Wall Street expects more M&A in life sciences

Analysts say there may be more consolidation in the life sciences sector following Invitrogen Corp.'s purchase of Applied Biosystems Group and Thermo Fisher's acquisition of Open Biosystems.

"There is some school of thought that we'll start to see a broader consolidation wave," said JPMorgan analyst Tycho Peterson Monday in a conference call.

Invitrogen Corp. has agreed to pay $6.4 billion for Applied Biosystems, which was a unit of Applera Corp. The deal brings Invitrogen's systems and Applied Biosystems' disposable products together to form the second-largest company in the sector behind Thermo Fisher Scientific Inc.

In a less-heralded deal announced Tuesday, Thermo Fisher bought Open Biosystems Inc. for an undisclosed amount.

In a telephone interview, Leerink Swann analyst Isaac Ro said that move may be more typical of future M&A action in the sector. With less capital available, he thinks smaller companies like Open Biosystems will try to negotiate sales to larger rivals instead of attempting initial public offerings.

Open Biosystems, which reported $14 million in revenue last year, makes products that help scientists learn how to deactivate genes that cause diseases.

Ro said the amount of capital raised by life sciences companies has dropped dramatically in 2008. He said those companies raised $6.5 billion through IPOs, venture financing and stock sales in the first six months of the year _ less than a third of the total from the first half of 2007.

That leaves companies looking for "alternative exit strategies," Ro said.

Ro thinks growing demand from China and India will support the sector through a U.S. economic slowdown, but companies that make diagnostic systems are vulnerable to customers that decide to delaying equipment purchases. That could hurt Bruker Corp., PerkinElmer Inc. and Waters Corp., he said. Demand for disposable products is more consistent, so companies offering a mix of both will do better.

Peterson said the sector will benefit as DNA analysis products become less expensive, which will draw interest from new markets like forensics and agricultural testing. Both analysts expect spending from the National Institute of Health to increase _ Ro said that will happen regardless of the outcome of the November presidential election.