Market Spotlight: Life Sciences

Invitrogen Corp.'s recent $6.4 billion deal to buy Applied Biosystems Group has ramped up speculation about further consolidation in the life sciences sector, as companies vie for larger market share.

Life sciences companies make genetic analysis tools, antibodies, proteins and other supplies that pharma and biotech firms use in drug development. The Invitrogen transaction is the industry's largest so far this year, topping Hologic Inc.'s $580 million takeover of Third Wave Technologies and Gen-Probe's $334 million purchase of Innogenetics.

Analysts say more deals are likely as life sciences companies look for new ways to increase profit and revenue in the face of efforts by biotech and pharma companies to cut R&D costs.

"If you pick any two of the larger companies, they are spending time, money and effort to call on the same customers," Leerink Swann analyst John Sullivan said in an interview.

Invitrogen's purchase of Applied Biosystems brings together biochemical equipment product lines with next-generation DNA analysis devices. The new company will be able to more easily serve the wider needs of its customers and invest in emerging markets such as China and India, Applied Biosystems President and Chief Operating Officer Mark Stevenson said in an interview.

By merging resources, the companies are able to more efficiently focus resources and potentially boost market share for their products. With annual revenue of about $3.5 billion, the combined firm now dwarfs rival PerkinElmer Inc., which had revenue of about $1.79 billion in 2007, and approaches the size of Burlington, N.C.-based Laboratory Corp. of America Holdings, which had sales of $4.07 billion last year. Madison, N.J.-based Quest Diagnostics reported 2007 revenue of $6.7 billion.

Consolidation in the sector dates back to Thermo Electron Corp. and Fisher Scientific International, which merged in 2006 to create Thermo Fisher Scientific Inc. The $10.6 billion buyout combined Thermo's expertise in analytical instruments with Fisher's key distribution channel for lab supplies.

J.P. Morgan analyst Tycho W. Peterson, in a note to investors June 12, said life sciences firms need to find new ways to increase profits to offset diminishing returns on offshore operations and efforts to streamline manufacturing. Reduced research and development spending from pharma and biotech customers has created additional cost pressures.

Acquisitions could help companies looking to take advantage of rising growth in genetic analysis, agricultural biotech and forensics markets. Likely consolidators in the sector include Thermo Fisher and industrial companies with life sciences interests including General Electric Co. and Agilent Technologies Inc., Peterson said.

For investors, though, life sciences shares have mostly underperformed an already depressed market, with Invitrogen down about 18 percent and Affymetrix Inc. shedding more than 50 percent year-to-date. PerkinElmer and Applied Biosystems are among the few stocks performing well, gaining about 10 percent and 37 percent, respectively.

"Business results have been positive, but investors are concerned that weakness in the overall economy will have a negative effect," said Leerink's Sullivan.