Issue Date: April 9, 2012
Instruments Of Success
In July 2011, SFW Capital Partners, a private equity firm, bought Littleton, Mass.-based Spectro, a 30-year-old maker of Fourier transform infrared spectroscopy, X-ray, and optical emission tools for analysis of fuels and lubricating oil. The seller was England-based defense contractor QinetiQ.
For Roger C. Freeman, a partner at SFW Capital, the deal was another opportunity to invest in a company that provides high-value analytical solutions to customers. For Brian Mitchell, who earlier this year became president and chief executive officer of Spectro, SFW’s understanding of the instrumentation market, along with its “invest and build” mentality, means that Spectro can focus on putting together a new line of portable tribology instruments.
SFW’s purchase of Spectro, which has about 55 employees, has given it new resources and the opportunity to innovate. Likewise, supportive private equity investors have made it possible for 20-year-old Advion to focus on its instrument business after the sale of its contract drug research operations in November 2011. And for start-up firms Mustard Tree Instruments and NanoSight, private funding has helped to bring new concepts to market.
But other people’s money comes with strings attached. Private equity investors generally want their money back, along with a hefty profit, within three to seven years. The limited time frame might work in other industries, but it doesn’t give instrument inventors enough time to develop their products, test them, and build a market. It takes a special breed of patient investor to make the longer-term commitment often required for small instrument makers to succeed.
It should be no surprise that private investors are putting money into scientific instrument makers, notes life sciences company stock analyst Peter Lawson at Mizuho Securities. Rising demand for food and environment testing both at home and abroad favor instrument companies, he points out.
Christopher P. Loran, a life sciences industry consultant whose clients include investment management firms, notes that some investors in instrumentation are high-net-worth people often referred to as angel investors. Loran, who attended the recent Pittsburgh Conference on Analytical Chemistry & Applied Spectroscopy to scope out opportunities for clients, says these individual investors are sometimes willing to wait longer for a return on their investment than are typical private equity firms.
Given consolidation in the scientific instrument business in recent years, Loran adds, successful small instrument makers are more likely to get gobbled up by large firms with far-reaching sales and distribution channels than they are to go it alone.
For Spectro, its new owner will help support development of portable and online process analysis equipment. For instance, the firm is working with the Navy to develop ways to continuously monitor engine oil quality aboard ships. And it recently came out with a portable viscometer, the Q3000, to help monitor machine oil viscosity.
Spectro’s Mitchell previously headed Polychromix, a maker of handheld infrared spectrometers that was acquired by Thermo Fisher Scientific in 2010. Spectro also could ultimately end up with a new owner such as Thermo, he acknowledges, although SFW’s Freeman says that “Spectro is a long-term investment” with no preordained exit horizon.
Spectro was SFW’s third acquisition in analytical tools or software over an 18-month period. The other two purchases, MD Buyline and Agdata, use software to analyze health care and agricultural data, respectively. Principals at SFW previously invested in separation sciences expert Waters Corp. and in weighing instrument firm Mettler-Toledo International. In general, Freeman says, SFW looks for promising scientific instruments and analytical software companies. He sees the two types of firms converging to provide high-value analytical solutions to customers.
Mustard Tree Instruments, a start-up in Research Triangle Park, N.C., with fewer than two dozen employees, gets most of its backing from 40 angel investors, who have put up anywhere from $50,000 to $250,000. Since it was formed in May 2009, CEO Todd Blonshine says, Mustard Tree has raised $6 million. Its strategy is to work with outside inventors to create instruments that satisfy customers’ unmet needs.
“We keep our ears perked for analytical problems in pharmaceuticals and chemicals,” says Blonshine, who previously worked for Beckman Coulter and Ahura Scientific. Thermo Fisher acquired Ahura in 2010. “We act as a middleman pairing people with problems to people with solutions,” he says.
