Sigma-Aldrich goes shopping

Jai Nagarkatti, Sigma-Aldrich CEO

Lab-supply companies are normally in the business of selling things to scientists, rather than buying. But the new CEO of Sigma-Aldrich, one of the world’s largest lab-supply firms, is shopping for new ideas, new partners - and new companies to invest in.

Company managers "have been assigned a responsibility to aggressively look at opportunities for acquisition and in-licensing", said Jai Nagarkatti, the St. Louis-based multinational’s newly appointed chief executive, in an interview. The acquisitions may average between $100 million and $175 million a year, in such high-growth fields as genomics, proteomics and cell signalling, he indicated. And rather than buy companies outright, he said, Sigma-Aldrich will also consider minority investments in hot areas - a policy that makes the lab-supplier a potentially important new source of international biotech funding.

"If there is any technology out there which people believe would benefit mankind if available [on the market], we would be willing to look at that," he said.

R&D-intensive business

Sigma Aldrich's call for new technologies reflects the new reality in the world of lab-supply. It’s now an R&D-intensive business in its own right, and partnerships and acquisitions are needed to stay ahead of the game.

In the past, companies like Sigma Aldrich were mainly catalogue-sales operations, stocking thousands of obscure chemicals and reagents that scientists ordered by phone or fax as raw materials for their own, laborious bench work. Today, with the biotechnology industry booming and some lab-market segments growing by 30 per cent a year, demand is climbing for fast, online ordering of ready-made kits - of synthetic DNA, cell culture supplies, RNA delivery systems and other complex lab products.

In the lab today, "people want to do things quicker, faster and cheaper," Nagarkatti says. And that means lab-equipment suppliers have to step up their own R&D to keep pace.

Until recently, Sigma-Aldrich was a laggard in that new, R&D-intensive world. The company, formed by the 1975 merger of two speciality-chemical companies, Sigma and Aldrich, mainly sold reagents, buffers and other lab supplies. Success in that business required just two things: a fat product catalogue and a fast, global distribution network. Sigma-Aldrich today lists 90,000 chemicals and 30,000 equipment products in its catalogue - of which it still circulates 3 million print copies despite a boom in online sales. It has operations in 35 countries, and gets more than 60 per cent of its sales outside the US. In this old-line supply business, the main players are also chemical companies, such as BASF, Dow and DSM. And the market is huge: more than $50 billion in 2004.

But chemicals isn't where the growth is any more. All the action is now in molecular biology and biotechnology - "and Sigma was caught unprepared", according to a 2005 brokerage report on the company by UBS Securities (which rates the company as "neutral" for investors, meaning the stock should keep pace with the market overall.) Other, R&D-intensive suppliers took early leads: Invitrogen, Qiagen, Applied Biosystems, Fisher Scientific. One reason, says UBS: "Sigma did not adequately invest in developing new molecular biology, genomics, and cell biology reagents, and as a result, the introduction of sufficiently differentiated new products has lagged."

That does not mean Sigma-Aldrich has not managed to prosper, at least in the short term. In 2004, sales rose 8.6 per cent to $1.41 billion and net income jumped 22.3 per cent to $232.9 million. But the gains came largely from such transient factors as a weaker dollar, a lower tax rate, and smart acquisitions; factoring those out, the company’s core business sales grew by just 2.2 per cent in 2004, and 0.3 per cent the year before. Growth perked up in 2005, with sales up 21 per cent in the nine months ended 30 September - but again, that was largely due to acquisitions, and analysts fret that too much of the business remains in low-growth, low-tech market segments.

The company acknowledges a problem. "We're trying to leapfrog some historic deficiencies in our R&D," said Shaf Yousaf, president of Sigma-Aldrich's Research Biotechnology business unit, in an interview. "We were a chemicals and biochemicals company with little intellectual property; most of the information (behind the products) was from the public domain. Since then we have set up to correct that, so we are looking for intellectual property - but also for collaborations and expertise."

Technology glasnost

Hence the policy of technology glasnost. Nagarkatti, an Indian-born PhD in organic chemistry who at 58 years old has spent half his life at the company, succeeded David R. Harvey as CEO on 1 January - and the new boss is planning changes.

In 2005, Nagarkatti says, the company launched "an exhaustive review of the markets" and mapped out a corporate reorganisation. It also plans a rise in R&D spending to 4 per cent of sales from 3 per cent in 2004. It is targeting basic sales growth of 10 per cent a year - with seven percentage points coming from "organic" growth in its existing businesses, and the remainder from acquisitions.

Nagarkatti declined to say how much Sigma-Aldrich will spend on acquisitions, but he said one could estimate "the type of money we will have to spend" by multiplying the acquisition-related sales growth he is targeting (at least $50 million a year) by the typical value of acquisition targets (between 2 and 3.5 times sales.) The result: $100 million to $175 million a year. That's a moderate size for Sigma-Aldrich - less than half its annual cash generation, and well below the $370 million it spent in 2004 to become the No. 2 player in the cell-culture supply market by buying Lenexa, Kansas-based JRH Biosciences.

But new technologies will be a theme of coming deals. For the cutting-edge market segments, Nagarkatti says, "we will take some calculated bets, realising that there will be no magic bullet in those activities. Some will work, and some will not work. Nothing ventured, nothing gained." Whether by licensing, minority investment or outright acquisition, the goal is to get an early, strong position in the hottest new fields in scientific research - then "bring those technologies in-house, and commercialize those products in our R&D centre."

The new approach was first telegraphed in October 2005, when the company announced investments in two small biotechnology companies, Oxford BioMedica of Britain and Benitec, an Australian-listed firm with operational headquarters in Mountain View, California.

Both companies have strong positions in a field about which Nagarkatti is bullish: RNA interference, a form of "gene-silencing" prompting new hopes for successful genetic therapies.

Benitec, which is developing RNAi technology to tackle AIDS and hepatitis C, has a patent portfolio in RNAi research reagents that it is sharing with Sigma-Aldrich in exchange for an initial $2 million licence fee and a $2.5 million equity investment.

Oxford BioMedica is a spin-out from Oxford University developing gene therapy treatments in oncology and neurotherapy, and has a strong patent position in what’s expected to be an important tool for gene therapy: using lentivirus to get the new gene products into a cell. Sigma-Aldrich announced a $5 million investment.

"We will be absolutely looking at similar deals" in RNAi and in other areas of biotechnology, Nagarkatti says. "Any company within the supply business has to have products with emerging technologies."