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In Vitro Diagnostic Market Insight: Continued Growth and Consolidation

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In Vitro Diagnostic Market Insight: Continued Growth and Consolidation MARKET INSIGHTS In Vitro Diagnostic Market Insight: Continued Growth and Consolidation Craig Steger Senior Vice President, Outcome Capital Oded Ben-Joseph, Ph.D., MBA Managing Director, Outcome Capital Echoe M. Bouta, Ph.D. Associate, Outcome Capital Driven by a multitude of factors including the ageing population, Introduction increasing burden of chronic and infectious diseases, mounting demand for early diagnosis, emergence of personalized medicine and higher demand for testing in the developing world, the global In Vitro Diagnostics (IVD) market is projected to grow at 5.2% CAGR from $68 billion in 2018 to $88 billion in 20231. We examined recent IVD market dynamics between 2016 and Q3/2019 including financing events, merger and acquisitions (M&As) and initial public offerings (IPOs). We analyzed these dynamics to assess the overall activity of the segment to provide management teams and boards with a market-aligned perspective. Mature Market Marked by million, three private equity (PE) Danaher’s acquisition of Cepheid, Intense Consolidation financings over $200 million, and Abbott’s acquisition of Alere, four acquisitions over $1 billion and PerkinElmer’s acquisition of The rapid growth of the (Table 1). With respect to the Euroimmun. Roche’s acquisition of IVD market has attracted more financing events, both transactions Foundation Medicine is expected to than a 100 players2, resulting in supported growth capital to close in late 2019. Roche acquired numerous M&As over the past commercialize and expand 56% of Foundation Medicine in several years. This has resulted product offering and to propel 2015 for approximately $1 billion in consolidation as players have revenue generation, allowing and has now decided to lock-up made two or more acquisitions these companies to become large that investment by acquiring the over this relatively short time players in the segment. The large remaining Foundation shares period (Figure 1). Further, we M&As afforded acquirers with the for $2.4 billion. This valuation witnessed large transactions, opportunity to aggressively expand indicates that Roche was looking including two venture capital (VC) market share, as demonstrated by at Foundation as a strategic fit for financing transactions over $100 1 www.outcomecapital.com MARKET INSIGHTS its pharmaceutical business and Figure 1 Most Acquisitive Players in the IVD Market their presence in the personalized 2016 – Q3/2019, Source: PitchBook and CapIQ. medicine space, rather than a purely revenue-driven transaction. Foundation was the first Food and Drug Administration (FDA)- approved comprehensive genomic profiling assay and had Centers for Medicare and Medicaid Services (CMS) reimbursement coverage. Given these transactions are We expect continued consolidation in the next several years as large players will seek to expand platforms, offerings, menus and applications. Table 1 Large Transactions Expand Market Share Source: PitchBook, CapIQ, & Press Releases. 2 www.outcomecapital.com MARKET INSIGHTS Figure 2 IVD Investments 2016 - Q2/2019, Source: PitchBook outliers, they have been removed several quarters of investments an instrument only, or those from figures assessing total amount made in this space, suggesting developing a platform, average invested or average deal size. that the VC and PE communities deal value does not increase with do not support earlier stage IVD subsequent series of funding, A Mere $5.5 Billion Invested in Pri- opportunities and that better return- again, indicating limited appetite vate Placements on-investment multiples are likely for IVD investments. As shown in to be found elsewhere in the life Figure 4, several firms continue To assess the likelihood science sector. Limited venture to support IVD companies and are of an early stage IVD company to activity is also demonstrated by taking multiple shots on goal in secure funding, we analyzed VC a modest 14 Series A financings the sector. Sands Capital is leading and PE, financings (Figure 2). VC and 20 follow-on financing (Series with 8 investments over the studied played a larger role than PE and B-E) in 2018. Furthermore, average period. Of note is that the top despite several large transactions, deal values were also modest with institutional investor groups consist VC firms provided relatively little an average Series C of only $17 of traditional venture capital firms, support for early stage companies million and $20 million in the such as Sands Capital and Domain in the IVD market. While over platform (instrument + associated Associates, as well as untraditional $5.5 billion was invested between assays) and instruments only sub- investors, such