MADISON, N.J., and ALAMEDA, Calif.—Quest Diagnostics Inc., a provider of diagnostic testing, information and services, and Celera Corp., a pioneer in genetic diagnostics discovery and development, have entered into a definitive merger agreement under which Quest Diagnostics will acquire Celera for $8 per share, representing a transaction value of approximately $344 million, net of $327 million in acquired cash and short-term investments.
"For Quest Diagnostics, this is an important transaction which will further strengthen our leadership position in molecular diagnostics discovery and development and drive sustainable revenue growth," says Dr. Surya N. Mohapatra, chairman and CEO of Quest Diagnostics. "We will gain immediate access to an impressive range of proprietary tests and products, and a strong pipeline of biomarkers for the future. This transaction advances our growth strategy to be the leading innovator and provider of esoteric and gene-based testing for cancer, cardiovascular disease, infectious disease and neurological disorders."
The transaction value is expected to be further reduced through the realization of a significant portion of Celera's available tax credit and net operating loss carry-forwards and capitalized R&D, which totaled $117 million at the end of 2010, Quest's management reports. The transaction was approved by the boards of directors of both companies.
"We are pleased to have reached an agreement through which Celera and our Berkeley HeartLab become part of the world's most respected diagnostic testing company. Our discovery and validation of new biomarkers has exceeded our capacity to commercialize them," says Kathy Ordoñez, CEO of Celera, which generated revenues of $128 million in 2010. "Combining Celera's expertise in genetics with Quest Diagnostics' medical leadership, market access and scale is expected to speed the realization of our vision to personalize medicine. We believe this is a compelling transaction that accelerates the delivery of value to our shareholders."
Quest Diagnostics expects the acquisition to be dilutive to its GAAP earnings per share by an "immaterial amount" in 2011, before anticipated charges related to the transaction. The acquisition is not expected to have a material impact on Quest Diagnostics' 2012 earnings per share. Assuming a close of the transaction at the end of April, 2011, Quest Diagnostics expects Celera to add just over one percent to its 2011 revenue growth.
While it may not be a big boost in the short run, banking and investment firm Barclays see the focus at Quest on mergers and acquisitions (M&As) for growth as a "positive" trend, but adds: "The key to whether or not the acquisition of Celera is a success, in our view, is if Quest is able to grow Celera, despite Celera having a hard time growing as a stand-alone company in recent years."
Zacks Investment Research also made note of the M&A trend when it commented in its note on the acquisition that for the last few years, Quest has been strengthening its foothold in the esoteric testing market, with gene-based and esoteric testing now accounting for 22 percent of the company's total revenues in 2010, up from nine percent in 2000.
"Earlier, in February 2011, Quest decided to acquire Athena Diagnostics from Thermo Fisher Scientific for $740 million. Athena, with $110 million in revenues in 2010, provides diagnostic tests for neurological and other diseases with an emphasis on gene-based tests," Zacks notes. "Although Quest has been witnessing a decline in revenues derived from anatomic pathology, the company recorded a three percent growth in gene-based and esoteric testing during the fourth quarter, driven primarily by sales to hospitals and specialist physicians."
Zacks maintains a "Neutral" recommendation with regard to Quest on the news of this M&A. The firm acknowledges that with positive volume growth during the quarter coupled with stability in pricing, the company is set for gradual recovery.
"Besides, the company is adopting strategies such as suitable acquisitions, increasing the sales force and targeting additional geographies to drive its top line," Zacks reports. "We are encouraged by Quest's strong portfolio of tests, many of which are finding greater acceptance with time although decline in revenues from anatomic pathology continues to remain a concern. Moreover, the company faces steep competition from Laboratory Corporation of America Holdings."
As for the specifics of what Quest will gain if the acquisition goes through as planned, here is a quick rundown:
- A portfolio of proprietary genetic biomarkers for numerous key clinical needs across the disease spectrum, with about 100 issued or pending patents. In addition, Celera's current research and development pipeline is focused on cardiovascular disease and cancer and is expected to produce significant value.
- Berkeley HeartLab offering, such as proprietary cardiovascular tests sold through its specialized sales force and supported by clinical educators who provide patient disease management services. Its leading tests include: HDL and LDL lipoprotein analysis to help characterize a patient's cardiovascular disease risk; KIF6 genotyping test to predict risk of coronary heart disease and response to statin therapy; 9p21 genotyping test to predict the risk of early onset myocardial infarction; and LPA genotyping test to predict risk of coronary heart disease and response to aspirin therapy.
- Celera's genetic in-vitro diagnostics products and development capability for test kits and reagents and its position as a provider of molecular test products for transplantation genetics, cystic fibrosis, HIV drug resistance and Fragile X syndrome.
