Clinical genetics: a part of Pharma’s DNA

UNLOCKING VALUE IN DNA: M&A IN THE GENETIC TESTING MARKET

Genetic testing has become an increasingly buoyant area for deal making in recent years. While the pharma industry has been experiencing price pressure and low R&D productivity, the recent market ambition for “Precision Medicine”1 has driven interest and growth in clinical genetics and M&A in the genetics market has been following a strong upward trajectory.

THE IMPACT OF GENETIC TESTING IN HEALTHCARE

Genetic tests can reveal details of various genetic conditions, including the risk of breast and ovarian cancer, celiac diseases, AMD, bipolar disorder, obesity, psoriasis, diabetes and Parkinson’s disease.

Bringing genetics into mainstream medicine represents a unique opportunity by offering relief from medical diagnosis uncertainty. It holds the promise of more informed medical decision-making, easier health management and more effective solutions to health-related problems, delivering great relief to patients and families. It could also eliminate the need for unnecessary check-ups and screening tests in some cases where medical intervention in the form of drugs or surgery is currently required (inherited disorders, some oncology indications, and certain viral infections).

Questions remain about the viability of gene therapies given their high price tag and the lack of experienced professionals and necessary infrastructure in many countries. However, Invitae, one of the fastest growing genetic information companies, states that high quality, low priced genetic testing will dramatically increase the total market to everyone with access to healthcare which makes this area so competitive and desirable. More than 4,000 genetic tests are currently in use, and even more are being developed2.

The implementation of genetic testing has skyrocketed in recent years due to its critical role in precision medicine. Market research forecasts the global market for personalized medicine (diagnostic test and treatments) to reach $140 billion, by 20263.

Diagnostic tests also have a role in the growth of preventative medicine, including identifying lifestyle changes to avert future illness. In an age of instant information, people want to get a fast and reliable solution on how to best predict the risk of developing disease. Preventative medicine is becoming more important in the modern world – we all want to know as much as possible as early as possible and are happy to pay for prevention rather than treatment. That is why it is fair to assume that while gene therapies are likely to change healthcare and the way the industry economics works – prevention vs treatment might be a better and potentially cheaper solution to global health problems.

With an aging demographic and the rising occurrence of complex chronic conditions, there are more patients than ever requiring care. This is consequently putting pressure on caregivers and increasing the need for more sophisticated means to care. Analysts expect to see businesses across the globe take advantage of the growing genetic testing market and evolve with the technological advancements that we have seen in recent years.

M&A IN GENETIC TESTING

Trading multiples of genetic information companies have been steadily increasing and surpassed those of pharma services, life science tools, reference labs and molecular and in-vitro diagnostics production players since early 2019.

Clinical Genetics has outperformed other life science industries in the last twelve months LTM4

Positive revenue and expectations for future growth of gene testing have been driving M&A deals within the industry. Business profitability indications, such as positive EBITDA, currently seem less important, even though they signal validation of the management and company technology as well as company ability to achieve higher returns in the short-term.

Several key players are heavily loss making though highly valued: Natera’s LTM EBITDA is c.$(107)m, while it is trading at 8.0x LTM Revenue multiple; Invitae’s LTM EBITDA is c.$(125)m, trading at 13.4x LTM Revenue (as per Capital IQ data as of August 2019).

As a result of this global trend, pharma has become more active with clinical genetics firms. M&A is often the only way for large companies to cope with the accelerating pace of healthcare industry transformation. Big pharma continues to view deal making as a vital tool for acquiring new technologies and seeking access to genomic data to feed novel drug development, particularly in the field of oncology.

PRIVATE INVESTMENT IN GENETIC TESTING

Britain’s largest drug maker, GlaxoSmithKline (GSK), first indicted its interest in gene testing by collaborating with UK Biobank and Regeneron in 2017. But GSK left the initiative of sequencing 500,000 UK Biobank participants behind to partner with 23andme, investing $300 million in the San Francisco genetics start-up in 2018.

Other big pharma companies have also been actively entering the gene information market: Amgen acquired Iceland-based deCODE Genetics in 2012 for $415 million to benefit from its unique genetic database.

