Off the auction block

Novartis tenders all-cash offer for challenged Genoptix at $25 per share

March 7, 2011
Lloyd Dunlap
CARLSBAD, Calif.—Faced with slowing growth and decliningprofits, Genoptix, a cancer testing company, put itself up for sale in Decemberand has now been rewarded with a tender offer from pharmaceutical giantNovartis.
 
 
According to several news reports, Genoptix hired BarclaysPLC to run an auction that ultimately resulted in the Novartis offer. In lateJanuary, Novartis announced that it has entered into a definitive agreement forthe acquisition of Genoptix, a laboratory that provides personalized diagnosticservices to community-based hematologists and oncologists. The acquisition willenhance Novartis's tools and services that aim to improve health outcomes forpatients by advancing the ability to define and monitor individualizedtreatment programs, the company states.
 
Under the terms of the agreement, Novartis will commence atender offer for all outstanding shares of common stock of Genoptix at $25 pershare in cash. This represents a total equity value of $470 million and anenterprise value of $330 million. The Novartis offer represents a premium of 39percent over Genoptix's unaffected share price of $17.98 on Dec. 3. It alsoimplies a 27 percent premium over the closing price of $19.76 on Jan. 21,according to a Novartis statement.
 
 
"The acquisition of the Genoptix medical laboratory willserve as a strong foundation for our individualized treatment programs," saysJoseph Jimenez, CEO of Novartis. "Genoptix is an innovative company with atalented team of people who share our commitment to transforming the waymedicine is practiced. By integrating Genoptix within Novartis, we can greatlyenhance the value we add to patients, clinicians, payors and society."
 
 
In the wake of questions about valuation in its $28 billionacquisition of Alcon, some observers were pleased to see that Novartis is stillin the acquisition mode. But if the company was playing the role of whiteknight when it snapped up Genoptix, it was doing so for a damsel with somewhattarnished prospects.
 
 
Genoptix sales have been hurt by unemployment in the UnitedStates, which has reduced the number of patients seeking care from bloodspecialists and cancer doctors who use its tests. Genoptix reported net incomeof $30.6 million on revenue of $184 million last year, but growth has slowed toa trickle to sales of about $195 million in 2010 after jumping nearly 59percent in 2009.
 
 
And in its own regulatory filings, Genoptix has admittedthat any shift toward in-network billing could hurt the company's futureresults. In its latest quarterly report, the company notes that "We weregenerally subject to reimbursement as a non-contracting provider forapproximately half of our revenues for the three and nine months ended Sept.30, 2009, and 2008. Use of a non-contracting provider typically results ingreater coinsurance or copayment requirements for the patient, unless we electto treat them as in-network in accordance with applicable law, which results indecreased revenues because we do not generally collect the full applicableout-of-network patient coinsurance or copayment obligations. In instances wherewe are prohibited by law from treating these patients as in-network, thus …requiring them to pay additional costs or copayments, such patients may expressconcern about these additional costs to their hem/onc. As a result, thathem/onc may reduce or avoid prescribing our services for such patients, whichwould adversely affect our results of operations and financial condition.Should any of the third party payors with whom we are not contracted insistthat we enter into a contract for the specialized diagnostic services weprovide, the resulting contract may contain pricing and other terms that arematerially less favorable to us than the terms under which we currentlyoperate. If reimbursement from a particular payor increases, there is heightenedrisk that such a third party payor will insist that we enter into contractualarrangements that contain such terms. If we refuse to enter into a contractwith such a third-party payor, they may refuse to cover and reimburse for ourservices, which may lead to a decrease in case volume and a correspondingdecrease in our revenues. If we contract with such a third-party payor,although our case volume may increase as a result of the contract, our revenuesper case under the contractual agreement and our gross margins may decrease.The overall net result of contracting with third-party payors may adverselyaffect our business, results of operations and financial condition."
 
 
Founded in 1999 and based in Carlsbad, Calif., Genoptixemploys approximately 500 people and will become part of Novartis MolecularDiagnostics (MDx), a unit within the Novartis Pharmaceuticals Division. Theacquisition will support and expedite the development of companion diagnosticprograms, especially in oncology. Novartis plans to maintain the existingoperations and continue delivering Genoptix's portfolio of personalizeddiagnostics services to community-based hematologists/oncologists across theUnited States.
 
 
The Genoptix board of directors has unanimously approved thetransaction and agreed to recommend that Genoptix stockholders tender theirshares. The transaction is conditional upon the tender of at least a majorityof the shares of Genoptix in the tender offer, receipt of regulatory approvalsand other customary closing conditions. The transaction is expected to closeduring the first half of 2011.
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