Fitch: Strategic Buyers Have Advantage In Life Sciences Sector
NEW YORK -- April 19, 2013
Strategic buyers may have a leg up on private equity buyers when it comes to
bidding on life sciences companies, according to Fitch Ratings. This is
illustrated by the recent deal struck by Thermo Fisher Scientific Inc. to buy
Life Technologies Corp.
Thermo Fisher believes it can profit via the deal by paying $76 per share for
Life Tech, which is quite a bit higher than the price the company was
originally expected to fetch through the bidding process. The Thermo Fisher
bid was also significantly higher than the amount reportedly offered by a
consortium of private equity companies, according to a number of press
reports. Thermo Fisher Monday announced it would acquire Life Tech in a deal
valued at $13.6 billion, which includes an assumption of about $2.2 billion in
Life Tech, like many of its peers in the life sciences sector, is highly cash
generative. This is an attractive characteristic for private equity firms
seeking acquisitions since these businesses can support a good amount of debt
used to finance a going-private transaction.
However, we think financial buyers may be taking a cautious view of the life
sciences sector given uncertainties regarding the outlook for the healthcare
industry. These include the implementation of the Affordable Care Act, federal
deficit reduction measures (sequestration and possible entitlement reform) in
the U.S., and slow organic demand growth for healthcare products and services
in developed markets.
Thermo Fisher's successful bid also highlights the power of scale in the life
sciences sector. In addition to the typical types of cost synergies available
to a strategic buyer, Thermo Fisher will see benefit from combining the vast
and complementary product portfolios of the two companies, which it will sell
through the company's well developed sales channels. This could provide a
boost to Life Tech's recently lackluster sales growth in research settings.
Fitch believes that new technologies that demonstrate both clinical and
economic value in healthcare consumption have excellent growth prospects.
There is accelerating pressure on the industry to lower the rate of growth in
healthcare spending in developed markets while improving outcomes for
patients. The application of next generation DNA sequencing in clinical
diagnostics is an example of technology with such potential.
Life Tech has recently been investing in building its portfolio of sequencing
assets, but it remains a small part of the overall business. As a strategic
buyer, Thermo Fisher is better positioned to make investments necessary to
capitalize on the growth potential of these assets. There remains risk related
to obtaining the regulatory and government approvals necessary to support
wider application of the technology, which will require financial flexibility
to make incremental investments.
The higher debt levels associated with the transaction will likely have
negative rating consequences for Thermo Fisher and will be neutral to
potentially negative for Life Tech's ratings. The ratings of both are expected
to remain investment grade, however.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
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companies and current ratings, can be accessed at www.fitchratings.com. All
opinions expressed are those of Fitch Ratings.
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Megan Neuburger, +1 212-908-0501
Kellie Geressy-Nilsen, +1 212-908-9123
Fitch Ratings, Inc.
Brian Bertsch, +1-212-908-0549
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