LabCorp Snaps Up a Momentarily Distressed Sequenom

LabCorp has entered into another big deal, coming to terms to acquire neonatal specialty lab Sequenom for $371 million.

The transaction, which will be consummated through a special firm created by LabCorp to handle the deal, includes a cash offer for $302 million and an assumption of $69 million in debt.

The San Diego-based Sequenom is best known for its MaterniT prenatal genomic test, but the company has been hit hard in recent years due to increased competition in the space. It reported revenue of $128.3 million in 2015, down more than 15 percent from the $151.6 million in 2014. Its stock had sunk from about $4.50 per share in the spring of 2015 to about 85 cents just prior to the deal being announced.

Ross Muken, an analyst with Evercore CSI, said that Sequenom had been challenged by a limited test menu and an inability to scale rapidly. He added that the deal with LabCorp should allow it to offer a much wider array of tests related to women's health care.

"Anyone who reviews the Sequenom balance sheet can see that this was a distressed sale. The company previously chose to capitalize the company using convertible debt instead of equity. Now the more cash they burned, the harder the prospects were for a shareholder-friendly recapitalization. Selling the company was not a surprise," said Marty Chilberg, an analyst with Seeking Alpha, in a recent report.

The purchase price—roughly a 180 percent premium over its stock price—drove shares back into the $2.30 range.

"This is exactly the kind of strategic acquisition that LabCorp seeks: Sequenom was the first laboratory to offer a clinically validated NIPT test and has performed more than 500,000 tests to date. Sequenom's proven best-in-class technology and strong research complement LabCorp's extensive women's health offering, providing patients and physicians with one source for the most complete range of testing options in women's health, including NIPT and reproductive genetics," said LabCorp CEO Dave King in a statement. "Sequenom expands LabCorp's geographic reach both domestically and internationally, offering services through licensing and commercial partnerships with an emphasis on the European Union and Asia Pacific. The addition of Sequenom to the LabCorp family meets our stated financial criteria, and creates a market leader in NIPT, women's health and reproductive genetics."

Muken said the deal likely canceled any potential LabCorp stock buybacks that "shareholders have been clamoring for" but "on a long-term basis if LabCorp is able to execute on repositioning the Sequenom asset the returns will likely be far superior to buybacks." He observed that the deal should be accretive to LabCorp's bottom line during the first year after the transaction closes "and be a significant contributor to growth over time."

But questions remain about the timing of the deal. Chilberg noted that Sequenom had begun turning around its fortunes during the second quarter ending June 30. Revenue was up a modest 4 percent from the second quarter of 2015, but gross margin had increased from 39 percent to 53 percent. That suggested to him that the company's leadership chose to sell prematurely.

"I find it remarkable that Sequenom couldn't have timed their acquisition acceptance any worse. The market had no opportunity to react to this quarter or updated guidance moving into the last half of 2016. The final chapter in this story, if no other bidder appears at the 11th hour, is a largely unsatisfactory one," Chilberg wrote.

At least two law firms said they were investigating a potential breach of fiduciary duty by the Sequenom board of directors.

Takeaway: LabCorp has pulled off another large deal that will allow it to expand its women's health menu, but the timing may have been questionable for Sequenom.