Dade Behring's Next Act

Dade Behring is positioning itself as a consolidator in the very mature diagnostics industry and through careful focus and aggressive cost cutting its management has turned a conglomeration of lckluster businesses into what it claims is one of the industry's most profitable companies.

Dade Behring's owners have spent years building up their investment in diagnostics. Are they ready to get out?

by Wendy Diller

• Four years ago, Bain Capital saw a consolidation opportunity in in vitrodiagnostics and bought the diagnostics business of Baxter International, then used it as a base to go on a shopping spree. The acquired properties were combined into a new company, Dade Behring.

• Dade Behring has become the fourth largest diagnostics company, and through careful focus and aggressive cost cutting its management has turned a conglomeration of lackluster businesses into what it claims is one of the industry's most profitable companies.

• But Dade Behring still faces a problem: its markets are mature and it isn't growing as fast as it needs to. That may keep its owners—a group of financial investors and Hoechst—involved in the business for some time.

Four years ago Bain Capital Inc. bought the diagnostics business of Baxter International Inc. [See Deal], renamed it Dade International Inc. and set about applying its brand of Wall Street financial expertise to a very mature sector of health care. Few observers at the time were optimistic about its chances. They wondered how Bain, an investment firm with limited experience in health care, could get acceptable returns by buying a company with few innovative products, a focus on sluggish markets, and no presence in high-growth subsegments of the industry. Bain, they said, would surely try to cash out quickly, hoping to profit by having bought Dade on the cheap.

But Bain is more deeply embedded in diagnostics than ever. Dade has since combined with two other diagnostics companies: the in vitrodiagnostics business of EI Du Pont & Nemours Co. [See Deal]. The combination forms Dade Behring Inc. , the world’s fourth largest diagnostics company, with $1.3 billion in revenues and one of the broadest product lines in the industry. It has leading positions in chemistry, hemostasis, microbiology, serum proteins, cardiac markers, and drugs of abuse, as well as a global infrastructure that allows it to push these products through to parts of the world that the separate companies couldn’t adequately reach.

The companies have come together at a dizzying pace, but Dade Behring's CEO, Steve Barnes, believes the changes are an advantage in a rapidly consolidating marketplace and plans to continue aggressively participating in mergers and acquisitions. A former EVP at Bain Capital, he sees the mergers as an opportunity to create a new company, completely focused on diagnostics, with a unique corporate culture that mixes the best of each of the disparate parts. The organization has the old Baxter diagnostics' sales finesse, the engineering and R&D skills of DuPont, and the technological expertise of Behring. "We brought the best of breed quickly to our organization and used this period of change to reposition the businesses faster than each would have been able to do on its own," says Barnes.

By many accounts the integration process has been swift and efficient. Barnes and the team he assembled shortly after the Behring merger get high marks for improving focus and productivity while maintaining an emphasis on customers. Barnes has cut redundant R&D projects, reduced the attention paid to some aging products—such as the Paramaxchemistry system and Stratus and Opus Magnum immunoassay analyzers—and sold off lagging businesses. The result is that Dade Behring's internal growth in 1998 was flat (on a pro forma basis its revenues declined by roughly $200 million because of the divestiture of several businesses and adverse foreign exchange rates). But it had more resources to invest in core products such as the Dimension RxL, a chemistry analyzer, the Stratus CS, a near patient system for cardiac testing, and its subsidiary Microscan's automated bacterial identification and susceptibility systems. Eighty-eight percent of revenues now comes from core products, up from 70% in 1997, says Jim Reid-Anderson, the company's chief administrative officer and CFO.

Still, the company operates in mature markets under considerable pricing pressure. Its competitors face the same challenge, but, unlike them, Dade Behring isn't currently visible in the higher growth areas of diagnostics like blood-glucose monitoring or nucleic acid probes. Moreover, its efforts to reallocate funds from older product lines to more attractive ones have caused concern among customers, alliance partners, and others that it isn't paying enough attention to R&D, a Faustian choice that they believe will hurt it down the road.

