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Life Science Tools, MDx M&A Deals Rise 15 Percent in H1 2011

By Tony Fong

NEW YORK (GenomeWeb News) – The number of mergers and acquisitions in the life science 'omics tools and molecular diagnostics space rose 15 percent year over year for the first half of 2011, spurred on by the low cost of debt and a handful of companies that proved to be especially aggressive buyers.

Despite the uptick, though, the M&A environment remains mixed and the forecast for the near future is unclear, according to industry observers.

Through June 30, a total of 38 M&A deals had been completed or announced, up from 33 transactions during the first half of 2010, among the markets covered by GenomeWeb Daily News. Among the more notable deals during the first half of the year were Danaher's $6.8 billion purchase of Beckman Coulter and Thermo Fisher Scientific's acquisition of Dionex for $2.1 billion, as well as its pending $3.5 billion purchase of specialty diagnostic company Phadia. (See table below for the list of first-half deals)

Meanwhile, Quest Diagnostics bought Celera for $671 million, Novartis snapped up Genoptix for $470 million, and Qiagen is waiting to close its purchase of Cellestis, recently upping its offer to $374 million.

According to Peter Lawson, an analyst at investment house Mizuho Securities, factors that have helped to make the M&A market "exceptionally appealing," include the low cost of debt; a "herd mentality" that has companies nervous about missing the boat by not snatching up innovative technology; and fewer companies in the life science tools and 'omics space, which have driven up valuations.

One promising development he noted is the appearance of buyers with little or no history in the space, and in particular, pointed to Nestle Health Science's purchase of Prometheus Laboratories for an undisclosed amount. Nestle Health Science is a wholly owned subsidiary of Nestle, and the Prometheus deal was "interesting because it was an outsider that you never even thought [would come] into this space," Lawson told GWDN. "Something like Nestle, they've got nothing in the diagnostic space."

A more prevalent trend during the first half of the year, however, was multiple buys by established companies in the space. Thermo Fisher Scientific, for example, completed or is the process of completing three acquisitions announced in H1 2011. This week it added to its buying binge with the purchase of Trek Diagnostic Systems from Magellan Biosciences.

Meanwhile, Qiagen, Sigma-Aldrich, Laboratory Corporation of America, Quest Diagnostics, and Agilent Technologies each did two deals during the first half of the year in the 'omics tools and molecular diagnostics markets.

No firm has been more acquisitive, though, than PerkinElmer, which through six months, made six acquisitions.

According to Paul Cleveland, a general partner and chief operating officer at venture capital firm Mohr Davidow Ventures, the business models of companies such as PerkinElmer and Thermo Fisher are driven by revenue growth through acquisitions, and so are "essentially like black holes. They get bigger and they just have to keep getting bigger," he said. "They're doing acquisitions, but they're not doing acquisitions in new technologies so much. Mostly, they're buying revenue and cash flow."

Consolidation within the industry also accelerated in 2011, and several prominent players including several publicly traded firms — Celera, Beckman Coulter, Rules-Based Medicine, Orchid Cellmark, Geospiza, and Dionex — were absorbed into other companies.

Ahead: M&A Peak or Cliff ?

Yet in spite of the higher number of deals and the fat price tags on some of them, some industry observers said that the M&A market is far from flourishing and companies looking to be acquired face multiple hurdles.

Steve Gullans, a managing director at Excel Venture Management, said, "There are some deals getting done, but what's more interesting, perhaps, are the number of deals not getting done.

"In our position, we can say, 'All right, we'll grow it one more year, that'll give us a bigger return.' It's just being patient. Patience is the key."

As 2010 was coming to an end, Gullans had expressed hope to GWDN that a slowly improving economy would light a fire under the M&A market and people would want to get in on the ground floor of a promising company before valuations went up.

But the reality is that while there have been a lot of discussions between firms, "the actual number of transactions has been slow, slower than we would like," Gullans said. "We are seeing a lot of collaborative interactions where people are kicking the tires," but a sour economic forecast has made people "reluctant to put serious money into things."

Mohr Davidow's Cleveland blamed part of the M&A stagnancy on the residual fear that shoppers have about new technologies. Experience gleaned during the boom times immediately following the completion of the initial phase of the Human Genome Project has taught the industry that technology, however promising, has inherent risks, and business development people are no longer willing to stake their careers on deals that may turn out to be lemons.

