NEW YORK – Mergers and acquisitions in the diagnostics space rebounded from a sharp decline in 2018, with the number of M&A deals increasing 22 percent to 39 in 2019 from 32 a year ago.
Included in the analysis are deals broadly in the in vitro diagnostic, molecular diagnostic, and non-molecular IVD spaces, such as immunoassays and clinical chemistries, that were announced or completed this past year. In most cases, only acquisitions of an entire company, rather than assets of a company, were included, though in some instances, such agreements were included if they were of a significant size.
Despite the year-over-year increase, the number of deals in 2019 still fell far short of the 58 deals in 2017. And though there was an increase in the number of deals in 2019, most were small or had undisclosed financial terms. The trend, according to Jonathan Norris, managing director at Silicon Valley Bank, was for companies to take the public offering route over M&A, which the market also saw in 2018. Companies that went public in 2019 include Adaptive Biotechnologies, which made a $300 million debut and Castle Biosciences, which had a $64 million initial public offering.
Part of the reason for the still-thawing M&A space, Norris said, is because acquirers are looking to add profitability to their bottom lines, rather than investing in new technologies. Since the IPO market has been so much stronger and is an easier exit strategy, companies need higher revenues and to have commercialized a product to get acquired. "If you have an interesting technology on the tools or diagnostics side, you really need to commercialize [it] and have a strong revenue ramp," Norris said.
The largest diagnostics deal of 2019, Exact Sciences' $2.8 billion purchase of Genomic Health, proves his point. Exact's Cologuard already had a total available US market of $15 billion in the colorectal cancer screening space. Linking it with Genomic Health's Oncotype DX products, which have an estimated total available market of $2 billion, created a significant player in the diagnostic and screening market across several cancers.
The number of large, transformative deals also stayed stagnant in 2019 compared to 2018. Both years had only one deal valued above $1 billion, whereas in 2017 there were four deals above $1 billion.
One behemoth deal involved a company with a significant diagnostics business but was not in the Dx arena: Danaher's pending $21.4 billion acquisition of GE's biopharma business.
Reimbursement struggles can also play a role in the ability of diagnostics companies to purse alternate exit strategies, as reimbursement has been one of the most difficult aspects for many venture-backed companies. "It's one thing on the diagnostic side to have a test that's approved and is being sold," Norris said. "It's a whole other one to actually get the payors to actually cover that test."
In Silicon Valley Bank's Healthcare Investments and Exits Report on Thursday, he noted that trying to get reimbursement for a test can significantly prolong the commercialization timeline.
Many diagnostics companies, likewise, have bemoaned the struggle to get payors to pay for their tests. NantHealth CEO Patrick Soon-Shiong termed it the "reimbursement conundrum." Without payors on board, getting clinicians to buy and use NantHealth's molecular tests would always be difficult, and profitability would always be elusive, he said.
Insurers often want more information in the vein of clinical studies and data, as well as regulatory clearance or approval, before deciding to cover a diagnostic test, and the wait for those decisions can be difficult for diagnostics companies. "It's really on the payors to make that decision, and they don't have a lot of pressure to make those decisions quickly," said Norris.
What PAMA effect?
The implementation of the Protecting Access to Medicare Act in 2018 led to speculation in the clinical lab space that big laboratories like Quest and LabCorp would go on acquisition sprees. That hasn't been the case, with Quest instead tending to form partnerships with hospital systems and labs, rather than acquiring them outright. For example, in 2019 the company agreed to provide testing and lab management services to a variety of health systems, including Houston Medical Center and Perry Hospital in Georgia and Catholic Health Services on Long Island.
Meanwhile, Laboratory Corporation of America's most notable acquisition in 2019 was the purchase of the diagnostic clinical laboratory testing business of South Bend Medical Foundation. In its Q3 earnings call, LabCorp's Chairman and CEO David King noted that although PAMA's impact on the company's revenues has been relatively modest, it was affecting the industry and impacting smaller providers more acutely. This impact has provided acquisition opportunities for LabCorp and other larger players, with King saying the company has a "robust acquisition pipeline," which, nonetheless, has largely been unrealized.
2019 also saw fewer late-stage financing rounds in 2019, Norris said in the SVB report. Investments were instead centered on Series A rounds, especially in the diagnostic tests and R&D tools sectors. Though the overall value of Series A funding decreased slightly in 2019, the number of deals increased, according to the report. Most of the companies focusing on Series A financing have a technology platform, rather than just a one-off test, which can help increase revenue. "If you do have a platform, you have a lot of shots on goal," Norris said. If a company can "own an indication" or retain a broad suite of tests, that can help ramp revenue. Although multiple kinds of tests mean fighting for reimbursement on multiple fronts, companies would "have a lot of different opportunities in a lot of big disease areas," Norris said.
Some of the companies with significant Series A financing rounds in 2019 include Thrive Earlier Detection, which raised $110 million, Sherlock Biosciences, which raised $31 million, cancer diagnostics firm Lucence, with a $20 million financing round, and startup Cradle Genomics, which raised $17 million.
Another surprise Norris noted, and an area to keep an eye on in 2020, is the lack of big tech companies moving more decisively into the diagnostics arena. Since many new diagnostics services are based on software and algorithms with large datasets and large technology companies have been seriously investing the past few years, Norris said he expected companies like Microsoft, Amazon, and Apple to take steps towards health care in 2019.
"I really thought that we'd see maybe an upswing in some of those big tech firms deciding to make some acquisitions and maybe own an area or an indication," Norris said. He also mentioned big tech companies could match some diagnostic tests with analytics or tools in the cloud to improve testing, but that it hasn't been seen yet.
But 2020 could be the year that changes. Norris said he thinks tech investors will continue to get involved in diagnostic and healthcare companies, although there's no way to know if their involvement will include acquisitions or will instead be limited to investments.
That being said, Norris noted one company with potential: Grail, which late last year raised $125 million in an equity financing offering. In May 2018, the company raised $300 million in a Series C financing round. Privately held Grail was valued at $3.9 billion as of the end of 2019, and could be an acquisition target in 2020, Norris said. However, Norris noted that while the company has raised a lot of capital, it hasn't yet seen significant revenue.
Qiagen is another firm to keep an eye on. Late in 2019, Qiagen announced it was undergoing a strategic review and fielding acquisition offers, including rumored interest from Thermo Fisher Scientific. The company later said it had rejected the acquisition offers and would remain a standalone company.
Cowen analyst Doug Schenkel, however, said in an investment note last week that he believes Qiagen "could still get sold" in 2020.
Overall, companies that could be active as acquirers in the coming year include Thermo Fisher, which has at least $15 billion of capacity, he noted, while Agilent Technologies and Illumina "have very clean balance sheets and capital to deploy." Danaher could also look to bolster its lineup of diagnostics and life science tools companies.
Exact Sciences and Invitae – which bought Clear Genetics, a developer of software that supports the delivery of genetics services at scale, and Singular Bio, which specializes in single-molecule, cell-free DNA analysis for noninvasive prenatal testing – could also remain active in 2020, Schenkel wrote.