The company, in short, has not completely shed its image as a broad-based but tired supplier of products to mature markets. Speculation abounds that Bain and Dade Behring's other investors may be staying in diagnostics at this point simply because they can't get out—without strong top-line growth the company can't do an IPO. Recently, rumors flew that Dade Behring was soliciting bids, and talk of potential partners is rampant.

Bain and Dade Behring executives say that is far from the case. On the contrary, argues Steven Pagliuca, a managing director of Bain Capital, Dade Behring is one of his firm's most successful buyouts. Bain doesn't have a rigid time frame for exiting the business—it has held on to some transactions for three years and to others for twelve. The returns on Dade Behring will far exceed the 30% rate targeted by most funds of the same kind, he says. The company's financial performance surpasses expectations— sales and earnings are up 200% and 250%, respectively, yet it is not highly leveraged compared to other LBOs.

Swift Integration

But Barnes confirms that the company is aggressively seeking mergers and acquisitions for scale and doesn't rule out the possibility of a combination of an unprecedented size in the industry. Size, he says, continues to be critical in diagnostics—large companies will have the advantage as customers consolidate, technology merges, and reimbursement for testing deteriorates, putting pressure on prices and forcing companies to seek more efficient use of resources. "We believe the industry is still fragmented and only half way through the consolidation process," says Barnes. "We think we'll see the process continue for the next two-to-three years."

If M&A is a key for growth in mature markets, certainly Dade Behring's owners and managers believe their expertise at making deals and integrating companies is a competitive advantage. They are one of the few groups who seem to successfully implement a large-scale integration plan in diagnostics—witness Bayer AG 's troubles with Technicon, Behring's difficulties with Syva Co. , and Johnson & Johnson 's woes with Eastman Kodak Co. If these companies were too slow and cautious, Dade Behring's executives have moved quickly, kept their focus, and strived to improve their products, all while keeping an eye on the bottom line.

Dade Behring's management began planning for the integration even before the deal closed. It was intent on clear, focused communication and quick implementation. Almost immediately, it identified a key group of top managers it wanted to run the company and let those who wouldn't be part of the team know quickly. Shortly after the Behring deal's closing, Scott Garrett, who had been Baxter's group VP for diagnostics and then Dade's CEO, resigned for undisclosed reasons (he remains on the board) and Steve Barnes, who had been at Dade a year prior to the merger, replaced him. Uwe Bicker, PhD, who had been head of Behring Diagnostics, became executive chairman of Dade Behring, playing a role in pharmaceutical-diagnostic R&D and acquisition synergies between Hoechst and Dade Behring R&D, and acting as a liaison to Hoechst. Jim Reid-Anderson, who joined Dade as EVP and CFO in mid-1996 from Wilson Sporting Goods, became CAA and CFO.

Other key players were Robert Brightfelt, a long-time head of the diagnostics business of Du Pont, who became group president, chemistry, Robert Kleinert Jr., and EVP of Baxter Diagnostics, became EVP, responsible for US sales and service, Friedhelm Blobel, PhD, Behring's former chief technology officer, who became group president, biology, and Marc Casper, an associate at Bain Capital, who became EVP, Europe, Asia, and Intercontinental.

A few days after the closing, Dade Behring had its top three layers of management in place and soon after was able to offer upper level managers financial and non-financial performance incentives. Moreover, the company has kept its top team in place, with a few exceptions—Blobel, for example, has since moved to head the company's new infectious diseases and advanced technologies business unit and was replaced by Donal Quinn, group president, biology, formerly VP and managing director, Europe, for Mallinckrodt Medical AG .

