagnostics business

CEO SUMMARY: It is a significant acquisition, and not just because Diagnostic Products Corporation has a major presence in immunodiagnostics. Siemens Medical Solutions is one of the dominant competitors in radiology. Its willingness to pony up almost $2 billion to enter the clinical diagnostics market signals a serious intent to develop services that support individualized patient therapies.

IT’S AN ACQUISITION THAT REPRESENTS more than just consolidation within the in vitro diagnostics industry. On April 27, Siemens Medical Solutions (SMS) announced that it would acquire Diagnostic Products Corporation (DPC).

Siemens will pay approximately $1.86 billion for DPC, which is based in Los Angeles, California and has annual sales of about $520 million. Financial analysts noted that the price paid was almost four times DPC’s sales, and Klaus Kleinfeld, President and CEO of Siemens AG, defended the high price by saying, “That’s the multiple in the sector. We can only ask, ‘Will we take part or won’t we?’”

Intense Competition

The aggressive price is just one intriguing aspect to Siemen’s interest in acquiring DPC. As one of the world’s leading players in radiology and medical imaging, the company is competing intensely against the two other huge competitors in this market, General Electric and Phillips. Thus, its motives for spending almost $2 billion to buy an in vitro diagnostics (IVD) manufacturer has triggered much speculation. In recent years, General Electric has acquire Triple-G Corporation, an LIS vendor, as well as IDX Systems Corporation, a software vendor for medical group practices and hospitals. In 2003, it also paid $9.5 billion to acquire Amersham PLC, a major source of contrast agents used in medical diagnostics.

For its part, Siemens Medical Solutions has been acquiring firms as well. For example, in 2005, it paid $1 billion to buy CTI Medical Imaging Inc., in part because it was conducting “next-generation molecular diagnostics research and the development of new imaging technologies and biomarkers.”

This background information on GE and SMS is relevant in understanding why Siemens will pay $1.86 billion to buy DPC. Both GE and SMS are heavily involved in radiology, but want to move upstream and downstream in the diagnostic and therapeutic process. Each has a vision of offering physicians a “total solution” for diagnostics and therapeutics. Moreover, each company understands the need to have electronic integration for the data generated by its clinical and medical support services.

Acquisition Motives

In discussing the motives behind the DPC acquisition, Erich R. Reinhardt, Ph.D., CEO and President of Siemen Medical Solutions, told analysts on a conference call that SMS wants to expand its portfolio of healthcare solutions, along with pursuing its objective of enabling early and specific diagnosis of disease, particularly in support of individualized patient therapy.

Reinhardt further stated that another goal behind the DPC acquisition is to bring together in vitro and in vivo diagnostics. Healthcare information technology plays a role, he added, because the healthcare industry generates growing volumes of data and, in order to use this data efficiently, a company must have the algorithmic systems necessary to process and analyze it. Proteomics and biomarkers may be a link between the in vitro diagnostic stage and the in vivo imaging state of diagnosis, Reinhardt also declared.

Personalized Medicine

THE DARK REPORT believes the key to understanding the DPC deal is Siemens’ use of the term “individualized patient therapy.” The company recognizes that continuing advances in genomics, proteomics, and a variety of other scientific fields will produce the ability for clinicians to offer “personalized medical services” to patients.

Just as an MRI can be more specific than a black and white X-ray film in diagnosing many conditions, the newest generation of diagnostic assays provide more information about the unique circumstances of a specific patient, than, say, the traditional chemistry panel or CBC test.

This same dynamic is happening on the therapeutic side. The pipeline is full of therapeutic drugs, compounds, and other agents which can be customized to the specific circumstances of an individual patient.

In recent years, industry experts have closely watched the moves of GE Healthcare and Siemens Medical Solutions in an attempt to understand how each firm wants to use its strong position in radiology as a springboard into other areas of healthcare.

The question is an important one for clinical laboratories and anatomic pathology group practices. That’s because both companies have vast amounts of capital and intellectual resources to bear—if they were to decide to enter the laboratory testing marketplace in a big way.

DPC May Be A Good Fit

In acquiring DPC, Siemens Medical Solutions comes one step closer to the laboratory testing market. DPC is likely to make a good fit with the Siemens corporate culture. It was a profitable company with a strong balance sheet. As a primary competitor in immunodiagnostics, it has earned a good reputation with both customers and competitors.

Although it is still too early to know the strategic thinking behind Siemens’ interest in DPC and willingness to pay almost four times annual revenue for the company, one fact stands out. Consolidation is ongoing in the IVD industry. Just weeks ahead of the sale of DPC to Siemens Medical Solutions, Athena Diagnostics, Inc. was sold to Fisher Scientific International, Inc. (See pages 12-13.) Together, these two deals affirm that larger companies want to expand their diagnostic test menu through acquisitions.

At the same time, all of these deals are a reminder that the pace of change remains constant throughout the laboratory industry.

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