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NIH Cuts, Reimbursement Fears Cited as M&A Deals in Life Science Tools, MDx Industries Drop 15 Percent in 2013

NEW YORK (GenomeWeb News) – Though Thermo Fisher Scientific's pending $13.6 billion purchase of Life Technologies sent shockwaves through the industry and led some to speculate about further deals, mergers and acquisitions in the life science tools and molecular diagnostics space were down year over year in 2013.

The number of M&A deals completed in 2013 or announced during the year totaled 47, down 15 percent from 55 transactions in 2012, and down from 58 in 2011. Activity was down in both the first and second halves of 2013 year over year as 23 deals were done in H2 2013, compared to 28 in the comparable year-ago period. In the first half of 2013, 24 deals were completed, down from 27 a year ago.

The year-over-year drop-off had been expected by some industry experts who predicted a year ago that an M&A rebound may be at least a year away while companies continued digesting acquisitions made in prior years, and a contentious political environment in Washington made life science firms nervous about spending.

Steve Gullans, managing director at Excel Venture Management told GenomeWeb Daily News recently that 2013 was a "year of consolidation" with "not a lot of risk taking" among firms.

The reasons for the drop-off were myriad, he and others said, including cuts to National Institutes of Health funding, as well as cuts by drug manufacturers to R&D budgets, both of which affected life science tools purchases. Meanwhile, implementation of the Affordable Care Act and concerns over Medicare reimbursements further dampened deal making.

According to Bill Ericson, a general partner in VC firm Mohr Davidow Ventures, an uncertain reimbursement landscape, in particular, prevented potential buyers from pulling the trigger on deals.

"I feel like reimbursement, and to a lesser degree healthcare reform, kind of just made people want to sit back and honestly see how some of these things played out," he told GWDN.

The result is that technology, by itself, can no longer entice potential buyers to open their wallets.

"The idea that exciting new technologies are going to win large business quickly and get large exits on very little sales is no longer a tenable hypothesis right now," Gullans said.

Aside from the reduction in the total number of deals, M&A transactions in 2013 were largely tuck-in acquisitions with modest valuations. Excluding the Thermo Fisher-Life Tech deal, Illumina's $450 purchase of Verinata Health and BioMérieux's buy of BioFire Diagnostics, also for $450 million, were the largest acquisitions during the year, based on price. Otherwise, the only other deal with a disclosed price tag of more than $100 million was Qiagen's acquisition of Ingenuity Systems for $105 million.

In place of M&A deals, 2013 saw an acceleration of partnerships, licensing deals, and R&D agreements, according to Kristin Pothier, a principal at EY's (formerly called Ernst & Young) transaction advisory services division. While that trend started several years ago, potential buyers increasingly are relying on them as less costly and less risky alternatives to M&A.

"While companies might not necessarily be ready to pull the trigger on certain potential acquisitions that they may do in the future, they are very much looking out and partnering with companies to try them out to allow them to test innovation and new technologies and to be able to move forward into the future without necessarily always bringing in a company to do so," she told GWDN.

"When we're moving from genomic sequencing to next-generation sequencing to next-next-generation sequencing, for example, we're looking at a very rapid pace of innovation,” she said.

But, regardless of collaborations, a clogged M&A pipeline can negatively impact the entire life science tools/MDx industry, especially if it is prolonged. In addition to M&A being down in 2013 and 2012, the number of deals was flat in 2011.

For one thing, a lack of M&A opportunities means fewer financing opportunities, as investors fail to see exit opportunities. In general, competition for VC funding is fierce across most sectors, but funding for diagnostic firms has been particularly barren, experts said — and earlier this year GWDN reported that many companies were finding it increasingly challenging to raise private equity.

"I think we're still very much seeing that in the marketplace, and I don't expect that to change that much until there is certainty in the marketplace," Mohr Davidow’s Ericson said. "Everybody gets more into hunker-down mode."

M&As Lackluster, IPOs Robust

But if the M&A market was lackluster in 2013, the year turned out to be unusually busy for the IPO market, which embraced life science tools/MDx firms at a level not seen in recent years.

During the past 12 months, seven companies operating in the life science tools/MDx space went public in the US: Cancer Genetics; Cellular Dynamics; Evogene; Foundation Medicine; Intrexon; NanoString Technologies; and Veracyte. Two other firms, CardioDx and Biocept, are waiting to complete their IPOs.

