Macroeconomic Concerns, Declining COVID-19 Interest Lead to Less Dx M&A Activity in 2022

NEW YORK – The party is over. 

After mergers and acquisitions in the diagnostics industry reached record highs during the past two years, largely as a result of increased attention on the space due to the COVID-19 pandemic, the number of deals in the space in 2022 took a dive. 

During the past year as society became more normal with the duration of the pandemic, the number of deals in the diagnostics space slipped to 47 in 2022 compared to 72 in 2021 and 54 in 2020. 

While the number of deals was still higher than the most recent low of 32 in 2018, the industry has seen a shift in the type of deals as well: Smaller tuck-in deals have been more popular, although three deals did top $1 billion during the year, the same number as in 2020. Those deals all occurred in the second half of the year, with Thermo Fisher Scientific buying UK-based specialty diagnostics company The Binding Site Group for £2.25 billion ($2.68 billion), Werfen purchasing transfusion and transplant diagnostics company Immucor for approximately $2 billion, and Korean diagnostic firm SD Biosensor and investment bank SJL Partners scooping up Meridian Bioscience for about $1.53 billion. 

Included in this analysis are deals in the molecular and non-molecular in vitro diagnostic spaces that were announced or completed in 2022. Only acquisitions of an entire company were included, although there were multiple acquisitions of partial assets — from Quest Diagnostics' and Laboratory Corporation of America's hospital lab business buying sprees, to the purchase of individual tests and test portfolios like those made by ProPhase Labs and Integrated DNA Technologies. 

According to Canaccord Genuity analyst Kyle Mikson, many of the deals that occurred in the past two years were the result of companies using cash from COVID-19 testing to expand their businesses. But as some firms cut their COVID-19 testing guidance, the "COVID cushion is … shrinking and also becoming more unpredictable," and those firms may not have the money to burn on M&A that they did in 2021.

Meantime, other companies that may be acquisition targets have seen their stock prices fall and valuations shrink, but they don't want to sell at those lower price points, Mikson noted, a possible factor in lower M&A in 2022. 

The decline in COVID-19 testing demand are not solely to blame for the downturn in M&A activity throughout the year, however. Larger economic concerns, such as rising interest rates and inflation, as well as geopolitical crises like the war in Ukraine have led to caution among many companies hoping not to rock the boat, industry experts said. 

The goal for many companies, said Jon Norris, managing director of Silicon Valley Bank, is to "defend the landscape that you already have" as they try to figure out where exactly the market is going in the next year. Right now, most firms are in a holding pattern and maintaining their own businesses rather than looking to spend money in an unstable environment, he said. 

Companies are sitting on the sidelines, not only due to the cost of the deal but also because of the high costs of integrating another company and are instead cutting back on spending to weather the macroeconomic storm, he noted.

2022 was also an aberration when it comes to M&A activity. According to Norris, 2021 was the "record to end all records" and the "apex of outlier years." However, the industry is still strong, and although 2023 may look similar to 2022 in deal volume, Norris said he believes the year will potentially build positive momentum for big moves in 2024, particularly if there are improvements in the broader markets.

There are still opportunities in play, despite the macroeconomic downturn. Newly public companies looking to expand their footprint have an expectation to grow revenues and may look to add smaller firms to their roster to bolster their profiles, and well-funded private companies that are looking to expand their platforms may be able to make a purchase and "get a quick win" while valuations are dropping, Norris said. 

In addition, there is room for some "big plays," as well, as a number of a companies are valued over $1 billion with technologies that could be "whiteboard space" for big acquirers. Those deals will likely be one-offs, but in a down cycle like the one the US is currently in, more acquiring companies are looking for tuck-in acquisitions of firms that are close to accretive with revenues in the $20 million to $50 million range and that could be profitable if they pulled back sales and marketing pushes. Getting acquired could allow those firms to leverage a larger company's sales and marketing teams to turn profitable very quickly, he said.