The company had integrated almost all sales, service, and administration within 60 days and within three months, says Barnes, it was largely monitoring the operation to make sure it was on track. Both in the US and abroad it closed some facilities and merged others. In the US, it closed Behring's Westwood, MA, facilities for manufacturing immunoassay systems, and Dade's hemostasis plants in Miami and Puerto Rico. Immunoassay R&D and operations were moved to Delaware and Atlanta, the sites of the old Du Pont business. Hemostasis business operations and R&D for reagents was centered in Marburg, Germany, where Behring had based its business. Duplicate sales and administrative offices throughout the world—the companies operated in 39 countries—were merged.

The Customer Comes First

A key challenge, says Barnes, was maintaining focus on customers and in one regard he seems to be succeeding. In the US, the company claims to have more sole and dual source contracts than its competitors. Access to large buyers has been a boon in particular for the old Behring products, which were strong in Europe and Japan but struggling in the US—Dade Behring, for example, recently won the Premier Inc. contract for plasma proteins in the US, something that would have been difficult for Behring alone.

The large GPOs are impressed with Dade Behring's current product line-up and its plans for the future, although smaller hospital networks and independent facilities cling to old perceptions. "They're focusing really well these days, especially considering they've gone through several mergers," says John Engles, director of laboratory program distribution services at Novation. "They continue to have a smooth interface with customers in sales and service. I'm not concerned about technology—as far as R&D, they have some of the best in the world in the Du Pont chemistry systems." Echoes Thomas Thompson, director, laboratory/ imaging at Premier: "They were the first to bring to market a diagnostics platform combining clinical chemistry and immunoassays. They have good, aggressive pricing, and a broad-based product line."

Still, many hospitals have yet to be convinced of or made aware of the changes at Dade Behring—one integrated network switched its allegiance from Premier to Novation last year in part because it wasn't happy with that GPO's laboratory suppliers, particularly in light of Premier's rigid compliance requirements. Few of its hospitals had Dade Behring instruments and getting them to use Dade Behring or the other companies on Premier's contracts would have been very tough, the network's laboratory purchasing manager says.

Barnes says that he is aware of the dichotomy between the large accounts' and the individual laboratories' perception of Dade Behring and explains that the gap exists in part because the company has so far concentrated its message on large buyers. This year, he says, it plans to expand its efforts to reach the smaller laboratories. To support this program, Dade Behring will be aided by a US sales force that is highly regarded in the industry. It is largely an amalgamation of Baxter, Du Pont, and Dade reps, many with years of experience in laboratory products, points out Duncan Ross, EVP of Sysmex Corp. , which has been selling its hemostasis instruments through Dade Behring since 1995 [See Deal]. The Dade Behring national sales meeting in January was like a reunion, he says, filled with industry veterans who understand transactional selling and sales management, have good account relations, and are well dispersed throughout the country.

Dade Behring has been able to retain top people in leadership positions in sales throughout the integration in part because it offers financial incentives all the way down to the upper levels of middle management, says Ross—although Barnes is quick to point out that the incentives are largely based on customer satisfaction.

The merger not only gave Dade Behring more clout with large customers, it also improved Dade's financial position. Dade had a debt of $800 million on sales of roughly $800 million following the Bain buyout of Baxter diagnostics and the purchase of Du Pont. By structuring the Behring transaction as a stock swap, Dade was able to increase revenues and profits without assuming additional debt. Furthermore, it gained Behring's cash flow, which it used to reinvest in the business' R&D and infrastructure, says Reid-Anderson. Banks are willing to lend to the company on favorable terms, giving it financing flexibility if it pursues acquisitions, adds Barnes.

The company is private, but because it has publicly traded debt it files its financial information. It is doing well—its EBIT, a measure of profitability, is 15-16% and its EBITDA, its ability to pay off debt, is in the 20% range. The EBITDA was $133 million in 1996, $175 million in 1997, and is expected to be in the $250-$260 million range in 1998. 1998's flat internal growth was part of the company's strategic plan to de-emphasize or sell off some outdated product lines, rather than a symptom of flagging customer interest in core businesses, and sales are expected to grow this year, says Reid-Anderson. The company sold its controls business to Medical Analysis Systems Inc. [See Deal]. The core products, on the other hand, are seeing revenue increases--Dimension RxL sales, for example, actually grew faster than the overall chemistry market, indicating that the company is gaining market share, says Henry Weinert, president of Boston Biomedical Consultants. Dimension RxL sales have grown 300% in Europe since it was introduced there in 1996. Microbiology is also gaining market share, increasing 5% in a market that is growing at 1-2%, the company says.

