PerkinElmer Expects to Make Acquisitions After $500M Business Sale: CEO Talks Boston-Area Talent and Growth in Software, Imaging

9/13/10

PerkinElmer has recently struck a deal that it hopes will fuel its growth in the human and environmental health markets, among other things. Rob Friel, the chairman and chief executive of the Waltham, MA-based maker of lab analytical tools, gave me his personal take on his firm’s (NYSE: PKI) sale of its illumination and detection solutions (IDS) business in an interview last week.

The company took in $482 million from the sale of IDS to the New York-based private equity firm Veritas Capital. The deal works well with its strategy to invest more money into growing its core businesses that serve customers in the diagnostics, biotech/pharma, and environmental health markets. (Read on for more on what Friel said to Xconomy about using some of the proceeds from the IDS sale to fund acquisitions.)

While shedding IDS, which made specialty lighting and sensor components, PerkinElmer has been buying up firms in the diagnostics market—where the company sees high growth potential as healthcare dollars move toward preventive measures, Friel says. In July, the firm bought VisEn Medical, a Bedford, MA-based maker of in vivo florescence imaging technology, for $29.8 million. (Friel talked to us about the potential of that technology both in lab experiments and potentially downstream for clinical use in patients.) And back in May, PerkinElmer acquired Signature Genomic Laboratories of Spokane, WA, and its genetic testing technology for finding chromosomal abnormalities behind unexplained developmental disabilities, in a $90 million buyout deal.

In our interview, PerkinElmer’s chief also gave his take on where he sees the global economy heading. The poor economy has been cited for the company’s rounds of layoffs over the past two years. It has let go 452 workers through three layoff plans since early 2009. Also, there are 3,000 people in PerkinElmer’s IDS business that will no longer work for the company after its sale to Veritas. But Friel talked about his expectation that his company, which had 2009 sales of $1.8 billion and 8,200 employees at the end of last year, would get larger as it acquires new businesses and expands existing businesses.

Here’s an excerpt from my interview with Friel about how his company plans to grow through acquisitions and organically, as well as how talented workers and internal innovation play an important part at PerkinElmer. Also, read further for his expectation for the role of software and IT systems in advancing the firm’s offerings for human health and environmental safety customers.

Xconomy: Regarding PerkinElmer’s sale of its illumination and detection business, why is this an important deal for the company?

Rob Friel: It was a good business and well respected for what it did. But I think we wanted to be a little more focused. So this deal allows us to sell a good business, take the proceeds, and redeploy the capital into the remaining businesses.

I think one of the criticisms of PerkinElmer in the past is that it’s a little complex from an end-market perspective. I think this reduces the complexity, reduces the number of end markets we’re in. I think we’re a more pure play than we were before.

X: How do you want the company to be portrayed?

RF: How we’ve portrayed the company in the last 18 months is as a human and environmental health company. With the IDS sale, we’re about 50-50 in those markets, so I feel good about that split. I just think that the IDS business wasn’t tightly aligned with those end markets, so it gives us a tighter focus.

I think from the innovation community, we want to be viewed as a global technology company, leading innovation. But I don’t want it to be innovation for purposes of interesting science. I want it to be innovation that really meets the needs of our customers, so I really want it to be application-specific. And that’s one of the other things we’re trying to do in the company right now is make sure that the products and technologies we develop, it’s really well-understood which customers and which applications its going to go into.

X: Does this deal signify that PerkinElmer wants to become a leaner operation?

RF: No, I don’t think so. If anything, we want to grow and become a larger organization. I think of it as a capital allocation. We want to reallocate some of our capital from one kind of business into another type of business. So our clear preference is to take the proceeds from IDS and acquire additional businesses. I would hope that twelve months from now PerkinElmer is a larger entity, not a smaller entity.

X: How do you plan to spend the cash your company is getting from this deal?

RF: I think it’s going to go back into the businesses that remain. I think we like all the businesses that are left. We have some preferences. I think that when we look at the markets that remain after we sell IDS, it’s fundamentally three customer markets. It’s diagnostics, pharmaceutical/biotech, and environmental—which would be broadly defined to include not just air and water but also food and consumer products. We feel that all of those end markets are very attractive, and we feel good about our core capabilities in those markets. But I would say that we probably put diagnostics a little ahead of the other two. I think we like the characteristics of the diagnostics market a little more; it seems to be a little less cyclical and higher growth than others.

