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Soft M&A Market in H1 2014 as Number of Deals in Omics/MDx Space Drops 33 Percent

NEW YORK (GenomeWeb) – Mergers and acquisitions in the omics and molecular diagnostics space stayed soft through the first half of the year as the number of deals dropped 33 percent year over year.

Through the six months ending June 30, 16 M&A deals were either announced or completed, down from 24 in the first half of 2013. Sequentially, the drop was 30 percent from 23 deals in the second half of 2013.

The numbers include those transactions in which an entire company was acquired, but does not include the purchases of assets or divisions only.

A year ago, Thermo Fisher Scientific's $13.6 billion planned purchase of Life Technologies was the signature deal in the omics/MDx space. Though 2014 has thus far lacked a similar transformative transaction, there have been a handful of notable deals. In particular, two purchases stand out simply because they involved next-generation sequencing firms.

In early June, Roche said that it would acquire Genia Technologies for $350 million, as Roche continued rebuilding its NGS business following the shutdown in 2013 of its 454 sequencing unit and the dissolution of its collaborations with DNA Electronics and IBM.

Meanwhile, Bio-Rad Laboratories acquired GnuBio for up to $110 million, launching Bio-Rad into the NGS space with technology that company officials said would leverage the knowledgebase that the company is growing in droplet digital PCR. Both Genia and GnuBio's technologies remain in the development stage, though, and it could be years before Roche and Bio-Rad are able bring them to market.

Deals also took place in the proteomics/protein science space with Fluidigm buying mass cytometry firm DVS Sciences for $207 million; Myriad Genetics acquiring Crescendo Bioscience for $270 million; Bio-Techne buying ProteinSimple for $300 million; and Retroscreen purchasing Activiomics for $6.7 million.

The largest transaction in H1 2014 was Dassault Systemes' $750 million all-cash acquisition of bioinformatics firm Accelrys. Overall, though, the M&A landscape in the omics/MDx market was lackluster, and if the trend continues in the second half of the year, 2014 will turn out to be the third consecutive year that the number of M&A deals has declined year over year. In 2011 the number of transactions was flat year over year.

At the end of 2013, life science investment managers cited a number of obstacles to acquisitions, including cuts to the National Institutes of Health's budget and the trimming of R&D budgets of many drug manufacturers. Implementation of the Affordable Care Act and concerns about Medicare reimbursements were also mentioned as limiting factors.

Still, there were guarded expectations that 2014 would see some rebound in the number of M&A deals. One reason that that has not occurred may be that academic researchers remain concerned about funding for their projects.

In a survey released last week, Mizuho Securities analyst Peter Lawson said that while academic sentiments about funding improved in the first quarter, in the second quarter those sentiments reversed. The 26 scientists who responded to the survey said that government funding during Q2 was down nearly 2 percent sequentially from Q1 and that they anticipate Q3 funding to trend down a little more than 2 percent. Expectations for full-year 2014 are that funding will be down between 1.5 percent and 3.1 percent year over year.

Mizuho also found that while spending on infrastructure in Q2 was up sequentially and spending on reagents, as well as personnel, were flat, capital spending on instruments "was weakest, as expected, and slipped from last quarter."

Those trends don't bode well for M&A activity since the academic market is a major revenue driver for companies in the omics/MDx space, and potential buyers may not want to pursue deals that could become short-term revenue drains or don't have the potential to be quickly accretive to earnings.

However, one potential big acquirer looms in the background — Danaher, which has indicated that it may be ready to actively shop again. Since buying Beckman Coulter three years ago, Danaher has mostly stayed on the sidelines in the life sciences market. The firm has about $8 billion available for acquisitions, and company officials have said that they plan to use at least part of that to expand its life science and diagnostics portfolio.

At an investor conference at the start of the year, Danaher CEO Larry Culp said the firm "will continue to be an active acquirer" throughout 2014 and beyond, and noted that while there are no specific gaps in Danaher's LS&D portfolio that needs to be addressed, it will "come from an offensive position" in pursuing deals by leveraging the strengths of its existing businesses including Beckman Coulter, AB Sciex, and Leica, in order to increase the value of a strategic buy.

In a research note last month, Goldman Sachs analyst Isaac Ro added that Danaher management has said that over the long term its capital allocation remains biased toward M&A. The focus is to deepen its presence within its five existing segments "and it expects to continue to add through both bolt-on and more significant M&A," Ro said.

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