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Catching something in China
WALTHAM, Mass.—Seeking in large part to complement its screening capabilities and allow it to enter the Chinese nucleic acid-based blood screening market, PerkinElmer Inc. in late 2012 completed the acquisition of Shanghai Haoyuan Biotech Co. Ltd., a China-based infectious disease diagnostics company.
In addition to extending PerkinElmer's capabilities into nucleic acid blood screening and allowing it a better position to capitalize on the growing molecular clinical diagnostics market in China, the acquisition will also be instrumental in, as PerkinElmer notes, "further strengthening the company's position as a diagnostics leader in China as well as across the globe."
The purchase price for the transaction was $38 million in cash and potential future additional consideration based on the achievement of revenue-based targets. The acquisition was anticipated to be immaterial to PerkinElmer's adjusted earnings for the remainder of 2012 and in 2013, and then accretive beginning in 2014.
Haoyuan, a supplier of molecular infectious disease screening technologies for blood bank and clinical laboratory settings throughout China, reportedly extends PerkinElmer's portfolio by adding four infectious disease assays that are approved by China's State Food and Drug Administration. These infectious disease diagnostics tools include a qualitative 3-in-1 assay for the detection of hepatitis B (HBV), hepatitis C (HCV) and human immunodeficiency virus (HIV), two clinical quantitative assays that screen for HBV and HCV, and one qualitative assay screen for Chlamydia trachomatis and Neisseria gonorrhoeae.
The deal isn't a sudden one; the acquisition talks go back some two-and-a-half years, "when we decided that we wanted to build a nucleic acid testing business to complement Sym-Bio Life Science, a leading provider of diagnostics reagents and technology and a major supplier to hospitals in China that PerkinElmer acquired in 2009," recalls Aaron Geist, vice president of business development at PerkinElmer. Although there was no direct connection between Haoyuan and PerkinElmer before those talks, Geist does note that the Shanghai, China-based company did use the services of Chemagen Chemistry, a company PerkinElmer acquired in 2011.
As to how Haoyuan ended up on PerkinElmer's radar, "We follow the blood screening industry very closely," Geist notes. "In China, there are only five companies who have the required license to sell blood screening tests. Two are multinational (Roche and Chiron/GenProbe) and three other Chinese firms. Of the three Chinese companies, only one has the necessary technology and business model that interested us."
"The acquisition of Shanghai Haoyuan Biotech Co. Ltd. provides PerkinElmer with a clear strategic roadmap for expansion into the high-growth molecular diagnostics market in China as well as other emerging markets," says Dan Marshak, chief scientific officer at PerkinElmer. "It enables PerkinElmer to enter a new market, blood screening in China, and expand into the high-growth nucleic acid market as an extension of our current immunoassays."
"In China, we are seeing significant government support for pharmaceutical and diagnostics innovation," Marshak adds, pointing to market forces and other factors that made this a good time to acquire the Chinese company. "Many companies have begun introducing newer and more complex therapeutics, even though some come with a higher price point. As average income rises, people are expecting more from the healthcare system and both government, pharmaceutical and diagnostics organizations are responding. The healthcare industry is making a focused effort to recruit and retain talent in China and the government continues to encourage advanced education, biomedical research and infrastructure development."
PerkinElmer notes that one near-term opportunity related to the acquisition is found in the fact that with China facing an annual 15 percent increase in the demand for donated blood, the Chinese government is now mandating and funding infectious disease screening of such blood. The Chinese government's latest five-year plan mandates that all blood be tested using nucleic acid technologies by the end of 2015.
According to PerkinElmer, compared to antibody testing methods, nucleic acid testing reduces the potential for failed detection of certain infection diseases that exhibit long incubation times between infection and detection. The company also notes that there are approximately 780,000 people living with HIV/AIDS in China and that the World Health Organization reports chronic infection rates of 8 percent to 10 percent of the adult population with HBV and 3.2 percent of China's 1.4 billion people living with HCV.
Marshak says that a brand strategy will be developed over the next few months "to ensure that PerkinElmer leverages the existing Haoyuan brand equity. We will replicate the strategy with Sym-bio as we had success with maintaining the brand in China with the backing of a multinational company."
Zacks Investment Research emphasized in an investor's note about the acquisition deal that PerkinElmer has established itself as a market leader, particularly in the genetic screening segment, and holds one of top two market-share positions in several important subsets of the life-sciences technology and genetic screening markets. Zacks further wrote, "With this takeover, PerkinElmer further cements its role as a global leader in diagnostics," and added, "The company continues to execute well across all its product lines aided by rebounding markets and cost containment efforts. PerkinElmer's transfer of select manufacturing to China has expanded its operating margins. The company has increased its productivity and improved product mix in favor of higher value-added products, resulting in higher operating margins."
However, the investment research firm does point out that PerkinElmer competes in a highly competitive industry that is characterized by "rapid technological change and evolving industry standards" and notes that because of this, the company would have to make large R&D investments to retain a competitive pipeline. As such, Zacks gave PerkinElmer its short-term #2 rank (buy) in the wake of the Haoyuan acquisition.