Testing has become one of the most defining words of 2020, especially as it relates to the COVID-19 pandemic. We see it in headlines daily and President Trump lists the testing capacity of the United States as one of his crowning achievements. But politics and media coverage aside, health experts often cite testing as one of the key components to containing the spread of the virus, underscoring the importance of those services.
The demand for COVID-19 testing and diagnostics can be seen in recent quarterly earnings reports. LabCorp’s (NYSE: LH) revenue jumped by 33% in Q3:20 to $3.9 billion, compared with Q3:19. Roughly 31.5% of the increase was thanks to organic growth, bolstered by COVID-19 testing. Quest Diagnostics (NYSE: DGX) celebrated similar results. The diagnostics giant reported Q3:20 revenues of $2.79 billion, up 42.5% from 2019, and even stated that it will be returning the $138 million it received from the CARES Act. Simply put, the company didn’t need it.
Covid-19 testing and diagnostics demand swelled over to the M&A market as well, as companies tried to capitalize on the new opportunity. In late October, ProPhase Labs, Inc. (NASDAQ: PRPH) acquired Confucius Plaza Medical Laboratory Corp., a clinical medical laboratory approved for a variety of tests, including Covid-19, for $2.5 million. Back in early September, Portland, Oregon-based Empower Clinics Inc. purchased Kai Medical Laboratory, a high-complexity CLIA and COLA accredited laboratory that provides reliable and accurate testing solutions to healthcare providers.
Clearly, there is plenty of opportunity in the COVID-19 market, but what about longer investments for the diagnostics market? COVID-19 will come and go (hopefully), so some of these acquisitions are really only for short-term gains. Let’s take a look at the Laboratories, MRI & Dialysis sector more broadly. Year-to-date deal volume has already surpassed the total for 2019 (56
deals versus 52), and we expect that number to rise before 2020 finally comes to an end.
The rise in deal volume, as you might have guessed, can be attributed to an increase in demand for diagnostic platforms, but it’s not entirely COVID-19 related. In 2020 so far, 39% (22) of all transactions have targeted a diagnostics company, compared with 33% (17) in 2019 And this makes sense with the overall growing trend in healthcare, as organizations, health systems and providers shift to a value-based healthcare model. Treatment and therapeutics are important, but treating a patient becomes much more cost-effective when a diagnostic exam or test helps a provider determine the best course of action.
One of the hotter targets for 2020 has been oncology diagnostics firms, which correlates to the demand for oncology firms in the Biotechnology sector, based on search results in the HealthCareMandA.com Deal Database. In late October, Exact Sciences Corp. (NYSE: EXAS) announced it purchased Cambridge, Massachusetts-based Thrive Earlier Detection Corp., a healthcare company focused on incorporating earlier cancer detection into routine medical care. Thrive is developing CancerSEEK, a liquid biopsy test that is designed to detect many cancers at earlier stages of disease.
Under the terms of the agreement, Exact Sciences will pay $1.7 billion at closing, consisting of Exact Sciences common stock and 35% in cash. An additional $450 million would be payable based upon the achievement of certain milestones. Combining Thrive’s CancerSEEK with Exact Sciences’ platform will establish Exact Sciences as a leading competitor in blood-based, multi-cancer screening. By joining with Thrive, Exact Sciences will be well-positioned to compete in a significant U.S. market for cancer detection, estimated to be at least $25 billion.
In June, Invitae Corporation (NYSE: NVTA), a genetic information company, bought ArcherDX, which offers genomic sequencing services and testing solutions to help develop and deliver personalized and precision diagnostics and monitoring in the field of oncology. The deal was valued at $883.3 million, consisting of $325 million in cash and 30 million shares of Invitae common shares at $18.61 per share (June 19, 2020 closing price).
We expect many of these trends to continue into 2021, especially once we exit a market weighed down by COVID-19. Diagnostics are critical in the healthcare process, and more investors should take notice.