Mergers and acquisitions are on the rise, and so is the guessing game is about where to expect the next deal. One area where M&A-watchers see another buyout happening soon is a secluded sector of biotechnology: DNA sequencing and genetic analysis. It's been a hot area that has already produced deals over the past three years.
"We are going to see increasing momentum in acquisition activity as the large players in genomic research try to acquire emerging technologies by buying the innovative smaller companies," notes Nickolay V. Kukekov, an investment banker in health care at Gilford Securities.
One big player in the industry is Illumina (ILMN), a leading maker of integrated systems for large-scale analysis of genetic variation and biological function. Its stock has been a big gainer, vaulting to $42.16 a share on May 11 from a 52-week low of $25 on Nov. 23, 2009. Some pros are betting that Illumina -- which provides an array of products for gene expression, sequencing and genotyping -- will continue to be one of the major acquirers in the consolidating genomic industry.
In January 2007, Illumina picked up Solexa, a company developing next-generation sequencing technology, for $359.4 million. Two other bigger players have pursued and acquired smaller biotechs. In August 2007, Roche Holding (RHHBY) bought NimbleGen, a maker of custom microarrays, for $375.5 million. And last December, Life Technologies (LIFE) purchased BigTrove, which makes chips for detecting particular genes involved in specific diseases.
A Compelling Company
Sequencing of the human genome has enabled scientists to focus on therapies that use information about a person's genes, proteins and environment in diagnosing and finding treatments for various diseases. This process is part of a new wave of "personalized medicine."
Analyst John L. Sullivan of investment outfit Leerink Swann says Illumina is one of the most compelling companies in the group and beat analysts' first-quarter forecasts. Momentum in its next-generation sequencing analysis looks healthy, while its microarray business remains stable, he notes. (Microarray is a tool for analyzing gene expression.)
He rates the stock a buy, with a 12-month valuation range of $47 to $54 a share. Analyst Marhsall Urist of Morgan Stanley says Illumina is well ahead in sequencing and microarrays, which when combined with a growing order backlog, "supports our overweight view" on the stock.
Which of the smaller genome-research companies are possible takeover candidates?
One likely buyout prey is Wafergen Bio-Systems (WGBS). It's an emerging company whose SmartChip technology -- used for analyzing gene expression -- is "paradigm-shifting," says Raghuram Selvaraju, biotech analyst at Hapoalim Securities. With gene expression analysis becoming a focus in disease research and drug development, he says, Wafergen could see significant growth in the sale of its SmartChip product over the coming years. Selvaraju rates Wafergen, which closed at $1.90 a share on May 11, a buy with a 12-month price target of $8.
Wafergen is in talks with drugmakers, incuding Pfizer (PFE), Amgen (AMGN) and Novartis (NVS), about using its SmartChip product. The discussions could lead to a partnership or a merger deal with one of the companies, says one Wafergen executive.
SmartChip enables scientists to know which genes or proteins are turned on or off in a given tissue sample in a cheaper, faster and more powerful way. It helps researchers and scientists in their quest to develop new drugs that target specific genes affecting a given disease. Selvaraju says it could become the "methodology of choice for industry and academic labs alike engaged in studying gene expression."
Selvaraju points out that with the broad applicability of SmartChip, Wafergen "represents an attractive acquisition target for a number of established companies." Potential acquirers, he believes, include Illumina and Life Technologies.
A Smart Combination
Elemer Piros, senior biotech analyst at investment firm Rodman & Renshaw, says current genetic profiling is performed through one of two approaches: real-time polymerase chain reaction (PCR) analysis and microarrays. PCR is a method of copying small DNA segments into large enough samples for researchers to study. Piros explains that SmartChip combines the sensitivity and accuracy of real-time PCR with the high throughput (efficiency) and low cost of microarrays.
"SmartChip is a fully automated system that can handle entire genomes at a cost 10 times lower than real-time PCR," says Piros, who rates Wafergen outperform.
With or without the allure of a potential buyout, SmartChip gives Wafergen its own appeal in genome research and makes its stock, analysts contend, a biotech to watch -- along with larger industry leader Illumina.
Investing in Emerging Markets
Learn to invest in a globalized world.View Course »