as Keiretsu Forum, 2016 and Q2/2019, this pales in segments, respectively (Figure 3). an angel investor group, and comparison to just the immuno- Average Series C appears to be oncology segment investments in higher in the lab services segment, the same time (over $14 billion, indicating that VC investors are Raising private capital in Source: GlobalData). Overall, more amenable to provide growth the IVD space represents a the IVD investments represent capital to services companies that challenge compared to other life science segments. Early stage less than 3% of total life science are at- or near-revenues, given the venture dollars invested (>$200 companies should focus on the relatively lower regulatory hurdles limited number of VCs active in billion invested) during the same for these companies to become period (Source: PitchBook). Figure the segment while seeking early revenue-generating. Interestingly, strategic partnerships. 2 indicates a flat trend over the past for companies developing 3 www.outcomecapital.com MARKET INSIGHTS Arboretum Venture, a geography- specific firm. Figure 3 Flat Investments Across Venture Rounds 2016 - Q2/2019 outliers excluded. Source: PitchBook Healthy IVD M&A Market The IVD market is marked by intense consolidation with 115 M&As in the studied period. These transactions account for >$22 billion in total transaction value (Source: Pitchbook) across all sub-sectors. Of these, 66% of acquisition taking place were in the lab services segment (Figure 5A). While we see rapid consolidation in the lab services sector, platform companies and those developing consumable reagents only made up 16.5% and 14.8% of the either reagents or platforms were respect to either growth or exit transactions, respectively. The more sought after compared to options. remaining 3% of IVD transactions instrument alone. were for instrument only With respect to company companies, demonstrating those As shown in Table 2, the development stage at acquisition, are not highly sought-after in this average duration to exit of IVD the overwhelming majority of segment. The consolidation of the companies exceeds 20 years for companies were acquired post- lab services sub-sector stems from most sub-segments, a reality that product approval by FDA or strategics seeking the addition of should be taken into account by CE certification (Figure 6A). capabilities (specialty services) management teams of early stage In addition, only 8% of those or geographic reach. Conversely, companies. For comparison, companies were acquired at the platform or instrument-based the average time to exit in the pre-revenues stage and 56% acquisitions require buyers to therapeutic medtech segment is of companies were generating strategically align themselves with 11.3 ± 6 years (Source: PitchBook). revenues (Figure 6B). It thus the target’s value proposition. It should be noted that lab services appears that, unlike other life companies show an extremely science segments, the IVD segment Interestingly, platform high variability (average of 21.9 ± does not support early exits and, companies command a higher 17.9 years) as Clinical Laboratory as such, management teams should average transaction value of $175 Improvement Amendments (CLIA) ensure sufficient capital well million, compared to $67 million certification requires less capital for lab services companies (Figure than FDA approval, allowing these 5B). There were 39 transactions companies to generate revenues over the period for companies quickly. Many of these labs are When assessing the path to liquidity, management teams developing reagents, instruments able to be self-sufficient and grow should ensure sufficient capital organically over a prolonged period or both, signifying an active space well beyond regulatory approval for both labs and IVD products. of time, resulting in an industry at minimum and also anticipate Of those requiring regulatory that, while consolidating, provides a prolonged time to exit. approval, companies developing founders with more flexibility with 4 www.outcomecapital.com MARKET INSIGHTS Figure 4 Top IVD Investors 2016 - Q2/2019, Source: PitchBook. beyond regulatory approval (at Biosciences. The GenePOC minimum) and also anticipate a The IVD segment does not acquisition total deal value was prolonged time to exit. support early acquisitions of $120 million, but the structure pre-regulatory approval and pre- of $50 million up-front payment Return on capital revenue companies. with various regulatory and sales multiples for IVD companies milestones allowed Meridian to (total acquisition price divided common in the IVD market de-risk the investment over time by amount of capital raised) is (Source: Outcome Capital, Capital while maintaining a significant healthy, with an average of 5.1x IQ, and Pitchbook,). An exemplary upside for GenePOC3. Similarly, a and
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