NEW YORK (GenomeWeb) – Despite a slight improvement in the last half of the year, 2014 turned out to be another down year for mergers and acquisitions in the molecular diagnostics and omics life science tools space.
During the year, the number of M&A deals in the MDx/omics tools space totaled 36, a 23 percent decline from 47 deals in 2013 and the third year in a row that M&A activity has dropped year over year, according to an analysis by GenomeWeb. The figure includes deals that were announced during the past 12 months and comprised of acquisitions in which an entire company was purchased. It does not include acquisitions of assets or divisions only.
There were 19 deals in the second half of the year, a marginal improvement from 17 deals in H1 2014, but down from 23 in H2 2013.
The biggest announced acquisition in 2014 was Merck KGaA's pending $17 billion buy of Sigma-Aldrich, a deal that Merck KGaA's Chairman Karl-Ludwig Kley called a "quantum leap" for the company's life science business.
On a dollar-value basis, that deal surpassed last year's blockbuster transaction: Thermo Fisher Scientific's $13.6 billion purchase of Life Technologies.
According to Steve Gullans, managing director at Excel Venture Management, 2014 was a "very difficult year" for private equity in the diagnostics space, in general, and only slightly better in the omics space as little venture capital was available for pre-revenue firms, leading to a lack of blockbuster exits and resulting in the soft M&A market. Among the deals that were done, he told GenomeWeb, only a few were completed in which a company was acquired "for a value that was a significant return for" investors.
In dollar amounts the largest transactions in 2014, beyond the Merck-Sigma deal, were Dassault Systemes acquisition of Accelrys for $750 million; Roche's buy of Iquum for up to $450 million; Roche's purchase of nanopore sequencing firm Genia Technologies for up to $350 million; and Bio-Techne's $300 million acquisition of ProteinSimple.
A year ago, reimbursement, flat National Institutes of Health funding, and the implementation of the Affordable Care Act were cited as pressures on the M&A environment. In 2014, many of those factors remained, Gullans said, noting specifically reluctance on the part of payors, both public and private, to cover new omics tests because of the added costs.
That, he said, is a more recent twist to how a company with new technologies gets evaluated. Where once a firm was valued for the quality of its technology, "now, [potential buyers] only see it when you actually [have] a significant revenue stream," Gullans said.
Congress recently passed an omnibus spending bill for fiscal year 2015 that aims to provide about $30.3 billion to NIH, but that is only a $150 million increase from FY 2014 levels.
Following Thermo Fisher's buy of Life Tech, some had suggested the transaction could spark M&A as competitors would feel pressured to scale up their operations to keep pace. In fact, though, the deal may have dampened M&A activity this past year as it took out two firms that had been vigorous acquirers in prior years, Mohr Davidow Ventures Managing General Partner Bill Ericson said. Added to that is the fact that there just aren't many assets in the MDx/omics tools space to be acquired, he told GenomeWeb.
Beneath the surface
However, he noted that the lack of deals may not be indicative of the broader progress taking place in the MDx/omics tools space.
"I just think that there's a lot more activity under the surface than the public M&A of this year would indicate," Ericson said. The use of MDx/omics tools is ramping up "in a really substantial way," he added, and "if you look across our portfolio and the industry as a whole, we just think that there's huge applications for the first time across the board of these genetic technologies in real clinical practice," most prevalently in cancer and in the non-invasive prenatal testing spaces.
As uptake of MDx/omics tools technologies continue, M&A activity around such firms will increase, he added, specifically pointing to Roche and Illumina as potential purchasers.
In fact, Roche was busy on the M&A front in 2014, buying four firms — Genia; non-invasive prenatal testing firm Ariosa Diagnostics; informatics shop Bina Technologies; and molecular diagnostics firm Iquum. Ericson attributed Roche's buying spree to its failed attempt in 2012 to acquire Illumina.
What doesn't happen can be as important as what does, "and what didn't happen was Roche and Illumina weren't consolidated into a single platform, and therefore Roche is out there as a player," he said. "And I think that's good for M&A."
