If you think value creation has anything to do with novel inventions and building good stuff anymore, think again. As private equity continues to look for places to put its moola, the future of Beckman Coulter, a pioneering company in the development, manufacturing, and marketing of diagnostic systems and life science research instruments, is uncertain. Last December the company put itself up for auction after receiving expressions of interest from potential acquirers.
Chairman, president, and CEO Scott Garrett resigned unexpectedly in September, and J. Robert Hurley was named the company’s interim chief. Garrett’s departure came after Beckman lowered its forecasts twice during 2010. The stock, which was down 13% at the time, rebounded from a low of $44.58 to $72.08 on September 7, 2010, the day Garrett’s resignation was disclosed.
Hurley assumed leadership amid ongoing problems surrounding the firm’s AccuTnI troponin test kits that run on its UniCel DxI immunoassay system. Last June, the FDA issued a warning letter to the company stating that Beckman Coulter was “marketing the AccuTnI on the Access Immunoassay System in the United States without marketing clearance or approval in violation of the Federal Food, Drug, and Cosmetic Act.”
2010 Not the Best Year
Beckman Coulter said potential restrictions on kit sales could adversely impact its previously issued outlook for full year 2010. Acting CEO Hurley said the company had “identified root causes and developed remediation plans. Implementation is under way with some projects continuing through 2011.” Although Beckman continues to work with the FDA to conduct clinical trials to support FDA applications for the troponin kit, product clearance is not expected before the middle of this year.
In 2009, Beckman Coulter recognized revenues of about $60 million in the U.S. for troponin testing, and 25% to 50% of this revenue was derived from test kits run on its DxI systems. The company said that the test kit recall would hurt its fiscal year 2010 earnings but reported third quarter 2010 revenues of $898.8 million, up from $822.8 for the same period the previous year. Analysts pointed out that the overhang from the product problems would also impact addition of new clients.
The troponin kit wasn’t Beckman’s only problem last year. In January the company issued a class I recall of its UniCel DxC Synchron Clinical System – Ion Selective Electrode Flow Cell, computer-controlled analyzers used to determine blood chemistries. The recall was due to the potential for excessive build-up of protein, bacteria, and sample tube additives in the instrument’s ion selective electrode flow cell, causing incorrect sodium measurements.
Who’s Doing the Bidding?
These woes along with a shareholder class-action lawsuit against Beckman Coulter, which began on September 3, for financial damages over the troponin assay kits, is what the company believes makes it a takeover target for private equity groups and other buyers interested in diagnostic businesses.
Interested private equity firms include Blackstone and Kohlberg Kravis Roberts & Co., said to be teaming up, Apollo, and Carlyle Group, according to unnamed sources talking to Reuters. Corporate buyers, or strategic bidders, include big players in the biomedical instrumentation business including 3M, Danaher, GE, and Thermo Fisher Scientific, Reuters and Bloomberg reported.
Leerink Swann analyst Dan Leonard agrees with sell-side analysts predicting a “starry-eyed valuation” based on standards set by high multiples in prior diagnostics deals. Some have suggested a price north of $5 billion for Beckman Coulter, or $71.50 per share. Beckman’s stock surged as much as 28% on reports that several large private equity firms and rival companies were interested in putting down that much money.
Leonard noted that previous deals in the space hint at an even higher price. He commented that Dade Behring was sold to Siemens in 2007 for 15x TTM (trailing 12 months) EBITDA. Although it did not come to fruition, Abbott Diagnostics’ sale to GE was priced at 15x TTM EBITDA in 2007. “Recall that quality/regulatory concerns were a rumored factor as to why the GE/Abbott deal fell through,” Leonard pointed out.
An acquisition price of 15x 2010 EBITDA would yield a stock price of around $160 for Beckman Coulter, he said. But a bidding war for Beckman Coulter has failed to materialize as the stock market for medical testing companies increased the value of such stocks. The disappearance of interested industry buyers is seen as leaving the bidding field to private-equity firms, which have been forming various alliances to strengthen their bids. Final-round bids for the company are reportedly due in early February.
What Makes Beckman Attractive?
Analysts say that private equity groups are becoming increasingly interested in healthcare companies in part because President Obama’s Affordable Care Act is expected to increase demand for medicines.
Beckman Coulter is perceived to be the kind of cash-generating business that attracts private equity. Through the first nine months of 2010, the company had net income of $150 million on $2.7 billion in sales and as of September 30, 2010, had about $285 million in cash, despite its recent spate of troubles. Beckman remains an innovative company for medical and biomedical research instrumentation. For example, the company’s flow cytometric analysis products enable a vast array of cell-based research.
And while Wall Street has carped that Beckman Coulter failed to refresh its business with the latest in genomic-based diagnostics, the company’s spate of relatively recent collaborations and acquisitions suggest otherwise. In 2009, the company acquired Cogenics, the genomics division of Clinical Data, as well as the diagnostics systems business from Olympus, and then announced the creation of Beckman Coulter Genomics.
Earlier this month the company initiated a collaboration with Transgene for the development of a companion test to be used alongside its Phase III trials with anticancer candidate TG4010, an immunotherapy for non-small-cell lung cancer. Under terms of the deal, Beckman Coulter will develop a test measuring triple-positive (CD16+, CD56+, CD69+/CD45+ lymphocytes) activated NK cells. In January, 2010, the company announced a collaboration with the J. Craig Venter Institute on validation of the SPRIworks Fragment Library System I for use with the Illumina Genome Analyzer.
The question remains whether an innovative company like Beckman will survive either a private equity takeover or a strategic investor. Warren Buffett once criticized private equity firms as deal flippers uninterested in building long-term value. On the other hand, big companies that buy others for the strategic fit often dismantle them to save money and consolidate redundant operations but may lose innovation, expertise, and employee motivation through restructurings.
Leonard told GEN that no matter who does the buying, he doesn’t expect Beckman to be run much differently. “I know that private equity firms are known for taking out costs, but Beckman’s efforts to reduce its costs in areas like technical service are part of what bothered its customers in the first place, and the company has subsequently been adding costs in these areas to keep customers happy.
“I don’t think a shrewd private equity buyer would undo this work. Actually, a strategic acquirer might be able to take out more costs because it would have more redundancies in the various general and administrative functions, for example, C-level jobs, IT, finance, etc.”
Meanwhile, another rumor out and about in early January has it that interest in the company is on the decline, and all bets are off as the deadline for final bidding in early February approaches.