Building a Company

If the management team at Dade Behring has been clear-headed and serious about its efforts to rationalize its business, it may be because the key players come from a financial, rather than a diagnostics, background. Bain Capital's involvement in diagnostics began in 1994, when it bought the diagnostics business of Baxter International for $448 million, a valuation of slightly more than one-half sales. Baxter was a troubled diagnostics company with eight product lines of varying attractiveness and a highly competent sales force. The business had been up for sale for some time, paralyzing R&D, creating uncertainty among buyers and forcing the exodus of talented personnel. Competitors relentlessly sought to capitalize on Baxter's problems by emphasizing its vulnerabilities to customers.

Following the purchase, Bain spent months setting up an infrastructure necessary for Dade to operate as an independent company. After belonging to a large parent, it had to create its own financial, administrative, and legal systems. It categorized Dade's products into core and non-core and made some changes in organization of national accounts staff. In the process, it won several large group purchasing contracts, including one with Corning Clinical Labs (now Quest Diagnostics Inc. ) for hemostasis and microbiology, and another with Tenet Healthcare Corp. for hemostasis reagents, controls and analyzers. But it still faced the problem of growing in mature markets which were facing enormous pricing pressure.

A year later, in 1996, Dade bought the in vitrodiagnostics business of Du Pont for $513 million, about one-and-a-half times 1995 sales and almost 40 times the $13.1 million pre-tax income. The Du Pont integration was comparatively straightforward: it merged two US-based businesses with complementary rather than competing product lines. In particular, Dade hoped to make use of Du Pont's experience with chemistry and immunoassay R&D to help revitalize its own aging immunoassay systems, support its strong position in cardiac markers, and replace its outdated Paramax chemistry analyzers.

Even with Du Pont, Dade still lacked a truly global infrastructure and the critical mass necessary to support a high-tech global organization in a competitive, slow-growth industry. A year after buying Du Pont, Bain hooked up with Hoechst, and the Dade-Behring merger was born. Hoechst, for its part, wanted to get out of diagnostics in order to focus on pharmaceuticals, but couldn't find an acceptable buyer for Behring. The agreement closed in October 1997. Bain Capital owns nearly 40% of the surviving company, Hoechst owns 32%, and Goldman Sachs and Dade Behring management own the rest.

A Merger of Scale

If the Dade-Du Pont integration was fairly straightforward, the Dade-Behring combination was far more complex. Both companies needed to fill gaps in their product lines and build critical mass in different parts of the world. But they had duplicative product lines, operations in many countries, and diverse, somewhat overlapping R&D programs. Dade's strengths lay in the US, where it had leading positions in chemistry, hemostasis, and selected areas of microbiology and immunoassays. It had excellent relations with GPOs, in part because it offered aggressive pricing, an experienced sales force familiar with the needs of large buyers, and a broad product line. But it lacked a presence in Europe and other parts of the world.

Behring, on the other hand, was the market leader in plasma proteins and coagulation in Europe and had active immunoassay and infectious diseases businesses. Its strengths lay in Europe but it had a small presence in the US, where it was making an effort to build an automated immunoassay business. In 1995, it bought Syva Co. from Roche [See Deal] gaining a drugs of abuse and therapeutic monitoring business and a generally stronger presence in the US. But Syva wasn't enough to ensure success in a heavily competitive environment increasingly focused on national accounts purchasing. Moreover, Behring needed a relationship with a clinical chemistry company to fortify its appeal to central laboratories and claim a stake in the workstation consolidation trend. This trend concerned it particularly since some of the plasma proteins and DOA tests were beginning to migrate from specialty instruments to routine clinical chemistry analyzers.

