Cancer Testing and Molecular Diagnostics Are Main Drivers in This Transaction

In a deal with implications for independent clinical pathology laboratories, pharmaceutical giant Novartis (NYSE: NVS) announced that it would acquire pathology testing company Genoptix, Inc. (NASDAQ: GXDX). Novartis will pay $470 million in cash to acquire all the shares of Genoptix.

Although the total amount of $470 million to be paid for Genoptix is nearly one-half billion dollars, one financial analyst who quickly responded to the news believes that Novartis did not pay a premium price for Genoptix. At William Blair & Company, Analyst Amanda Murphy, CFA, wrote that “…the valuation [of Genoptix] is below what esoteric/specialty labs have been sold for in the past (closer to 10 times or more), which might reflect the company’s recent operational issues and/or potential reimbursement pressure from a shift to in-network status with payers.”

For 2009, Genoptix reported revenue of $184 million. Its 2010 revenue is expected to be around $196 million. In recent years, Genoptix was considered a top-performing stock. However, last spring, Genoptix failed to meet the Wall Street estimates for its net income. In the following weeks, its share price declined 65%, from as high as $39.00 to as low as $13.51. Over the course of 2010, Genotopix’ share price never recovered and closed at $24.86 yesterday after the acquisition announcement became public.

In its press release, Novartis said that the testing services at Genoptix laboratories would be a “strategic fit with the current portfolio of companion diagnostic programs within Novartis Molecular Diagnostics unit,” and that, acquiring Carlsbad, California-based cancer diagnostic laboratory “complements the Novartis internal capabilities aimed at improving health outcomes by advancing individualized treatment programs.”

Novartis said that it would operate Genoptix as part of a division it calls Novartis Molecular Diagnostics. It expects the acquisition to be completed in the first half of 2011.The buzz words associated with media coverage of the acquisition stressed the themes of personalized medicine and companion diagnostics.

Most pathologists and clinical laboratory managers know that Genoptix offers a range of cancer tests. On its website, Genoptix describes its test menus as tests for “diagnosing cancers, disorders, and subtypes in bone marrow, blood, and lymph nodes, with expertise in the most challenging diagnoses. We also specialize in solid tumor workups using molecular testing.”

When Novartis closes this acquisition and becomes the owner of Genoptix, it will mark further consolidation within the clinical pathology laboratory testing industry. Large corporations continue to purchase independent medical testing laboratory companies.

Moreover, experts will be watching to see if any of the other major pharmaceutical companies take steps to acquire pathology companies and clinical laboratories. Should this occur, it would be important confirmation that the pharma industry sees the need to invest in in vitro diagnostics (IVD). That would be a favorable trend for pathology and all of laboratory medicine.

Related Information:

Novartis to Buy Genoptix for $470 Million (Wall Street Journal)

Novartis announces agreement to acquire Genoptix, Inc. in all cash offer (Novartis Press Release)

Genoptix Jumps 25% On Novartis Bid (Forbes)

Novartis to Buy Genoptix for $470 Million in Cash (Bloomberg)

Genoptix Announces Agreement to be Acquired by Novartis (Genoptix Press Release)

THE DARK REPORT January 18, 2011 Issue