Monday's announcement that Novartis (NYSE:NVS) will acquire Genoptix (Nasdaq:GXDX) offers an interesting lesson in how quickly things can change in the medical technology market. It was not so long ago that Genoptix was a hot idea and analysts treated it as an example of how the practice and business of medicine was changing. At that same time, Novartis was seen as a sluggish pharmaceutical company and a lagging part of the old guard.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

More recently, though, Genoptix appeared to have hit a wall in its near-term growth and management seemed to have a nearly empty bag of tricks to change that. Novartis, though, has remade the investment community's vision of the company, with more credit being given to its attractive pipeline and growing generics business. To that end, Monday's deal gives Genoptix shareholders a decent exit strategy, while giving Novartis yet another growth option for the future. (For more, see The Latest Greatest Corporate Mergers And Acquisitions.)

The Terms of the Deal
Novartis announced that it will acquire Genoptix for $25 in cash, a 27% premium to Friday's price, but still a relative bargain on an EV/revenue or EV/EBITDA basis. Even acknowledging the low apparent valuation ratios on the deal, the terms were in line with the recent General Electric (NYSE:GE) acquisition of Clarient (a similar business) and reasonable relative to Genoptix's own near-term growth outlook. (For more, see Investment Valuation Ratios: Enterprise Value Multiple.)

What Novartis Is Getting
Genoptix is a specialized lab services provider that targets community-based oncologists and hematologists with its specialized diagnostic services in leukemias and lymphomas. In very simple terms, an oncologist will send a patient sample to Genoptix, who will perform a variety of advanced tests on it to determine whether the sample is cancerous (and if so, what type).

The business model is supposed to be something of a win-win for both parties. Community doctors do not have the resources (or the patient population) to justify the cost of advanced diagnostic equipment, nor the personnel to operate them. Moreover, Genoptix offers a more "hands on" customer service model that large reference labs like LabCorp (NYSE:LH) and Quest Diagnostics (NYSE:DGX) often find difficult (or too expensive) to match.

Unfortunately for Genoptix, the company had hit something of a wall. Although the company had about 10% of the bone marrow testing market and a customer base of over 1,300 oncologists, management seemed hard-pressed to find ways for the company to grow, and there was always the overhanging threat of more focused competition from LabCorp, Quest or Bio-Reference Laboratories (Nasdaq:BRLI).

Where Does Novartis Go Next?
In some respects, this could be a challenging deal for Novartis. Although there is more of a "high touch" sales aspect to pharmaceutical sales than many people realize, Genoptix nevertheless operates according to a much different model than the rest of Novartis's business. By the same token, it could be just one step in Novartis building a much larger and more comprehensive diagnostics enterprise. (For more, see A Checklist For Successful Medical Technology Investment.)

Diagnostics is arguably the only large high-growth/high-margin healthcare market where Novartis does not have much presence, and this deal could be the beginning of a bigger push. In buying Genoptix, Novartis is, at a minimum, acquiring state-of-the-art facilities and equipment, as well as highly trained technicians.

All of that could be leveraged with a larger suite of testing capabilities (either acquired or developed internally). There could be a natural synergy between cancer testing and a developer of cancer drugs - particularly as there seems to be an inexorable trend toward drugs that require advanced testing to identify those patients who will respond best. Although that thesis does not really argue for Novartis getting involved in the bidding for Beckman Coulter (NYSE:BEC), for instance, it could mean that Novartis is more of a player in molecular diagnostics deals in the future.

The Bottom Line
Novartis has not always been a company that has enjoyed the benefit of the doubt when it comes to Wall Street respecting or valuing the company's moves and strategies. Nevertheless, the stock still seems to be attractively priced, and the company offers investors a good growth outlook and one of the best pipelines among European biotechs without some of the risks that are bedeviling Sanofi-Aventis (NYSE:SNY), AstraZeneca (NYSE:AZN) or Roche (Nasdaq:RHHBY). Novartis has a long way to go before becoming any sort of diagnostics titan, but investors should be encouraged that management is looking at multiple avenues to continue growing the business. (For more, see Where The M&A Action Is, And What's Next.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    Asset Manager Ethics: Acting With Competence and Diligence

    Managers must make investment decisions based on their personal investment process, which in turn should be based on solid research and due diligence.
  2. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  3. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  4. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  5. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  6. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  7. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  8. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  9. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  10. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center