Thermo Fisher to Acquire One Lambda

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Within one year of the Phadia acquisition (for €2.47 billion), in August 2011, which strengthened the company’s  Specialty Diagnostics business, Thermo Fisher Scientific (TMO) yet again announced another strategic move to diversify its offerings. The company has decided to acquire California based One Lambda, the global leader in the filed of transplant diagnostics, for $925 million in cash.

The deal value is inclusive of the cost of a three-year benefit program undertaken by One Lambda for its key employees, amounts payable to some shareholders for noncompetetion agreements and other contingent payments.

One Lambda & Transplant Diagnostic

Founded in 1984, One Lambda’s diagnostic tests are used by transplant centers for tissue typing. This determines the compatibility of donors and recipients before the transplant is done in addition to identification of antibodies that can lead to transplant rejection.

As per the company, transplant diagnostics is an attractive market, valued at $480 million in 2011, and growing in the mid- to high-single digits. The potential for growth in this market is very high given the increasing global demand for transplant procedures, increasing utilization (tests per patient), and growing use of post-transplant antibody monitoring. New evidence shows improved graft survival on continued antibody monitoring.

One Lambda, with 320 employees, recorded $182 million in revenues in 2011. With a wide customer base (1,400), One Lambda derived 49% of its revenues from antibody detection, 44% from human leukocyte antigen ("HLA") typing and the rest from serology. Thermo Fisher expects to leverage its extensive network in the emerging markets to drive uptake of One Lambda’s portfolio of tests, which is currently marketed in the US (59%) and Europe (21%).

Deal Funding & Synergies

Thermo Fisher expects the transaction to close in the fourth quarter of the current fiscal. The deal is expected to be immediately accretive and add 9−11 cents per share to the company’s adjusted earnings in 2013. It would also generate greater tax efficiencies, and revenue and cost synergies leading to an adjusted operating income benefit of about $15 million in 2015.

For now, the transaction will be funded partly by the company’s existing cash balance and through new debt financing. Thermo Fisher exited the first quarter of 2012 with $788.3 million in cash and cash equivalents compared with $1,016.3 million at the end of fiscal 2011. The company’s outstanding debt at quarter end was $6.7 billion.

Moody’s Downgrades

Besides the acquisition, the company announced an additional $500 million of stock repurchase authorization, through December 2012. As of June 30, 2012, the company had $250 million remaining under its existing share repurchase authorization, which expires on November 9, 2012. Although the debt burden will increase with the proposed acquisition, we believe that the company will be able to deal with it given its steady top-line growth and strong cash flow.

Rating agency, Moody’s, has however downgraded the senior unsecured rating and all rated senior unsecured notes of Thermo Fisher Scientific by one-notch to Baa1 from A3 with a stable rating outlook. Moody's expects the company to incur an incremental $1.3 billion of debt to fund the acquisition and repurchase shares. The agency expressed its concern over the company’s strategy of funding acquisitions through financial leverage and rewarding shareholders through share buybacks and dividends.

Diagnostics Deals at Large

The year 2012 has witnessed several major deals in the diagnostics space. Agilent Technologies Inc. (A) recently completed its acquisition of a Danish cancer diagnostics company, Dako, for $2.2 billion (on a debt-free basis). In addition, Hologic (HOLX), a prominent player in the field of women’s health, is in the process of acquiring Gen-Probe (:GPRO). The deal is expected to close next month. This will entrench Hologic’s presence in the molecular diagnostics space.

We currently have a Neutral recommendation on Thermo Fisher. The stock retains a Zacks #3 Rank (Hold) in the short term.

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