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Dx Industry M&A Activity Jumps in 2020 Driven by Promising Genetic Testing, Cancer Players


NEW YORK – Despite the coronavirus pandemic making waves in economies around the world, the diagnostics market benefitted from increased investor interest and an upswing in mergers and acquisitions in 2020.

Overall, the numbers of mergers and acquisitions in the diagnostics industry increased 38 percent to 54 in 2020 from 39 in 2019. 

Included in the analysis are deals in the molecular and non-molecular in vitro diagnostic spaces that were announced or completed this past year. In most cases, only acquisitions of an entire company were included, although one significant deal involved the acquisition of only some assets of a company.

M&A deals are continuing their rebound from recent lows in 2018, when only 32 transactions were made. However, the 58 deals in 2017 remain a recent high point for the diagnostics industry. Many of the deals listed were for small amounts or had undisclosed financial terms, although three deals were valued above $1 billion this year, in contrast to only one in 2019.

Andrew Cooper, an analyst at Raymond James, said he thought some of the earlier-stage companies who may have been looking to get acquired this year had their chances put on ice due to the pandemic. That pause should lift in 2021, as COVID-19 vaccines become more available and companies that received significant boosts in revenues from SARS-CoV-2 testing, such as Quidel, Abbott, and Hologic, look to burn some of that cash, he added.

Quidel will likely focus on point-of-care testing in infectious disease testing and has mentioned looking to "vertically integrate" its business, potential acquiring swab or other materials manufacturers, Cooper said. The firm is probably "less likely to go … wildly outside of that sort of infectious disease focus that they have," he added.

Piper Sandler's Steven Mah also noted Quidel has M&A as a big part of its "go-forward plan," focusing on strategic fit, growth, and profitability, and mentioned Fulgent Genetics as a company with a major focus on M&A, since it is missing a solid distribution channel and could go looking for something to fill that void. 

In contrast, companies like Abbott and Hologic may have more flexibility due to the wider spread of their revenues across the diagnostic sphere. The attention on the diagnostics industry as a result of the pandemic is also a positive that could lead to more deals, since outside players are applying more value to diagnostic testing and realizing that these tests are helpful, Cooper said. 

Even though many companies in the diagnostics space have seen skyrocketing revenues because of COVID-19, none of the three biggest deals this year were in the infectious disease space. Illumina's acquisition of Grail for $8 billion, Exact Sciences' acquisition of Thrive Earlier Detection, which could cost as much as $2.2 billion, and Invitae's merger with ArcherDx for $1.4 billion were all in the cancer and early disease detection space. Both ArcherDx and Grail had filed to go public before they were acquired, which has been a strategy used to garner increasing interest in companies.   

Oncology and liquid biopsy are two specific areas with a lot of deal interest, along with players in the transplant space, although it is currently dominated by CareDx, Mah said. Next-generation sequencing continues to be a particular area of interest as capabilities expand and develop further. "We're in this really interesting window where you just have the evolution of blood as [an] interesting sample for NGS and other sequencing-based modalities," Oppenheimer analyst Kevin DeGeeter said. "I think that just fundamentally leads itself to larger addressable market opportunities and the genetic side of the testing spectrum." 

Mah added that oncology assets, specifically those with an emphasis on cancer genetics, were attractive this year, with Oncocyte acquiring Insight Genetics for $12 million and NeoGenomics acquiring Human Longevity's oncology business for $37 million. Oncology assets have been an emphasis for NeoGenomics for the past few years, shown by acquisitions of Genoptix and Clarient in 2018 and 2015, Mah said. 

Puneet Souda at SVB Leerink noted that the large market opportunities for cancer and liquid biopsy were driving the large size of the deals and said the market opportunity "for screening, early detection, using liquid biopsy, that opportunity is more than $30 billion." Some of the early detection deals in the space include Foundation Medicine's acquisition of Lexent Bio and the merger of Sienna Cancer Diagnostics and Bard1. 

