Perkinelmer Hones Life Sciences Plan

In early October, PerkinElmer took a large step in its transformation from a company once focused on cyclical industrial businesses to a firm riveted on the health care and life sciences market.

PerkinElmer signed an agreement to sell a large chunk of its fluid sciences business to Eaton Corp. for $333 million. The deal, to be complete by the end of 2005, means that PerkinElmer will no longer be involved in selling sealing and pneumatic systems to aircraft makers. What's more, the firm disclosed that it is discussing the sale of two smaller fluid sciences units. Ultimately, PerkinElmer said it hopes to raise $400 million from the asset sales.

Gregory L. Summe, 49, chairman, president, and chief executive officer, is clear on how he intends to use money raised from the sale of the businesses: The proceeds will help us build our growth platforms, with particular emphasis on genetic screening, medical imaging, molecular medicine, and service.

The fluid sciences businesses were once part of EG&G, a firm founded in the 1930s to market high-speed photographic and stroboscopic techniques employed during World War II for nighttime aerial reconnaissance. EG&G ultimately developed into an organization that offered technology, goods, services, and weapon system design to the U.S. government.

Summe, an alumnus of AlliedSignal and consulting firm McKinsey & Co., joined what was still EG&G in 1998 to help focus the firm on life sciences instrumentation and services. He did not waste any time. In May 1999, EG&G bought the analytical instrumentation businesses of the former Perkin-Elmer for $425 million. In August, it sold a number of EG&G businesses along with the rights to the EG&G name to the Carlyle Group, a private equity investment firm. Then in October 1999, it adopted the PerkinElmer name, minus the hyphen.

In acquiring Perkin-Elmer, the former government services contractor obtained a business founded in 1937 by optical component makers Richard S. Perkin and Charles W. Elmer. Perkin-Elmer entered the analytical instrument market in 1944 with the introduction of an infrared spectrophotometer. In the 1960s, the firm began producing atomic absorption instruments, and it introduced its line of liquid chromatography equipment in the 1970s.

The new PerkinElmer has beefed up its analytical instrumentation business with a number of life-sciences-related acquisitions. In 2000, it acquired NEN Life Sciences for $418 million to offer drug discovery products, services, reagents, and technology. In 2001, it spent $764 million to acquire Packard Bioscience, a specialist in liquid handling and sample preparation. Also in 2001, PerkinElmer acquired Analytical Automation Specialists, a maker of lab software, for an undisclosed sum.

Following the fluid sciences sales, Wall Street analysts expect PerkinElmer to continue buying life sciences businesses. Analyst John L. Sullivan of the investment research firm Leerink Swann notes that PerkinElmer already has a strong distribution franchise and could leverage its position with pharmaceutical and biotech customers by acquiring other drug discovery equipment and reagent providers.

After all, reasons John Harmon, an analyst with the investment banking firm Needham & Co., the fluid sciences business has an entirely different customer base from the life sciences business. Fluid sciences also has a very different business cycle and generally lower margins, he points out. It makes sense for PerkinElmer to focus on its core area, he says.

The sell-off of fluid sciences will take PerkinElmer from a business that derives 70% of revenues from health sciences to one that gets more than 80% of sales from those markets. Revenues from sensors and specialty lighting directed largely at industrial customers will make up the balance of sales.

Sullivan warns that PerkinElmer will encounter competition as it looks for smaller life sciences acquisitions. Major competitors include instrument firms such as Thermo Electron, Waters, Agilent Technologies, and Varian. Competitors in lab consumables like reagents and cell-culture plates include firms such as Fisher Scientific and Invitrogen. These companies could bid up prices for small target firms and force PerkinElmer to pay too much, Sullivan says.

Still, PerkinElmer is in a better position to add to its portfolio now than it was a year ago. Long-term debt was at $268 million at the end of the third quarter, down from $469 million a year ago. The architect of the firm's financial strategy, Robert F. Friel, chief financial officer, will become vice chairman on Jan. 1 with responsibility for corporatewide operational improvement initiatives and business development. With the $400 million infusion expected from the fluid sciences sales, PerkinElmer has further set the stage for the business enlargements envisioned by CEO Summe.

