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M&A Deals in 'Omics Tools, MDx Space Drop 30 Percent in H1 2012

NEW YORK (GenomeWeb News) – Through the first six months of 2012, the number of mergers and acquisitions in the 'omics-related tools and molecular diagnostics markets fell nearly 30 percent compared to a year ago, though a few big deals focused on diagnostics were consummated.

During the first six months of the year, the number of deals announced or completed in the markets covered by GenomeWeb Daily News shrank to 27 deals from 38 in the year-ago period, signaling a continued wariness on the part of potential buyers to invest in often risky technologies.

Softness in the M&A market was already apparent in the second half of last year when just 20 deals were completed or announced, and concerns continued to linger into 2012 about funding for the National Institutes of Health, which could see its budget slashed by nearly 8 percent for 2013, as well as the broader global economy. The 27 deals in H1 2012 also are down from the 33 deals recorded in H1 2010.

This year started off promising for M&A activity when Roche announced in late January a $5.7 billion hostile bid to acquire Illumina. It raised its bid to $6.7 billion in March after being rebuffed by Illumina, and the deal never transpired as Illumina fought to remain an independent company.

While that deal fizzled, a rumored seller from 2011 did finally succeed in finding a buyer: Gen-Probe, which is in the midst of being acquired by Hologic for $3.7 billion, the largest deal by dollar amount in the 'omics tools and MDx spaces during the half-year. A year ago, Gen-Probe reportedly went looking for a buyer but found only window shoppers.

Other notable deals during the just-concluded six months include Agilent Technologies' $2.2 billion purchase of Dako; Affymetrix's $313 million acquisition of eBioscience; GE's purchase of SeqWright; and Qiagen's buy of Intelligent Bio-Systems.

Overall, though, the M&A picture for the first half of 2012 was lackluster. According to Gary Kurtzman, managing director at private equity and venture capital firm Safeguard Scientifics, concerns about the healthcare market and worries about reimbursements have been a barrier to acquisitions.

He also noted that changes in probably the most-prized technology in the 'omics space, next-generation sequencing — where smaller, faster technology is creating new markets — have caused potential buyers to pause before moving ahead with a purchase.

"With newer technologies coming down the pike, we're seeing a lot of the newer technologies, which are going to supplant these bigger box solutions," he told GWDN. "There's just a natural, 'What's coming next?' type of thing in the sequencing space."

A year ago, some cited the low cost of debt as a driver of M&A deals. The cost of borrowing remains low, but with many of the larger tools firms flush with cash, that's a moot point, said Kurtzman. Such companies continue to have interest in acquisitions, but "I'm not sure they're going to pull the trigger," he said.

Companies such as Life Technologies, Thermo Fisher Scientific, Agilent, PerkinElmer, and Danaher have gone on buying sprees in recent years to build out their life science capabilities, and now the focus has shifted to integrating those purchases.

"It seems like a lot of the companies have gobbled up things, and now they're just trying to digest them," said Kurtzman.

Dx Drives Deals

While the appetite for 'omics tools firms may have hit a lull, diagnostics properties were a key driver of deals during the past six months. As Ken Powell, president of healthcare consulting firm Genesis Business Development, told GWDN, there was "a distinct recognition by all the different stakeholders to acknowledge the value of diagnostics and healthcare delivery … you're looking at life science tools companies trying to transition into the routine diagnostic space, with new technologies."

This was perhaps most evident in Agilent's acquisition of Dako. While Agilent had signaled its intention to raise its profile in the diagnostics space during the past year with the registration of its Cedar Creek, Texas facility with the US Food and Drug Administration, diagnostics comprised just 1 percent of the firm's total business.

The purchase of Dako is expected to provide Agilent with a significant boost in the market, especially in cancer diagnostics.

Agilent President and CEO Bill Sullivan said when the deal was announced that Dako would accelerate his firm's growth in several markets, such as the $2.2 billion anatomic pathology space, as well as the molecular diagnostics space, and would move Agilent into companion diagnostics, a fast-growing subspace within diagnostics.

Meanwhile, Hologic's proposed buy of Gen-Probe creates what Hologic said will be the biggest diagnostics firm focused on women's health. Once completed, a company official said in June, Gen-Probe, which will operate as a wholly owned subsidiary, will become the diagnostics hub for Hologic.

That deals are now taking a diagnostics slant may be the result of the evolution of 'omics technologies from purely research tools to instruments with clinical use. Platforms such as next-generation sequencers and mass spectrometers have until very recently been owned primarily by core laboratories and research facilities.

But technology development is increasingly focused on clinical applications and exclusive of M&A, companies are putting more resources into building out their diagnostic operations. At a recent investor conference, an Illumina official noted clinical diagnostics as its largest growth opportunity, as GWDN's sister publication Clinical Sequencing News reported. The firm also has established a molecular diagnostic segment to take in-house developed products through the US Food and Drug Administration approval process.

Life Technologies, meanwhile, hired Ronnie Andrews in February to further develop the company's diagnostics strategy. Both it and Illumina are focusing their newest platforms — the Ion Torrent Personal Genome Machine and Ion Proton for Life Tech, and the MiSeq for Illumina — on the clinical diagnostics space.

Additionally, NanoString Technologies has established a diagnostic unit, and genomics services firm BGI said in the fall that it planned on setting up a sequencing-based diagnostics shop.

Roche's failed hostile takeover of Illumina was also motivated, in part, by Roche's plans to move next-generation sequencing into the diagnostics arena.

Kurtzman said that one driver of M&A activity longer term will be smaller diagnostic firms that use NGS technology and that have established revenue streams and growth trajectories. "Sequencing is going to have a bigger foothold in the clinical diagnostics space and … once that becomes more established and some of those companies get traction, I think you'll see some of them [getting] acquired," he said.

That seems to be the thinking behind Qiagen's purchase of Intelligent Bio-Systems, a deal which brings the molecular diagnostics and sample prep technologies firm into the NGS fold. Qiagen already uses pyrosequencing technology as the basis of some of its tests, but CEO Peer Schatz said just a year ago that NGS technology was "not yet ready for prime-time clinical use," as GWDN sister publication Pharmacogenomics Reporter reported.

But with NGS now making headway into the clinic, Qiagen is trying to keep from being left out of any sequencing bonanza down the road.

"While next-generation sequencing is viewed today mainly as a research tool, our initiative is to expand beyond this and to offer applications designed to address the needs of customers in clinical research and molecular diagnostics," Schatz said when the Intelligent Bio-Systems deal was announced in late June.

The M&A picture for the second half of 2012 is uncertain. While H1 2012 was down year over year, it was up sequentially from the second half of 2011. A complicating factor is the NIH budget for 2013, which is not expected to be clarified until after the US presidential elections and possibly not until early next year.

In the end, what will drive M&A back up are companies with successful technologies and signs that profitability is in sight, Kurtzman.

"A lot of these companies are still unwilling to acquire earlier-stage assets that risk hitting their earnings. We'll see M&A happening [with] companies that are either at break-even or [where] there are true synergies on the operating expense side," he said.