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Originally published September, 1997
IVD Technology News
IVD megamergers: Just the beginning?
Consolidation in the IVD industry has reached a fever pitch. Before year's end, two megamergers will have taken place--Roche Holding, Ltd., with Boehringer Mannheim GmbH, and Dade International with the Behring Diagnostics business unit of Hoechst Behring. A third merger significant for its impact on the IVD industry is also in the works, between multinational giant Becton Dickinson and relatively small PharMingen.
The mergers appear to be driven by the growing cost-consciousness of the marketplace. For the parties involved, each of the deals promises greater cost efficiencies, increased market share, and complementary technologies. For other companies, the desire to obtain the same advantages could accelerate an already booming interest in consolidation. "The super-big companies are getting so big that to compete effectively against one another they have to buy up all the technology they possibly can," says Thomas Tsakeris, president of Devices and Diagnostics Consulting Group (Rockville, MD).
Acquisition of technology was a major reason behind Becton Dickinson's purchase of PharMingen (San Diego) for an undisclosed amount. PharMingen's 260 employees have crafted about 2500 biotechnologies ranging from antibodies to cell-cycle proteins. In an open letter to customers of Becton Dickinson Immunocytometry Systems (BDIS; San Jose), BDIS president Deborah Neff emphasized the natural synergy between the people, products, technologies, and services of the two firms. "By integrating our collective research capabilities, we strengthen our ability to rapidly commercialize and provide the broadest range of innovative products," Neff wrote. "This allows us to accelerate the transfer of technologies for clinical assay development."
Technology was also a major part of Roche's strategy in 1991, when the Swiss company paid $300 million to buy the polymerase chain reaction (PCR) gene amplification technology from Cetus Corp. (Emeryville, CA), prior to its current bid for Boehringer Mannheim. Since then, Roche has invested about $1 billion more in PCR development. As a result, it brings to the table its significant investment in PCR technology and test kits; Boehringer Mannheim brings its clinical laboratory equipment and IVD tests. Together Roche Holding, Ltd. (Basel, Switzerland), and Boehringer Mannheim (Mannheim, Germany) will be the largest diagnostics company in the world, eclipsing even Abbott Laboratories in annual revenues with more than $3 billion from diagnostics sales. To make the deal work, Roche is spending an estimated $11 billion to buy the Bermuda-based holding company of Corange, Ltd., which owns Boehringer Mannheim, as well as 84.2% of the stock in DuPuy, Inc. (Warsaw, IN), a manufacturer of orthopedic equipment.
But if diagnostic companies' future success depends upon the depth and breadth of their product offerings and distribution systems, the global diagnostics industry could be in for some dramatic changes in the next few years. According to some analysts, the result will be an industry very different from today's, one that will be dominated by a half dozen or so large, multinational companies.
"Not every company that goes into a period of consolidation and restructuring comes out again," says Scott Garrett, chairman and CEO of Dade International. "And those that emerge are very different from what they were before. They become consolidated organizations with radically redefined approaches toward competing and toward serving customers, as well as toward managing operations and controlling costs."
Dade Behring, the combination of Dade International (Deerfield, IL) and Behring Diagnostics (Frankfurt, Germany), will be very different. For starters, the new company, whose merger should be completed by early fall, will be king of the clinical laboratories industry, sporting annual revenues in excess of $1.5 billion. The new company will combine Dade's clinical chemistry, microbiology, and hemostasis products with Behring's drug monitoring and testing products as well as its plasma-protein testing, infectious disease, and coagulation technologies. "Dade Behring will have unexcelled breadth in the products and services we offer to laboratories," Garrett says.
Synergies may also be achieved by merging two globally complementary organizations. Dade sales are now about 70% in the United States and 30% in the rest of the world. If the proposed merger with Behring Diagnostics is finalized, the combined company will make half its sales in the United States and the other half spread around the world.
The merger of Roche and Boehringer Mannheim, which will not be final until at least this fall, will strengthen Roche in Italy, Spain, France and the UK, as well as in smaller European and Latin American markets. "The main reason for the merger was to gain market share in the diagnostics division," says Peter Wullschleger, a spokesperson for F. HoffmannLaRoche, Ltd.
Achieving these competitive strengths are essential for survival, according to Dade International's Garrett. He believes there are only two choices for companies--at least those that serve clinical laboratories. "Either you find a way to take part in the consolidation or you get left behind and forgotten, particularly by customers," he says.
The prospect of a future in which survival depends on consolidation sends a shiver down the collective spine of an industry whose long-term future depends on continued innovation. Dave Casal was a research scientist at Hybritech when it was bought by Eli Lilly for more than $300 million 12 years ago. Lilly sold Hybritech to Beckman Instruments in 1996 for about $10 million. "A lot of pharmaceutical companies have bought diagnostic concerns thinking they complement the pharmaceutical technology, only to find they're completely different," says Casal, who is now an officer at IVD maker Metra Biosystems (Mountain View, CA). "Diagnostic concerns do not necessarily respond well to the same structures and motivations as pharmaceutical concerns."
There is, in fact, a very strong presence of pharmaceuticals in the current consolidations. About 65% of the annual revenues racked up by Roche Holding comes from pharmaceuticals. Boehringer Mannheim is also heavily involved in this sector, garnering about 40% of its revenues from drug sales and the other 60% from diagnostics.
Both major companies, however, already have strong diagnostics businesses. When device businesses are present as well, mergers can be in the best interests of all parties, large and small. PharMingen, for example, is expected to integrate its biotechnologies with advanced instrumentation held by BDIS. In return, it can expect to gain extended access to overseas markets through Becton Dickinson's distribution channels.
Casal, now Metra Biosystems' senior director for clinical, regulatory, and quality affairs, believes that such synergies result from a greater sophistication on the part of large companies. They are already familiar with the character of diagnostics companies, he says, often through collaborative research agreements. For example, Metra Biosystems, which has about a half dozen IVD technologies for assessing bone turnover, is collaborating with several large pharmaceutical and diagnostics companies. "Large companies use firms like Metra as incubators for research, letting us either thrive or fall on our merits," Casal says. "If the bone marker field were to take off, one of those companies might be interested in buying us because we have done all the groundwork and they can then develop the market."
However, there remains the threat that unbridled consolidation will depopulate the corporate landscape of innovators. Not to worry, says consultant Tsakeris. Acquisitions are part of a natural cycle--like evaporation and rainfall. Large companies may absorb small innovators, but inevitably those same companies spin off the next generation of entrepreneurs. "At least half of our small clients were started by individuals who came from other major companies with the objective of getting big enough to get gobbled up," says Tsakeris, whose consulting firm serves mostly small start-up companies.
If the now-pending megamergers go through as expected, there could be plenty of opportunity for new small businesses. Roche Boehringer Mannheim Diagnostics will have 13,500 employees. The combined Dade Behring will have 8700--5500 from Dade and another 3200 from Behring.
But the kind of world in which disenfranchised entrepreneurs will try to build their companies may differ from the one in which earlier entrepreneurs prospered. David Carville has been knocking on the doors of big diagnostics companies, hoping to raise interest in his start-up IVD firm Causeway Scientific (Mishawaka, IN). "It's difficult to convince larger entities that you have something that may be a resource for them," Carville says. "Their idea is that if you want to help them, you should join them. But don't try to go in as a third-party independent--at least not until you have something solid to put on the table."--Greg Freiherr
