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Life Science Tools, MDx M&A Flat in 2011; Improvement Ahead?

By Tony Fong

NEW YORK (GenomeWeb News) – The number of mergers and acquisitions in the genomics tools and molecular diagnostics markets in 2011 was flat compared to 2010 as a strong start to the year fizzled out in the second half.

Despite the late-year lull, some experts are predicting a rebound in M&A activity over the next couple of years.

The number of acquisitions in 2011 among the companies covered by GenomeWeb Daily News came in at 58, even with 2010 as challenging macro-economic factors kept potential buyers on the sidelines during the second half of the year.

In the first six months of the year, 38 acquisitions were completed or announced, up from 33 during the comparable period in 2010. The second half of 2011, however, saw a significant downturn in M&A activity as 20 deals were completed or announced, down from 25 in the comparable year-ago period.

Given the broader economic landscape as well as factors more specific to the life science tools market, the flat 2011 M&A environment may not be surprising. Throughout much of the year, there was uncertainty surrounding government funding — and while the picture coming out of Europe has played out better than feared, the US funding landscape continues to concern many, even with the recent passage of a 1 percent increase in NIH funding for fiscal year 2012.

Particularly worrisome for those in the field was the failure of a Congressional Super Committee to reach a budget-cutting deal last month, which could lead to significant cuts in scientific research funding in fiscal year 2013.

"We're in a suppressed M&A environment, and I do think that is [due to] a combination of uncertainty around healthcare funding, in particular, and the macro-world environment," Paul Cleveland, a general partner and chief operating officer at venture capital firm Mohr Davidow Ventures, told GWDN recently.

Concerns about budget deficits and automatic cuts to the National Institutes of Health as a result of the failure of the Super Committee "have contributed to make everyone cautious and to make the outlook uncertain, and that's not a good environment to encourage anyone to go out and do a lot of acquiring," Cleveland said.

The current funding environment is particularly troublesome for smaller firms, he added, because they often rely on government funding to help build out their technologies. Without such support, developing them to the commercial stage can be difficult, and without a product that can make it to market, those firms have almost no hope of being purchased, or alternatively, of attracting investors for a possible public offering.

"There's an awful lot of inability to predict accurately the business models of companies and also a concern that government subsidies or support for research is declining, and both of those have an impact on things like diagnostics and sequencing and other tools," Cleveland said.

Jim Prutow, a principal at PWC, formerly called PricewaterhouseCoopers, said that a tight credit market didn't help either. During the latter part of the third quarter and into the fourth quarter, hurdles to borrowing money got higher "so there's been some pullback in both the interest in deals, as well as … the potential valuations that deals might get."

Not only did the number of deals dwindle as the year progressed, the size of the deals also became more modest. No acquisition in the second half of the year approached the $6.8 billion that Danaher agreed to pay in February to swallow up Beckman Coulter, and the most noteworthy M&A event in H2 2011 may have been a deal that didn't take place — a rumored sale of Gen-Probe.

Despite reports in April that the molecular diagnostics firm was looking to get acquired, reported bidders backed off and by mid-summer any potential purchase of Gen-Probe had come and gone.

Acquisitions during the second half of 2011 mostly consisted of small to mid-sized firms combining their businesses.

The most high-profile transaction in the last six months of the year was probably PerkinElmer's $600 million grab of Caliper Life Sciences. Overall, PerkinElmer was the most acquisitive company in the life science tools space with seven purchases in total during the year, including four companies offering bioinformatics-related products.

Such firms are especially attractive to buyers because of the potential market that they address as researchers try to make sense of all the data resulting from their experiments.

Other busy buyers in 2011 were Thermo Fisher Scientific, which made five purchases, and Agilent Technologies, which acquired four firms, including most recently Halo Genomics and BioSystem Development.

No Longer a Science Experiment

Moving forward, though, some industry observers are predicting a pickup in M&A activity for 2012. According to recent report from PWC, the number of deals expected in the in vitro diagnostic market is expected to grow in 2012 to 2014, driven by partnerships in companion diagnostics, and the emergence of new players in the space.

In the life science tools and 'omics space, M&A activity may be even livelier in the coming years, according to Prutow. Generally, there are just more growth opportunities in the space than in the general IVD market, in part because the technologies that have been in development are now finally mature enough to be commercialized, he told GWDN.

"We're now getting to the stable technologies and it's not so much a science experiment," he said.

He also said that pharmaceutical firms are becoming increasingly interested in the use of 'omics technologies to develop companion diagnostics for drugs in their pipelines. As an example, Swiss pharma giant Novartis created a molecular diagnostics unit three years ago to focus specifically on developing diagnostics for determining which patients may benefit from certain drugs.

In August the companion diagnostic space also received a boost from FDA when it cleared Roche's test for use with its metastatic melanoma drug Zelboraf (vemurafenib) and Abbott's test as a companion diagnostic for Pfizer's Xalkor (crizotinib), a non-small cell lung cancer drug.

Most pharma efforts in the CDx space have been achieved through licensing deals, and that trend will continue, Prutow said. But, he added, a trend toward acquisitions of companies developing companion diagnostics by pharma is likely, driven by a maturation of the technologies, and a need by drug firms to diversify their business models as they move away from the blockbuster drug model.

Peter Lawson, an analyst at investment firm Mizuho Securities, also is bullish on the M&A landscape. As a whole, 2011 shaped out to be better year on the M&A front than 2010 in the broader life science space, he told GWDN, because although the number of deals may have stayed level year over year, the number of "impactful" acquisitions will total about $20 billion this year compared to $3 billion a year ago.

In late-2010, he said, multiples started to creep up, raising the purchase prices that sellers sought. But more recently, management at different firms have suggested to him that as buyers passed on deals, multiples are "becoming far more reasonable, so in that light you would expect that there would be a continued acceleration in M&A," going forward.

In a research note in early December, Lawson said that the deals are expected to be "relatively modest in size," with Qiagen, Bruker, Sigma-Aldrich, Life Tech, and to a lesser extent, Waters, expected "to be active acquirers."

Investment bank Goldman Sachs also anticipates a healthy rate of acquisitions in the near-term. In a report this month, analysts Isaac Ro and David Roman said that companies in the life science tools and diagnostics space have employed cash "more offensively in the form of M&A," as opposed to share repurchases in recent years.

"Though many of our companies under coverage return free cash flow to shareholders via share repurchase, the primary preference for capital use for the majority of management teams is tuck-in M&A," they said. "Our discussions with management teams in [its tools and diagnostics portfolio], in particular, highlight the belief that these sectors are still growth sectors with fragmented competitive landscapes, creating ample opportunity for consolidation. For the most part, these businesses generate strong [free cash flow] and have stable balance sheets … leaving ample ammunition for a continuation of this trend."

In particular, private firms or smaller publicly traded companies will be targeted by potential buyers looking to expand their geographic reach and access new content to expand their diagnostic menus, as well as looking to add new technologies to their portfolios and increase their scale, they said.

Cleveland of Mohr Davidow, however, cautioned that many factors still point to a continued slowdown in M&A activity. During the summer, he accurately predicted a pessimistic outlook moving forward and said recently nothing has changed his opinion.

While the global macroeconomy is slowly improving, in the US, budget cuts, government inefficiency, and politics will continue to hinder funding opportunities. That, he said, is "going to take years to sort itself out. … I see uncertainty continuing for a relatively extended period of time."

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