NeoGenomics to Acquire Clarient for $275 Million

Annual revenue at NeoGenomics will more than double once this transaction is closed

CEO SUMMARY: In a surprise move that further consolidates national anatomic pathology services, NeoGenomics will acquire Clarient Inc., from General Electric Healthcare. General Electric is getting cash, and preferred and common stock. The two companies announced plans to pursue integrated diagnostic services that would combine lab testing and diagnostic imaging data. The deal is subject to antitrust review and approval from NeoGenomics’ shareholders and is expected to close by the end of the year.

LAST WEEK, NeoGenomics, Inc., announced that it would acquire Clarient Inc., a unit of GE Healthcare’s Life Sciences business, for $275.2 million. Included in the sale is Clarient’s subsidiary, Clarient Diagnostic Services, Inc., which provides cancer diagnostic tests to hospitals, physicians, and pharmaceutical companies.

This is an unexpected consolidation among molecular diagnostic testing companies. To pay for the acquisition, NeoGenomics will use a mix of $80 million of cash, 14.7 million shares of preferred stock at $7.50 per share, and 15 million shares of common stock. In addition to common stock representing 19.8% of NeoGenomics, GE also has preferred stock that, if fully converted, would give it 32.9% ownership of NeoGenomics, the companies said.

The pending acquisition is subject to regulators’ and shareholders’ approval. The transaction is expected to close by year-end. Clarient has 415 employees working in Aliso Viejo, California, and Houston, Texas.

The acquisition will more than double NeoGenomics’ revenue. Last year, Clarient had revenue of $127 million and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of about $13 million. In 2014, NeoGenomics reported revenue of $87 million and adjusted EBITDA of $9.2 million.

Five Years and $312 Million

Five years ago this month, GE Healthcare, a division of General Electric Co., paid $587 million to acquire Clarient. At that time, it said that it intended to combine molecular diagnostic technologies in anatomic pathology with its molecular imaging technologies in radiology.

Five years after the acquisition, GE now is, in essence, recognizing that the value of Clarient is lower by $312 million. In an email to clients, Amanda Murphy, an analyst with William Blair & Co., estimated that the price NeoGenomics will pay suggests a multiple of 2.1 times revenue, “which is quite reasonable for a lab in this space.”

Yet in 2010, GE paid about 5.3 times revenue to acquire Clarient. “By historic measures, this is a premium price for a pathology testing laboratory,” wrote Dark Daily on October 22, 2010. At the time, GE Healthcare President and CEO John Dineen said GE could, “build a $1 billion plus business by developing integrated diagnostic solutions for cancer and other diseases.” Clearly, GE was unable to generate such revenue from its vision of integrated diagnostics.

Acquisition Seen as Good Fit

Yet NeoGeonomics CEO Douglas VanOort is bullish on the deal, viewing the acquisition as a good fit involving two companies with complementary assets. Annual revenue at NeoGenomics will more than double to about $240 million to $250 million and adjusted EBITDA will more than triple to $33 million to $38 million, next year, he said in a press release.

“Of all the possible acquisition candidates we have reviewed, Clarient is by far the best fit for NeoGenomics,” noted VanOort. “NeoGenomics has been talking with GE about acquiring Clarient for more than one year.”

Acquiring Clarient will allow NeoGenomics to offer more cancer diagnostic tests to hospitals and physicians across the country. It will also accelerate its movement into pharmaceutical trials and research. Additionally, the two companies will collaborate on new bioinformatics that take advantage of each company’s interest in precision oncology with the goal of developing new products that combine genomic and imaging data, the companies said.

Integrated Diagnostics

Murphy agreed, writing, “Clarient and NeoGenomics are highly complementary businesses, bringing together strengths in tech-only hematopathology and molecular assays as well solid tumor/IHC testing and digital pathology. Thus, we view this as a good deal with a number of areas to drive synergies. The combination provides robust East and West Coast presences, a low-cost testing position in all testing paradigms, a combined clinical trials business of $25 million, and GE as a significant long-term investor,” she added.

“We’re expecting the prices overall for our collective mix of business to increase slightly in part because of changes CMS is proposing for the physician fee schedule for 2016,” VanOort said. “CMS increased the proposed FISH reimbursement rates to correct an error in the rates for 2015 and that will have a positive impact on the mix of business that we each have. There is a slight offset to that because the proposed rates for flow cytometry are expected to decline significantly.”

In addition, the acquisition gives NeoGenomics broader coverage of markets nationwide. “Both Clarient and NeoGenomics are national companies and have significant footprints across the country,” he said. “In geographic areas where we currently don’t provide as much access, the combined companies will provide a greater coverage across all of the United States.

Managed Care Opportunities

“That expanded geographic coverage has benefits for managed care organizations, particularly the national ones that want to make sure that a single lab will cover all of their clinicians and hospital providers,” emphasized VanOort. “Additionally, hospitals and pathology groups also want one- stop diagnostic services.

“With the complexity increasing for many types of cancers, it’s a benefit for a pathology group or a hospital to have a single lab that can handle these diagnostic services, rather than sending specimans to multiple labs and having to manage that administrative burden,” he concluded. “Sole-source lab testing services continues to be a core part of our strategy.”

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