Mustard Tree’s first instrument, developed in collaboration with Duke University scientists and North Carolina instrumentation firm Centice, is the VTT-1000, a Raman spectrometer that allows drug companies to analyze the chemistry, size, form, and color of raw materials, process samples, and finished products. The firm’s second instrument, whose inventor Blonshine won’t disclose, is the VPS-1000, a portable noncontact Raman spectrometer to be used in pharmaceutical facilities to monitor continuous or batch chemical reactions through a sight glass.
Mustard Tree won’t take investments from those just looking for a quick buck, Blonshine insists. He is looking for patient investors. “We love active investors,” he says. “We just don’t want investors who would force a sale of the company and change what it does.”
W. Christopher Daum, a principal at Eight Man Ventures, which is an investor in Mustard Tree, explains that his company is different from other private equity firms because it has a “buy and hold” philosophy. “We’re not like most private equity firms that have a three- to seven-year horizon,” he says.
Investors at Eight Man are patient, Daum notes, and when they invest in a firm they are willing to wait for a return because they believe in the firm’s management team and its business plan. Through the fund they take a position early in a company’s formation and sell their position only if the company’s managers agree to a sale.
Advion joined the ranks of small instrument makers late last year after it sold its contract drug research business to the research services firm Quintiles. Now 55 people remain at the Ithaca, N.Y.-based company, where the latest product is a mass spectrometer small enough to fit inside a fume hood. The firm also makes nanoelectrospray ionization sources and flow-chemistry synthesis systems.
When Advion sold its contract research business, many of the firm’s venture capital backers stayed invested in the firm, CEO David B. Patteson says. They are counting on Patteson, who has been with Advion since 2006 and formerly headed the U.S. operations of laboratory consumables maker Biotage, and Jack Henion, Advion’s founder and a professor of analytical toxicology at Cornell University, to profitably grow the instrument business.
Backers include longtime investor Polaris Venture Partners, Aisling Capital, and Skyline Ventures. The latter firm, which focuses on health care investments, says on its website that its managers are known for “being extremely patient investors.” Patience is a quality that Advion values as it advances its business in building tools for biotechnology and pharmaceutical researchers, Patteson says.
NanoSight, a nine-year-old England-based company, has its sights set on either a public offering or selling out to a strategic buyer, says CEO Jeremy Warren. When it does, the England venture capital firm Shackleton Ventures stands to benefit. Shackleton has been the lead investor in NanoSight since it was formed.
Any company that acquires NanoSight would get an instrument firm that uses optical microscopy to count, size, and visualize nanoparticles as small as 10 nm. The firm’s instruments work through laser light illumination of particles in a liquid. The smallest particles move quickly while larger ones move more slowly. Software tracks the particles and determines their size, Warren explains.
NanoSight was founded by Bob Carr, a microbial biochemist who had worked for the U.K. government’s defense research lab at Porton Down. When the government decided that the pathogen detection systems Carr was developing had no future for defense purposes, Carr was out of a job, Warren says. With the help of John Knowles, a civil engineer who Warren describes as “a successful senior manager at a number of international companies and now a serial chairman of start-up firms,” Carr started up NanoSight to commercialize his nanoparticle characterization research.
Smiths Detection, a U.K.-based threat detection instrument firm, was an early backer and partner but is no longer involved with NanoSight, Warren says. NanoSight also received some government funding and raised money from a number of venture capital firms in addition to Shackleton.
Warren estimates the firm, which has around 30 employees and annual sales of about $6 million, has penetrated less than 10% of potential markets in protein characterization, diagnostics, and particle measurement for ceramics, catalysts, and foodstuffs. “We’re expecting 50% or so growth over each of the next three years,” he says.
But being able to reach potential customers can be a serious headache for small firms such as NanoSight. Mizuho’s Lawson points out that “getting global distribution is a big stumbling block for small companies.” Eventually, he says, the need for a distribution network will send such firms into the arms of Waters, Agilent, PerkinElmer, or another big instrument maker.
No doubt that would be fine with private equity investors in the small companies. After all, patience isn’t unlimited, even for a patient investor.
- Chemical & Engineering News
- ISSN 0009-2347
- Copyright © American Chemical Society