The Grail and Thrive transactions are "very clearly going after creating new markets and testing modalities that we just haven't had access to before," DeGeeter said. "I don't think Grail is the endgame for where Illumina wants to be on the clinical testing side," he added. 

"Whether 2021 is the timeframe where Illumina looks to continue to get aggressive in expanding its clinical testing menu or whether they just focus on integrating Grail, I don't have a crystal ball on that specific question, but over the course of multiple years, I would expect that Illumina will continue to be active," he continued.

Although COVID-19 "brought about a recognition that diagnostics is important to healthcare," Souda said, for companies like Illumina and Exact Sciences, "their core businesses are a lot more important than serving the COVID testing during this time when the demand is high." Despite the increased attention on the space, the timelines and opportunities of those companies haven't changed, he added. 

Two of these deals weren't particularly surprising, according to Mah, because each of the acquiring companies had an "intimate familiarity" with the company they picked up. Grail was spun off by Illumina in 2016, and Exact Sciences had prior a financing history with Thrive.

Mah said he doesn't think the Invitae and ArcherDx merger is a particularly good fit for Invitae due to ArcherDx's kit-based strategy, although he noted Invitae may be looking to diversify its offerings and integrate ArcherDx's kits into their lab, along with offering companion diagnostics. ArcherDx does have some of the best cancer panels available, he said, but it was still a pretty expensive acquisition. ArcherDx, however, found significantly more value in an M&A deal than it likely would have had going public, Mah added.

Invitae was the year's main dealmaker; besides the merger with ArcherDx, the San Francisco-based company also acquired YouScript, GeneLex, and Diploid in March. Mah said Invitae was doing "a land grab" as it attempts to expand its options to as many different testing lines as possible. DeGeeter added that Invitae "has steadily been building a broader channel for their business" and the acquisition of ArcherDx signals an increased focus on oncologists for their test distribution. 

Expanding distribution channels was an area of focus for many dealmakers this year, DeGeeter said. The benefits of most of the major deals this year, along with a number of smaller ones, were the ability to open up new distribution channels in oncology to access a wider variety of customers.

Exact Sciences was also a major acquirer – along with the Thrive deal and two deals announced in February that happened at the tail end of 2019, the company also acquired Base Genomics for $410 million. These deals, largely focused on bioinformatics or IT software, were smaller in purchase price but "arguably more frequent as this wave of innovation on new content works its way towards market," DeGeeter said.

Access to capital wasn't a problem for many companies experiencing a boost from COVID-19, which allowed M&A volume in 2020 to continue to increase and firms to continue their strategic priorities. "I think companies that were looking to move forward with strategic transactions had different tools available to finance those deals and get them done in 2020," DeGeeter said.

The major deals this year also involved companies that have relatively early-stage technologies, which is a contrast to "the past few years" and is a "boost to the industry," Jonathan Norris, managing director of the healthcare practice at Silicon Valley Bank, said. Last year, Norris attributed part of the low deal value to companies looking to add profitability to bottom lines rather than investing in new technologies. As deals with early-stage companies flourished this year, being close to commercialization was no longer as important to acquirers. 

"Big companies are willing to pay up for really interesting, important technologies, and I think we've seen that in biopharma all the time over the last five, six years," Norris said. "But we haven't necessarily seen that in tools, so it's nice to see that."

One potentially huge deal that fizzled out was Thermo Fisher's attempted acquisition of Qiagen, which would have been one of the biggest deals of the year at $11.5 billion had two-thirds of Thermo Fisher's shares been tendered by current shareholders. 

Norris also noted that more platform technologies are attracting interest from investors, such as CRISPR-based tech, but he said it was hard to know whether that interest would translate to M&A activity. 

DeGeeter added that if there were transactions in the CRISPR arena, the dollar numbers would likely be smaller. "Building testing around sort of new biology is challenging," he said. "It's often much easier to build businesses that use improvements over existing techniques to expand a market that already has, you know, pretty good size." 

