By Tony Fong
NEW YORK (GenomeWeb News) – A slowly improving economy and increasing interest in the potential payoff from molecular diagnostics bodes well for mergers and acquisitions, particularly in the MDx space, according to some experts.
Last year's economic recession resulted in one of the weakest M&A environments in recent memory, but the first half of 2010 has seen a gradual recovery that some say will continue through the balance of the year.
Not everyone agrees that a turnaround is happening, and no one is saying that M&A activity this year will approach that of 2007 when the total dollar figure for transactions in the molecular diagnostics space exceeded $23 billion, according to one estimate. But in interviews with analysts and industry insiders, early indications are that the chill that spread across the M&A landscape in 2009 may be reversing itself.
According to a review by GenomeWeb Daily News, 33 deals — which included 19 acquisitions of complete companies and 14 of which were purchases of a business segment or an asset — were either completed or announced in the MDx and 'omics tools space in the first half of 2010, including a handful of blockbuster deals.
Among these blockbusters, Germany's Merck KGaA is expected to close on its $7.2 billion purchase of Millipore later this year. Meanwhile, Agilent Technologies closed on its $1.5 billion acquisition of Varian, and Danaher completed its $1.1 billion purchase of MDS' Analytical Technologies division and the mass spectrometer joint venture formerly held by MDS and Life Technologies' Applied Biosystems business.
According to Ernst & Young, in non-imaging diagnostics, there were nine deals totaling $1.9 billion announced in the first quarter of 2010, up from four deals for $335 million in Q1 2009. Five other deals were announced in Q1 2010 whose terms were not disclosed.
"It's very safe to say that we have seen a very significant rebound in M&A activity in the sector," said John Babitt, a partner in the life sciences transaction advisory services group at Ernst & Young. Though the non-imaging diagnostic space is much broader than the MDx arena, the figures "get to the core" of the MDx space, he told GWDN.
As interest grows for M&A deals from both potential buyers and sellers, Babitt added that there will be a sequential increase in activity in the second quarter, "and the second half of 2010 should be a fairly robust deal environment, as well."
Harry Glorikian, managing partner at life sciences consulting firm Scientia Advisors, added that, in general, the MDx market "is just very hot right now … and I expect that over the next couple of years that the deal flow will increase."
"The mid-sized and larger companies are looking to either a bolt-on or a new group they can have in molecular [diagnostics] to grow that segment of their business because it is a growth area in the life sciences," he said.
Driving any deals in the space, he and others said, is the continuing maturity of 'omics-based technology and research from the discovery phase to potential clinical utility and diagnostics capabilities.
Such companies "will look to M&A to advance their capabilities in areas such as sales, marketing, and reimbursement [because] the sale of diagnostics to hospitals is much different than [selling] genomics to primarily research institutions," Babitt said.
In particular, next-generation sequencing is being eyed by potential buyers as technology that can translate into potential MDx profits. A case in point, in mid-June, Gen-Probe invested $50 million into sequencing platform developer Pacific Biosciences, a deal that includes the co-development of diagnostics using PacBio's single-molecule real-time sequencing technology.
It's still too early to say what sort of MDx tools or tests can result from such alliances, and it will be a few more years before next-gen sequencing companies become full-on acquisition targets. "That's got to run its course before anybody might be interested in anything else," Glorikian said of the Gen-Probe/PacBio partnership, adding "They're trying to understand what a test is going to look like, those sorts of things."
But "the opportunity is significant," he said.
As pharma looks to the MDx space for tools to incorporate into their new drug-development processes, it may also spur on M&A deals in the space, especially as drug companies "look at trying to really incorporate personalization of healthcare, and where their drugs are most effective," Babitt said.
Last September, Qiagen bought UK companion diagnostics firm DxS in a deal valued at up to $130 million. According to Ulrich Schriek, vice president of corporate business development at Qiagen, a big plus to the acquisition was that DxS had established relationships with pharma firms such as Bristol-Myers Squibb and AstraZeneca. As his company evaluates future deals, such partnerships with pharma will continue to be a major selling point, he added.
The height of M&A activity in the MDx space was in 2007 when, according to Qiagen's estimates, the dollar figure on deals exceeded $23.4 billion.
According to Glorikian, in addition to partnerships with MDx firms, drug companies will be looking to acquire companies operating in the space. Only a limited number of companies have successfully launched MDx tests, "so if you said, 'I want to start something from scratch,' where do you hire these people from?" he said. "They're definitely unique assets … it could be easier for you to acquire an asset than to build it from scratch."
Bits and Pieces
While that has yet to happen, one trend that did appear in the first half of 2010 was a tendency toward purchases of business segments, rather than whole companies. They include Danaher's purchase of MDS Analytical Technologies and the mass spec JV, as well as Biocartis' acquisition of a molecular diagnostic technology platform for DNA and RNA testing from Royal Philips Electronics.
Starting late last year, Caliper Life Sciences also embarked on a strategy to sell off non-core parts of the company to concentrate on high-growth markets, such as next-generation sequencing, biotherapeutics, molecular diagnostics, and imaging. In December, it sold its Xenogen Biosciences subsidiary, and in May sold its RapidTrace solid phase extraction and TurboVap evaporation product lines.
Babitt said that such deals could become more prevalent "as companies get a little bit more strategic about what businesses they want to be in and what businesses they don't and how they can monetize those."
While the buy-side has always expressed an interest in carve-out purchases, the change over the past year has been that the sell-side has become more receptive to such deals as they look for ways to trim their own businesses and control costs.
"The problem is that in the past, there have been organizations that haven't wanted to sell off [segments]. With certain organizations that may be changing," Glorikian said.
Not everyone is convinced that a recovery in M&A activity is underway, of course, and a reminder of the difficulties that remain to piecing together a deal is CombiMatrix. Last month, the company announced it has stopped looking for a potential buyer, and instead will focus on building its diagnostics business. The company had hired investment bank Robert W. Baird last summer to explore options including the sale of the firm.
The company did not say why it dropped its M&A plans, although its President and CEO at the time, Amit Kumar, said that CombiMatrix "is at an inflection point in its development and needs to refocus its efforts on increasing the commercial use of its tests." Ceasing its M&A activity was "based on an analysis of a number of factors including what we believe is the best course of action for the company and creation of total shareholder value," Kumar said.
According to Qiagen's Schriek, in place of acquisitions, there may be a preference now for forging licensing agreements, especially in the biomarker space.
"The run for biomarkers is ongoing, so if you have the capabilities to make the product and to distribute the product, the question is, what kind of intellectual property can you apply to protect your test," he said. "A lot of companies are highly interested in getting additional licensing and royalty income rather than getting acquired."
Such a shift could have a long-term effect on the M&A landscape, said Gary Kurtzman, managing director for life sciences at private equity and venture capital firm Safeguard Scientifics.
"As long as people view [these technologies] as nice to have but not [necessary] to have, we'll continue to see this," he said. He added that rather than a rebound, M&A across the entire life sciences field has been "muted."
Purchases being made in the current environment are done with an eye toward quick returns, and whereas larger firms once may have been willing to buy a company with technology either in the early commercial or pre-commercial phase, they are now "waiting to see if there's traction in the marketplace," he said.
M&A deals may never return to their historic levels, either, he added. "It never goes quite all the way back."