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 transaction valued at $13.6 billion, which includes an assumption of about $2.2 billion in debt.
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, according to Fitch, 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.
© 2013 PEPD • Private Equity’s Leading News Magazine • 4-22-13