Small acquisitions are certainly a possibility in the life and analytical science unit, admits Peter B. Coggins, 57, the unit's president. But acquisitions aren't the only way that PerkinElmer can acquire and commercialize intellectual property. Joint ventures can make sense, he points out. For instance, in September, PerkinElmer and Invitrogen formed a marketing partnership that combined PerkinElmer's CellLux fluorescence cellular screening platform for ion channel drug discovery with Invitrogen's voltage sensor probe reagents.

Coggins says that this latest partnership is consistent with our strategy for expanding our cellular sciences portfolio, enabling drug companies to adopt more predictive and productive methodologies to increase their downstream success rates and allow drug candidates to get to the clinic sooner.

Coggins, who joined PerkinElmer in 2002 from Amersham Biosciences, a provider of separation and lab analysis equipment that is now part of GE Healthcare, says his company doesn't always need to buy a business to get a competitive edge. We are tool providers, he points out.

In some instances, PerkinElmer will loan academic researchers equipment or will run samples provided by researchers on its equipment. Such was the case in 2003 when PerkinElmer entered a research collaboration with the Rush Alzheimer's Disease Center and the Buck Institute for Age Research. PerkinElmer performed proteomic studies to identify proteins involved in Alzheimer's. About 30 of the company's scientists worked to speed the development of proteomic-specific tools for the study of important disease-related changes, Coggins says.

PerkinElmer is particularly focused on developing metabolic and genomic screens for disease, as in its neonatal screening system, which can screen newborns for more than 30 biomarkers and allow early treatment of life-threatening metabolic disorders. Coggins says the firm hopes to complement its lead in neonatal screening with similar services for adults, leading to a more personalized approach to treating adult disorders.

Genetic profiling could also help drug firms stratify patients for clinical trials and test only those predisposed to benefit from a new pharmaceutical. Now, it's hit or miss when firms conduct a large clinical trial with a new active ingredient, he says. But with a diagnostic to screen those most likely to benefit from a new therapy, drug firms would increase their rates of success.

Perhaps, Coggins suggests, drugmakers could avoid problems similar to those of Merck, whose drug Vioxx, a once widely used COX-2 anti-inflammatory treatment, was discovered to increase certain patients' heart attack risk. Big pharma wants the big blockbusters. But Vioxx and its associated liabilities may cause these firms to change their view, he says.

Coggins acknowledges the benefits of joint ventures, licenses, and bolt-on acquisitions, but PerkinElmer does quite a bit of its own internal research. About 500 researchers are attached to Coggins' unit, which will spend $75 million of the company's $100 million R&D budget this year.

About $25 million of PerkinElmer's R&D budget goes to the firm's optoelectronics unit, where 40% of revenues come from health-sciences-related markets. For instance, the unit supplies xenon bulbs and lamp circuitry for spectroscopy systems made by PerkinElmer's life and analytical sciences business as well as those made by competitors, says John A. Roush, president of optoelectronics. Roush, 40, is an electrical engineer; he joined PerkinElmer in 1999.

The optoelectronics unit also produces amorphous silicon digital X-ray detectors used in radiography, angiography, and cancer treatment. PerkinElmer supplies these panels to GE Healthcare, where they are used as a digital alternative to traditional film-based imaging systems. Another interesting use for the X-ray detectors is in radio-oncology, Roush says. The detectors help locate a tumor and then can monitor the treatment of the tumor to minimize the impact of X-rays on healthy tissue.

But 60% of the unit's revenues come from industrial and consumer applications, such as xenon lamps for video projectors and camera flash tubes and photonic sensors used in smoke detectors and street lighting controls. Given this non-health-care thrust, does Roush see the optoelectronics unit going the same way as fluid sciences?

Roush says he can't predict the future, but he argues that many of the unit's products started out serving the health sciences market. The spillover into consumer and industrial applications gives us volume which results in overall reduced costs. Plus, many optoelectronics businesses, such as the silicon detector and consumer lighting operations, deliver double-digit revenue growth, he points out.

CEO Summe appears to buy the argument that optoelectronics has its place within PerkinElmer. In late October, when the firm reported third-quarter results, Summe said, Our investment going forward will be centered around opportunities in health sciences and photonics end markets that drive long-term growth. In other words, the transformation from military equipment supplier EG&G to health-sciences-oriented PerkinElmer appears to be complete.