Investopedia: Should Investors Worry If Gen-Probe Doesn't Sell Out?

Gen-Probe (Nasdaq:GPRO) shareholders enjoyed a nice pop in late April when this diagnostics company announced that it was considering a sale. Those easy gains proved short-lived, though, as the stock gave up a lot of that jump when rumors started spreading in early June that the sale process had not been going well and there was only one interested party still in the bidding. (To help you determine if a stock is popping or if the entire market is moving, read Gauging The Strength Of A Market Move.) 

Missing the quick and low-risk payday of a buyout would certainly be disappointing to some investors, but shareholders should not be too worried about this turn of events. While it would be discouraging to consider the idea that other companies do not see a lot of must-have value in Gen-Probe's business, there are other interpretations available. All in all, it may prove to be the case that life sciences companies look back on this opportunity with regret and shareholders ultimately benefit from the ongoing independence of Gen-Probe. 


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Does Beckman Bow To The Inevitable?

If multiple reports from respected sources like Wall Street Journal and Bloomberg are to believed, Beckman Coulter (NYSE:BEC) is on the block. If true, the board deserves applause for bowing out and seeking the best possible source of good returns for its shareholders. 

A Long Way From a Deal 

Beckman itself has not commented on any of the rumors, but multiple reports indicate that the company has tapped Goldman Sachs (NYSE:GS) to manage a potential sale of the company. Some reports have gone so far as to indicate that this is in direct response to the receipt of bids or indications of interest for the company - though apparently from private equity buyers and not other companies. (For more, see Potential Takeout Targets.)

 
Match Game 
The stock has shot up more than one-quarter in response to these rumors, and the market is once again playing the Chinese menu game (pick one from column A and then one from column B). It is unlikely that any of Beckman's current major rivals would want to make a bid. It would not make sense for Abbott (NYSE:ABT) to be eager to buy into the chemistry business (where Beckman is strongest). Siemens (NYSE:SI) and Roche (Nasdaq:RHHBY) would not only have potential antitrust worries to reconcile, but would also have to explain to their shareholders how that deal would complement their stated efforts to produce more growth from their testing businesses from next-gen technology.


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Qiagen Hopes To Ride MDx

Sometimes being the best does not make a stock a success. Qiagen (Nasdaq: QGEN) is an acknowledged leader in sample prep in both clinical and research applications, and it has built a solid franchise in clinical diagnostics. None of that makes the company immune to economic reality, though, and weaker patient visit counts have sapped some of its strength.

Another Sluggish Healthcare Quarter
Reporting on a medical technology company having sluggish performance is getting a bit old hat, but it is nevertheless true. Qiagen saw revenue rise almost 6% (about 8% organically when excluding swine flu-related business), with weak results in academia offset by strength in the molecular diagnostics (MDx) business. Profitability was more of a mixed outcome, however. Gross margin declined more than a full point, while operating income fell about 5% and operating margin dropped more than 300 basis points. If there is good news in this result, it is that the company bumped up its R&D spending by about 16%. 


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GE Goes Outside The Box In Healthcare

There is an old saying that if you are going to make predictions, you may as well make a lot of them. Even though I recently laid out multiple medical technology acquisition prospects for General Electric (NYSE:GE), GE managed to go off the board with an interesting purchase. 

On Friday morning, GE announced an agreement to acquire Clarient (Nasdaq:CLRT), a specialist in oncology diagnostics services. GE is paying cash in this deal, giving common shareholders $5 a share (versus Thursday's close of $3.74) and preferred shareholders $20 per share. That is a total deal value of $580 million for a company with about $100 million in trailing revenue.

As a major holder (more than 30 million shares as of September), Safeguard Scientifics (NYSE:SFE) will benefit significantly from this deal, booking roughly a $145 million gain in the transaction. (For more, see Is GE About To Stir Up The Medical Arena?)


