It’s finally official! Ortho Clinical Diagnostics (OCD) will be sold to The Carlyle Group (CG: NASDAQ), an asset management firm and equity investor. The sales agreement was announced on Thursday. Carlyle will pay $4.15 billion, and the transaction is expected to close mid-year, pending regulatory approvals.
OCD’s change of ownership will be closely watched by the thousands of medical laboratories in the United States and abroad that are customers of OCD. Typically, pathologists and clinical laboratory managers like continuity and little changes whenever one of their major vendors is sold to new owners.
About One Year for OCD to Find a Buyer
OCD is a business unit of Johnson & Johnson Company (JNJ: NYSE). It was in January 2013 when executives at J&J announced the company’s intention to sell OCD. (See Dark Daily, “Johnson & Johnson Says It Is ‘Exploring All Options’ for Selling, or Spinning Off, Its Ortho Clinical Diagnostics Unit That Sells Clinical Laboratory Products ,” January 28, 2013.)
It was big news in the in vitro diagnostics industry when Johnson & Johnson and The Carlyle Group announced the sale of J&J’s Ortho-Clinical Diagnostics business to The Carlyle Group. The sale is projected to close before mid-year.
Despite being the fifth largest in vitro diagnostics (IVD) manufacturer in the world, OCD was performing below expectations. The company has had relatively slow growth and was not a market leader, according to Morningstar Analyst Debbie Wang, as reported by Reuters last year. She noted that these two facts made it difficult for the OCD unit to compete in clinical diagnostics.
Revenue Growth Was Below Expectations at Ortho Clinical Diagnostics
In 2012, OCD had $2.07 billion in sales of diagnostic tests and blood-screening supplies, down 4.4% from $2.16 billion in 2011, reported the company . Also in 2012, OCD reported earnings before interest, taxes, depreciation and amortization (EBIDTA) of about $475 million.
In its story about the deal, The Wall Street Journal wrote, “In 2012, while J&J’s medical devices and diagnostics business segment sales were up nearly 9%, much of that was driven by booming growth in orthopedics and specialty surgery; its diagnostic business revenues—at $2.1 billion—were down 3%. And for the first nine months of 2013, diagnostics revenues were down another 2.1%.”
Assuming that the EBIDTA reported for OCD during 2012 is still close to the current number, then the sales price of $4.15 billion paid by Carlyle represents a multiple of 8.75 times EBIDTA.
Johnson & Johnson Bought the Kodak Ektachem Business in 1994
Veteran pathologists and clinical laboratory managers remember that OCD was originally the Kodak Ektachem business owned by Eastman Kodak Co., of Rochester, New York. Ektachem analyzers used a dry chemistry technology. It was in 1994 when J&J acquired the Ektachem business from Kodak, the sales price was $1 billion.
Headquartered in Raritan, N.J., the OCD unit has a research and development center in Rochester, New York, with about 1,100 employees. It also has manufacturing operations in Pompano Beach, Florida and Pencoed, Wales, United Kingdom. OCD serves clinical laboratories and transfusion medicine providers in 130 countries.
Last January, when the plans to divest the OCD business was discussed during an earnings call, Alex Gorsky, J&J’s CEO, told analysts, “When we look at (Ortho-Clinical Diagnostics), what we see is a business with many very good technologies. (But) we also saw a business that did not have a Number 1 or Number. 2 position within their respective marketplaces.”
Carlyle Will Operate OCD as a Stand-Alone Company
In its report about the sale, Bloomberg News wrote that Carlyle will operate the business as a stand-alone entity, quoting sources said to have knowledge of the matter. Bloomberg mentioned that a source also said Carlyle would invest in research and development and international expansion.
One interesting point that will add complexity to the transfer of ownership is the fact that the sales agreement also contains what are known as “transition services agreements.” Knowledgeable parties have said that Carlyle wants J&J to will handle certain back-office functions and other systems for OCD. That would provide Carlyle with the time it needs, post-sale, to contract with different vendors to run those functions independently.
Another point that may frustrate OCD medical laboratory customers is that sales transactions may not close until the spring or mid-year and, as a consequence, important decisions may not be made in the months before the final closing date. It is characteristic of mergers and acquisitions that executives and managers of the company about to come under new ownership will defer decisions about many management issues—both large and small—until the new owners take over.
In fact, since it was January 2013 when J&J executives announced their intention to sell OCD, more than 12 months have already passed during which time many major decisions may have been shelved by OCD executives and managers, since they prefer to wait for the new owners to review and act upon these matters. Thus, it would not be surprising if a significant number of OCD’s laboratory customers already feel frustrated about the inaction on matters of importance to them.
Finally, as reported during December, other parties interested in buying OCD were the Blackstone Group (BX: NASDAQ), another investment company, and Danaher Corp (DHR: NASDAQ), which owns several diagnostic companies, including Beckman Coulter (BEC:US). By outbidding Danaher, Carlyle kept one big IVD manufacturer independent, and it held its place among the largest global IVD manufacturers.
—By Joseph Burns