Rapid-diagnostics manufacturer Inverness Medical Innovations Inc. (Waltham, MA) has entered into a definitive agreement to purchase Acon Laboratories Inc. (San Diego) for $175 million, subject to adjustment for working capital and net indebtedness. The acquisition adds to Inverness's already dominant position in the $630 million pregnancy and fertility consumer diagnostics market, and ends more than three years of legal wrangling between the two companies. In a 2002 lawsuit, Inverness and its Unipath Diagnostics unit claimed that Acon's test-strip products infringed its patent for colored-particle immunoassays.

As part of the deal, Inverness will also acquire Acon's newly built manufacturing facility in Hangzhou, China. Inverness has announced a strategy to lower production costs by moving much of its manufacturing operations to China over the next few years.

"We're extremely excited about this acquisition. We're the market leader in many ways, but to offer low-cost distribution . . . is extremely advantageous for us," said Inverness CEO Ron Zwanziger during a presentation earlier this month at the Lehman Brothers Global Healthcare Conference. Inverness currently operates a plant in Shanghai, China. Through a pilot program with the government there, the company expects to produce about 30 million tests this year.

Since it was formed in 2001, Inverness has seen an enormous jump in sales, due in large part to a flurry of purchases. Between 2001 and 2005, annual revenues increased from $47.3 million to $421.9 million. However, during the same period, the company's gross margins fell from 48% to 36%.

"During the three years that the patent litigation raged in Boston, Acon demonstrated its skill in producing lateral-flow products in China, and Inverness's need for a lower-cost manufacturing solution grew over that same time period," said David Doyle, an attorney at Morrison and Foerster, the law firm that represented Acon in its patent litigation and advised the company on its acquisition. "It was the intersection of Inverness's need for lower-cost manufacturing and Acon's impressive track record of lower-cost manufacturing in China that drove the litigation settlement and resulting business transaction." In addition, the purchase will help Inverness make inroads into the drugs-of-abuse testing market.

The claim filed against Acon centered on Inverness's so-called '982 patent, which covers much of the lateral-flow technology behind the company's pregnancy and ovulation tests. Over the last few years, Inverness has brought suits against a number of companies in the United States and abroad that it claims have infringed its patents.