Ventana & Cytyc Fall Short, Danaher Wins the Prize

Goal was Vision Systems’ molecular markers and product line for histology laboratories

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WHEN Danaher Corporation’s high bid for Vision Systems Limited of Melbourne, Australia, was accepted last month, it appeared to be simply another acquisition by a large U.S. manufacturer. But, in fact, there are four reasons this transaction is significant to pathologists in the United States and worldwide.

If approved by Vision’s shareholders later this year, the deal would mark the end of a startling string of attempted buy-out offers, involving, in order, Ventana Medical Systems Inc., Cytyc Corporation, and Danaher. It was August when Ventana signed a friendly agreement to buy Vision for approximately $346 million. Within four weeks, Cytyc announced a $375 million bid for Vision, causing Ventana to drop out of the bidding. Cytyc later raised its bid to $518 million when it learned that Danaher was an interested bidder.

Paying A Premium Price

Danaher walked away with the prize after agreeing to pay an all-cash price of approximately $520 million. Pathologists probably know Danaher because of its ownership of Leica Microsystems, which manufactures microscopy systems and products used in histology laboratories. Danaher acquired Leica in 2005.

As noted, the reason why Vision Systems was highly desirable to Ventana, Cytyc, and Danaher (Leica) makes this deal significant for at least four reasons. First, three companies with a strong interest in anatomic pathology were active bidders for Vision, which owns technology for molecular markers that have strong potential for growth.

Founded in 1987, Vision makes automated instruments such as the Peloris rapid tissue processor, the Bond-maX advanced staining system, and Novocastra antibodies and bio-chemical reagents for biopsy-based detection of cancer and infectious diseases. Its sales in 2006 are expected to be about $128 million in U.S. dollars.

Second, the fact that Cytyc would step into the Ventana–Vision deal shows that Cytyc remains highly motivated to diversify away from its core cytology products. Longtime clients and readers of THE DARK REPORT will recall that, in 2003, Cytyc invested $168 million to acquire rights to a ductal lavage test for breast cancer. That business line has not grown as the company had anticipated.

Third, the deal shows that Danaher is seeking to complement its market presence in histology and anatomic pathology, a presence it acquired last year when it purchased Leica Micro-systems. By acquiring Vision Systems, Danaher adds additional products in specimen processing, as well as technology for molecular markers.

Fourth, and perhaps most important, the deal is significant for laboratory medicine because it shows that the investment community is willing to pay a premium price for companies that have molecular technologies that can be used in diagnostic medicine.

Revaluing Anatomic Path

“By agreeing to buy Vision Systems, Danaher has single-handedly revalued anatomic pathology (AP),” stated a lab industry expert knowledgeable about many aspects of the bidding contest. “It is significant when a company such as Danaher steps in and does the thorough financial analysis needed to justify this premium price to buy Vision. This event puts anatomic pathology on the radar screen. In the past, large companies have shown some interest in AP. But that interest was just nibbling com- pared to what Danaher just did.

“Looking at Danaher’s acquisition of Leica last year and its acquisition of Vision this year, it’s clear that Danaher isn’t irrationally jumping into this market,” he continued. “They know enough about the space to value it as they did. That is significant.

“The price paid for Vision Systems shows the sizable value that companies now place on AP,” he added. “For years, the philosophy among companies in pathology was that blood tests would some day make tissue testing or histology obsolete. But obviously that hasn’t happened. In fact, the opposite has happened. Tissue testing has gained more value because of the diagnostic tests that are tied directly to a specific therapy, such as the example of Herceptin to treat some types of breast cancers.

Access To New Markets

“Danaher’s acquisition of Vision gives it instant access to the immunohistochemical marketplace, along with a proficient group of engineers and talent in life sciences because of Novacastra,” our source explained. “Novacastra is highly respected in the life sciences arena. Also, Vision has an engineering division called InviTech Corporation, which gives Danaher those capabilities as well. Putting Vision’s front-end components together with its existing product line now gives Danaher a strong presence in the immunohistochemical and in situ hybridization market.

“Taken together, these actions make other companies ask if they’ve been missing something in the AP marketplace, including why they didn’t value Vision as Danaher did,” he added. “Danaher was strategically looking at a growth driver for its business and found it in Vision.

Changing The Landscape

“Medicine that requires targeted therapies is changing the landscape. It has always been true that a certain percentage of targeted therapies will be guided by what’s found in the blood. But now the remaining percentage of therapies will be guided by what’s found in the tissues or cells. That’s the game today. What’s in the pipeline at all of the big pharmaceutical companies looks more and more like there is a growing business in this sector. There is a significant volume of therapies that will require tissues, making this a legitimate business.

“In addition, you also have important demographic shifts occurring at the same time,” he added. “The baby boom population is hitting retirement age, causing the number of cancer cases to rise.

“All of these factors contribute to higher values for companies in the immunohistochemical market,” he said. “It’s a fast-growing and good-margin business. Across the in vitro diagnostic industry worldwide, there is a strategic consensus that the analysis of tissue for cancer specifically, and for other disease generally, will be a segment that grows explosively in the coming years.”

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