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Cepheid to Broaden Danaher Dx Portfolio, Fast-Track MDx Presence

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NEW YORK (GenomeWeb) – Danaher's acquisition of Cepheid for $4 billion, including debt, would give the diversified technology firm a pure-play molecular diagnostics company with potential to accelerate revenue growth in its diagnostic test portfolio.

"Cepheid will significantly accelerate our presence in molecular diagnostics, complementing our recently introduced Veris high-volume system, and bringing an enhanced product offering to our customers," Thomas Joyce, Danaher president and CEO, said during a conference call Tuesday organized to present details related to the acquisition. "Our existing diagnostic businesses will benefit from Cepheid's exceptional assay development capabilities, improved access to under-penetrated segments such as small- and medium-size hospitals, [and] high-growth point-of-care and oncology testing markets."

Danaher's diagnostics business currently consists of assets from the acquisitions of Beckman Coulter, Lecia Biosystems, and Radiometer. Based on information provided by Joyce during the call, the firm's diagnostics business has annual revenues of around $3.33 billion of which $1.50 billion is in high growth markets, including China, India, and Brazil.

Danaher, similarly, would enhance Cepheid's business, according to Joyce, driven in part by implementing the Danaher Business System, which according to the firm is a business philosophy, set of values, and series of management processes.

"Cepheid will benefit from Danaher's broader suite of diagnostic testing, and our effective, disciplined go-to-market strategies in regions around the world," he said. "Our already well-established infrastructure and deep visibility in high-growth markets — with one example being Danaher's strong presence in China — will enable Cepheid and our diagnostics platform to accelerate growth."

Joyce said that he is impressed by the capability of Cepheid's system to take advantage of new and advanced assays over time, and its capability of enabling customers to reconfigure the system as testing needs change.  

Industry analysts were generally positive in their response to Danaher's plan to purchase Cepheid by acquiring all of its outstanding stock for $53.00 per share, a 54 percent premium to the closing price of the stock last Friday.

"From a strategic perspective, [Danaher] has seemingly increased its focus on MDx initiatives, and [Cepheid] tremendously boosts [Danaher's] MDx positioning (largest installed base in the industry)," Doug Schenkel, a senior research analyst at Cowen, wrote in a research note after the deal was announced. The value of the deal presents a measure of sticker shock, he wrote, but Cowen believes that Danaher is well positioned to "at least achieve if not exceed outlined financial targets for the deal."

For the quarter ended June 30, Cepheid reported a narrowing of its net loss to $10.2 million, or $0.14 per share, from a loss of $16.7 million, or $0.23 per share, in the prior-year second quarter. Revenue for the second quarter of 2016 grew to $146.0 million year over year, representing growth of 10 percent, or 12 percent on a constant currency basis, from $132.5 million.  

The company's top-line growth has been encouraging, Danaher said. In 2015, revenues grew almost 15 percent to nearly $538.6 million from $470.1 million in the prior year — and greater than 75 percent of Cepheid's revenues are considered recurring, according to Danaher.

Cepheid, in its Q2 earnings report, said it expected revenue for 2016 to be in the range of $618.0 million to $635.0 million, with a net loss in the range of $0.47 to $0.44 per share and non-GAAP net income in the range of $0.31 to $0.34 per share.  

Danaher said it expects that in the first year post acquisition, Cepheid's business would be moderately dilutive to GAAP-diluted net earnings per share and approximately $0.05 accretive to non-GAAP, adjusted diluted net earnings per share. The company added that it expects the acquisition to be approximately $0.30 accretive to non-GAAP, adjusted net earnings per share in the fifth year post acquisition. The non-GAAP, adjusted net earnings per share numbers exclude non-cash amortization, purchase accounting charges, and transaction expenses attributable to the acquisition.

Year five following the acquisition will be an important year for Danaher. The firm said it has identified synergies to the tune of around $100 million in annual cost savings and around $100 million in added annual revenue in that timeframe. Lower general and administrative costs and replacing some existing activities with activities at Cepheid will contribute to cost savings, according to Danaher.

The Danaher Business System has potential to significantly improve Cepheid's operational efficiency and profitability, according to Danaher's executives, and the Cepheid leadership team has a strong focus on execution. "The team at Cepheid is off to a good start," Joyce said. "They have a framework … around gross margin improvement that they have been driving. With the capabilities and resources that we can bring through DBS, we can take that good start and move it forward very effectively."

According to Cepheid, more than 11,000 of its GeneXpert systems are installed in 182 countries, enabling one to eighty tests to be performed at the same time and enabling flexibility in throughput that allows customers to scale up from low-volume testing requirements, such as in point-of-care settings, to the high-volume requirements of reference laboratories. Using proprietary test cartridges, the GeneXpert menu offers 23 tests outside the US and 20 tests in the US.

"The molecular market has several attractive long-term growth drivers and is still in the early innings of penetration into a range of clinical arenas from large hospitals and reference labs to smaller hospitals and physician labs, and various point-of-care settings," Joyce said. "As care delivery networks continue to migrate closer to the patient, care platforms such as Cepheid's will be best positioned to address these evolving needs."

Cepheid is a double-digit growth business today, he added, before longer-term opportunities materialize, such as those presented by the potential of the Cepheid Omni system, a point-of-care molecular platform that could be available to customers in emerging markets in Q3 2017. Joyce said he sees the core healthcare-associated infections area as a steady growth business and near- and medium-term opportunities opening up in tests for sexual health and virology.

"The Omni launch in 2017 is a tremendous opportunity relative to the shift in the care delivery networks," he said. "As care moves closer to the patient, a small-footprint, easy-to-use, essentially one-step analytic is going to be critical, and the Omni investment … is going to be key to realizing that opportunity."

Joyce said he also sees oncology testing using the Cepheid molecular system as holding significant promise, with returns on investment developing in the longer term.

"We will take a hard look at [the product pipeline]," he said. "Obviously, we want to make sure that near-term opportunities are well staffed and resourced ... Cepheid has a disciplined process for establishing [product roadmap] priorities, and the current milestones may be appropriate, but we will take our time and make sure that we have resources aligned appropriately with those timelines."

Joyce said the firm is seeing good traction and opportunities for growth in the European market for the Beckman Coulter Veris molecular diagnostics system, and that the Cepheid and Beckman Coulter molecular platforms are highly complementary. Veris delivers a simplified workflow that combines sample DNA extraction, purification, assay set up, and analysis in a single four-step workflow, according to Beckman Coulter. The system was designed specifically for high-volume testing, with lab volumes of up to 40,000 tests per year, Joyce said.

Customers who are moving up in volume are more likely to be Cepheid customers, according to Danaher, while customers in Europe who are already doing high-volume testing are more likely to be Veris customers. Additionally, the Cepheid system will be available for relatively high-volume testing in the United States where Veris is not yet available, and Danaher sees opportunities for Cepheid where it is underpenetrated in Europe, in helping customers looking to scale up from low test volumes. The firm also sees opportunities for Cepheid, Joyce said, in China, Brazil, India, as well as in other high-growth markets where the MDx company is also underpenetrated.

Danaher does about $2.50 billion per year in diagnostic test business with core labs. "We have a tremendous installed base there today and a sales force of over 3,000 people globally —sales reps, applications people, and service engineers — all of which present some leverage for Cepheid's growth in that market," Joyce said. The company will also look for synergies and resources from within its microbiology business and its applications in critical care, he added.

The deal, which is expected to close by the end of the year, is subject to approval from Cepheid shareholders and regulatory bodies as well as other traditional closing conditions.