NEW YORK (360Dx) – With its deal to purchase Lübeck, Germany-based Euroimmun Medical Laboratory Diagnostics for $1.3 billion, PerkinkElmer has taken a significant step to raise its profile in the diagnostics space, in what could be a precursor to additional similar deals.
The deal announced on Monday provides PerkinElmer with an asset that is recognized as a global leader in autoimmune testing and an emerging player in infectious disease and allergy testing. According to PerkinElmer, Euroimmun has "extensive expertise and capabilities" across immunology, cell biology, histology, biochemistry, and molecular biology.
It further noted that the acquisition expands its reach into the autoimmune and allergy diagnostic markets, and enables it to offer "new infectious disease capabilities to customers in China."
Importantly, the transaction highlights growth opportunities in emerging market diagnostics, and the opportunity that PerkinElmer sees in that part of its business, said Cantor Fitzgerald analyst Bryan Brokmeier in an interview.
Founded in 1987 by Winfried Stöcker, Euroimmun employs about 2,400 people globally.
Diagnostics currently makes up almost 30 percent of PerkinElmer's revenues, and this deal — with expected Euroimmun revenues of $310 million in 2017 — would increase PerkinElmer's diagnostics revenues to about 38 percent of its total revenues. Longer term, the firm has a goal of achieving half of its revenues from diagnostics, said PerkinElmer Chairman and CEO Robert Friel in a conference call on Monday.
Friel noted during his presentation to analysts that he believes that the markets in which Euroimmun participates are growing on a weighted average basis of around 8 percent. Autoimmune testing itself, he said, is growing at 7 to 8 percent per year; infectious disease at mid-single digits; and allergy testing at "high single- to low double-digits."
Euroimmun has been growing at more than double that rate for several reasons, he added. "They do a very good job of identifying [growth areas] and very quickly turning that into assays and developed tests, and they have an extensive number of global collaborators that help them identify these areas," he said. Overall, the speed at which they get products to market, their ability to identify opportunities, and their ability to significantly grow in the markets in which they participate "is very attractive," and something from which PerkinElmer can benefit, he noted.
The transaction, as well as other recent deals, may also indicate that PerkInElmer is more bullish on the diagnostics sector than its competitors.
Brokmeier noted that PerkinElmer has found diagnostics to be more differentiating than some of its closest peers, such as Agilent Technologies, Thermo Fisher Scientific, Danaher, and Waters. These firms are similar to PerkinElmer in that diagnostics is an important part of the business mix, but they do not have the same diagnostics exposure, he said.
ISI Evercore's Ross Muken wrote in a research note Monday that that for PerkinElmer, Euroimmun marks a well foreshadowed departure "from prior small tuck-in acquisitions, and furthers management’s push into accelerating [the firm's] growth rate and transforming the business into a [diagnostics] leader."
The acquisition is PerkinElmer's largest and more than twice the price of its 2011 acquisition of Caliper Life Sciences, a provider of detection products for life sciences research, diagnostics and environmental markets, for about $557 million.
Historically, autoimmune testing accounts for about two-thirds of Euroimmun's revenues; infectious diseases about 20 percent to 25 percent; and allergy testing somewhere in the mid-teens, PerkinElmer said.
Within the autoimmune segment, Euroimmun "provides its customers with a comprehensive offering of more than 70 assays and 100 tests for use in identifying medical conditions across a broad range of practices, including dermatology, gastroenterology, and rheumatology," Friel said on the conference call. In the area of infectious disease, the focus is on emerging diseases, including Zika, dengue, chikungunya, MERS, and pregnancy-related infections, such as those diagnosed using the TORCH test. He noted that the firm's allergy business is well positioned to leverage its own installed base of autoimmune tests by offering a menu to evaluate a broad array of allergens, including the use of high- and low-volume tests for environmental and food allergies.