At the Cusp of a Trend

Nowhere was consolidation more necessary than in Dade Behring's chemistry and immunoassay businesses. These areas of the laboratory are critical to the company's well-being—together they contribute nearly 41% of total revenues. They are slow-growth, mature markets, but companies can make money in them by taking market share. And because it has integrated its organization well, Dade Behring is now in a position to take share, particularly since other companies are stumbling. In addition, with its internal house in order, Dade can place itself at the cusp of a technological change in the laboratory—the consolidation of chemistry and immunoassays onto one instrument. People have been predicting this for years, but it now appears on the verge of becoming a reality.

Dade Behring's clinical chemistry strategy rests on technology acquired with Du Pont—notably the Dimension RxL—and the merger with Behring didn't change that. The Dimension RxL, which was launched nearly three years ago, is a chemistry analyzer that is popular in mid-to-large-sized hospital laboratories and gets high marks for being reliable and inexpensive to run. The Dimension has a 13% share of the global chemistry and immunochemistry markets and a 23% share in the US, where it ranks first in placements, says Robert Brightfelt, group president, chemistry.

But what sets it apart from competitors and gives it a stake in the laboratory of the future are its workstation consolidation features. Perhaps more than any other instrument currently on the market, it exemplifies this trend of melding chemistry and immunoassays onto one instrument. With a menu of more than 60 assays, it can run all of the routine chemistry and many high-volume immunoassay tests. Other instruments have bigger menus and can run more chemistry and simple immunoassay tests. But only the Dimension RxLcurrently handles complex, or heterogeneous, immunoassays, which traditionally are done on dedicated immunoassay analyzers. The Dimension RxL allows users to do these tests on a separate module that fits inside existing Dimension RxLs, resulting in lower costs per test and savings on labor and space expenses. Dade Behring introduced the module a year ago and sales have far exceeded expectations, says Reid-Anderson, a statement confirmed by Boston Biomedical Consultants.

Behring's primary contribution, rather, has been geographical—Behring's strong presence in Europe and other parts of the world means that the combined company can be more aggressive overseas—and Dimension RxLsales performance overseas reflects the extra boost. But it also has brought some technology and reagent development expertise to the table—because of Behring's strength in plasma proteins, for example, Dade Behring is adding high-volume plasma proteins to the Dimension RxL menu. Behring also had some internal technologies that are being applied to the next generation Dimension RxL and to a new chemistry/ immunoassay modular platform that the company is developing and hopes to launch in 2002.

Beyond that, eliminating duplicate R&D efforts in other parts of both companies has resulted in savings which are funding the additional R&D dollars being poured into the workstation consolidation effort. Indeed, Barnes notes that, contrary to critics who accuse the company of depleting R&D, the company is spending 30% more on R&D in chemistry and immunoassay this year than last year and plans to continue the step up. More resources are being devoted to chemistry and other core products without an increase in total R&D spending—in the 9-10% of sales range, or $100 million a year—because the company has cut support for non-core products.

Near-term, the company is preparing to launch at least 15 new tests for the heterogeneous module, and, next year, an information management network, and it is looking at methods of enhancing the pre-analytical steps in the analysis process. Longer term, the Dimension RxL, while appealing to mid-sized hospital labs, is going to run up against stiff competition from modular work cells, systems which other companies are expected to start introducing later this year and which are better suited to large laboratories. The modular systems link the same or different kinds of analyzers, using small internal tracking systems. While these don't literally consolidate chemistry and immunoassay analysis into one process on one box, they have the same goal—to save money and increase ease of use—and allow flexibility according to changes in laboratory work flow.

