Ariel Fund Comments on Beckman Coulter
Beckman Coulter, incorporated in 1934, develops and manufactures diagnostic products, which simplify, automate and innovate complex medical testing. The company’s products are found in hospital settings, reference labs (such as Laboratory Corporation of America [LH] and Quest Diagnostics [DGX]) and research labs. Being a solely-focused diagnostic company and having an extensive corporate history, the company boasts some of the longest relationships globally with their clients, giving them an advantage when launching new products.
Innovation Driven Organization
Beckman Equipment became Beckman Coulter with its 1997 acquisition of Coulter Corporation (the founding company of blood tests). Through its innovative strategy within diagnostics, Beckman Coulter is the only company that can offer products to meet 75% of a hospital’s laboratory needs. Some of Beckman Coulter’s offerings are clinical chemistry systems that test organ function, blood cell analysis systems and immune system analysis. As the worldwide population ages, governments’ focus on lowering health care costs through early disease detection, better health care awareness in Asia, and increased monitoring of chronic diseases should cause demand for Beckman Coulter’s products to grow nicely.
Quality Issues Arise
During February 2010, Beckman Coulter announced a recall of its troponin test, which helps physicians diagnose heart attacks. Obviously this test is extremely valuable and must be accurate. Unfortunately, the test was providing false positives, leading doctors to believe patients were having heart attacks when they were not. The company is working aggressively with the Food & Drug Administration (FDA) to correct the tests and increase attention to quality control procedures throughout the organization. As concerns occasionally arise surrounding diagnostic testing, we believe the company will manage through these issues, as it has in the past.
The diagnostic equipment industry is highly competitive with many players. Within clinical diagnostics, the primary competitors are Roche Holding Ltd. (RHHBY), Abbott Laboratories (ABT), Ortho (a part of Johnson & Johnson [JNJ]), and Siemens (SI). Of the large industry players, Beckman Coulter is the only one that focuses purely on diagnostics. In so doing, Beckman Coulter has cultivated a strong reputation for service, focus, product breadth and product innovation versus peers. In addition, strong client relationships have created a significant amount of goodwill.
Changing of the Guard
After several misguided quarters and increased quality concerns, management lost credibility from investors. Chief Executive Officer Scott Garrett announced his immediate resignation in 2010. Robert Hurley has been named interim Chief Executive Officer as the Board searches for a replacement outside the organization. Mr. Hurley, who joined Beckman Coulter in 2005, served as the company’s Senior Vice President, Human Resources and Chairman of Beckman Coulter Japan. Glen S. Schafer was appointed by the Board to non-Executive Chairman.
The market historically saw Beckman Coulter as a leader in quality and innovation before the company’s big hiccup. Now aggressively working with the FDA, Beckman Coulter will work through its quality issues with new leadership. In December 2010, several news reports indicated Beckman Coulter was approached by potential acquirers and the stock price increased significantly. We were not surprised because we believe the company will emerge stronger once the quality issues are addressed. As of December 31, 2010, shares traded at $75.23, a 14.2% discount to our private market value of $87.72.