The Muddy Waters of IVD

Ron Zwanziger, CEO of Inverness Medical Innovations, must be one helluva juggler. The company announced its twelfth acquisition in as many months. This time the Waltham, MA-based diagnostic player is spending $1.18 billion in cash and stock to bring health management company, Matria Healthcare, into its ever-widening fold. (For a more in-depth look at the Inverness strategy, check out this piece from colleague Tom Salemi.)

Matria is a leading provider of disease management services, especially strong in women's health and oncology. Inverness's acquisition is a big bet--$900 million to acquire the company and the assumption of Matria's $280 million debt--in the importance of building a diagnostics empire that directly touches patients not just in the doctor's office, but also in their homes. The ultimate goal: a range of services from tests that assess risk and help diagnose disease to home monitoring systems that keep a particular scourge, be it congestive heart failure or cancer, under control.

At first blush, the marriage of point-of-care diagnostics with health management services seems odd. It's certainly not one the Street understands. (The market reacted negatively to the news sending the stock down $4.26--about 8%--to $47.97.)

But there is a certain logic to the idea. Importantly, both health management and the diagnostic business are driven by the same underlying principle: companies that succeed in these spaces provide products for which payers will reimburse, which in turn means offering tests or services that improve an individual's health while simultaneously lowering health care costs.

Even more broadly, Inverness’ acquisitiveness is another illustration of the blurring of the lines between previously distinct sectors including the traditional IVD space, home healthcare services, benefits plans, even DTC.

The Matria acquisition comes just months after Inverness ponied up more than half a billion dollars to buy two other leading health management outfits. In October, Zwanziger's team bought Alere, which develops home monitoring systems for patients with chronic diseases, for $302 million; in November, the company bought New Jersey-based ParadigmHealth, which offers disease management services for patients with complex health problems, for $230 million.

In a conference call, Zwanziger reported that pro forma revenues from these three companies will bring in roughly $500 million, giving Inverness a dominant position in the estimated $1.8 billion health monitoring market.

Certainly the purchase price of Matria dwarfs the previous two buy-outs and is second only to its spring acquisition of BioSite. In part, the size of the deal reflects the breadth of Matria's offerings. (Services to more than 1000 employers and managed care organizations, increasing the number of patients under active management from 100,000 to over 1,000,000 according to Inverness's Ron Garety, former Alere CEO.)

There was also, apparently, some competition. "We had to move quickly," confirmed Zwanziger on the conference call. "There were other interested parties."

But Inverness's decision, while rapid, was far from hasty. According to Zwanziger, the point-of-care diagnostic company had been interested in Matria for quite some time. Such a prolonged time, in fact, that as the company sketched out its long-term strategy, they had already penciled in the Matria name.

"It's a transformative acquisition," says Garety, who will be busy integrating Alere, ParadigmHealth, and Matria into Inverness in the coming months. That's because this isn't just about adding patients to Inverness's nascent management system. It's about connecting fragmented and disparate players in the health care delivery system to offer better care for lower cost. Or as Zwanziger told a packed house at JP Morgan a few weeks ago: "Extending diagnostic testing from disease identification to risk assessment to patient management greatly extends our business potential."

To help accomplish this, Inverness also announced its intention to form a joint venture with as yet unnamed financial backers around this bulked up health management business. This JV, seems to be primarily a strategy to reduce the capital risk associated with the move into health management.

But it could also give the company a much needed capital infusion at a time when the public equity and debt markets are--to say it politely--a little uncertain. In addition, noted Zwanziger, "The [JV would provide] strong liquidity to allow us to take advantage of all the opportunities out there."

(Translation: despite the spate of acquisitions, Inverness ain't done buying yet. )

Wall Street's lack of support doesn't appear to phase Zwanziger. "As we integrate our diagnostic products into the health management side, the value of Inverness will only go up," he predicts.

It's the same sort of mantra you'll hear when you listen to execs at GE Healthcare, Siemens, or even Royal Philips Electronics, which late in December expanded into the patient monitoring business with its $4.9 billion acquisition of Respironics. (For those who haven't been following, IVD has suddenly become fashionable again in our price-pressured health care environment. Here's IN VIVO's primer from our 2007 trends story.)

Like Inverness, these companies have also been gobbling up smaller entities as they create end-to-end solutions in the health care testing market. One can hardly blame the analysts for seeming a bit confused by Inverness's move into health management (or Siemens' advance into IVD or even pharmacy benefits manager Medco's forays in personalized medicine and disease management, for that matter).

Each acquisition seems to stretch the definition of what it means to be a diagnostic company. With all these companies newly under the Inverness banner--including BioSite, Paradigm, Alere, Diamics, HemoSense, BBI Holdings, Pan Bio and Matria --there's no easy way to label the company anymore. Is it a point-of-care diagnostic company that also develops home monitoring devices? Is it a rapid IVD company that happens to have a service arm for monitoring patients?

The diagnostic waters have gotten very muddy. Perhaps clarity will come with additional acquisitions. Given Zwanziger's track record in 2007, it's likely we won't have to wait very long.

"The Mighty Mekong River" by Flickr user Cap'n Surly used under a creative commons license.

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GE's Abbott Indigestion

Now that GE has pulled out of its proposed $8.13 billion all-cash deal for Abbott Diagnostics (ADD) and Abbott’s point-of-care testing business, will anyone else step up to the plate?

Perhaps the logical suitor is P&G, because from what we hear, only the makers of Pepto-Bismol could have treated the massive indigestion the parties were experiencing.

We believe the explanation that it fell apart because of the complexities involved in prying them—ADD, specifically—out of Abbott.

Some analysts have suggested that compliance issues and issues over the transfer of licenses also helped scotch the deal. But while there were literally thousands of transition services agreements that the parties were going to have to enter into, in the end, it appears that the degree to which ADD is integrated into the rest of Abbott, and how difficult it would therefore be to deliver it to a company that perhaps has a different culture, very much surprised both sides. And that pain was going to persist over a protracted integration period—“a lot longer than three years,” according to one insider.

What’s puzzling is that this would not be the first time such a diagnostics business was sold lock-stock-and-barrel to a health care generalist (Siemens, for example, managed to buy Bayer Diagnostics and immunoassay player Diagnostic Products last year). Nor is GE inexperienced at handling such moves (there's too many potential links to choose from for this one to even begin to know where to start).

So we have to ask: Were the cultures an obviously terrible mix? That’s very possible, and yes, it'd be interesting to contemplate what those differences may say about each company. We’ve also heard that the first marching order for Abbott now will be to improve the level of service to its diagnostics customers, which of course suggests GE may have uncovered something specifically troubling during its preparations.

In any event, the take-home is it’s unlikely that Abbott will be looking for another buyer for those businesses. And with the exception of Roche, which unlike Abbott, views diagnostics as intimately connected with its drug development ambitions and personalized medicine, there aren’t really any very large in vitro diagnostics (IVD) players left from whom GE could wring out efficiencies, exploit scale, and improve productivity in the IVD market the way it expected to with Abbott.

It may continue pursuing smaller, more targeted acquisitions in IVD and, like Abbott, certainly in molecular diagnostics. And with some of the premiums companies offered recently to companies with molecular content, like Biosite (63%, measured from the time of Beckman-Coulter’s initial offer for it before Inverness finally landed it), TriPath (58%, from Becton Dickinson), and Ventana (43% at the time of Roche’s recent hostile tender offer of $75 per share), an exit via acquisition is nearly impossible for those companies to resist at today’s prices, leading to a wave of consolidation that might only pick up more steam, now.

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