Recently, Quest Diagnostics (DGX) 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. Moreover, the transaction value will be lower based on realization of a significant portion of Celera’s available tax credit, carry forward of net operating loss and capitalized R&D, which amounted to $117 million at the end of 2010.
Through the acquisition of Celera, Quest 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 is expected to close in the second quarter of 2011 and is expected to have insignificant impact on its 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 derived 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 quarter coupled with stability in pricing, the company is set for gradual recovery. Besides, the company is adopting strategies such as suitable acquisitions, increasing the sales force and targeting 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
LABORATORY CP (LH): Free Stock Analysis Report
THERMO FISHER (TMO): Free Stock Analysis Report
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