Serologicals Corp. is paying $205 million to grow its business through the acquisition of Upstate Group Inc.

An inherent synergy between the companies - both offer drug research, discovery and development services and products - points to the underlying core behind the transaction. Factor in Atlanta-based Serologicals' desire to expand, and the deal makes even more sense, said the company's CEO.

"I've talked about the need to utilize very strategic acquisitions," David Dodd, Serologicals president and CEO, told BioWorld Today. "I believe, and our board believes, that doing this is much better than trying to do a series of small things and then trying to get them to add up to get what we got through this."

Serologicals will bankroll the deal with cash and stock, less amounts to repay Upstate's debt and expenses. It agreed to issue up to 5 million common shares, worth about $106 million based on a per-share value of $21.25, when the deal was announced after the market closed Tuesday. The balance will be paid through cash on hand and a new credit facility from JP Morgan Chase Bank.

Perhaps most appealing to Serologicals are Upstate's assets, which include cell-signaling research reagents and preclinical drug screening and target-validation technologies, with a focus on kinase screening and protein interaction. The company, headquartered in Charlottesville, Va., expects revenues to top $60 million this year.

"The deal is expected to be immediately accretive upon closing, and is anticipated to contribute $80 million in revenues, $16 million to $20 million in EBITDA and 3 cents to 5 cents in EPS in '05," Adam Chazan, an analyst with Pacific Growth Equities LLC in San Francisco, wrote in a research note.

Serologicals is excited about the addition of kinase screening to its drug discovery services. Upstate's research reagent business is similar in growth and size to Serologicals' Chemicon International Inc. unit, Dodd said, but he added there is only about a 5 percent overlap in product areas. Temecula, Calif.-based Chemicon is established in G protein-coupled receptor screening, and Serologicals' acquisition of the company in April 2003 signaled an entry into the research products market.

"So we will end up in excess of $100 million in research reagents, with a minimal overlap," he said. "So that puts us, in protein research reagents, ranked No. 2 in a tie with Becton Dickinson's Pharmingen division, with a 20 percent market share, and slightly behind Techne [Corp.] that has about 24 percent."

Chazan noted that the companies' combined consumables sales force approaches 50, and opportunities exist to leverage Serologicals' European infrastructure and for both companies to go direct in Japan.

"About 30 percent of all drug screening activities by pharmaceutical and biotech companies deal with kinases," Dodd said. "Upstate is the leader in having a portfolio of kinases, and also doing the actual screening on a contract basis for pharmaceutical and biotech companies. That's a very exciting area for us, as it's the fastest [growing] area, probably, in life science tools."

He said Upstate's portfolio included about 150 kinases and is expected to grow to about 200 by the end of the year. Through facilities in Dundee, Scotland, the company runs its kinase-screening operations to serve multiple contracted pharmaceutical partners. Ongoing expansion efforts there will triple its capacity, and the site will be maintained following the transaction's closing, as will a facility used to develop research reagents in Lake Placid, N.Y. Smaller sites will be integrated into Serologicals, while several Charlottesville positions will be relocated to Atlanta.

Prior to the deal, Upstate employed about 260 people worldwide, while Serologicals had more than 750 worldwide employees. Members of Upstate's management signed employment contracts with Serologicals, with Upstate Chairman and CEO Sheridan Snyder agreeing to remain in a consulting role during a transition period to integrate the companies.

Serologicals' board has approved the deal, as have holders of about 90 percent of Upstate's voting stock. JP Morgan acted as Serologicals' exclusive financial adviser, and any financing provided by the bank would be secured by substantially all the company's assets and will mature between five and seven years after the closing date.

For the quarterly period ended June 27, Serologicals posted $5.4 million in net income and $44 million in net sales. It had $56.4 million in cash reserves through that date, as well as about 34.4 million diluted shares outstanding. For its part, Upstate recorded revenues of $44.4 million in its last fiscal year, and for the six months ended June 30, it posted consolidated revenues of $27.3 million.

Into next year, Dodd said the companies' combined operations would create a $300 million company with an annual growth rate approaching 20 percent. After the acquisition closes next quarter, Serologicals will operate three business groups - Chemicon, Upstate and another division that produces cell culture supplements and diagnostic antibodies.

"Coming out of this acquisition, we will be spending approximately 9 percent of our revenues on R&D," Dodd said. "Our announced target, made three years ago, was to get to the level of 10 percent of revenues into R&D. In our space, the average is 8 percent. So we think we will be highly competitive in terms of our investment in innovation and portfolio development, and it's right on track where we had hoped to be."

On Wednesday, Serologicals' stock (NASDAQ:SERO) rose 18 cents to close at $21.43.

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