Health-care cos chase growth in diagnostics
CHICAGO (Reuters) - The promise of preventative medicine is driving an acquisition boom in the diagnostics sector that is expected to stay hot as would-be acquirers with cash to deploy chase a dwindling list of potential targets.
Established companies with mature product lines are eyeing smaller developers of promising tests and technologies as both an investment in the future of health care and a relatively painless way to boost cash flow nearer term, analysts said.
"The big players are starting to notice we have this highly lucrative field that is somewhat underexposed," said Morningstar analyst Alex Morozov. "There are a lot of tests out there that could be breakthrough technologies that could be a significant source of growth in the years to come."
Swiss drugmaker Roche's (ROG.VX) willingness to pay a healthy premium for Ventana Medical Systems Inc. VMSI.O, which specializes in tissue-based testing, pushed up shares of several diagnostics makers on Tuesday as investors speculated who could be next.
Roche, already a top player in medical testing, on Monday announced a hostile $3 billion takeover bid for Ventana.
Gen-Probe Inc. (GPRO.O), a maker of tests to diagnose infectious diseases and to screen donated blood, hit a new all-time high on Tuesday and closed up $3.19, or 5.72 percent, at $59.00.
Cepheid Inc. (CPHD.O) climbed 10.02 percent to $13.72, Quidel Corp. (QDEL.O) climbed 5.3 percent to $17.10, and Luminex Corp. (LMNX.O) rose 5.09 percent to $12.17.
Shares of Immucor Inc. (BLUD.O), Dade Behring Holdings DADE.O, OraSure Technologies (OSUR.O), Meridian Bioscience (VIVO.O), Hologic Inc. (HOLX.O) and Inverness Medical Innovations Inc. IMA.A all gained.
"So many smaller diagnostic companies have been bought out recently at premiums that you are seeing a lot of companies trade up just on pure speculation," said Morozov.
Hologic, a women's health-care firm, in May agreed to buy Cytyc Corp. CYTC.O, which focuses on cervical cancer and pre-term birth screening, for $6.2 billion.
Also last month, Inverness, which makes home pregnancy tests and fertility monitoring kits, agreed to buy Biosite Inc. BSTE.O for $1.67 billion, after Beckman Coulter Inc. (BEC.N) bowed out of a bidding war for the maker of tests to diagnose heart ailments.
The mid-cap mergers follow deals earlier this year by conglomerates Siemens AG (SIEGn.DE) of Germany and General Electric Co. (GE.N), which are both beefing up their presence in the diagnostics sector.
Siemens bought Bayer Diagnostic, while GE has agreed to buy two of Abbott Laboratories Inc.'s (ABT.N) diagnostics units.
ATTRACTIVE MARKET
Acquirers look at the diagnostics market, with its myriad of small players enjoying healthy gross margins on specialty tests, and see an advantage to paying up for the intellectual property and market share those companies bring, analysts said. Diagnostic tests are also seen as facing fewer reimbursement hurdles from insurers.
"If you have good products and good sales channels, then you have barriers to entry. You can't replicate that so easily, so companies that can't replicate it will try to buy it," said Robert Baird & Co. analyst Quintin Lai.
A relatively easy credit environment and focus on achieving greater scale to drive growth are also fueling the appetite for deals, analysts said.
"Companies that have a vision that health care is going to become a bigger and bigger part of the economy are making investments to get better exposure to diagnostics," Lai said.
As the population ages, the diagnostics sector will play a pivotal role in balancing the demand for better medical treatments with the pressure to control health-care costs.
Targeting biomarkers through diagnostic testing can potentially help physicians better tailor therapies to their patients' needs and promote more efficient use of expensive medicines, said Bruce Cranna, analyst with Leerink Swann.
