A large non-healthcare company will acquire an IVD company this year. This prediction is like forecasting that there will be a large winter storm on the East Coast this winter: quite possibly wrong, but still very plausible. So what’s interesting here? The fact that we would not have made this same prediction only a few years ago.
From an investor perspective, diagnostics is only just becoming exciting. Last year was notable in that there were several acquisitions of IVD companies by non-traditional companies, including Nestlé’s purchase of Prometheus and GE’s of Clarient (the latter completing at the end of 2010). That this pattern might continue in 2012 doesn’t seem too far-fetched. So what’s going on here? Let’s examine the logic of each of these acquisitions first.
Acquisitions in 2011
Nestlé’s ~$0.6 to $1.2 billion (est.) acquisition of Prometheus, a provider of proprietary diagnostic testing services for gastrointestinal disorders, appears to be the most surprising. Why would Nestlé, the largest food company in the world, get into medical diagnostics? Firstly, Nestlé leads the industry in R&D spending, and manufactures medical nutrition products (baby formula, nutrition supplements). The Prometheus acquisition, however, gets them into diagnostics, which seems unrelated to the business of selling food. Or is it? The use of genetic and biochemical information to inform individuals’ selection of medicines – Personalized Medicine – is catching on in Pharmaceutical companies, but its use in tailoring individual nutrition has been on the far horizon for years. This horizon appears now to have come much closer.
GE’s acquisition of Clarient, a provider of pathology laboratory services for community doctors and hospitals, was another big ($580 M) event in 2011. GE is already a healthcare company – GE Healthcare is a leading maker of medical imaging devices and pharmaceuticals – so this is not an entirely new industry for GE. One can also argue that pathology and radiology have common technologies, such as image digitization, storage and interpretation. GE’s Omnyx joint venture with the University of Pittsburgh Medical Center to develop digital pathology solutions indicates that GE has entered the game already. And information from pathology and radiology come together in diseases like cancer to inform diagnostic and treatment. GE is making a bigger bet than this, however: GE announced that it is investing $1 B over five years to develop cancer diagnostics and molecular imaging capabilities. As clinical decision-making increasingly involves integration of multiple diagnostic modalities, with multiple clinical stakeholders, often using sophisticated algorithms, it makes sense for GE to play across all these critical modalities – including molecular diagnostics.
A consumer electronics company creating point-of-care devices, a food company offering gut-health diagnostics, and a medical imaging company combining multiple diagnostic modalities – these are indications that IVD has become a critical entry point for companies entering into or expanding their healthcare business. Already on January 25th Roche made a $5.7 B hostile offer to acquire Illumina, which would strengthen Roche’s already strong position in the Life Sciences and Diagnostics Market. We should expect more M&A activity this year, but from non-traditional IVD companies. What might these be? An Apple or Samsung acquiring a diagnostic device company? Or a consumer products company like P&G, Colgate-Palmolive, SC Johnson, Mead-Johnson or Unilever making a big move into IVD? This no longer seems completely ridiculous. But whatever happens, one trend is clear – for the IVD industry the hunting season is open. If you don’t have an IVD strategy, you may be left behind.
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