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M&A Deals in MDx/Omics Life Sciences Tools Space Up 33 Percent in 2015

NEW YORK (GenomeWeb) – After three straight years of declining mergers and acquisitions in the molecular diagnostics and omics life science tools space, 2015 was the year M&As came roaring back. The sector saw a 33 percent increase in deals, with Roche continuing the buying spree it started in 2014 and Merck KGaA closing its $17 billion acquisition of Sigma-Aldrich.

According to an analysis by GenomeWeb, there were 48 deals completed in the MDx/omics tools space in 2015, compared to 36 deals in 2014. This is the first time in three years that the sector has had an increase in deals — M&A decreased 23 percent in 2014.

The first half of the year saw the completion of 30 deals compared to 17 deals in H1 2014, and 18 deals were completed in the second half of the year, down from the 19 deals in H2 2014.

A year of big deals                                                                 

The biggest deal completed this year was Merck KGaA's acquisition of Sigma-Aldrich for $17 billion in November. Merck said it plans to integrate Sigma into its EMD Millipore business, and the company's Chairman Karl-Ludwig Kley called it a "quantum leap" for Merck's life sciences business. 

But the Merck-Sigma deal was far from the only billion-dollar acquisition in 2015. While 2014's biggest deal was Dassault Systemes' $750 million Accelrys buy, Danaher bought Pall for $13.8 billion this year, and Opko Health acquired BioReference Labs for $1.47 billion. Rounding out the top five were Roche's acquisition of GeneWeave for up to $425 million and Thermo Fisher Scientific's acquisition of Alfa Aesar for $403 million.

There were also several deals in the $200 million to $300 million range, including Fujifilm's acquisition of Cellular Dynamics, Thermo Fisher's acquisition of Advanced Scientifics, Agilent Technologies' Seahorse Bioscience acquisition, and NeoGenomics' Clarient buy.

Surprisingly, Roche continued the buying spree it started in 2014 with its acquisitions of Iquum, Ariosa, and Bina, adding Signature Diagnostics, CAPP Medical, Kapa Biosystems, and GeneWeave to its roster. The buys show Roche continues to be interested in expanding its diagnostics business as well as its next-generation sequencing offerings.

Trends for 2016

The activity in 2015 is probably a harbinger of things to come in 2016, according to some analysts. Earlier this month, Goldman Sachs upped its rating of the life science tools sector to Attractive from Neutral, saying the biopharmaceuticals market is likely to remain robust. Goldman analyst Isaac Ro added that academic funding is set to grow in 2016, which portends well for the tools sector.  

Indeed, a few days ago, President Obama approved a $2 billion funding increase for the National Institutes of Health for fiscal 2016, which is by far the agency's biggest budget increase in 12 years. Add that to high spending on the development of industrial labs and an acceleration in US GDP, and Goldman is bullish on the prospects for organic growth of the tools sector in 2016.

William Blair analyst Amanda Murphy told GenomeWeb that many of the companies she follows have pursued a strategy of tuck-ins in 2015, and that might continue into next year. But she also believes that 2016 may see some "transformative" M&A action, and she speculated that Thermo Fisher could come back as a major buyer.

"With Thermo buying Life [Technologies in 2013], that took a major buyer out of the market," she said in an interview. "I would suspect now that they've digested that acquisition they'll be back on the market again in 2016, so I think it's fair to say they may look to do something next year that may be more transformative."

Indeed, Thermo seems to have started dipping a toe in the water with its 2015 acquisitions of Alfa Aesar and Advanced Scientifics totaling $703 million.

She added that many companies may be looking for new areas of growth as their end markets have been challenged historically. "There are a number of companies in the genomics space that are private that may look to a larger company to help with distribution, especially in sequencing, where it's fairly challenging to access all the end points you need to globally," Murphy said.  

In a note to investors, UBS analyst Jonathan Groberg wrote he believes consolidation will be a major theme in the tools sector. "We see M&A as an important ongoing sector theme that will be necessary to drive increased returns for both buyers and sellers," he said. Similarly to Murphy's view of tuck-ins, Groberg added, "We expect companies will largely choose to pursue bolt-on deals given the challenges inherent in larger deals and reticence towards hostile deals."

He also seemed to concur with Murphy's assessment of Thermo Fisher as a company to watch. "Should there be a bigger deal in the industry we would expect TMO to be the acquirer as the firm's [balance sheet] will be in good shape and its largest M&A competitors are side-lined digesting their own recent acquisitions," he wrote.

Groberg also seemed bullish on Illumina for 2016, citing the strong growth in the genomics market and the company's steady 37 percent sequencing utilization rate that has remained within the historical range of 30 percent to 45 percent despite exponential increases in total annual sequencing capacity.

"Over the past several months, there has been an influx of new sequencing product launches and additional details of soon to be launched products. This news flow has begun to raise some concerns over the sustainability of Illumina's dominant NGS market position," Groberg said in his note.

"While we do not discount the impact of competition … the reality is that today many of these competitive launches are likely to remain niche players that will struggle to compete directly with ILMN's high-throughput offerings, which we think are becoming increasingly sticky with many companies that are pushing forward the 'Genomics of Things.'"

It would take a "significantly superior" product to displace Illumina, he added, which is unlikely to happen anytime soon.

However, he said, the clinical diagnostics market is likely to be challenged in 2016, with questions arising as to what pricing will look like after the implementation of the Protecting Access to Medicare Act of 2014, whether payors will begin to reimburse patients for novel genetics tests, and whether the FDA will begin to regulate lab-developed tests.

For 2016, Murphy said she's looking to recommend stocks that haven't reached peak valuation. "Generally, because the end markets have performed well, the stocks have outperformed and from a relative perspective, at least at a historical level, the space is at peak valuation relative to historical levels," Murphy said. "Trying to find a spot where there's a divergence between fundamentals and valuation is difficult. There are a few stocks that have had some issues and those are the places we're looking at to recommending for next year."

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