By comparison, only one company went public during each of the past two years, Atossa Genetics in 2012 and Fluidigm in 2011.

Of those firms that went public this year, Foundation Medicine had the most successful IPO and in its first day of trading, its shares closed at $35.35, well above the $18 share price at which the company went public, though the stock has since dropped and was trading at $23.27 early Monday afternoon.

But while IPOs can be a sign of growth in a particular market, they also may indicate that a firm has run out of other funding options. Or if its investors are seeking an exit, an IPO can suggest a company could not find a suitable buyer or negotiate a suitable price.

"You have to assume … that many of these companies have actually sought M&As," and failed, Gullans said of the companies that went public in 2013.

Also, in addition to a full-blown IPO, smaller companies with limited revenues can pursue the so-called Form 10 pathway in order to raise funds. Unlike an IPO, a Form 10 is used to register a class of equity securities, rather than shares, and does not create shares that can be freely traded.

This creates a way for institutional public equity funds, which are prevented from investing in private companies, to now invest in these firms even though their securities are not yet publicly trading. While no data exists for the number of firms that have gone the Form 10 route, according to Gullans, more companies, particularly in the life science tools/MDx space, are filing Form 10s.

For firms that have attracted M&A interest, many of the criteria to get a deal done remain the same. For instance, they need to generate revenues and to have products with clinical use or at least have a clear clinical pathway. But with recent changes for reimbursement of molecular diagnostic products, often resulting in lower reimbursement rates, now casting a long shadow over the industry, such firms also now must at least show promise that their tests will be reimbursed at acceptable levels.

There are a "number of regulatory reimbursement concerns with every product and service out there," Excel Venture's Gullans said. The firms with the best chances of getting acquired are those with products that can improve patient outcomes and can "greatly reduce the cost to the [healthcare] system," he said. "It's not an incremental cost-savings, it's greatly reduced."

Additionally, sellers need to prove that they are running "a very capital-efficient model" for their business, in order to "raise the money you need to get to an exit," Gullans added.

But he and others said that 2014 may be poised for improvement in the M&A space even though obstacles persist. As the Federal Reserve pushes rates up and getting money becomes more expensive, "I would suspect that there will be acquisitions," Gullans said.

Among the firms that reportedly may be shopping for add-ons to their businesses are Danaher and Sigma-Aldrich. According to Goldman Sachs, Danaher, in particular, has suggested an interest in building out its life science operations. Since acquiring Beckman Coulter in mid-2011, the Washington-based conglomerate has largely stayed on the sidelines, integrating that business into its operations. In the past few months, though, it cleared a major hurdle when the US Food and Drug Administration cleared Beckman Coulter to market its troponin assay on its immunoassay platforms.

Moving ahead, analyst Isaac Ro said in a recent report, "sizable M&A is a near-term possibility" for Danaher, noting that during the company's investor meeting in December, CEO Larry Culp said that Danaher has "at least $8 billion" for deployment and that "as a board, we have plenty of [M&A] opportunities still in front of us."

Investment bank Leerink Swann earlier this month also said in a research report that it anticipates consolidation to continue in the coming year and that "large life science tools acquisitions appear to have historically created shareholder value."

The Thermo Fisher-Life Tech deal, it said, could cause competitors to make purchases to strengthen their own businesses.

"[W]e continue to think diagnostics companies will look attractive to strategics, either life science tool companies looking to grow in adjacent markets, or multi-business companies attracted by the promise of personalized medicine," the investment bank said.

In addition to life science tools firms, potential acquirers could include private equity firms. Companies that reportedly bid for Life Tech before Thermo Fisher sealed a deal included the Blackstone Group, KKR, TPG Global, and the Carlyle Group — and if the right firm presented itself as an M&A target in 2014, they could once again become involved in a possible deal.

Two larger companies that have been mentioned as acquisition targets are Waters and Hologic. Chatter about a possible buy of Waters increased after CEO Douglas Berthiaume announced his plans to retire from the company within the next two years.

Meanwhile, leadership changes at Hologic have similarly led some analysts to believe the company could be sold. In July Jack Cumming replaced Rob Cascella as the firm's president and CEO. Cumming has since been replaced by Stephen MacMillan.