Leading diagnostics player, Quest Diagnostics (DGX) took a step forward toward the proposed acquisition of Celera Corporation (CRA). The company recently announced that the waiting period under the HSR Act has expired, though some other conditions are yet to be met. The tender offer to acquire the shares of Celera is supposed to close on April 25, 2011, unless extended further.
Last month, Quest decided to acquire Celera for $8 per share, through which the company plans to strengthen its footing in molecular diagnostics discovery and development. Celera’s proprietary genetic tests, pipeline of biomarkers, along with esoteric cardiovascular test, offered by Berkeley HeartLab should drive Quest’s revenues.
Celera, with revenues of $128 million in 2010, is expected to add just over 1% to Quest’s 2011 revenue growth. The transaction, to close in the second quarter of 2011, is expected to have insignificant impact on Quest’s earnings in 2011.
For the last few years, Quest has been strengthening its foothold in the esoteric testing market. Gene-based and esoteric testing now accounts for 22% of the company’s total revenues in 2010, up from 9% in 2000. Earlier, in February 2011, Quest decided to acquire Athena Diagnostics from Thermo Fisher Scientific (TMO) for $740 million. Athena, with $110 million in revenues in 2010, provides diagnostic tests for neurological and other diseases with an emphasis on gene-based tests. Although Quest has been witnessing a decline in revenues from anatomic pathology, the company recorded a 3% growth in gene-based and esoteric testing during the fourth quarter, driven primarily by sales to hospitals and specialist physicians.
Recommendation
With positive volume growth during the last reported quarter coupled with stability in pricing, the company is prepared for gradual recovery. Besides, the company is adopting strategies such as suitable acquisitions, increasing of sales force and tapping additional geographies to drive its top line. We are encouraged by Quest’s strong portfolio of tests, many of which are finding greater acceptance with time although decline in revenues from anatomic pathology continues to remain a concern. Moreover, the company faces steep competition from Laboratory Corporation of America Holdings (LH).
We are currently ‘Neutral’ on the stock, which also corresponds to the Zacks #3 Rank (hold) in the short-term.
CELERA CORP (CRA): Free Stock Analysis Report
QUEST DIAGNOSTC (DGX): Free Stock Analysis Report
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THERMO FISHER (TMO): Free Stock Analysis Report
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