Roche acquisition creates world's largest IVD company, eclipses Abbott

Diagnostic Insight, 1997 Interview Conducted by Robert Bauer

On May 24, 1997, Roche agreed to purchase the outstanding shares of Boehringer Mannheim for $11 billion (US). This is the largest diagnostics acquisition in history, and Roche’s largest acquisition since its inception 100 years ago. The acquisition includes Boehringer’s pharmaceutical and diagnostics divisions, and DePuy, an orthopedic products business owned by the company. These businesses together, combined for annual sales of $3.50 billion in 1996. Roche’s reported sales in 1996 of $12 billion.

The merger of the diagnostics businesses of Roche and Boehringer Mannheim will create a $2.90 billion diagnostics division employing 13,500 and rivaling Abbott for the number one position in the industry. Prior to the acquisition, Roche’s diagnostic business was $0.55 billion.

In addition to diagnostics, the acquisition includes Boehringer Mannheim's pharmaceutical business, which posted sales of $1.2 billion in 1996, and which will improves Roche’s share in the global pharmaceuticals market share from 2.7% to 3.3%. The acquisition will give Roche a strong marketing/sales position in Europe, particularly Germany where Roche will become the third largest pharmaceutical company. Additionally, Boehringer Mannheim's newly launched cardiovascular, metabolic and oncology products, as well as their research and treatment for osteoporosis, will complement the Roche product portfolio.

Roche also acquired Boehringer’s interest in the DePuy Group, one of the world's leading manufacturers of artificial joints and orthopedic products. In 1996 DePuy employed 2,900 people and posted sales of $700 million. DePuy’s products range from artificial joints and implants to orthopedic instruments and arthroscopic equipment covering the areas of joint replacement, fracture stabilization and sports medicine. DePuy will continue to operate as an independent company. The 15.8% of DePuy shares not held by Boehringer are traded on the New York Stock exchange.

At this years annual AACC meeting in Atlanta, Jean Luc Belingard, head of Roche’s Diagnostics Division, chatted with Robert Bauer, President of CaseBauer and Associates about changes within the company, the effect they will have in terms of the diagnostics industry, and the direction the new division and the industry will take in the future.

Roche Biomedical Labs and National Health Laboratories Combined to form Lab Corp - the largest commercial lab in the United States

ROBERT BAUER: Roche has significantly changed the profile of its laboratory business portfolio, divesting its interest in Roche Biomedical Labs and expanding its interests in IVD. Can you tell us what drove this fundamental change?

BELINGARD: We merged Roche Biomedical Labs with National Health Laboratories to create the number-one commercial lab in the US, Lab Corp. of America. Lab Corp. will be a $1.7 billion company this year. It is our intent to make sure that whatever we own is positioned favorably in the market. Lab Corp. has the biggest volume of testing every day, and is in a position to achieve the lowest cost position in the industry. Lab Corp. is streamlining its operation, leveraging synergies between the two companies, and reducing from 36 regional labs to 24; shaving $130 from operating costs. At Roche, we feel that it is much better to own 49.9 percent of the number-one organization than 100% of a number-four that is not positioned to be competitive in the long term. There is no question that we see the merger as a step forward.

ROBERT BAUER: Has the relationship of Roche Diagnostics to the commercial lab business changed since this change in ownership?

BELINGARD: We have not changed the relationship significantly because historically we have always made sure that the lab service group of Roche would stand on its own feet in terms of being profitable. In effect, we are managing RBL as before.

Roche's Acquisition of a Diagnostic Company Reflects its Broader Interests in Healthcare

ROBERT BAUER: There was some surprise in the industry that Roche made a diagnostic acquisition rather than a pharmaceutical acquisition. What was the thinking behind that?

BELINGARD: Roche is not a pharmaceutical company -- it is a health care company. We have pharmaceuticals, diagnostics, and chemicals. We did not buy just a diagnostics company -- we bought a health care company. Boehringer Mannheim is in pharmaceuticals, diagnostics, and hip replacement. We perceived the acquisition as strengthening Roche as a health care company. You can say that Boehringer Mannheim is a bigger diagnostics company than a pharmaceutical company, but it just happens to be that way.