Ericson has made optimistic predictions about the M&A space before, but the difference this year, he said, is that the omics platforms are reaching maturity and the larger players in the space, as well as pharma, do not want to miss out on the opportunity.
M&A typically lags behind uptake of an industry's products, Ericson said, and going forward, "because of the growth of some of these companies and where I'm just seeing the uptake of some of these technologies … we're bullish on M&A in the space."
As an example of that trajectory, he pointed to Verinata Health, which had been a Mohr Davidow portfolio company. The VC firm believed in Verinata's NIPT technology, and in 2013 its faith paid off when Illumina bought Verinata for $450 million.
The maturity of that market, you knew that if you had a test and you validated it, you'd get reimbursement because the alternatives [to NIPT] were far less appealing from both a cost and a procedures standpoint," Ericson said, adding that the NIPT space is poised to become a $1 billion market.
Against that backdrop, Roche acquired Ariosa for an undisclosed amount earlier this month, and investment firm ViaLogy acquired molecular diagnostics business Premaitha Health in June with plans to launch an NIPT in 2015.
Ericson sees the same potential for next-generation sequencing and its applications, including diagnostics.
"For the first time in my career, if you go talk to the clinicians and you ask any them if they're going to use sequencing-based diagnostics for regular clinical use, this is maybe the first year where almost everyone will say 'Yes,' across cancer, prenatal testing, post-birth testing," he said. "It's just filtering into everything."
He credited Illumina for broadening the use of NGS technology into the diagnostics space and driving up adoption of the technology to the point that tools and assay companies feel that they must have a position in the NGS market or risk getting left behind.
NGS-related acquisitions during the past year included Roche's buy of Genia, Bio-Rad's purchase of GnuBio, and Illumina's acquisition of Myraqa, a firm focused on the regulatory processes for in vitro diagnostics.
IPOs instead of M&A
Perhaps as a consequence of a downbeat M&A space, the market for initial public offerings has been comparatively welcoming to MDx/omics tools firms over the past few years, as privately held companies that run out of private financing options, which can include getting bought, will sometimes turn to the public markets instead. The trend toward IPOs has also been driven by an excess of available funds in the public markets, Gullans said.
In 2013, seven MDx/omics tools companies went public while two others filed to go public. One of those firms, CardioDx, has since dropped its IPO plans.
In 2014, five firms went public — Great Basin Scientific, T2 Biosystems, CareDx, Signal Genetics, and Roka Bioscience. Five other firms also filed for an IPO during the year — AltheaDx, AutoGenomics, and Exagen Diagnostics are sitting on their planned offerings, while DermTech International withdrew its IPO, and Roche bought Ariosa.
For the coming year, Gullans predicted the public markets will remain friendly to firms in the MDx/omics tools space. He also said that he anticipates an uptick in international acquisitions of US-based MDx/omics tools firms, noting, in particular, interest from China-based firms as the Chinese population ages.
"They've actually [invested] into so many other sectors, [healthcare] is a new opportunity for them," Gullans said. "They're not interested in making investments to get a return in capital, they want to buy assets to make them global brands and provide healthcare for their citizens," similar to what BGI did with its buy of Complete Genomics in 2013.
Gullans also said that moving ahead firms that use omics technologies for diagnostics purposes could be potential targets for M&A. With a soft research market and stagnant NIH funding, omics tools firms are increasingly moving to platforms that provide a blood-to-answer format. Aside from the actual tests, tools firms seeking to move into or expand their footprint in the MDx space would need to increase their capabilities along the testing pipeline, and companies developing the technologies, as well as those that specialize in clinical samples and information technology could be acquisition targets, he said.
Lastly, Nanosphere could find itself getting bought in the coming year. It hired investment bank Jefferies in September to explore strategic alternatives, including a possible sale of the firm. TheNorthbrook, Ill.-based molecular diagnostics company said in November that the process is ongoing but provided no further update.