Recently, Thermo Fisher Scientific (TMO) decided to sell its Athena Diagnostics to leading diagnostics player Quest Diagnostics (DGX) for $740 million. Athena, with $110 million in revenues in 2010, provides diagnostic tests for neurological and other diseases, with an emphasis on gene-based tests.
For the last few years, Quest has been strengthening its foothold in the esoteric testing market. Gene-based and esoteric testing now accounts for 22% of the company’s total revenues in 2010, up from 9% in 2000.
Although Quest has been witnessing a decline in revenues derived from anatomic pathology, the company recorded a 3% growth of gene-based and esoteric testing during the fourth quarter, driven primarily by sales to hospitals and specialist physicians.
The increase in esoteric testing was primarily driven by a more than 30% growth in Vitamin D testing, which is being increasingly used for a range of conditions such as osteoporosis, cancer, diabetes and heart disease.
Additionally, Thermo Fisher decided to sell its Lancaster Laboratories to Belgium based Eurofins Scientific for $200 million. Lancaster Laboratories, with $115 million of revenues in 2010, is a contract-testing laboratory providing analytical services for pharmaceutical, biopharmaceutical and environmental sciences customers.
In another development, the company authorized a new $750 million share repurchase program. For 2010, Thermo Fisher had spent slightly more than $1 billion on its buyback program and is left with $385 million of authorization at present.
As a result of this continuous buyback program, the outstanding share count at the end of the fourth quarter was 398.8 million, down 5.5% from the year-ago period, thus boosting the bottom line.
The divestment of the two businesses is expected to be closed in the second quarter of 2011, subject to regulatory approvals. In 2010, the combination of Athena and Lancaster Laboratories contributed 11 cents to Thermo Fisher’s adjusted EPS.
The company will provide an updated 2011 guidance early in the second quarter. The company assumes that the proposed acquisition of Dionex Corporation (DNEX) will be over in early second quarter, and these two divestments along with the new share buyback programs will raise 2011 adjusted EPS by 5 cents.
Recommendation
A gradual improvement in the economic scenario along with its focus on potential markets and other strategies should drive Thermo Fisher’s top line in the forthcoming period. Moreover, the company’s decision to align its business to focus on core areas is also encouraging.
However, any kind of economic turbulence could negatively impact the company’s sales based on financial constraints and customers deferring their buying decisions.
We are currently Neutral on the stock.
QUEST DIAGNOSTC (DGX): Free Stock Analysis Report
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THERMO FISHER (TMO): Free Stock Analysis Report
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