What we've done is strengthen Roche’s overall position in terms of being the leading health care company; as a result of that, we end up being number one in diagnostics. We bought $1.5 billion in pharmaceutical sales as well, with some very promising pipeline products in pharmaceuticals. I have read with interest that we are making a diagnostic acquisition, but it is not the case at all -- we invested in health care.

ROBERT BAUER: Will Roche expand its interest in diagnostics with additional acquisitions?

BELINGARD: I don’t know. We are in pharmaceuticals, diagnostics, chemicals -- we want to be a leader in each of those pillars of Roche. Our goal is to be number one in each segment we're in. If to remain number one it takes some more acquisitions, why not? We are very flexible, very open -- and we certainly do what we have to do to maintain the position. I cannot say that we have specific targets as we speak, but we like to make sure that in term of our ranking, in terms of the breadth and depth of our portfolio of technologies, we have a leading position.

Diagnostic Market Trend is Toward Polarization - Small Niche Players vs. Broad Multinational Companies

ROBERT BAUER: There has been a lot consolidation in the diagnostics industry. What do you think are the key components for a successful company in this environment?

BELINGARD: We perceive the diagnostics trend to be toward a type of polarization. We will have the small niche players, which are going to be mostly technology based, Gen-Probe is an example. Then we will have the global players--Abbott, Roche-Boehringer, and to some extent Johnson & Johnson and Dade Behring. You will see more consolidation, and I think that the people who remain in the medium sized will have a problem in terms of competing in the long term.

ROBERT BAUER: When you look at the industry overall, there’s a lot of speculation on how much the industry will ultimately consolidate. There are still a number of large companies that hold the potential for acquisition. Do you have a vision of how the industry will look some years in the future?

BELINGARD: There are years of capacity in the market--it’s a vast market. That kind of capacity will have to go away. As long as you see over-capacity, you will see consolidation. There are 30 or 50 immunoassay systems on the floor--how many do we need? Two or three?

The diagnostics industry is not normalized; it is losing money and does not have a fighting chance for the future. I expect the consolidation to be pretty brutal. I think that we are in for some extremely aggressive consolidation. I think there will pretty aggressive consolidation the five years to come and by the turn of the century we will stay with four or five global players and a lot of small niche players.

ROBERT BAUER: How do you think the companies will ultimately end up competing against each other? Historically, one company has stood out in a particular area. Behring in proteins or Abbott in immunoassay.

BELINGARD: The company dominating one specific segment is passé. Dominant, focused positions is going to go away. You will have people with 15% of the global market--you will have three or five of these unless you can institute a strategy of consolidation across segments. Business segmentation on the basis of technology will go away.

Commercializing Diagnostic Technology Brings Value to the Customer

ROBERT BAUER: Some analysts say that the diagnostic industry is not very healthy from a competitive point of view--that companies are overly aggressive in discounting products. Could you compare and contrast the competitive atmosphere in the diagnostic industry vs. that in the pharmaceutical industry?

BELINGARD: I think it’s a matter of providing value. If you offer generics, you may have a pricing problem but if you offer value you can charge more. Our dedication is research--innovation based business, so we can charge fair pricing.

ROBERT BAUER: Roche’s investment in PCR was certainly one of the most significant investments made in the diagnostic industry in recent history. What are some of the lessons to be learned from that experience?

BELINGARD: When you invest in technology, you are rarely wrong. When we bought PCR, for 300 million dollars, everyone thought it was crazy, but now it is a very fruitful, profitable products business. Today, including the acquisition price, it still is very profitable.

Some of the difficult parts of that business? Turning a scientific idea into an everyday, practical product that customers can use is a big challenge. Consumers don’t understand the role of industry. They think what matters is that someone invented PCR. Kerry Mullis’s idea is a great one--he won the Nobel Prize for it. But the rest is turning what Kerry Mullis invented into a product that can be manufactured in an industrial process that can be repeated on a cost-effective and regular basis. That is as big a challenge as inventing the technology. That’s what industry does--it brings value to the customer.

