In July 2019, Exact Sciences (NASDAQ: EXAS) announced it would acquire Genomic Health (NASDAQ: GHDX) for $2.8 billion in cash and stock. This was one of the largest M&A deals in the genetic diagnostics space since Konica Minolta’s USD$1 billion acquisition of Ambry Genetics, an Intrepid client. As one of the recent landmark transactions in genetic diagnostics, there are some interesting takeaways that may show signs of continued M&A activity in this rapidly growing sector.
Test menu expansion is key to grow addressable markets
In this deal, two well-established tests are coming together, Cologuard and Oncotype DX. By joining forces, these two players are vastly expanding their addressable markets to more than $20 billion (per management), which tells a great story for Wall Street. Further, building a broader test menu helps mitigate potential reimbursement challenges in this evolving landscape.
Developing breadth for the clinical journey
Notably, the combination of these businesses brings together two tests at very different stages of the clinical spectrum with Cologuard being an early pre-symptom screening test to determine if a patient might have colon cancer while Oncotype DX is a somatic test administered after a patient has already been diagnosed with breast cancer to select optimal clinical treatments. Expect diagnostics companies to bulk up their test offerings to address the patient’s complete clinical journey.
Lofty stock valuations provide acquisition currency
One interesting element of the deal is that nearly 62% of the consideration is in Exact Sciences stock, which has nearly doubled in the past 12 months. With the broader genetic diagnostics sector seeing strong stock valuations, expect buyers to try to push stock as compelling acquisition currency.
Profits matter and consolidation can bring operational improvements
By combining forces, these large companies can leverage their commercial sales operations, R&D, and back-office functions across a larger revenue base to drive profit improvements. We expect this to help drive margin expansion while providing the resources to reach a much broader market across physician specialties. While investors love a revenue growth story, it will only last so long before they want to see cash on the bottom line. Finally, as the sector matures, it appears more than ever that scale is increasingly important. Scale can provide the resources to drive commercial operations, fund long-term R&D efforts, and provide leverage in conversations with payors. It can be increasingly difficult for smaller players to compete given the dynamic reimbursement landscape and the race for resources to grow. We are excited to see the genetics space mature with its compelling innovation leading to transformative M&A events.