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Diagnostics Deals: Sold, Fold, and On Hold

The in vitro diagnostics sector continues to generate significant industry interest as evidenced by three deals that have dominated medtech headlines over the past several weeks. While Siemens' acquisition of Dade Behring appears to be a done deal, GE's previously announced agreement to buy two of Abbott's diagnostic units has fallen through. Meanwhile, the final outcome of a hostile takeover attempt by Roche to acquire Ventana Medical Systems remains uncertain, as the targeted company vows to beat back the unsolicited bid.

Building an unparalleled portfolio.

In the deal that is expected to proceed without incident, Siemens Medical Solutions USA Inc. ( Malvern, PA), a division of Siemens AG ( Munich, Germany), announced that it will purchase Dade Behring Holdings Inc. ( Deerfield, IL) for $77 per share of common stock. The all-cash transaction is valued at around $7 billion. Dade Behring's board has unanimously endorsed the acquisition, which is expected to close by the end of the year, following requisite regulatory and other approvals. Dade Behring will become a wholly owned subsidiary of Siemens Medical Solutions.

This is Siemens' third acquisition in the diagnostics sector over the past 15 months. Last year, the company acquired Bayer Diagnostics for $5.4 billion and Diagnostics Products Corp. for nearly $1.9 billion. In a statement, Siemens said it intends to become "the global leader in full-service diagnostics, offering imaging diagnostics, clinical laboratory diagnostics, and healthcare IT solutions—from a single source and along the entire value chain."

Erich R. Reinhardt, president of Siemens Medical Solutions, said the acquisition "complements our current capabilities and offers us the unique opportunity to create an unparalleled portfolio of products and services, and become the world market leader in comprehensive clinical laboratory diagnostics."

Uniquely positioned.

"Together, Dade Behring and Siemens will become uniquely positioned to offer the broadest and most-capable range of clinical diagnostic products and services in the world," said Jim Reid-Anderson, Dade Behring's chairman, president, and CEO.

Dade Behring manufactures clinical laboratory equipment and provides integrated solutions for routine chemistry testing, immunodiagnostics, hemostasis testing, and microbiology. The company has 6400 employees operating in 35 countries, and posted revenues of $1.7 billion for fiscal year 2006.

Siemens Medical Solutions, a provider of diagnostic imaging systems, clinical laboratory diagnostics, and healthcare IT solutions reported sales of $10.5 billion for the fiscal year ending September 30, 2006. The medical group accounted for 9.4% of Siemens' annual revenues.

Just before news of the Siemens-Dade Behring deal broke, General Electric Co. ( Fairfield, CT) and Abbott ( Abbott Park, IL) quietly announced that they were terminating their agreement by which GE would purchase Abbott's in vitro diagnostics unit and point-of-care diagnostics business. The $8.1 billion deal, which was announced in January, represented GE's first foray into medtech's in vitro diagnostics sector.

Both companies issued almost identically worded statements indicating that they were "unable to reach agreement on final terms and conditions." There was no breakup fee in the dissolution of the agreement.

Most industry analysts saw the collapse of the deal as more of a problem for Abbott than for GE. Abbott had indicated that it would use the proceeds of the deal to invest in new medical technologies and pay down some outstanding debt. Both companies were generally reluctant to go beyond their prepared statements, but several medtech analysts noted that Abbott's diagnostics manufacturing plant in Irvine, TX, had received FDA warning letters regarding what the agency referred to as "adulterated" and "misbranded" products. The company was ordered to hire an independent consultant who would ensure that the facility returned to full compliance. It was widely speculated that GE was seeking to extricate itself from what could become a protracted regulatory morass.

For its part, GE has to be concerned that Siemens, a prime competitor, is continuing to build up its IVD footings to complement its business in molecular diagnostics, where GE is also hoping to become a major player. With the collapse of the Abbott deal, GE continues to lack a presence in the IVD space.

During a recent conference call, Abbott said that the company felt "no crying need" to sell its diagnostics units. However, most analysts detected definite signals that the company is continuing to look for another buyer. Similarly, GE said it is committed to exploring opportunities in the IVD sector.

So the Siemens-Dade Behring deal looks like a winner for both parties, while GE and Abbott return to their respective corners to await further developments. But in the meantime, the diagnostic sector may be gearing up for a real donnybrook, as Roche Holding AG ( Basel, Switzerland) and Ventana Medical Systems Inc. ( Tucson, AZ) continue to ratchet up the rhetoric in their battle for control of Ventana.

A full and fair offer.

Late last month, Roche made an all-cash proposal to acquire Ventana for $75 per share, for a total deal value of about $3 billion. Ventana dismissed the offer as "wholly inadequate" and said it had no interest in negotiations. Roche quickly went to a full-court press, contacting Ventana's executive management, board, company employees, and shareholders—all in a largely failed effort to communicate the value and benefit of Roche's ownership of the company.

Roche said it wants to buy Ventana because the company is a leader in the $1 billion tissue-based testing market, a segment that has been growing at an annual rate of 10%—twice the rate of Roche's other IVD business segments. " Ventana's leadership in tissue-based testing will broaden and complement Roche's leading in vitro diagnostic and life science businesses—molecular diagnostics, immunodiagnostics, and clinical chemistry," said a company press release.

Capturing value.

Roche chairman and CEO Franz B. Humer described the company's bid as "a full and fair offer and a unique opportunity for Ventana's stockholders to receive value now that reflects Ventana's current business and full future potential." While Roche said it would "prefer to commence discussions with Ventana to effect a negotiated transaction," it also said it was prepared to pursue a "unilateral course of action" if Ventana chose not to cooperate.

"This is about stockholder value," said Ventana chairman Jack Schuler. "Simply put, we believe that Roche is trying to capture value for its stockholders that rightly belongs to Ventana's stockholders." Ironically, as Roche was hailing its offer as a 44% premium on Ventana's stock value of $51.95 on June 22, 2007 (the last trading day before Roche submitted its bid to Ventana), the stock has steadily risen to a recent close of more than $83.

Not even close.

When the initial tender offer expired this month, Roche extended it to August 23—a move that drew a sharp response from Ventana president and CEO Christopher Gleeson. "The situation has not changed," he said. "Not only is the offer significantly below our current market price, it does not even come close to reflecting the intrinsic value of the company, its strong growth prospects in an accelerating market, and the synergy value of Ventana to Roche."

It's probably too early to tell whether Roche and Ventana are poised for a protracted struggle for control, or merely posturing with one another to achieve a more favorable outcome from a deal that both considerable inevitable. But by touting its value to Roche, Ventana may be sending a signal that it might consider a deal—if the price is right.

Roche employs 75,000 people worldwide, including more than 30,000 in the United States. The company's 2006 revenues totaled $34.4 billion—$27.3 billion from the pharmaceutical division and $7.1 billion from diagnostics.

Ventana Medical Systems, with 952 employees, reported annual revenues for 2006 of $238 million.

© 2007 Canon Communications LLC

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