Re-thinking Immunoassays

Dade Behring says that the Dimension RxL, as a truly consolidated workstation, is easier to use, cheaper, and faster than these modular systems. But it, too, is working on a modular work cell version of the Dimension RxLfor the largest labs. Further down the road, it plans to offer customers a next-generation consolidated workstation, which will incorporate the Dimension RxL and new technologies into an instrument that combines chemistry, immunoassays, infectious disease testing, and nucleic acid probes and doubles throughput to 1,800 tests per hour, says Bob Brightfelt.

But if the Dimension RxLis a major strength for the company, it doesn't completely resolve one of the company's key vulnerabilities—the aging of its traditional immunoassay platforms. And here too the consolidation has been helpful. Although Dade and Behring each offered dedicated immunoassay systems, neither had particularly competitive products. The Stratus, which was developed at Baxter, is a batch analyzer in a world of random-access instruments—it can only run one kind of test at a time; random access instruments run tests in whatever order the samples are placed on the machine. In the early 1990s, Baxter had successfully focused the Stratus on the cardiac marker niche, where the system gained a loyal following. The instrument's reputation in the field was so strong, in fact, that laboratories were willing to buy it just to run cardiac markers. And since physicians relied on a panel of three key cardiac markers to guide them in making therapeutic decisions, many laboratories would maintain three Stratus instruments in order to get coordinated results.

Behring's immunoassay analyzers, the Opus, for small labs, and the Opus Magnum, a high-throughput instrument for large labs, on the other hand, were random access. The Opushad a following and a solid reputation in the cardiac marker field. But the Opus Magnum never caught on in part because of reliability problems. The company still sells the Stratus and the Opus Magnum but is not promoting them or conducting R&D using their technology.

Rather, Dade Behring is relying on Dimension RxLas the cornerstone of its immunoassay platform. The company's strategy is to migrate its mid-sized and larger lab immunoassay customers to the Dimension RxL's heterogeneous module for doing high-volume immunoassays. It has positioned the Opus for placement in small labs and in those that need additional immunoassay capacity. For specialty tests, it will urge customers to rely on stand-alone immunoassay systems. In all cases, the company continues to build on its reputation in cardiac markers—the Dimension RxL can currently run two of three key cardiac markers, CK-MB and Troponin I, and is expected to add the third, myoglobin, to its menu this year.

In addition, Behring had technology that has been incorporated into Dade Behring's newest instrument, the StratusCS, which was introduced this fall. It is a near patient testing instrument which does STAT testing of cardiac markers and is geared to emergency rooms and alternate site locations. Emergency rooms typically send cardiac test panels to central laboratories, then have to wait an hour or two for results, decreasing the tests' utility in helping physicians rapidly diagnose and treat patients who present with symptoms of acute myocardial infarctions. The Stratus CS, on the other hand, provides results within 15 minutes, enabling physicians to make on-the-spot decisions about stratifying patients and admitting them to hospitals in cases in which EKGs and other information is non-definitive.

Still, Dade Behring faces several challenges in gaining widespread acceptance of the StratusCS. First, it has several competitors in the point-of-care cardiac marker market, including relative newcomer Biosite Diagnostics Inc. , which also has a reputation for obtaining high-quality results. Second, questions remain about the appropriate use of these markers, including the extent to which they can be relied upon to accurately rule in or out heart attacks and the best combination of tests, as well as the frequency of testing. The Stratus CS has an advantage, says Brightfelt, in that its answers can be correlated to the Dimension RxL and the Stratus in the central laboratory and will soon be correlated to the Opus. This is important in tracking patients throughout their stay in a hospital.

While much of Dade Behring's attention is going towards its chemistry and immunoassay efforts, in part because of the technological and marketing changes underway there, the integration has also benefited the company's other, more staid businesses. The management team has applied its integration skills to hemostasis and serum proteins, with an eye towards improving their operating efficiencies. As a result of the merger, Dade Behring has become the global leader in the $600 million hemostasis market, garnering a 30% market share. And while, ultimately, hemostasis, like Dade Behring's other markets, is mature, with a growth rate of 1-2%, Dade Behring believes that it can exploit small subsegments, which are poised for slightly faster growth.