In 2018, Roche acquired Flatiron Health for $1.9 billion to accelerate industry-wide development and delivery of breakthrough medicines for patients with cancer. Later that year, Roche paid $2.4 billion to acquire Foundation Medicine to further strengthen Roche’s personalised healthcare strategy. Most recently, in February 2019, Roche announced it intended to acquire Spark Therapeutics for $4.8 billion to add the approved gene therapy treatment Luxturna to its product pipeline.

Daniel O’Day, CEO Roche Pharmaceuticals, said, “…we believe molecular insights and the broad availability of high quality comprehensive genomic profiling are key enablers for the development of, and access to, new cancer treatments…”

In a recent transaction announced in July 2019, Exact Sciences and Genomic Health announced a definitive agreement to combine two of the strongest brands in cancer diagnostics, Cologuard® and Oncotype DX®, creating leading global cancer diagnostics company, positioned to deliver c.$1.6 billion in revenue and c.$1.2 billion in gross profit in 2020.

In 2017, Invitae completed an acquisition of CombiMatrix, which specializes in providing genetic information for prenatal diagnosis, miscarriage analysis and diagnosis of paediatric developmental disorders.

In 2017, Konica Minolta acquired Ambry for up to $1.0 billion. Ambry is a US-based privately held healthcare company with the world’s most comprehensive suite of genetic testing solutions for inherited and non-inherited diseases as well as for numerous clinical specialties, including oncology, cardiology, pulmonology, neurology, and general genetics.

GOVERNMENT INVESTMENT IN GENETIC TESTING

The importance of genetic testing is emphasised by government initiatives such as UK government’s recent announcement to start the largest genetics project in the world. The proposed £200m investment will support the complete sequencing of the genetic code of all 500,000 participants in the UK’s Biobank. The aim is to try and understand the factors that contribute to the development of disease, such as cancer, diabetes and dementia.

According to GOV.UK, funding for this project comes from a consortium formed by the government’s research and innovation agency, UK Research and Innovation (UKRI) with £50 million through the Industrial Strategy Challenge Fund, £50 million from the research organisation, Wellcome.

The government funding forms part of a wider £210m industrial strategy challenge “From Data to Early Diagnosis and Precision Medicine”, administered by UKRI.

Additional £100 million has come from Amgen, AstraZeneca, GSK and Johnson & Johnson – further proving big pharma interest in genetics and commitment to improving personalised medicine.

John Lepore, Senior Vice President, Research at GlaxoSmithKline (GSK) said: “This historic whole genome sequencing effort is a welcome asset for researchers and testament to the volunteers who believe in the power of data to advance science. Genetically validated drug candidates are twice as likely to become registered novel medicines, and efforts like this bring us closer to developing transformational medicines that can significantly improve patient health and change lives.”

CONCLUSION

Given the current speed of development and evolving interest in gene technology by global pharma (including Roche, GSK, Regeneron) and tech companies (including Amazon and Google), genetics and genetic testing (ability to test for genetic factors important in disease) are rapidly becoming a critical part of daily life.

The market remains largely fragmented and underdeveloped, so buyers are looking for differentiated platforms to acquire. Most of the currently available tests are over-priced and under-utilised – this creates a huge potential opportunity to occupy the market niche with cost effective tests in the race to transform the industry and foresee disease before the onset of symptoms.

The ability to diagnose chronic and potentially fatal conditions before it is too late to intervene is a big task. However, thanks to the recent market activity and enormous investment in research and development, we are close to reaching that goal.

SOURCES:

According to the Precision Medicine Initiative, precision medicine is “an emerging approach for disease treatment and prevention that takes into account individual variability in genes, environment, and lifestyle for each person”, ghr.nlm.nih.gov/primer/precisionmedicine/definition
Invitae investor presentation for the 35th Annual JP Morgan Healthcare Conference as of 2017
”Global precision medicine market to reach $141.70 billion by 2026, reports BIS Research,” BIS Research, Cision PR Newswire, December 15, 2017, prnewswire.com
Capital IQ as of October 2019 for the LTM period: 1 October 2018 – 7 October 2019