Recently, Quest Diagnostics (DGX) offered senior notes worth $1.25 billion in four parts. Proceeds of the issue will be used to fund the proposed acquisition of Athena Diagnostics, and to repay debt under its senior unsecured revolving credit facility and secured receivables credit facility.
Quest Diagnostics has undertaken several acquisitions in the recent past with a focus on esoteric testing. 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 derived from anatomic pathology, the company recorded 3% growth in gene-based and esoteric testing during the fourth quarter, driven primarily by sales to hospitals and specialist physicians. Gene-based and esoteric testing now accounts for 22% of the company’s total revenues in 2010, up from 9% in 2000.
The company’s strong cash balance enables it to target suitable acquisitions to strengthen its business in the areas of genetics, esoteric testing and cancer diagnostics including anatomic pathology.
Last week, Quest decided to acquire Celera Corporation (CRA) for $8 per share, representing a transaction value of $344 million, after taking into account $327 million of cash and short-term investments. The company exited fiscal 2010 with $449.3 million in cash and cash equivalents, down 15.9% from $534 million at the end of fiscal 2009.
In the absence of rewarding acquisitions, Quest will repurchase shares and pay dividends to drive shareholder value. During fiscal 2010, the company repurchased shares worth $750 million. The company also announced an additional $750 million share repurchase program taking the total authorization level to $1 billion.
Recommendation
With positive volume growth during the quarter coupled with stability in pricing, the company is set for a gradual recovery. 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.
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
THERMO FISHER (TMO): Free Stock Analysis Report
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