A Hefty Price for Biosite

Beckman Coulter's $30-per-share premium for the maker of a heart disease test puzzles many. The deal may mean more consolidation lies ahead

Analysts anticipate further consolidation in the medical-devices sector after Beckman Coulter (BEC) said it would acquire cardiac diagnostic company Biosite (BSTE). The structure of the lumbering industry—where several major outfits dominate a long list of scrappier startups—has observers speculating that there will be more deals in the near future.

The $1.55 billion deal sent shares of San Diego-based Biosite skyrocketing 51% on Mar. 26. But the biggest question for most on Wall Street was not about the general wisdom of the transaction but its valuation: $85 per share, a staggering 53% premium to Biosite's $55.38 stock price Mar. 23. (The deal was announced Mar. 25.)

Plump Market

The price "doesn't quite make sense" Morningstar (MORN) analyst Alex Morozov says. Biosite's product lines complement those of Beckman. But at nearly 20 times operating cash flow, Morozov says the company is overpaying, even with some inevitable cost savings that will come with merging the product lines. Biosite reported revenues of just over $300 million for 2006.

Beckman Coulter spokeswoman Mary Luthy called the sale price "fair" and said it presents the company with an entry into the market for diagnostics administered around the patient. She also cites Biosite's research pipeline, which includes potentially valuable diagnostic candidates for sepsis and a form of "acute kidney injury." Adds Luthy: "There was a lot of skepticism when Beckman acquired Coulter [in 1997], and we have demonstrated our ability to integrate a company."

For companies like Beckman and competitor Dade Behring Holdings (DADE), more acquisitions could be likely as they fight to keep pace with much larger outfits like Abbott Laboratories (ABT) and Swiss pharmaceutical giant Roche, both of which have formidable diagnostics businesses. The industry lacks the glamour that comes from discovering new pharmaceuticals and has experienced slowing growth in recent years. Nonetheless, a recent report cited the 2006 market for in-vitro diagnostics at $33 billion.

Too Rich?

Stocks around the sector climbed on hopes of consolidation. Digene (DIGE), a Gaithersburg (Md.)-based producer of gene-based tests for human papillomavirus, or HPV, which causes cervical cancer, saw its shares climb 5.3% on Mar. 26, to close at $41.76 on the Nasdaq. The stock rose another 2.3% in trading after the bell. Shares of Dade Behring rose 2.4%, to $44.02, on the Nasdaq. Beckman Coulter shares tumbled nearly 7%, to settle at $62.51 on the New York Stock Exchange.

Beckman has a diverse product portfolio of medical diagnostics and lab equipment, including immunoassay systems that can screen bodily fluids for signs of cancer or risk of heart disease. Additionally, it sells equipment to companies and other institutions conducting biomedical research.

Biosite's main source of revenue comes from Triage BNP Tests and associated products that measure for a hormone found at higher levels in patients with heart failure. The company sells them primarily to hospitals with acute-care facilities. By measuring the level of the hormone, B-type natriuretic peptide, or BNP, the test is designed to help doctors gauge the severity of a patient's heart failure and to guide doctors in future treatment. The machine is a small device that resembles a desktop phone. Beckman Coulter has worked with Biosite in the product line for the past four years, and expects the deal to be reflected in GAAP earnings next year.

The deal hasn't helped analysts' diagnosis of Biosite. Following the announcement, Standard & Poor's Equity Research maintained its hold rating on the company and reduced its target price $4, to $68. In a Mar. 26 note, S&P said Biosite's products are in mature markets and called the purchase price for Biosite a "rich premium" (S&P, like BusinessWeek.com. is a unit of The McGraw-Hill Cos. (MHP)).

More Deals to Come

The rationale behind the deal is straightforward. Beckman believes Biosite will help it to increase its market share in cardiac diagnostics. Immunoassays such as Triage BNP are thought to offer more promising growth stories than areas such as hematology and centrifugation, in which Beckman also has strong positions. The diagnostics industry, analysts say, also presents limited opportunities for growth. That, in turn, could be a factor in driving up acquisition prices.

Morozov says investors should keep watch for further inflated deals in the sector. The diagnostics space has major players like Siemens (SI), Roche, Abbott, and Dade Behring. Much of the rest of the industry is comprised of small players that lack the resources to market promising products. "They prefer to be acquired by a large player, and I think that's the case with Biosite," says Morozov.

He declined to name other potential takeover targets. Unfortunately for investors looking for the next logical target, many of the smaller companies are not publicly traded. Last year Beckman completed acquisitions of Diagnostic Systems Laboratories and Lumigen, both of which were private.

Abbott shares also benefited Mar. 26 from a study demonstrating that its Xience drug-eluting stent, not yet on the U.S. market, performed better in some respects than a leading product from Boston Scientific. Abbott shares gained 6.3%, closing at $57.24 on the NYSE.

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