An Executive Interview with

Jean Luc Belingard, President of Roche's Diagnostic Businesses

Diagnostic Insight, 1997 Interview Conducted by Robert Bauer

Roche Biomedical Labs and National Health Laboratories Combined to form Lab Corp - the largest commercial lab in the United States

Roche's Acquisition of a Diagnostic Company Reflects its Broader Interests in Healthcare

Diagnostic Market Trend is Toward Polarization - Small Niche Players vs. Broad Multinational Companies

Commercializing Diagnostic Technology Brings Value to the Customer



	An Executive Interview with Jean Luc Belingard, President of Roche's Diagnostic Businesses

	Diagnostic Insight, 1997 Interview Conducted by Robert Bauer On May 24, 1997, Roche agreed to purchase the outstanding shares of Boehringer Mannheim for $11 billion (US). This is the largest diagnostics acquisition in history, and Roche’s largest acquisition since its inception 100 years ago. The acquisition includes Boehringer’s pharmaceutical and diagnostics divisions, and DePuy, an orthopedic products business owned by the company. These businesses together, combined for annual sales of $3.50 billion in 1996. Roche’s reported sales in 1996 of $12 billion. The merger of the diagnostics businesses of Roche and Boehringer Mannheim will create a $2.90 billion diagnostics division employing 13,500 and rivaling Abbott for the number one position in the industry. Prior to the acquisition, Roche’s diagnostic business was $0.55 billion. In addition to diagnostics, the acquisition includes Boehringer Mannheim's pharmaceutical business, which posted sales of $1.2 billion in 1996, and which will improves Roche’s share in the global pharmaceuticals market share from 2.7% to 3.3%. The acquisition will give Roche a strong marketing/sales position in Europe, particularly Germany where Roche will become the third largest pharmaceutical company. Additionally, Boehringer Mannheim's newly launched cardiovascular, metabolic and oncology products, as well as their research and treatment for osteoporosis, will complement the Roche product portfolio. Roche also acquired Boehringer’s interest in the DePuy Group, one of the world's leading manufacturers of artificial joints and orthopedic products. In 1996 DePuy employed 2,900 people and posted sales of $700 million. DePuy’s products range from artificial joints and implants to orthopedic instruments and arthroscopic equipment covering the areas of joint replacement, fracture stabilization and sports medicine. DePuy will continue to operate as an independent company. The 15.8% of DePuy shares not held by Boehringer are traded on the New York Stock exchange. At this years annual AACC meeting in Atlanta, Jean Luc Belingard, head of Roche’s Diagnostics Division, chatted with Robert Bauer, President of CaseBauer and Associates about changes within the company, the effect they will have in terms of the diagnostics industry, and the direction the new division and the industry will take in the future. Roche Biomedical Labs and National Health Laboratories Combined to form Lab Corp - the largest commercial lab in the United States ROBERT BAUER: Roche has significantly changed the profile of its laboratory business portfolio, divesting its interest in Roche Biomedical Labs and expanding its interests in IVD. Can you tell us what drove this fundamental change? BELINGARD: We merged Roche Biomedical Labs with National Health Laboratories to create the number-one commercial lab in the US, Lab Corp. of America. Lab Corp. will be a $1.7 billion company this year. It is our intent to make sure that whatever we own is positioned favorably in the market. Lab Corp. has the biggest volume of testing every day, and is in a position to achieve the lowest cost position in the industry. Lab Corp. is streamlining its operation, leveraging synergies between the two companies, and reducing from 36 regional labs to 24; shaving $130 from operating costs. At Roche, we feel that it is much better to own 49.9 percent of the number-one organization than 100% of a number-four that is not positioned to be competitive in the long term. There is no question that we see the merger as a step forward. ROBERT BAUER: Has the relationship of Roche Diagnostics to the commercial lab business changed since this change in ownership? BELINGARD: We have not changed the relationship significantly because historically we have always made sure that the lab service group of Roche would stand on its own feet in terms of being profitable. In effect, we are managing RBL as before. Roche's Acquisition of a Diagnostic Company Reflects its Broader Interests in Healthcare ROBERT BAUER: There was some surprise in the industry that Roche made a diagnostic acquisition rather than a pharmaceutical acquisition. What was the thinking behind that? BELINGARD: Roche is not a pharmaceutical company -- it is a health care company. We have pharmaceuticals, diagnostics, and chemicals. We did not buy just a diagnostics company -- we bought a health care company. Boehringer Mannheim is in pharmaceuticals, diagnostics, and hip replacement. We perceived the acquisition as strengthening Roche as a health care company. You can say that Boehringer Mannheim is a bigger