Two Baxter moves further ruffle an unsteady lab market – Baxter Healthcare Corp
Baxter Healthcare Corp. completed two separate deals this spring that could have a major impact on the shape of laboratory and diagnostic products distribution. Insiders say the deals will probably turn out on the positive side for Baxter and are yet another part of a consolidation mode that has swept the big players in the laboratory industry, just as it has hit other segments.
The numbers speak for themselves. In 1987, about 15 companies controlled 75% of the laboratory business. By 1993, the lineup had shrunk to only nine companies. Aside from Baxter, the segment is populated by giant companies such as Coming Clinical Laboratories (CCL), Corning, N.Y.; Curtin Matheson Scientific (CMS), Houston; Abbott Laboratories, Abbott Park, III.; Becton Dickinson, Franklin Lakes, N.J.; and Johnson & Johnson, New Brunswick, N.J., which recently bought into the segment when it purchased a lab unit from Eastman Kodak, Rochester, N.Y.
Rumors have been flying for months that CMS is ripe for takeover. Expect that company to be sold sometime this summer. Johnson & Johnson and pharmaceutical giant Merck & Co., Inc., West Chester, Pa. are said to be angling for CMS. The acquisition would seem to make sense for J&J because it would provide access to CMS’ established distribution channels. For Merck, CMS would provide additional access to the U.S. hospital and integrated delivery system market.
Three lab segments, all are faltering
The lab market, which most observers agree is flat or even shrinking, can best be divided into three portions: hospital-based labs, independent reference labs and physician office-based labs. The lab side is declining in response to consolidation on the part of those three provider portions.
There are fewer hospitals in operation today than there were in 1987, even though this segment still comprises the largest piece of the lab industry. As recently as one year ago, there were as many as 15 independent reference labs; today there are three. The survivors include Roche Diagnostic Systems, Inc., Branchburg, N.J. (which recently acquired National Health Laboratories, Inc., La Jolla, Calif.); SmithKline Diagnostics, Inc., San Jose, Calif.; and Corning Clinical. The physician office lab market is also contracting due primarily to the formation of integrated systems that often merge lab analysis responsibilities into other entities of the integrated system.
Now, as reported last month in HIT (“DuPont to sell its medical units, but don’t expect garage sale prices,” p. 6), Wilmington, Del.-based DuPont Co. announced in May that it would divest its medical supply business, a string of units that includes the DuPont In Vitro Diagnostics division. DuPont’s lab unit racks up about $335 million in annual sales.
In DuPont’s case, the sale was spurred in large measure by a desire on the part of the Bronfman family, the majority owners of beverage makers Seagram Corp. – a major owner of DuPont – to jettison their chemicals interests in favor of turning to the entertainment business. To do that, the Bronfmans had to garner a quantity cash to help finance the purchase of what became an 80% stake in MCA Inc. Wall Street analysts and others see the Bronfmans as saviors who rescued the entertainment giant – which includes Universal Pictures – from the “Jaws” of Japan’s Matsushita Electric Industrial. Their more recent moves toward DreamWorks Studios are even stronger evidence of their desire to get out of chemicals and the medical businesses.
Baxter SP sales down in general downturn
Aside from a desire by some high rollers to scratch a Hollywood itch, other forces are making a serious impact on the laboratory business. Sales of Baxter’s Scientific Products division were reported down for the first time. Clinical lab business has been shrinking and labs have been faced with the prospect of outsourcing, a daunting proposition for long-time lab suppliers to many health care facilities. Moreover, even though the technology has yet to catch up to the industry in a big way, stat labs – small versions of analytical laboratories – have been deemed redundant in scores of hospitals. Hospitals are finding that stat labs often cost more than they save in lab expenses and more may be phased out in the future as the use of hand-held, point-of-care testing units gain in popularity. Most say that the lab community has yet to embrace point-of-care units made by companies such as i-Stat Corp., Princeton, N.J., Diametrics Medical Inc., St. Paul, Minn., and others.
Baxter, meanwhile, continues to be active. The company just signed a five-year sole-source distribution agreement with Corning Clinical that covers laboratory and diagnostic products, including supplies manufactured by Baxter’s Miami, Fla.-based Dade International division. That contract, which is estimated to total about $200 million in sales over the five years, expands Baxter’s relationship with CCL, which operates a national network that provides lab tests to health care facilities. It combines CCL’s clinical testing capabilities with Baxter’s product lines, supply chain management and marketing status with evolving health care networks.
The agreement will give Baxter access to Corning Clinical’s national lab network and provide the impetus for a wave of money-savings product standardization in those labs. Products included in the agreement are Baxter’s general lab supplies such as disposable glass and plastics, Dade’s MicroScan[R] testing system and Dade’s hemostasis products used for the analysis of bleeding and blood clotting disorders. And, by the end of this year, the two companies will be able to transmit all business documents such as purchase orders and invoices through EDI.
The Corning Clinical deal resembles an agreement forged last year between SmithKline Diagnostics and Curtin Matheson Scientific. Like the Baxter-CCL contract, the SmithKline-CMS deal gives those companies an opportunity to drive out costs through standardization and take advantage of wider economies of scale. Last December, Baxter sold its diagnostics manufacturing businesses, a move that established Dade as an independent company. Baxter retained exclusive distribution rights in the U.S. for Dade products.
Baxter sells industrial lab division
In its second recent agreement, Baxter will sell its Industrial and Life Sciences Division to San Francisco-based VWR Scientific Corp. for approximately $400 million in cash in a deal that will have much less of an effect on the health care sector than the pact with Corning Clinical. This Baxter division had sales of more than $450 million in 1994, or just under 5% of Baxter’s $9.3 billion total 1994 sales, and would almost double VWR’s revenue. The sale is expected to close sometime in September. At that point, VWR will change its name to VWR Scientific Products Corp.
The Industrial Division should not be confused with Baxter’s biomedical Scientific Products distribution business, which markets and distributes clinical laboratory supplies, reagents, chemicals, equipment and diagnostic systems to the hospital and clinical lab market. The sale is in keeping with Baxter’s stated strategy of heightened focus on its core businesses, including biotechnology, renal therapy, cardiovascular, international expansion and the U.S. health care distribution market.
As part of the agreement, Baxter will continue to supply its manufactured products and supplies sold in non-health care markets to VWR under a long-term distribution contract. When the VWR deal closes, all 568 Baxter Industrial Division employees will become VWR employees. VWR currently has about 1,350 employees.
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