Gen-Probe Poised to Gain 33% as Profits Prove Superior: Real M&A

Gen-Probe Inc., the tester of sexually transmitted diseases that jumped 18 percent on speculation it will be sold, may still be worth $1.3 billion more in a takeover by Novartis AG or Life Technologies Corp.

Gen-Probe, which makes diagnostic tests for gonorrhea and human papillomavirus, reached a record last week after three people familiar with the matter said it hired Morgan Stanley of New York to find a buyer. A sale may command a “significant premium,” Jefferies Group Inc. said. San Diego-based Gen-Probe is twice as profitable per dollar of reinvested earnings as rival Qiagen NV, while its gross margin outstrips Cepheid Inc. by 36 percent, according to data compiled by Bloomberg.

With more than 60 percent of the STD-testing market and an 80 percent share of blood-bank screenings in the U.S., Gen-Probe could fetch $5.3 billion, based on comparable diagnostic-equipment deals, the data show. Potential bidders -- including Novartis, Life Technologies, Thermo Fisher Scientific Inc. and Danaher Corp., according to one person familiar the process -- also stand to profit from pending approvals of Gen-Probe’s HPV and prostate cancer tests and a plan by the Obama administration to extend health-care coverage, said Natixis Bleichroeder.

“Gen-Probe is best in class,” said Peter Lawson, a Mizuho Securities analyst in New York. “What really makes Gen-Probe stand out is its profitability and margins, which are outstanding for the industry. It’s not surprising at all if they were purchased.”

‘Matter of Policy’

Michael Watts, a spokesman for Gen-Probe, declined to comment, as did Tim Ingersoll at Life Technologies and Thermo Fisher’s Ron O’Brien. Eric Althoff of Novartis said the company doesn’t comment on market rumors and speculation. Danaher’s Matt McGrew didn’t return a telephone call seeking comment.

On April 28, Gen-Probe Chief Executive Officer Carl Hull said on an earnings conference call that he was aware of the Bloomberg News report and said “as a matter of policy we never comment on marketplace rumors or speculation such as this.”

Initial bids for Gen-Probe are due in the next couple of weeks, one of the people with knowledge of the sale, who declined to be identified because the process is confidential, said last week.

Gen-Probe jumped 13 percent to $79.61 on April 28, eclipsing its previous high in October 2007. The shares advanced 4.2 percent more the next day to close at a record of $82.92.

The two-day, 18 percent rally boosted Gen-Probe’s market value by $616 million to $4 billion last week, data compiled by Bloomberg show. The shares rose 1.5 percent to $84.15 on the Nasdaq Stock Market at 10:02 a.m. in New York today.

Shareholder Value

Diagnostic equipment and kit makers have fetched a median of 27 times earnings before interest, taxes, depreciation and amortization in takeovers in the last five years, according to data compiled by Bloomberg.

Based on Gen-Probe’s Ebitda of $195.1 million in the past 12 months, its equity alone may command a price tag of $5.3 billion, the data show. That equals about $110 per share, or 33 percent more than its current stock market value.

Jon Wood, an analyst with Jefferies in New York, said in a report to clients last week that Gen-Probe could get more than $100 a share if it was sold to a strategic buyer.

“If it’s below $100, we would not even vote for the deal,” said Paul Li, partner and healthcare analyst at Baltimore-based Brown Advisory Holdings Inc., which oversees $24 billion and owns more than 500,000 Gen-Probe shares. “Our view about this company is that it’s probably going to hit an inflection point this year because so many new products are getting approval.”

Return on Equity

Gen-Probe’s return on equity, a measure of how much it earns for each dollar invested, climbed to 13.5 percent last year, according to data compiled by Bloomberg. Qiagen, the Venlo, Netherlands-based maker of disease-predicting tests, had a return of 6.1 percent last year, the data show.

Gen-Probe also retained about 69 cents per dollar of revenue after subtracting the cost of goods sold, higher than the 51 percent gross margin at Cepheid, according to the data. Sunnyvale, California-based Cepheid sells a device called GeneXpert that detects both anthrax and tuberculosis.

New diagnostic devices will help Gen-Probe boost earnings, according to Brian Weinstein, a Chicago-based analyst at William Blair & Co. The Panther, a test-processing machine designed for smaller labs, will be available for sale in the U.S. by the year end, he said. The device is already sold in Europe.

FDA Approval

The company is waiting for the U.S. Food and Drug Administration to approve its HPV test, which would compete with products sold by Qiagen, Hologic Inc. and Roche Holding AG, according to Weinstein. Gen-Probe’s test for trichomonas was approved last month, and it plans to release a prostate cancer screening test.

“They’re kind of getting this whole pipeline at this point that’s going to reaccelerate their growth,” Weinstein said.

Adjusted net income at Gen-Probe will increase 18 percent next year and 20 percent in 2013, according to analysts’ estimates compiled by Bloomberg. That’s faster than Novartis, Carlsbad, California-based Life Technologies, Danaher of Washington or Thermo Fisher in Waltham, Massachusetts.

A plan by the U.S. government to extend health-care benefits to more Americans may also increase Gen-Probe’s sales.

Signed into law by President Barack Obama a year ago, the Patient Protection and Affordable Care Act requires that almost all Americans obtain health-insurance coverage by 2014.

‘Best Placed’

“If you look at the assets of the company and where the company is going, Gen-Probe is one of the best placed,” said Ashim Anand, a New York-based analyst at Natixis Bleichroeder.

Novartis of Basel, Switzerland, may be the most likely buyer, according to Brown Advisory’s Li. The company already distributes Gen-Probe’s blood-screening equipment, a segment that represents about 40 percent of Gen-Probe’s sales.

“There’s been rumors over the last several years that Gen-Probe and Novartis may look to get together,” William Blair’s Weinstein said. “It would be natural for Novartis to want to bring that entire relationship in-house.”

Gen-Probe’s share in the U.S. in testing for sexually-transmitted diseases is larger than Roche and Franklin Lakes, New Jersey-based Becton, Dickinson & Co. combined, according to Bill Bonello, an analyst at RBC Capital Markets in Minneapolis.

In Europe, Gen-Probe has 20 percent of the market, where Basel-based Roche is the dominant competitor.

Gen-Probe also provides eight out of every 10 blood screenings domestically, he said.

‘Huge New Growth’

“This is a company that today has a dominant, a leading position in the molecular blood screening market and the molecular testing for sexually transmitted diseases market,” Bonello said. “But in its pipeline it has an HPV test in front of the FDA right now, so a potential huge new growth area.”

It makes sense for Gen-Probe to put itself up for sale now, as it seeks approval for its cervical cancer screening test, according to Mizuho’s Lawson.

Hologic, the Bedford, Massachusetts-based medical-equipment maker specializing in women’s health, bought Third Wave Technologies Inc. in 2008 for $516.3 million before it won approval for an experimental cervical cancer test, betting that the FDA would authorize Madison, Wisconsin-based Third Wave’s product. Hologic won approval to sell the tests in March 2009.

“It makes for an interesting parallel,” he said. For Gen-Probe, “there is a risk, so why not sell into the hype as opposed to waiting for an event,” he said.

Overall, there have been 8,169 deals announced globally this year, totaling $821.9 billion, a 25 percent increase from the $657.4 billion in the same period in 2010, according to data compiled by Bloomberg.

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