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M&A in Genomics/MDx Sector Surges in H1 2021

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NEW YORK – As the COVID-19 pandemic began to ease early this year with the introductions of multiple vaccines, the genomics and molecular diagnostics industries celebrated by going on a shopping spree.

Through the first six months of the year, 55 M&A deals have been announced or completed in the MDx/omics tools space, already eclipsing the 54 deals done in all of 2020, matching the number of deals done in all of 2018, and on pace to beat 2019's 62 completed deals. Importantly, the 55 deals announced or completed in H1 2021 amount to a 120 percent increase compared to the 25 deals announced or completed in H1 2020.

There are three main reasons for the spike in the number of deals, according to Kevin DeGeeter, managing director of healthcare research at Oppenheimer. First, and most obvious, is that the first half of 2020 was riddled with disruption from the pandemic. "As we work through that, some of the comparisons — and I expect M&A may be one of them — get a little easier," he said.

The second, and more important reason, leads to a trend that has been playing out over several quarters, and which surged into prominence in the first half of the year. There's been a lot of innovation in the liquid biopsy space, DeGeeter explained, specifically on the clinical side and with companies developing tests for sample types such as urine and blood.

Indeed, while Illumina is still wrangling with the US Federal Trade Commission over its proposed $8 billion acquisition of Grail, Agilent Technologies in March announced plans to acquire precision oncology firm Resolution Bioscience for up to $695 million. Bio-Techne acquired molecular diagnostics firm Asuragen for an initial payment of $215 million, noting that Asuragen's technology would be useful to taking its liquid biopsy products to the market.

Exact Sciences is also illustrating what a strategic M&A plan can do as it aims to build an end-to-end cancer testing pipeline, including diagnostics for minimal residual disease, through acquisitions of smaller companies. The company has made two buys this year — PFS Genomics and Ashion Analytics — in the oncology space to give itself capabilities it didn't have before.

In a note to investors at the time of the PFS acquisition, William Blair analyst Brian Weinstein said the deal would add a new product to Exact's breast cancer franchise that potentially could add several hundred million dollars of revenue to the company's business over time.

"As this deal highlights, the pace of M&A at Exact Sciences continues to be indicative of a management team that is aggressively investing in assets to support its broader plans of being the leader in the advanced cancer diagnostics space," he wrote. "We see Exact Sciences as a clear leader in the just emerging precision oncology segment of diagnostics, with an unrivaled infrastructure built out to support the many initiatives being pursued."

There are also companies with interesting approaches to methylation detection and other similar assays that aren't directly liquid biopsy tests but are in the related food chain that are being swallowed up, DeGeeter added.

"[There's this] opportunity to go after big markets on the clinical side on the tools component of it or hardware side," he said. "And then we're in a very nice innovation cycle with a lot of different companies with some new and clever ideas as to how to build off of the investments that have been made, particularly in short-read DNA sequencing. So I think it's a bit of a golden-age dynamic with regard to innovation in the group, and innovation is a great underpinning for M&A."

The final reason DeGeeter noted for the rise in M&A activity is the "exceptionally robust window" of fundraising and financing, especially in the public market. The flood of investor money is giving private companies more opportunities to go public, he said — and as part of the run up to a potential IPO, buyers get more aggressive in their willingness to bid up assets.

Indeed, at least 11 companies in the MDx/omics tools space have gone public or have announced their intentions to go public at some point this year, including Oxford Nanopore Technologies, Singular Genomics Systems, Caribou Biosciences, and Sophia Genetics.

"A wide-open IPO window, in our view anyway, is good for M&A in this group," he added.

There's also another trend that has hit the genomic tools and diagnostics industries this year that combines aspects of both IPOs and M&As: special purpose acquisition companies, or SPACs. They offer companies the opportunity to go public more quickly and avoid some of the disadvantages of a traditional IPO, but they have features of a traditional acquisition.

Seven companies in this space announced SPAC deals in H1 2021, including 23andMe, which recently closed its deal and became publicly listed on the Nasdaq. The latest was Ginkgo Bioworks, which agreed to merge with SPAC Soaring Eagle Acquisition in May, with the purpose of becoming a publicly traded company on the Nasdaq. The transaction implies a $15 billion pre-money equity valuation for Ginkgo and is expected to provide up to $2.5 billion of gross cash proceeds.

DeGeeter believes the SPAC trend will continue through 2021 and beyond, as diagnostics companies tend to have a profile that's attractive to many SPAC investors.

"Many [of these] companies do have revenue, as opposed to pre-revenue companies. That's generally attractive to many of the SPACs — opportunities for relatively high levels of growth and an opportunity for some of the capital that is available through the SPAC and perhaps other related financings to fund many years of operations," he said. "So, at least within the life sciences, we continue to think about diagnostics companies as being a relatively more attractive option for SPACs than, for example, biotech companies, which have largely stuck to the more traditional IPO."

Overall, DeGeeter concluded, the record pace of M&A set in the first half of the year is on track to continue in the second half as well.

In addition to continued interest around liquid biopsy and precision oncology, he also believes there will be building momentum around more artificial intelligence products and technologies within the diagnostics space. The most visible indicator of this budding trend is Sophia Genetics' IPO, he said. The company offers a core genomic analytics platform called Data Driven Medicine to support its analytics pipelines and builds components, including AI technology, for predicting variant pathogenicity. There are also similar, smaller companies in the private realm that are beginning to catch the interest of investors, he noted.

Further, DeGeeter added, "there's an entire ecosystem around AI where it intersects with diagnostics," such as technologies that can help a company optimize its liquid biopsy supply chain, "that will be a critical area for M&A, not just in the second half of 2021, but in 2022."

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