Can Ron Zwanziger Do It Again?

In the past two years, Inverness Medical Innovations has paid a total of roughly $500 million to buy five rapid point-of-care (POCT) diagnostic testing businesses, which now lie at the heart of its effort to expand in the POCT realm. These have laid the ground work for four subsequent transactions and related financings, all aimed at making Inverness a world leader in women's health and pregnancy testing. But what's of interest isn't so much the women's health play per se as the company's management tream, which has twice before built up POCT companies, then sold them for significant premiums.

In the past two years, Inverness Medical Innovations has paid roughly a combined $500 million to buy five rapid point-of-care (POCT) diagnostic testing businesses, which now lie at the heart of its effort to expand in the POCT realm. The first and largest, the acquisition of Unilever PLC 's women's diagnostic health business Unipath Ltd. for $150 million in cash [See Deal], laid the ground work for four subsequent transactions and related financings, all aimed at making Inverness a world leader in women's health and pregnancy testing.

Inverness is the latest in a line of companies that is betting on a roll-up strategy in rapid, easy-to-use POCT. Most of these visionaries, including competitors like Quidel Corp. and Thermo BioAnalysis Corp. , a division of Thermo Electron Corp. , are languishing to some degree or another. But investors are expecting more out of Inverness. That's because what's of interest at the company isn't so much the women's health play per se as its management team, which has twice before built up POCT diagnostic companies, then sold them for significant premiums. Inverness chairman and CEO, Ron Zwanziger, founded MediSense Inc. , a blood-glucose monitoring company, which he sold to Abbott Laboratories Inc. in 1996 for more than $876 million [See Deal]. He then repeated the strategy by taking POCT technologies of no interest to MediSense and creating a second start-up in POCT, Inverness Medical Technology Inc., whose blood glucose monitoring business Johnson & Johnson bought in May 2001 for more than $1.3 billion [See Deal].

Zwanziger's third act, Inverness Medical Innovations, is a carve-out of the former Inverness Medical Technology. The company has made six acquisitions over a three-year period to buttress its position in women's health, points out SG Cowen & Co. analyst Sara Michelmore. These transactions give Inverness a critical mass for distribution and intellectual property.

But many of the new Inverness product lines are less than exciting. Nutritional supplements, which make up a minority of Inverness Medical Innovation's sales, are struggling due to fierce competition and price wars. The women's health POCT businesses Inverness has bought consist mainly of pregnancy and ovulation tests: they are mature, slow-growth product lines, and therefore prime candidates to profit from consolidation and economies of scale. Inverness has been a cautious buyer—paying less than two times sales for most purchases, and financing them through a mixture of cash from financings and loans, and stock. The new properties include former high-flyer Ostex International Inc. , an osteoporosis bone marker company, which fell on hard times years ago when its lead test didn't gain physician acceptance; Inverness acquired it last year for $29.7 million in an all-stock deal [See Deal]. Some months later, it bought Applied Biotech Inc. , a women's testing division of Apogent Technologies Inc. , for $27.6 million in stock [See Deal]. A year ago, it also bought MedPointe Inc. 's Wampole Laboratories , which also makes POCT women's health test kits, for $70 million in cash [See Deal].

The largest transaction since Unipath, however, was Inverness's purchase in October of many of Abbott's rapid diagnostic product lines, including OTC pregnancy tests and professional market products marketed under the TestPack and Signify brand names [See Deal]. Also included were rapid tests for strep and drugs of abuse. Abbott keeps marketing rights to products in the US hospital market and will convert marketing and distribution overseas to Inverness on a country-by-country basis. The $92.6 million purchase price was close to 2.2 times sales, a higher premium than Inverness is accustomed to paying, but the company says the Abbott product line brings coveted IP, an international distribution system for the professional market, and opportunities for gross-margin improvements as synergies kick in.

These weren't core products for Abbott, which neglected new product development to support the line. That gap offers a turnaround opportunity, and is an attractive side benefit to the deal, though not the driver for it. More important to Inverness was Abbott's global distribution network.

In addition, Inverness last spring won a court victory against Pfizer Inc. in a dispute over intellectual property used in Pfizer's pregnancy tests. Analysts say that while Inverness didn't get a significant amount of money from the litigation, the results helped to validate the strength of the company's IP position. In June, the company introduced its first internally developed pregnancy test, based on digital readings, using Inverness's proprietary technology.

Still, while these activities provide a foundation for a business, they're hardly exciting enough to attract the kind of attention given to Inverness's predecessor companies. What's going to drive greater interest, Zwanziger said in a recent talk with analysts, is the company's investment in applied research on new products. The trick is to maintain growth while investing heavily in R&D that will deliver rewards longer term, he adds.

Inverness is currently still sorting through its diverse and somewhat overlapping product lines, which it says need to be trimmed and parsed. On the near-term horizon, the company expects to launch digital ovulation and strep tests in the first half of 2004, both based on technologies developed by Inverness's three acquisitions. The company will also launch a prothrombin test for measuring blood clotting in late 2004 or early 2005, and a test based on Ostex technology for osteoporosis monitoring, also next year.

But at the core of its R&D is a program in cardiovascular diagnostics and monitoring. Two-thirds of R&D spending is being applied to find tests for better management of congestive heart failure in particular and cardiac diseases over all, with the first test expected to launch in 2005. Zwanziger won't say much about specifics in what is a very competitive, R&D-intensive environment, somewhat contrary to the staid world of pregnancy testing. He did tell analysts that the cardiac tests are likely to be candidates for central lab instruments, to achieve maximum potential, making them candidates for licensing deals.