diagnostics company than a pharmaceutical company, but it just happens to be that way. What we've done is strengthen Roche’s overall position in terms of being the leading health care company; as a result of that, we end up being number one in diagnostics. We bought $1.5 billion in pharmaceutical sales as well, with some very promising pipeline products in pharmaceuticals. I have read with interest that we are making a diagnostic acquisition, but it is not the case at all -- we invested in health care. ROBERT BAUER: Will Roche expand its interest in diagnostics with additional acquisitions? BELINGARD: I don’t know. We are in pharmaceuticals, diagnostics, chemicals -- we want to be a leader in each of those pillars of Roche. Our goal is to be number one in each segment we're in. If to remain number one it takes some more acquisitions, why not? We are very flexible, very open -- and we certainly do what we have to do to maintain the position. I cannot say that we have specific targets as we speak, but we like to make sure that in term of our ranking, in terms of the breadth and depth of our portfolio of technologies, we have a leading position. Diagnostic Market Trend is Toward Polarization - Small Niche Players vs. Broad Multinational Companies ROBERT BAUER: There has been a lot consolidation in the diagnostics industry. What do you think are the key components for a successful company in this environment? BELINGARD: We perceive the diagnostics trend to be toward a type of polarization. We will have the small niche players, which are going to be mostly technology based, Gen-Probe is an example. Then we will have the global players--Abbott, Roche-Boehringer, and to some extent Johnson & Johnson and Dade Behring. You will see more consolidation, and I think that the people who remain in the medium sized will have a problem in terms of competing in the long term. ROBERT BAUER: When you look at the industry overall, there’s a lot of speculation on how much the industry will ultimately consolidate. There are still a number of large companies that hold the potential for acquisition. Do you have a vision of how the industry will look some years in the future? BELINGARD: There are years of capacity in the market--it’s a vast market. That kind of capacity will have to go away. As long as you see over-capacity, you will see consolidation. There are 30 or 50 immunoassay systems on the floor--how many do we need? Two or three? The diagnostics industry is not normalized; it is losing money and does not have a fighting chance for the future. I expect the consolidation to be pretty brutal. I think that we are in for some extremely aggressive consolidation. I think there will pretty aggressive consolidation the five years to come and by the turn of the century we will stay with four or five global players and a lot of small niche players. ROBERT BAUER: How do you think the companies will ultimately end up competing against each other? Historically, one company has stood out in a particular area. Behring in proteins or Abbott in immunoassay. BELINGARD: The company dominating one specific segment is passé. Dominant, focused positions is going to go away. You will have people with 15% of the global market--you will have three or five of these unless you can institute a strategy of consolidation across segments. Business segmentation on the basis of technology will go away. Commercializing Diagnostic Technology Brings Value to the Customer ROBERT BAUER: Some analysts say that the diagnostic industry is not very healthy from a competitive point of view--that companies are overly aggressive in discounting products. Could you compare and contrast the competitive atmosphere in the diagnostic industry vs. that in the pharmaceutical industry? BELINGARD: I think it’s a matter of providing value. If you offer generics, you may have a pricing problem but if you offer value you can charge more. Our dedication is research--innovation based business, so we can charge fair pricing. ROBERT BAUER: Roche’s investment in PCR was certainly one of the most significant investments made in the diagnostic industry in recent history. What are some of the lessons to be learned from that experience? BELINGARD: When you invest in technology, you are rarely wrong. When we bought PCR, for 300 million dollars, everyone thought it was crazy, but now it is a very fruitful, profitable products business. Today, including the acquisition price, it still is very profitable. Some of the difficult parts of that business? Turning a scientific idea into an everyday, practical product that customers can use is a big challenge. Consumers don’t understand the role of industry. They think what matters is that someone invented PCR. Kerry Mullis’s idea is a great one--he won the Nobel Prize for it. But the rest is turning what Kerry Mullis invented into a product that can be manufactured in an industrial process that can be repeated on a cost-effective and regular basis. That is as big a challenge as inventing the technology. That’s what industry does--it brings value to the customer.

	CaseBauer has 5 practices: Market Modeling, Strategy / Business Development, Benchmarking, Market Research and Business Services.