This is especially true at pharmaceutical firms, which appeared once upon a time to eye the life science 'omics tools space with greater affection.

Valuations may be down, but unless pharma is convinced that an acquired technology will make a billion dollar difference to their business, they will pass, according to Cleveland.

"Getting an early stage technology at 50 percent of what you would have had to pay three years ago is not building the career of some business development guy at a big pharma company," he said.

Uncertain regulatory and reimbursement environments have also stalled potential M&A activity, particularly in the MDx space. Regardless of how transformative an early-stage technology may be, a buyer is reluctant to open its wallet unless it is sure that the technology will pass regulatory muster and insurers and payors will reimburse for it. Otherwise, the technology has little chance of penetrating the marketplace.

The result is that the length of time it now takes for a company to go from early-stage funding to being acquired — or going public — has increased by "a couple" of years relative to a few years ago, Cleveland said. Meanwhile, the amount of venture funding available to sustain them until they've reached that point has leveled off dramatically.

"The problem is, just because a small company wants to sell itself because it can't get venture money, it can't go public … doesn't mean there's a buyer out there," Cleveland said. "The low M&A rate right now is not because there aren't a number of companies that would be willing to sell themselves, [it's] because there really aren't a lot of buyers."

It's not only small players that are having trouble attracting buyers, either. By any measure, Gen-Probe is one of the more successful businesses in the molecular diagnostics space, posting $543 million in revenues last year and securing US Food and Drug Administration clearance for a number of its products.

Yet since it went shopping for a buyer, it has been met with only lukewarm interest, and the The Wall Street Journal reported earlier this week that Novartis, who is believed to have been the only remaining bidder for the firm, had backed out.

The relative disinterest in Gen-Probe "definitely has a negative connotation for the space," said Mizuho's Lawson, and if it ultimately is unable to find a suitable buyer, or if it gets sold below market value, it could put a chill on the M&A space.

While Lawson saw the first half of 2011 as a positive period for M&A in the life science 'omics tools and MDx space, he added that that could turn quickly if the cost of borrowing money increases.

"The returns [on capital] will have to increase if the debt levels increase," Lawson said.

Growth Drivers

For M&A activity to truly take off, it will take a number of companies with genuinely disruptive technology to appear on the landscape, "and then people will suddenly feel like they can't afford not to be invested in [such] companies," Cleveland said. "It won't be one company, you'll need two or three or four like that, but that can happen in" just a few quarters.

He added that a number of companies in Mohr Davidow's life science tools portfolio could potentially fit that bill, and that his firm is in active discussions with some of them about possibly being acquired.

Companies involved with next-generation sequencing and related technologies remain the ones that attract the most attention, and last year's acquisition of Ion Torrent by Life Technologies for up to $725 million — despite the fact that at the time that the deal was announced Ion Torrent did not have a platform on the market or any revenues — reflects the appetite that the industry has for the technology.

Molecular diagnostics is another sector "where we believe there is a potential transformational landscape," Cleveland said. There continue to be breakthroughs in the genetic sequencing and screening areas "and those are very exciting and have the potential to make everyone a lot of money," he added.

Within the next year to 18 months, Cleveland predicted, a number of molecular tests could be introduced with the potential to make headway into the clinical market.

To that point, this week Roche announced a deal that could reach $269 million to buy cervical cancer test development firm MTM Laboratories.

M&A activity may also pick up in the companion diagnostics space as pharma increasingly sees benefits in such tools to guide new drug development. So far, drug manufacturers have been more prone to partner with companion diagnostic firms, but Excel Venture's Gullans said that that could progress to outright purchases of the companies in the near future.

"It's all about personalized medicine," he said. "As you get to smaller markets, you really do have to have the test that goes with the drug."

Another catalyst for M&A activity moving forward are deals that can unlock opportunities in emerging markets, in particular China.

This can be seen in Thermo Fisher's buy of Dionex, a deal which was driven in part by the chromatography firm's presence in Asia-Pacific and other emerging markets. When the deal was announced in December, Thermo Fisher noted that 35 percent of Dionex's total revenues came from emerging markets.

"There are clearly companies that want to have a worldwide footprint that are going around buying up people that have distribution in Asia," Cleveland said. "If you've got a feet-on-the-street presence in China, your company is worth a lot of money."

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