The merger had a significant impact on both Dade's and Behring's hemostasis operations. Dade was the largest US provider of hemostasis reagents, while Behring was the market leader in both reagents and instruments in Europe. Dade's expertise was high-volume reagents; Behring had built a stellar reputation for producing high-quality specialty coagulation assays—especially appealing since these also had higher margins.

Still, the businesses overlapped in some areas and were therefore good targets for cost-cutting programs. In the first place, the business didn't need two separate R&D programs or facilities, and Barnes closed Dade's hemostasis operations in Miami and Puerto Rico, consolidating operations in Marburg. Furthermore, the merger is likely to bring an element of stability to a business that has been, at least for Dade, somewhat challenging in recent years. Dade had for decades made only reagents and relied on a partner, Medical Laboratory Automation(MLA), for its instruments, and the two companies enjoyed a highly successful relationship. But five years ago, just before Bain got involved in Baxter's diagnostics business, MLA abandoned Baxter and took up with a competitor, the Ortho Clinical Diagnostics SPA unit of Johnson & Johnson. In a move that surprised the small world of coagulation testing, MLA and J&J formed a joint venture, Hemaliance [See Deal], and set out to take away accounts from Dade. Dade was left without an instrument that was specifically correlated to its reagents.

In 1995, Dade found another partner, Sysmex, to provide instruments that were compatible with its reagents. Dade claims that the deal is a success and that it has been able to retain 90% of its customers following the loss of MLA. But Sysmex has since signed a strategic alliance in hematology with Dade Behring's competitor, Roche [See Deal], something that Dade Behring and Sysmex say doesn't affect their relationship.

Behring, on the other hand, also had a leading position in coagulation and made not only reagents, but also instruments. Thus, the merger, for the first time, gives Dade Behring total control of its hemostasis instruments—though it will inevitably raise tensions with Sysmex. Dade Behring executives say not to worry, the two product lines are targeted to different-sized laboratories. And it comes at a good moment: Dade Behring's chief competitor in this arena, Hemaliance, was bought in January by Instrumentation Laboratories.

Clear Pathways to Growth

If the merger has allowed Dade Behring to capitalize on economies of scale and expanded market share in hemostasis, its impact on the Microscan microbiology business has been more subtle. The field, like hemostasis, is mature, expanding at 1-2% a year and not undergoing significant structural changes that might lead to new opportunities. Microscan is the market leader in the automated identification/ susceptibility portion of microbiology in the US, but, prior to the merger with Behring, it didn't have a substantial sales and distribution structure in Europe. Microscan's chief competitor, bioMerieux SA , became the dominant provider of ID/ susceptibility systems in Europe and some other parts of the world.

The Behring merger, however, can help Microscan leverage its name in Europe, since in the past it was almost entirely focused on the US, with the exception of Spain where it has 40% market share, says Marc Casper. Getting this access to Europe at this point in time is critical. Automated ID/ susceptibility testing—which identifies strains of disease-causing bacteria and determines which antibiotics are effective against them—is the only growth area of microbiology. Microbiology customers, even more so than other laboratory customers, tend to be conservative and partial to particular kinds of equipment. Microbiology laboratories in Europe and Japan are just now converting from manual to automated ID/ susceptibility systems, and the transformation offers a window of opportunity for gaining new customers; in the US, the window is all but closed—the conversion process took place several years ago. Also, the third strongest player in microbiology, Becton Dickinson & Co. , which has not been selling an automated ID/ susceptibility system, is preparing to enter that subsegment and has an instrument, the Phoenix, in development (See "BD at the Crossroads,"IN VIVO, Feb. 1998).