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One Small Step For Novartis ... One Slightly Larger Step For Cepheid

Interesting little news item from molecular diagnostics company Cepheid (Nasdaq: CPHD) last night. The company announced a collaboration with drug giant Novartis (NYSE: NVS) to use its GeneXpert system to develop and market a test for BCR-ABL expression in patients with a type of leukemia called Philadelphia chromosome-positive chronic myelogenous leukemia.

Detecting the Philadelphia chromosome is currently the definitive means of diagnosing CML, and that is usually accomplished with FISH or standard PCR. With the GeneXpert system, though, it may be possible to do perform the tests more quickly, more efficiently, and closer to the patient - a hospital may or may not have a regular PCR machine on hand (or the personnel to use it), but could almost certainly use the simpler, more user-friendly GeneXpert system in its place. It may also be the case that monitoring the expression of BCR-ABL is useful in assessing or fine-tuning therapy for these patients. 

In any case, this is not a transformative deal for Cepheid (or Novartis). Cepheid had talked about expanding into cancer diagnostics before, and this may simply accelerate and smooth the process a bit. Even still, I believe molecular diagnostics will have a major role to play in oncology as more and more is learned about the genetic/proteomic basis of the disease (in all its forms) and how that information pertains to treatment.

Cepheid is a great stock for the watch list. Even though I believe in the company's future, I would have to swallow hard to buy it at today's levels.

Companies With Big MDx Dreams

This is a relatively unusual quiet period in medical technology, as there are so few emerging sectors that are really capturing attention and drawing high stock multiples. One of the areas that still is drawing attention, however, is molecular diagnostics. A subset of the lucrative multi-billion dollar diagnostics market, molecular diagnostics focuses on the use of modern life sciences technology to use genomic and/or proteomic expression information to diagnose or predict disease. (Find an investment that will give your portfolio a shot in the arm. To learn more, check out A Checklist For Successful Medical Technology Investment.)  

Molecular diagnostics (often abbreviated as MDx) has garnered a lot of hope, enthusiasm, and more recently, disappointment. Although many of the leaders in this space are some of the large companies investors might expect (Roche (Nasdaq:RHHBY), et al), there are several small companies that could give risk-seeking investors an interesting play on the space. 


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A Private Deal For Sequenom

Interesting little deal today in the diagnostics space.  

Sequenom (SQNM) announced a private placement of 12.4M shares at a price of $4.15/sh ($51.6M total). The company definitely needs the cash to continue its R&D program, and the size of this deal should calm the funding fears for a while.Still, I can't help but notice that the investors in this deal demanded a pretty substantial discount to the prevailing stock price - nearly a 25% haircut to today's opening price.

To me, that seems like a pretty fair discount given the concerns and controversy around this company. There are plenty of places where you can read about the details, but the gist of it is that a major scandal hit the company last year; costing most of the sr. mgmt their jobs, costing the company several lawsuits, and throwing into question whether or not the company's lead test even works. On top of that, I'm still under the impression that the owner of the underlying technology (who had extended SQNM a license) wants out of that agreement.

So, in other words, this is a $340M market cap company trading basically on the hope that their test for Down's Syndrome works (but where the past data is all but useless because of the possibility of deliberate bias in prior studies) and that they still have the rights to develop and market it. Given all that, then, a 25% discount is not an unreasonable margin of safety.

On a more positive note, the company gave pretty clear guidance last week regarding the development timeline for this test, with test optimization expected to be over by the end of Q3'10, testing of samples conducted in the fourth quarter, and commercial launch by the end of 2011.Now, maybe I'm reading too much into this, but doesn't this sound a bit like "back to the drawing board?" If  they're having to go back to test optimization, that suggests to me that there were at least a few significant flaws in the old test. Whether that completely invalidates the old promise or not, I do not know. Unfortunately, I don't think anybody outside the company knows either, so it's basically an exercise of faith at this point.

I happen to think that the baseline technology the company is using is pretty sound, and I think there's some real market potential for this test. But with so many other options to chose from, and options that offer "clean" stories, I just don't see the need to take the risk here right now.