In Vitro Diagnostic Market Insight: Continued Growth and Consolidation

MARKET INSIGHTS

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

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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.

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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 range from 0.6 to 8.3x (Table transaction is the acquisition minimal investment in NeuMoDx 3). In fact, the majority of exits of GenePOC by Meridian ($9.3 million) allowed Qiagen to returned capital to investors, with only one falling below a 1x return. Note that these calculations Figure 5 Lab Services Dominate M&A assume that all milestones were 2016 – Q3/2019, Source: PitchBook & CapIQ, outliers removed. met and that the total deal value was realized. The Bio-Techne’s acquisition of Advanced Cell Diagnostics provided the highest return multiple. Advanced Cell Diagnostics developed an in situ hybridization assay for detection of RNA to monitor single cell gene expression, while retaining tissue morphology. Novel, transformative technologies therefore, expectedly garner higher returns on capital. Structured transactions are

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Most IVD M&A transactions Table 2 IVD Companies Show Lengthy Time to Exit are structured, allowing risk 2016 – Q3/2019, Source: PitchBook, average ± SD. mitigation for the buyer and upside participation for the seller. acquire ~20% of the company with a pre-negotiated milestone-based exit, securing NeuMoDx with capital needed to move forward, but allowing Qiagen to retain the right to back-out of the transaction Figure 6 Strategic Market Seeks Mature Assets through 2020 if the undisclosed 2016 – Q3/2019, Source: PitchBook, Press Releases, GlobalData, 4 milestones are not met . Note: Does not include lab services.

Table 3 Healthy Return Multiplies 2016 – Q3/2019, Source: PitchBook, Note: Does not include lab services.

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the studied period. However, while Given the low probability of the overall number of IPO was and well-established companies, an IPO, we believe that IVD limited, the public markets did which is a recurring theme for the companies should not focus on support a significant increase in IVD market as a whole. Note that the public markets to attract market capitalization at six-month Siemens Healthineers went public growth capital. post-IPO (typical insiders’ lock- on the Frankfurt stock exchange up period). Interestingly, only one with a market cap of $37.8 billion IPO, Guardant Health, occurred but was excluded as growth was Limited IPOs for IVD Companies on a U.S. stock exchange which attributed to Siemens’ imaging and may provide further insight into advanced therapies business and IPOs were relatively limited what public markets would best hence not considered a pure play in the time period examined (Table support an IPO. Moreover, these IVD company. 4), with only four public offerings IPOs all occurred with mature for pure play IVD companies in

Table 4 IPOS are Limited but Garner Public Market Support 2016 – Q3/2019, Source: PitchBook

While IVD represents a well-established market, large transactions Conclusions continue to occur for mature companies that offer the opportunity to capture market share (Table 1). Venture financing tends to be focused on growth areas with favorable prospects of return. For these reasons, venture financing tends to focus on laboratory services (47% of financing transactions, Figure 3) potentially due to the activity in the M&A market where they can expect a return on their investment (Figure 5). IVD companies require a considerable time to exit (Table 2) and it is imperative that management focuses on achieving regulatory approval and early revenues prior to becoming an acquisition target (Figure 6). However, return multiples demonstrate that investors are likely to get a return on capital if an exit occurs (Table 3). These healthy returns and large transaction values are encouraging some venture firms to take multiple shots on goal (Figure 4). However, IPOs in this segment are limited to mature businesses but those that were able to secure a public funding do garner support with subsequent return on investment (Table 4).

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Based on Outcome’s presence in the IVD space, we believe that The IVD market will reward the segment will continue to experience healthy growth over the coming technology advancements several years. Infectious disease testing will remain a key growth driver resulting in novel assays, lower as the need for expanded menus continues to press with increasing cost of goods and faster turn- burden of infectious diseases and antibiotic resistance testing. Advances around times. in molecular “sample-to-answer” testing, coupled with targeted menu expansion, will drive the decentralization from large reference and hospitals labs, through small and medium regional hospitals, to near- patient and point-of-care testing. Outcome maintains that the IVD market will reward early stage companies that are focused on biomarker discovery or on technologies that increase multiplexing and decrease test turn-around-time. However, early stage companies need to focus on managing cost per test and market adoption as these are the two main drivers in the IVD market space.

References

1. In Vitro Diagnostic/IVD Market - Global Forecast to 2023. Market and Markets 2019 2. Molecular Diagnostics Market Trends and Outlook. Enterprise Analysis Corporation 2019 3. Meridian Bioscience Announces Agreement to Acquire Business of GenePOC; Adds State-of-the Art Molecular Diagnostics Platform, BusinessWire, 2019 4. Qiagen SEC Filings

About Outcome Capital

Outcome Capital is a specialized life science and technology investment bank with a global reach, providing middle market companies with a value-added approach to mergers and acquisitions, corporate finance and advisory services. The firm uses its proven ‘strategy-led execution’ approach to value enhancement by assisting boards and management teams in navigating both the financial and strategic markets and in implementing the best path for success. Outcome Capital’s strength stems from its unique ability to draw on its wide range of operational, strategic and investment experience, its expertise across the life science value chain, and its broad industry relationships.

About the Author About the Author About the Author

Craig Steger Oded Ben-Joseph, Ph.D., MBA Echoe M. Bouta, Ph.D. Senior Vice President Managing Director Associate

Craig is the Vice President of Life Dr. Ben-Joseph is a Managing Dr. Bouta is an Associate at Sciences at Outcome Capital and Director at Outcome Capital and Outcome Capital. A scientist by brings corporate and commercial co-lead of its life sciences practice. training, she is excited to identify expertise in the diagnostic and life He brings a unique combination novel technologies and help science space. of executive, entrepreneurial, determine strategy to optimize scientific and transactional market potential and ultimately experience to client companies. improve patients’ lives.

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