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Amid Molecular Dx Acquisition Trend, Some View Cepheid as Prime Target

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
As a handful of molecular diagnostics firms have been snatched up by acquirers in recent months, industry observers believe Cepheid is a prime candidate for a takeover.
 
Cepheid is currently the only firm to offer a fully integrated real-time PCR-based molecular diagnostics platform that has been cleared for marketing by the US Food and Drug Administration. It also has received clearance this year of a couple of potentially lucrative tests, and its stock climbed 77 percent over the first six months of the year.
 
Cepheid runs molecular diagnostic tests on its GeneXpert system, which combines automated sample preparation and RT-PCR testing technologies. In April, the firm received FDA clearance to sell its Xpert MRSA test, which identifies methicillin-resistant Staphylococcus aureus in just over one hour (see BioCommerce Week 4/25/2007).
 
The market potential for rapid molecular tests for hospital-acquired infections is massive — Cepheid officials have estimated the market at $3 billion — and right now the company’s primary competition comes from Becton Dickinson, which is the only other firm to sell an FDA-cleared molecular-based MRSA assay and is working on other HAI tests.
 
This market potential, as well as the continued M&A activity in the diagnostics industry, has made Cepheid an attractive acquisition target, according to industry observers. For Cepheid shareholders, such an acquisition could provide a big payday.
 
A string of recent M&A deals in the diagnostics industry shows acquirers willing to pay big premiums to bring complementary technologies and capabilities in house. For example, Roche last month offered to buy diagnostics firm Ventana Medical Systems for around $3 billion, or $75 per share — a 45 percent premium to Ventana’s closing price of $51.74 the day before the bid (see BioCommerce Week 6/27/2007). The bid also values Ventana at eight times its 2006 sales of $238.2 million.
 
Ventana shunned the offer this week, calling it “inadequate.” (see related article)
 
Early last year, Becton Dickinson gained its MRSA molecular diagnostic test through the roughly $250 million acquisition of GeneOhm Sciences. At the time of the acquisition, GeneOhm reported 2005 revenues of only $5 million, but BD officials justified the acquisition price by pointing to the market potential of the firm’s tests.
 
Usual Suspects
 
“Any of the players that you can think of that don’t already have a [molecular diagnostics] platform built could be suitors” for Cepheid, said Harry Glorikian, managing partner of life sciences consultancy Scientia Advisors.
 
He cited Abbott, General Electric, Siemens, Beckman Coulter, Hitachi, and Philips, among others as possible acquirers. “Any of these who are not in [molecular] Dx that may want to get into [molecular] Dx is a likely candidate to buy them.”
 
Siemens and GE have both made moves to significantly expand their presence in the diagnostics field through acquisitions over the past year. Siemens acquired Bayer Diagnostics for $5.26 billion and Diagnostic Products Corp. for nearly $2 billion (see BioCommerce Week 7/5/2006).
 
GE is nearing completion of its acquisition of Abbott’s diagnostics business, except for the molecular diagnostics portion, for $8.13 billion in cash (see BioCommerce Week 1/24/2007).
 
Meanwhile, Beckman Coulter recently lost a bidding war with Inverness Medical Systems to acquire near-patient diagnostics firm Biosite for more than $1.5 billion (see BioCommerce Week 5/16/2007). The firm, which was looking to add Biosite’s cardiac markers to its diagnostic products, also is in the process of developing its own molecular diagnostics platform that it hopes to launch around 2010 (see BioCommerce Week 12/6/2006).
 
Both Beckman Coulter and Abbott have real-time PCR licenses for diagnostic applications, Glorikian noted. “If they think can build a better mousetrap, then they won’t” look to acquire a molecular diagnostics player, he said. But if those firms don’t want to spend the time and money developing a new system, they could opt to buy a firm such as Cepheid.
 

“They’re the only company in the history of molecular [diagnostics] that has gotten a medium-complexity assay approved, and I don’t think people understand the magnitude of that accomplishment.”

“They’re the only company in the history of molecular [diagnostics] that has gotten a medium-complexity assay approved, and I don’t think people understand the magnitude of that accomplishment,” said Glorikian. “Even Roche and GenProbe, and all those guys, all of those assays are run in high-complexity laboratories.”
 
Glorikian isn’t the only one who thinks Cepheid is an attractive acquisition target. Last week, UBS Securities analyst Derik De Bruin raised his price target on Cepheid’s stock and speculated in a research note that the firm is a “potential take-out candidate.”
 
He maintained his ‘buy’ rating on the stock and raised his price target on Cepheid’s shares from $15 to $18.
 
The firm’s shares closed at $14.57 on Tuesday. Cepheid’s stock has been the best performer among BCW Index companies so far this year and crossed the $15 mark on July 5 for the first time since July 2000.
 
De Bruin noted that since FDA clearance of the MRSA assay, Cepheid has won more contracts with hospitals run by the Veterans Administration, which was an early adopter of the molecular tests. According to De Bruin, the VA hospitals market represents a $60 million opportunity.
 
He also sees revenue opportunity from Cepheid’s $27 million acquisition earlier this year of Sangtec Molecular Diagnostics (see BioCommerce Week 2/21/2007). That purchase provided Cepheid with a portfolio of real-time PCR-based assay kits for a variety of infectious diseases that affect immunocompromised patients.
 
“With GeneXpert momentum and potential upside from the Sangtec deal, we believe [Cepheid] is on track to deliver its ’07 revenue guidance of” between $112 million and $115 million, De Bruin wrote. UBS forecast revenues of roughly $144 million in 2008 and $173 million in 2009 for Cepheid.
 
Scientia’s Glorikian said Cepheid is now “getting to a revenue level that is meaningful. They’ve proven that the system works, that they can build these things and get them out there. They’ve proven that they can manage the whole FDA situation,” he said. “All of these are big steps for what’s still, relatively speaking, a small company.”
 
Glorikian said that a potential acquirer, though, would have to be looking for an instrument system, not just assays. If an acquirer is more interested in assays, a firm like Prodesse would be a more likely target, he speculated.
 
Cepheid officials declined to comment on the speculation that the firm is a potential takeover candidate.

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