X: What makes diagnostics a high-growth market for PerkinElmer to be in?

RF: As you think about rising healthcare costs, one of the ways to reduce the rate of increase is to identify diseases earlier. I think it’s been proven in a number of studies that the earlier that you can diagnose or detect a disease, first of all, the better the outcome, and the cheaper the treatment for the disease. So we think that there’s going to be a larger percentage of all healthcare dollars spent on trying to diagnose diseases earlier. The tests have to get more reliable, and that comes down to sensitivity of the diagnostics and also finding new biomarkers, to find the relationship between the things we find in the body and diseases.

X: Do you think the worst of the recession is past us? Why?

RF: I do think that the worst is behind us. Going forward, I would say that there’s a 65 percent chance that the economy will continue on a relatively modest growth trajectory. So we’ll see a relatively slow pullout from the recession of last year. Then I think you’ve got a 10 or 15 percent chance that we’ll go back down into a double-dip, but I would put that at a one in 10 chance. Then I think there’s a similar type of probability that we would see a more rapid increase.

X: Which technologies are transforming the way scientists do research and why?

RF: I would say that one of the areas where innovation is really changing the way people do research is the imaging area, and particularly around the in vivo imaging area. That was behind our motivation to acquire VisEn recently. We think that aspects of the VisEn technology will allow our customers to use similar reagent and imaging technology in the pre-clinical setting as well as all the way into the clinic, because you can do some interesting things from a modular in vivo imaging perspective.

Historically, when people did drug discovery research, they were using high throughput screening. Now there’s a desire to not only understand what’s going on outside the cell, in essence whether the cells are binding, but in essence understanding what’s going on inside the cell. Of course, there’s a lot of work around the pathways and understanding how the prospective drug works on the pathways. To do that, you really need to have fairly sophisticated imaging to go inside the cell. Another aspect of this is looking at live cells, so you can actually image the cell while the cell is alive.

X: As CEO of a multi-billion dollar company, what keeps you up at night?

RF: The direction of the global economic environment, I would say, kept me up more towards late 2009 to early 2010 than it does now. Like we talked about before, I do feel like we’re pulling out of this thing, so there is some aspect of that. The other thing is making sure that you have the right leaders in place. You think about running and overseeing a large global organization and a lot of technology involved. It really gets down to having very good people working for you, and so I spend a lot of time making sure that we’re developing and retaining the right leaders.

X: How does operating in the Boston area help the company recruit and retain talented people?

RF: I think Boston is a terrific location for talent. It starts out with great universities, so you have a great pool of talent coming out of certain schools. And then, of course, it’s a very good place to live. I think it’s a great place to have a technology-based company.

X: Why would a talented person graduating from a top school in the Boston area want to work for PerkinElmer?

RF: I think it’s a couple of things. First of all, if you look at what PerkinElmer does, in human and environmental health, I think when you come to PerkinElmer you can feel terrific about what we’re doing as a company. Whether it’s screening newborns where we’re saving 32 babies lives a day, to the point where our products are being used to hopefully discover new cures for cancer, to the point where our products are being used to monitor the water supply in Hong Kong to make sure that the water is pure.

The second aspect of it is the culture at PerkinElmer makes this a great place for people, because you get an opportunity to learn. There’s an emphasis on technology and innovation. And I think we want to have people who are entrepreneurial but also want the security of working in a large company. And then when you think about the breadth of PerkinElmer, not only from a technology perspective but from a globalization perspective, it gives a young person an opportunity to see a lot of technologies, businesses and geographic regions.

X: One of your business areas is software. Is that an area where you see a lot of growth?

RF: Software is becoming increasingly important, not only on the products that we provide today, but in the future. What you’re finding in a lot of detection modalities is that the real differentiation from a product perspective is your ability to take the images of what is being detected and convert that to algorithms. The products that have the better software interfaces are usually the ones that do well. Then there’s the aspect of trying to pull all the data together, whether it’s in an environmental lab or a pharmaceutical R&D lab. So I think software will be a bigger part of PerkinElmer’s business on a going-forward basis than it is today.

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