Companies that are particularly interesting to him, and that could be targets for acquirers, include artificial intelligence and precision medicine firm Tempus and cancer detection company Delfi Diagnostics. Both have raised significant funds — in October, Tempus announced $275 million in funding, and in July, Delfi Diagnostics raised $225 million in a Series B financing round. 

Canaccord Genuity's Mikson echoed Norris' comments, saying that most acquirers want to see either profitability or a relatively quick path to profitability, citing Thermo Fisher's buy of The Binding Site Group as an example. A firm's growth profile must be validated, likely through multiple publications backing its technology, and must have a sound business model and strategy to make it attractive as an acquisition, he said. 

Areas of interest

Some technologies are more attractive to acquirers than others, experts said. Liquid biopsy and point-of-care and at-home testing were cited as key areas to watch, although not without caveats. 

Liquid biopsy has been a popular area of investment and M&A for the past few years, although Mikson was more hesitant because many of the companies in the space are large players. There's a question of who would buy those firms, as well as the fact that multi-cancer early detection is "kind of an unproven market." Mikson said he's not sure an established company would want to take that bet and deal with the cash burn for the next several years, along with having to scale the technology. 

SVB's Norris added that liquid biopsy continues to be interesting and that there have been some big funding rounds for companies with that technology but questioned whether there's opportunity for M&A for larger companies in the space. Liquid biopsy firms have had more traditional life science investors, but recently it has been nontraditional investors that have led big later-stage deals, he noted.

The recent ECLIPSE trial data readout from Guardant Health could have a big impact on the liquid biopsy arena, which BTIG analyst Mark Massaro called "hugely important" for the entire liquid biopsy space. He said he feels the data — which many investors found disappointing, leading to a tank in Guardant's share price — is a validation of liquid biopsy and will hopefully encourage other liquid biopsy companies to continue their development programs and bring more investment into the space, despite investor hesitation in the early days post-readout. The data may also have a ripple effect on other companies' valuations, he said.

Moving from lab-based testing to at-home testing is also a key area of opportunity. Massaro said that there is still interest in the point-of-care sector, even as the interest in COVID-19 testing has declined. In his view, the pandemic helped accelerate the point-of-care movement by about three years, and the general public's new comfort with at-home antigen tests is a "huge win" for the industry, he said. There are opportunities for companies that originally had a major focus on COVID-19, such as Cue Health, to expand their menus and add to the already high consumer interest. 

Andrew Brackmann, an analyst with William Blair, said that while COVID-19 testing is not necessarily seen as ongoing revenue, the interest in decentralized testing has "always been there" and is still present. Larger players that benefited from COVID testing must determine how they can deploy some of the capital from COVID-19 and fill the hole left by decreasing COVID-19 testing, which could lead to acquisitions, and some companies may eventually take swings at smaller at-home testing firms where valuations have come down. Before they take those steps, however, there will need to be more clarity on where the at-home testing market is going beyond COVID-19 and the consumer willingness to test at home for other diseases, he said.

2023 Forecasts

Despite the downturn in M&A last year compared to 2021, there is room for optimism in the coming months. In 2023, Canaccord's Mikson said he expects that some companies that went public in 2021 and now have cash issues will grow desperate for a deal and turn to buyouts at lower valuations, but that he doesn't think it's the "year of the deal." 

However, some companies may be due for a big deal after divesting parts of their businesses, he said. Two firms that announced large divestitures in 2022 were Danaher and PerkinElmer. Danaher said in September that it would spin off its environmental and applied solutions business, while PerkinElmer announced in July that it plans to sell its applied, food, and enterprise business to New Mountain Capital for $2.45 billion. The remaining company will be developed into a high-margin life sciences and diagnostics firm, it said.

Brackmann, meantime, said there might be a slight uptick in M&A this year compared to 2022, but that the "significant bolus" won't hit until the second half of 2023 or 2024. 

Although 2022 saw less activity, Norris said he doesn't think that this down cycle is endemic to what will happen in the future and that the industry is an exciting place to be right now. There "will be another up cycle," he said. "We've never seen as much technology advancement … as we've seen over the last few years, and I don't think that that's stopping any time soon."

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