But most important, the Behring merger has enabled Dade Behring management to renew efforts to revitalize R&D projects at Microscan and merge microbiology with more advanced nucleic acid technologies. Many in the industry perceive Microscan to be stagnant and some have questioned Dade Behring's commitment to the field—they point out, for example, that the company hasn't produced a major new instrument in years. Barnes disputes this. The company never cut R&D at Microscan, he says, and in fact has made a consistent investment in new product development for Microscan. R&D spending at Microscan was up 40% in 1998 from a "significant base" in 1997 and will rise by that amount again this year, he says. The money is being used to improve existing Microscan technology, as well as to develop a next-generation identification/ susceptibility platform.

Moreover, as part of a fine-tuning, Dade Behring recently created a new business unit, headed by Blobel, incorporating Microscan, as well as ongoing work in infectious diseases and emerging diagnostic technologies. The unit has an active program in nucleic acid probe development, which many predict will replace selected common microbiology tests and which is one of the big growth opportunities in diagnostics. It is, for example, exploring ways to use Loci, a highly sensitive detection technology developed at Behring's Syva division, with nucleic acid probes. Many outsiders thought Dade Behring had shelved Lociin the aftermath of the merger. But the technology is flexible and sensitive enough to be used with several kinds of amplification technologies, as well as other kinds of assays, says Susan Evans, SVP of R&D. And it will help Dade Behring in its efforts to incorporate different kinds of testing onto one platform—the large modular system the company is planning for 2002, for example, will use Loci and will incorporate nucleic acid probes, infectious disease tests, and standard immunochemistry assays.

Work in this area is going on globally and is a major effort at the company, she adds. In addition, the company has a proprietary technology, BMI, which is a single mutation assay format that can link up with polymerase chain reaction or NASBA amplification technologies to do cancer and genetic disease testing. Barnes says the company plans to complement this work with external alliances and small acquisitions and is continually scouting small probe companies.

Still, critics say, Dade Behring's commitment to microbiology remains to be seen—the increases in R&D are huge but they are off a small base, particularly if that money is going to be used to design a new instrument. And lack of interest in other areas of microbiology means Microscan may miss the opportunity to provide integrated blood culture and susceptibility testing to customers—either integrated on one instrument or through information network, a concept its competitors are eagerly trying to make a reality.

So What's Dade Behring Worth?

Dade Behring's management argues that it has integrated swiftly and well, is reinvesting vigorously in the company, with the aim of building a company with depth and value to customers. Certainly, it has obvious strengths in chemistry, general systems engineering, sales, and a management which clearly knows how integrate companies and run them for profit. But it also has some notable weaknesses, such as its heavy dependence on mature markets—something that perhaps can't be avoided in today's diagnostics climate—and gaps in its product line, namely in glucose and hematology. Moreover, it has to deal with widespread and hard-to-get-rid-of perceptions that label the company as weak in innovation and owned by investors who are interested more in profit than in building a sustainable business and who are continually evaluating whether to stay in diagnostics or exit.

Barnes says the company is changing faster than people think and that perceptions have to catch up with the reality of what is happening at Dade Behring. Barnes and Paliuga insist that they are committed to building a company with a long-term future. They are under no pressure to get out of diagnostics—Bain Capital certainly doesn't need its money back and is more than happy with Dade Behring's progress.

Still, the rumors fly and the question linger: Is the company for sale? And, if it is, will it be sold in pieces or as a whole? Will it buy another diagnostics company? Dade Behring executives say they are looking for M&A for scale, technology and tuck ins. Scale could mean that they will buy another large company or be sold. Realistically, it seems unlikely they will buy anything comparable in size to themselves—to do so they would have to pay a hefty premium and in the process acquire a lot of overlapping products that they don't necessarily need. In fact, says Barnes, Dade Behring's relations with banks is so good that it can make another large-scale acquisition if it chooses. And certainly, he notes, it believes that the next big consolidation opportunity in diagnostics will be among mid-sized companies, an area of the industry which has yet to see much activity of this kind but is ripe for it.

Constant uncertainty about the company's next step is perhaps the trade-off for the benefits that have come from being owned by financiers rather than diagnostic industry veterans. But in an industry undergoing rapid change, perhaps it's not a bad trade-off.