Lab Acquisitions Update

Myriad to Buy Counsyl, to Gain Presence in NIPS Test Sector

In women’s health testing market, Myriad Genetics will have a commanding presence

LATE LAST MONTH, Myriad Genetics Inc. announced a definitive agreement to acquire Counsyl, Inc., an innovative genetic testing company in South San Francisco, Calif., for $375 million. In a deal that is expected to close by early next year, Myriad will use a combination of cash and common stock.

Founded in 2007, Counsyl offers carrier and non-invasive prenatal screening (NIPS) tests. Over the past 12 months, the company did 280,000 reproductive genetic tests, generating $134 million of revenue, the companies said.

Counsyl has three products in women’s health: Foresight, an expanded carrier screening test; Prelude, an NIPS test; and Reliant, a hereditary cancer test.

“Over Myriad’s last three fiscal years (ending June 30), Counsyl has reported a 22% revenue compound annual growth rate—largely driven by volume,” wrote Amanda Murphy, an analyst and partner with William Blair and Company.

For Myriad, the deal allows the laboratory testing company in Salt Lake City to position itself as a leader in genetic testing for women’s health, expanding the customer base for Counsyl’s reproductive tests by almost 300%, the companies said.

The deal also gives Myriad an innovative company that has commercial insurance coverage for its genetic tests, and room for more insurance coverage of its Foresight test for expanded carrier screening and its Prelude test for non-invasive prenatal testing, Zacks reported. THE DARK REPORT has covered the story about Counsyl’s patient-friendly innovations.(See “How Price Transparency Increased Lab’s Revenue,” TDR, Aug. 3, 2015.)

By combining sales forces, the two companies will have a total of more than 300 sales professionals calling on the nation’s 40,000 ob-gyns, the companies said. Myriad said it has a women’s health sales force of about 225 representatives and Counsyl has about 80.

Strong Market Potential

In her analysis of the market potential behind Myriad’s acquisition of Counsyl, Murphy wrote, “In aggregate, Counsyl is approximately 13% penetrated in the total women’s health market for reproductive testing. Each additional 5% gain in market share translates to $50 million in revenue and $25 million in incremental earnings before interest, tax, depreciation, and amortization (EBITDA).”

Genetic testing labs serve only about 25% of the full market potential for reproductive health testing, a market that could grow at a compound annual rate of 15% to eight million tests annually, Murphy predicted. Counsyl’s three tests represent a $5 billion market, she added.

In addition, there is strong potential for growth if health insurers cover more of these tests, she said. Most patients who get carrier screening tests do so for a limited number of genes, such as those for cystic fibrosis (CF), spinal muscular atrophy (SMA), and Fragile X, Murphy wrote. While health insurers do not broadly cover expanded carrier screening tests, the American College of Obstetricians and Gynecologists (ACOG) last year recommended universal screening for CF and SMA, she said.

Value in Payer Coverage

“In addition, the [ACOG] committee pointed to use of expanded carrier screening panels as an acceptable strategy for prenatal screening,” she wrote. “Finally, the use of non-invasive screening is moving into the average-risk market, which could further accelerate growth.”

To bolster this point, she wrote that one of the strengths of the deal is Counsyl’s strong relationships with health insurers. The company is in-network with about 90% of the nation’s commercial payers. What’s more, several professional organizations representing physicians providing women’s health have guidelines that strongly support expanded carrier screening and non-invasive prenatal screening tests, Murphy said. Among these organizations are ACOG and the Society for Maternal-Fetal Medicine.

Expanded Carrier Screening

“Given that these guidelines have increasingly moved toward recommending expanded carrier screening and NIPS as the standard of care tests recommended for patients, management believes it is possible that the ACOG could strengthen its endorsement of NIPS in its 2018 professional guidelines,” commented Murphy in her report.

In addition, although Medicaid pays for about half of all births in the United States, more than 90% of Counsyl’s revenue comes from commercial insurance. “Thus, there is significant potential to expand Medicaid reimbursement,” she explained.

Buyers Pay Good Multiples to Buy Genetic Test Companies

TWO FINANCIAL ANALYSTS see an emerging trend involving genetic lab companies. In a report issued by Adam Abramowitz and Jonathan Bluth of Intrepid Investment Banks, Myriad Genetics’ plan to acquire Counsyl exemplifies a possible trend in consolidation among diagnostic testing companies, such as Konica Minolta’s acquisition last year of Ambry Genetics for $1 billion. (See TDR, July 17, 2017.)

The two analysts noted that Myriad is an established company that has been disruptive in the market for noninvasive prenatal screening (NIPS) tests, thus providing “a strong entry point and foothold in the large NIPS market with well-established reimbursement to fill out its test portfolio.”

In addition, Abramowitz and Bluth said the purchase price represents about 2.8 times Counsyl’s revenue of the previous 12 months. What Myriad is paying to acquire Counsyl is at the same dollar value that Laboratory Corporation of America paid when it acquired Sequenom less than two years ago, they added. In September 2016, LabCorp spent $302 million to acquire Sequenom, a competitor to Counsyl in the NIPS testing market.

In their report, Abramowitz and Bluth characterized the 2.8-times-revenue number as being a “relatively low” multiple when contrasted with that of Invitae, another genetic testing company that trades at a revenue multiple of more than five times its last 12 months’ revenue, they said. They added that Invitae forecasts substantial revenue growth that translates into a revenue multiple of 2.9 times over the next 12 months, which, they added, is similar to the valuation of Counsyl.

“But, for other genetics diagnostics businesses, does this deal suggest that a nearly three-times-revenue multiple should be the new threshold for a flat revenue company in this sector?” they asked.

Contact Amanda Murphy at 312-364- 8951 or amurphy@williamblair.com.

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