Smaller deals in the IT and analytics spaces also made up a large portion of M&A activity, such as Cyted's acquisition of digital pathology provider Pathognomics and Nanthealth's $6 million acquisition of OpenNMS Group. Cardiovascular disease, and more specifically high-sensitivity troponin testing, is also an area of interest, Mah said, indicated by Impact Lab Group's acquisition of HeartGenetics in November.

Regardless of what happens in 2021, M&A deals will likely continue, although the dollar amounts may not be quite as big and the players may be different than usual. "I think M&A is going to continue through 2021 for lots of reasons," said Harry Glorikian, a diagnostic industry consultant and general partner at Scientia Ventures. "There's so much available cash out there that some of it is going to have to continue … because some companies are going to have to acquire different capabilities to sort of get into these new areas."

COVID effect

For a number of companies, COVID-19 testing has made 2020 a solid year financially, which DeGeeter said could spark interest in deals and "give the teams and their corporate boards confidence to move forward on investments, whether they be internal or whether they be acquisition in 2021."

However, Mah isn't convinced there will be major deals based on COVID-19 testing, largely because there are vaccines available now. If companies aren't in the SARS-CoV-2 testing space already, they're "a little bit late to the game," Mah said. But that's "not to say people that came up with technologies won't get acquired later," he added, such as Lucira Health, which received the first Emergency Use Authorization from the US Food and Drug Administration for an at-home SARS-CoV-2 test. There are many competitors in the at-home testing space, but they're focused on the technology rather than COVID-19 specifically, he said. 

There could be one-off deals from bigger companies like Danaher, Thermo Fisher Scientific, or Roche, or consolidations within the sector, Mah added.

Although there are two authorized vaccines available, and likely more on the way, Mah said that this doesn't mean testing for COVID-19 will disappear. "You still have a durable flu testing business every year," he said, but he expects the trend will move toward respiratory pathogen panel testing for multiple viruses.

Mah echoed Cooper's opinion that the number of deals could go up in 2021, especially as travel opportunities become more available, and said he specifically expects to see rollups of CLIA laboratories. 

Other potential areas of interest related to COVID-19 testing are in the contact tracing and digital health arenas, because there is a need to streamline reporting of testing to public health officials and to manage data, Mah said. Glorikian also noted there could be increased interest in sampling technologies or other technologies related to COVID-19 clinical trials. 

Silicon Valley Bank's Norris said he thinks companies that aren't based in diagnostics should show caution as they make entrances, because there's a lack of understanding of the sector and they could encounter difficulties maintaining a long-term presence. Many of the companies that have pivoted to SARS-CoV-2 testing may not have long-term plans to stay once the pandemic is over and could be here for the one-off opportunity, Norris said. 

He did note that there are some companies that are really taking advantage of the pandemic to show off their technology and its abilities, even though they may not be planning to stay in the infectious disease business for the long haul. Acquirers would most likely be interested in nimble companies that were able to pivot to SARS-CoV-2 testing and bring their tests to market quickly, Norris said.

Glorikian said that the diagnostics industry as a whole isn't going to "turn around and snap back" to the way things were, because people want testing in distributed facilities, and the pandemic has catapulted the Dx space forward faster than anyone expected. Market dynamics have changed as a result, leading to more of an emphasis on telemedicine and clinical trials, as well as ancillary capabilities to support test development, he said. 

For the companies that were aiming to fill a gap due to the pandemic, Glorikian suggested that if those firms expand their product lines, they could carve out a lasting niche for themselves. If they use the funds from SARS-CoV-2 testing to make second or third products with a wider reach, they could have a fighting chance, he said. Some of those companies may also need to acquire new capabilities, he said, such as Everlywell, which has had a large presence in the at-home testing market but is facing competition from others, such as Abbott and Ellume.

Glorikian also forecasted a reckoning of sorts as the pandemic draws closer to its conclusion, because "there are a lot of things … that the FDA has let through that I'm just not comfortable with from a performance perspective." He expects a 2021 "shake out" with the agency looking deeper into some of the tests it has authorized for use, especially in the serology space, and potentially rescinding EUAs. 

— Additional reporting by Christie Rizk