COVID-19 test makers near risky M&A endgame

Covid-19 testing companies were the big winners of the pandemic

  
People line up for nucleic acid testing at a residential compound following new cases of the coronavirus disease (COVID-19) in Ruili, a border city with Myanmar, in Yunnan province, China July 5, 2021. cnsphoto via REUTERS

People line up for nucleic acid testing at a residential compound following new cases of the coronavirus disease (COVID-19) in Ruili, a border city with Myanmar, in Yunnan province, China July 5, 2021. cnsphoto via REUTERS

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

LONDON - The ebbing pandemic is awakening animal spirits in the Covid-19 testing market. The market value of diagnostic groups like Swiss pharmaceutical giant Roche and Chicago-based Abbott Laboratories soared thanks to the world’s hunger for their products. But as vaccination reduces the demand for virus tests, pressure to do deals will increase.

Covid-19 testing companies were the big winners of the pandemic. America and India alone have performed nearly 1 billion tests since the outbreak of the virus, according to Our World in Data. The boom has helped push up the combined market capitalisation of eight of the largest listed test makers, including Qiagen, BioMerieux and Thermo Fisher Scientific, by 38% or $228 billion since the start of 2020, according to Breakingviews calculations.

Now the testing party is waning. The monthly number of Covid-19 tests carried out in America has collapsed 65% since the peak in January, according to a New York Times database. Having seen their revenue grow by an average of 15% in 2020, those eight diagnostic groups will on average see sales decline by 5% next year, according to Breakingviews calculations based on Refinitiv forecasts. Dealmaking is one way for companies to replace lost earnings and keep shareholders happy.

Companies are already starting to spend the windfall. Milan-based DiaSorin stumped up $2 billion for Nasdaq-listed Luminex to secure a foothold in the hot area of molecular diagnostics, which aims to predict the course a disease by analysing patients’ proteins or DNA. The shifting nature of the pandemic may also influence deals: demand for mass-testing kits, like the kind sold by Roche, will decline, but hospitals will still need to monitor individuals. That could make $14 billion BioMerieux, a big player in polymerase chain reaction tests, attractive. Companies may also merge to take out costs. Thermo Fisher’s aborted deal for German-Dutch group Qiagen, for example, promised to eke out savings equivalent to 10% of the target’s expected sales, according to Refinitiv.

Still, the market is less than ideal for takeovers. There’s a lack of clarity over how quickly virus revenues will come off, stock prices are inflated, and executives need to do deals. That all makes for a risky end to the Covid-19 boom.

CONTEXT NEWS

- The market value of Covid-19 test makers Qiagen, Thermo Fisher Scientific, Quidel, BioMerieux, DiaSorin, Roche, Abbott Laboratories and Quest Diagnostics has increased by $228 billion since the beginning of January 2020.

- Swiss drugmaker Roche said on July 22 that strong demand for Covid-19 tests had helped it rebound from a weak start to the year, as it posted better-than-expected sales for the first half.

- However, the Basel-based company said demand for its Covid-19 tests peaked in the second quarter and is likely to decrease in the second half of the year.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

(Editing by Neil Unmack and Oliver Taslic. Graphic by Vincent Flasseur.) ((For previous columns by the author, Reuters customers can click on DONNELLAN/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | Aimee.Donnellan@thomsonreuters.com; Reuters Messaging: Aimee.Donnellan.thomsonreuters.com@reuters.net))


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