NEW YORK (GenomeWeb) – The number of mergers and acquisitions in the molecular diagnostics and omics life science tools space continued to climb in 2016, marking the second year of increased deals after declines in the previous three years. But the increase of 6 percent was significantly smaller than the 33 percent increase in 2015 over the previous year.
According to an analysis by GenomeWeb, there were 51 deals completed in the MDx/omics tools space in 2016 compared to 48 deals in 2015. The previous three years, 2012 to 2014, had seen continued declines in M&A with deals decreasing 23 percent in 2014 alone.
The first half of this year saw the completion of 35 deals compared to 30 deals in H1 2015, but only 16 deals were completed in the second half of the year, down from the 18 deals in H2 2014. This trend continued from 2015, where the number of deals in first half of the year surpassed the number of deals in H1 2014, but then declined in H2 compared to the previous year.
The sector saw the completion of two multibillion-dollar deals — Thermo Fisher Scientific's purchase of FEI for $4.2 billion and Danaher's purchase of Cepheid for $4 billion — as well as Thermo Fisher's $1.3 billion buy of Affymetrix. Another deal worth billions — Abbott's as-yet incomplete $5.8 billion acquisition of Alere — is in dispute.
A dramatic H1
Several of the year's biggest deals — Abbott's pending acquisition of Alere, Thermo Fisher's acquisition of Affymetrix, Qiagen's Exiqon buy, and Luminex's takeover of Nanosphere — came with notable challenges.
Abbott made its offer for Alere in February, but uncertainty emerged almost immediately as Alere delayed filing its 10-K report with the US Securities and Exchange Commission, and received a grand jury subpoena from the US Department of Justice over sales practices and dealings in Africa, Asia, and Latin America, leading Abbott to request termination of the acquisition and an offer to pay Alere between $30 million and $50 million to cancel the transaction — but Alere refused.
Abbott's acquisition of medical equipment maker St. Jude Medical for $25 billion in April played a role in the speculation, as Abbott CEO Miles White declined to affirm the company's commitment to completing the proposed acquisition with Alere, and some analysts speculated the deal signaled Abbott's declining interest in Alere.
Alere sued Abbott after that, but the two companies agreed to consider mediation of their dispute. However, mediation failed, and Abbott sued Alere earlier this month saying it wants out of the deal because of "the substantial loss in Alere's value following the merger agreement," and what it described as adverse events that materially change Alere's long-term prospects.
Thermo Fisher's acquisition of Affymetrix was not without its own challenge, as Affy received a competing bid from a new company formed by formed Affy executives called Origin Technologies. After its first bid was rejected, Origin followed with a second, higher offer, which Affy seemed to consider for a short time before ultimately rejecting it. Origin then withdrew, and Thermo Fisher completed the deal in March.
Meanwhile, Qiagen's acquisition of Exiqon also had its own hiccups. Qiagen first offered to purchase the Danish life science research tool and molecular diagnostics firm in March, but was forced to amend the terms of the deal three times in order to meet the shareholder acceptance threshold. In May, Exiqon was even forced to tell reticent shareholders that failure to close the deal would pose risks to its short-term profitability and would necessitate an increased investment in its life sciences operations at the expense of its diagnostics segment. The deal eventually closed in June.
And Luminex was forced to raise its purchase price for Nanosphere to $1.70 per share in cash from the $1.35-per-share price it originally offered for the molecular diagnostics developer, in response to an unsolicited bid from an unnamed third party. That deal also closed in June.
The usual suspects?
Aside from the drama, various large buyers quietly snatched up several acquisition targets apiece.
In December 2015, William Blair analyst Amanda Murphy said in an interview that she believed 2016 could 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 at the time. "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, the company made three purchases this year — Affymetrix, FEI, and stem cell research products firm MTI-GlobalStem — totaling at least $5.5 billion. MTI's purchase price was not disclosed.
Meanwhile, Danaher, Laboratory Corporation of America, Myriad Genetics, PerkinElmer, Takara Bio USA, and several other companies made two buys each. LabCorp's $371 million acquisition of Sequenom was one of the year's biggest deals. Siemens and Illumina made an appearance with one acquisition each.
In an interview, Janney analyst Paul Knight said he felt the pace of deals in 2016 was "a little light," adding that although there were several big deals, M&A in the diagnostics sector as a whole didn't reach the levels he had expected.
"I think some corporate initiatives occurred late in the year," he said. "For example, the Danaher spinoff [of Fortive] didn't occur until late in July, and Siemens has only recently indicated it would be spinning off its healthcare division. So, I think some corporate events like that are [responsible for the light M&A pace]. I think the diagnostics sector has had a period of revaluation due to FDA uncertainty and due to the lack of revenue growth in the sector."
Canaccord Genuity analyst Marc Massaro had a slightly different take on 2016, saying he didn't believe deal volume was lighter than expected. In fact, he chose to focus on the sizes of the deals that were made, noting that "the size of the deals were relatively large, and if you look at the total revenue that was sold, it was a heck of a lot more than the prior year."
The year of diagnostics
In 2017, Knight said he sees potential for a lot of M&A activity in the diagnostics space. In fact, he added, the slower pace in 2016 may have been a lead-up to a flurry of deals next year.
"There could have been more of Danaher, more of Siemens, and General Electric [in 2016]. Therefore, I think you're going to see the diagnostics sector be a little more active next year," he said. "That race has been going on silently, but it may make more noise next year. I think the Abbotts and the Roches and the PerkinElmers, and the Danahers, the whole diagnostics sector has been very quiet compared to the value that's building there, so I think you'll see a higher level of activity."
Massaro concurred, pointing to Danaher and Thermo Fisher as likely acquirers in 2017.
"I think Danaher has proven that they're a player in diagnostics [after the Cepheid acquisition], and they're not done. They could easily buy Cepheid for a lot of reasons, one of which was there was not material overlap with their business," he said. "It's a company that grows via acquisitions, it doesn't have a lot of overlap with other companies right now, and it's likely to do another deal in 2017.
"Roche is a buyer — I think they will always be a buyer. Thermo Fisher is clearly always a buyer as well," said Massaro. "I would continue to emphasize that any of the pure-play deals in molecular diagnostics could be a target at the right price."
As for Abbott's deal with Alere, Massaro believes Abbott will be forced to complete the deal when all is said and done. Abbott's claim that Alere's business has suffered a material adverse event — particularly that the government eliminated the billing privileges of a substantial Alere division — is unlikely to hold up, he said.
"Typically, a material adverse event occurs when there's 10 percent of revenue impacted, and we haven't hit that threshold," he noted. "I think Alere is likely to win against Abbott in court. Based on my discussions with Alere, they think a court case could take as little as two to three months, and recent information suggests a potential trial date of April."
He also cautioned that although Abbott is usually a reliable acquirer, the Alere drama may put Abbott in "one-year purgatory period," as other companies may shy away from the firm.
"Abbott has their hands full, and there's not a long line of companies that want to sell to Abbot after this brouhaha," Massaro said. "I think this episode with Alere has hurt their ability to make acquisitions in the future. People will get over it in 2018, but 2017 is going to be a tough year for Abbott to go out and acquire things."