The company markets several testing techniques including indirect immunofluorescence for detecting autoantibodies or antibodies against infectious agents; microplate ELISA; a Euroassay that consists of membrane strips coated with parallel lines of purified antigens; Immunoblot; Western blot; DNA microarray; and a radioimmunoassay in which the intensity of radioactive radiation is inversely proportional to the concentration of specific antibodies or antigens in a sample.
"It's my understanding that there is no overlap among the tests offered by PerkinElmer and Euroimmun," Brokmeier said, adding that, for example, "PerkinElmer's infectious disease business has been focused in the past on HPV, HCV, and HIV, and Euroimmun has been focused on Zika, mosquito-borne viruses, and similar areas."
Aside from bolstering PerkinElmer's diagnostics' portfolio, Euroimmun may boost the firm's footprint in the Asian-Pacific market, in particular in China. While it sold its products in more than 130 countries in 2016, sales in China made up 45 percent of Euroimmun's total revenues.
"The APAC region has been a major growth driver in PerkinElmer's diagnostics business," as well as its company business overall, Brokmeier said, noting the company's acquisition of Shanghai Sym-Bio Life Science, a Chinese in vitro diagnostics company, in 2009, and Tulip Diagnostics, a leading Indian provider of in vitro diagnostic reagents, kits, and instruments, earlier this year.
"Both fit in really well with the acquisition agreement announced Monday," Brokmeier said.
He added that PerkinElmer "sees this as an opportunity to accelerate growth of Euroimmun and those existing businesses" because there are "significant synergies."
In China, Euroimmun has built a leading presence with 500 employees and more than $120 million in revenue, Friel said on the conference call. The German firm has established "strong relationships with key opinion leaders, maintaining a reputation of excellent reagent quality and providing an extensive menu of relevant tests for both hospital and commercial labs," he said.
"Our more than 2,000 clinical lab customers in China will further accelerate Euroimmun's sales growth, and our China-based R&D and manufacturing capabilities will augment its local capabilities relative to both in-country and international competitors," Friel said. In India, the acquisition of Tulip provides "a well-recognized channel and infrastructure, to accelerate distribution of the Euroimmun menu in that growing market," he added.
Additionally, the acquisition provides an "opportunity to drive Euroimmun's solutions" into PerkinElmer's "well-established" reproductive health channel in the US, the firm said. Historically, the US market has been a lower priority for Euroimmun, as it focused first on building strong businesses in Europe and China, Friel noted. PerkinElmer's "extensive presence in the US" and "market leading US reproductive health channel," particularly in public health labs, should accelerate Euroimmun's US expansion, he added.
Assuming that PerkenElmer can accelerate US penetration of Euroimmun, its US business may be able to grow to about $300 million over the long term, Brokmeier said.
Currently, about 5 percent of Euroimmun's revenues derives from US sales. In contrast, about 40 to 50 percent of PerkinElmer's diagnostics business comes from the US.
About 30 percent of Euroimmun's revenues is from Europe, the Middle East, and Africa. The remaining 20 percent is from the rest of the world.
Evercore's Muken wrote in another research note Tuesday that Euroimmun "brings clear cross-selling opportunities" that include its autoimmune testing portfolio and its infectious disease and allergy testing that can be combined with PerkinElmer’s reproductive health business.
Muken said that his firm believes that these cross-selling opportunities could drive a significant amount of around $30 million in top-line synergies proposed by PerkinElmer's management.
PerkinElmer intends to finance the deal with cash on hand and $900 million in incremental debt, "using the vast majority of the $1.5 billion in M&A capacity it had previously indicated it had available," Brokmeier said.
PerkinElmer said that by year five of the acquisition, it expects that the deal will generate synergy-related revenues of $30 million per year, and as soon as 2018, the Euroimmun business will be accretive to earnings per share by about $0.28 to $0.30. The company has reaffirmed its 2017 revenue and EPS guidance, and it expects the deal will close in the fourth quarter of this year.
The deal is "more of a revenue opportunity than a cost play," with synergies "in the areas we've talked about," Friel said. "We expect that the acquisition will accelerate our diagnostics business growth, but as we see other opportunities to add nice technologies or disease areas, we'll look to do that."