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The Past, Present, and Future of M&A in the IVD Industry

Mon, 03/03/2014 - 2:01pm
Richard K. Park, Contributing Editor

PwC recently released its “Pharmaceutical and Life Sciences Deals Insights Quarterly” report. In this report, PwC stated that, “The diagnostics sector remained relatively quiet in the M&A market throughout 2013. However, this sector may see a return to deal making over the next year. Diagnostic technologies may remain relevant as personalized medicine continues to gain momentum and pharmaceutical companies seek to drive greater effectiveness from their R&D efforts.”

I spoke with several industry analysts and asked them to take a look at PwC’s report. I also asked these analysts to look into their crystal balls and give their own projections of what they think could be coming down the M&A pipeline in the IVD industry in 2014 and beyond, as well as which emerging trends and developments could influence M&A activity in IVD.

The analysts agreed that business considerations will continue to be one of the primary factors that influence and dictate any potential M&A activity in the IVD industry. IVD companies will need to focus on attaining growth this year and in the future; and in order to achieve such growth, they will need to develop revenue-generating products. In addition to their own organic, in-house product development, IVD companies will look to M&A as an essential strategy for growth.

“I believe that any M&As in the diagnostics sector in 2014 could more likely come from larger IVD companies acquiring smaller ones, or even mergers of two mid-sized companies to form one larger company,” said Emily S. Winn-Deen, Ph.D., President of Rx Dx Advisors Inc. (San Diego, CA). “These M&A deals will look to find business synergies between complementary product lines to drive increased bottom line revenues. Acquired companies will need to be either cash flow positive or close to it, with little interest by any party in acquiring cash flow negative companies.” Winn-Deen identified Cepheid, Genomic Health, Myriad Genetics, Foundation Medicine, Luminex, Quidel, and Qiagen as potential companies that could be ripe for such M&A deals.

Winn-Deen added that she disagrees with the PwC report’s assessment that pharmaceutical companies are looking to make M&A deals with IVD companies.

“I do not think there is much interest by pharmaceutical companies in acquiring an IVD company outright anymore,” said Winn-Deen. “The Novartis model did not turn out well and resulted in the sale of Novartis Diagnostics to Grifols in late 2013. Abbott also separated its pharmaceuticals from diagnostics in 2013 to form AbbVie. Roche is the only pharmaceutical/diagnostics combination that is really making the integration of IVD and pharmaceutical functions work, with Genetech actively working with both Ventana and Roche Molecular to develop needed companion diagnostics in-house.”

Some analysts made interesting comments and observations about how DNA sequencing could play a role in M&A activity in the IVD industry. Analysts believe that IVD companies need to consider all the sequencing technology platforms (i.e., sample prep, the sequencing itself, the informatics around sequencing) and the M&A deals that could happen with the development of such technologies.

“We will see many more sequencing companies emerge, and some of those will be acquired,” said Harry Glorikian, MBA, managing partner at Scientia Advisors LLC (Cambridge, MA). “Existing IVD companies will also need to bolster what they have. So sequencing is going to be a very dynamic space. We will also see new business models emerge as a result of this sequencing technology implementation. The impact of sequencing will be as great, if not greater, than what we have seen with modern therapeutics. It may not be seen quickly, but during the next ten or more years, the effect will be profound. But keep in mind that, although critical, it is not the sequencing itself but rather the data, or should I say the answer, that will make the difference and be the value driver for M&A deals.” 

Other analysts believe that companies in Japan could be in a prime position to make M&A deals in the IVD sector. This is primarily due to macroeconomic developments in Japan that have emerged during the past couple of years.

“Buyers from Japan could especially be in an active hunt for IVD companies,” said Manfred Scholz, Ph.D., MBA, President of Scholz Consulting Partners LLC (Medford, MA). “Immediately after the earthquake and tsunami in Sendai, Japanese companies repatriated foreign assets to deal with the consequences of the disaster. This led to a very strong Japanese yen and created a lot of economic drag since making products for export became expensive. Under the economic policies of Prime Minister Shinzo Abe, the yen eventually weakened, and the profitability of export-oriented Japanese companies improved. Now that their balance sheets are improving, this new money can be put to work abroad, which could mean making offshore M&A deals.” 

The IVD landscape has changed dramatically since the mid-2000s when mega M&A deals was the growth strategy du jour. In 2006-2007, Siemens AG decided to get into the IVD business and consequently plunked down more than $14 billion to purchase three major IVD companies (Bayer Diagnostics, Diagnostics Products Corp., and Dade Behring – remember them?). Within one year, Siemens Healthcare Diagnostics was formed and instantly become one of the biggest IVD companies in the world. Also in 2007, General Electric tried to buy Abbott’s IVD businesses for $8.1 billion, but that deal crashed and burned within a few months.

Considering how much the global economy and financial markets have also radically changed during the past few years since the Great Recession, IVD companies tend to take a much more cautious approach to M&A. So it may still be a while before we see any mega M&A deals in the IVD industry on par with what we witnessed 7-8 years ago, if at all. But while such mega M&A deals could very well be a thing of the past, the prospects of M&A still offer enticing opportunities for IVD companies to improve their businesses. This is especially true as specialized niche areas, such as DNA sequencing, continue to develop and gain greater acceptance and utilization. As this happens, IVD companies may have no other choice but to open their wallets to make M&A deals.

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