Quest Diagnostics (NYSE:DGX) is certainly not shy about spending shareholders' money to expand its business opportunities. Quest's latest deal, announced Friday morning, will have the company paying $8 per share in cash to acquire all of Celera (NYSE:CRA), a small company with a focus on molecular diagnostics and cardiovascular tests.

The Terms of the Deal
Quest Diagnostics will be paying $8 per share for Celera, a deal that has a sticker price of $671 million but a net cost of $344 million. Moreover, given the tax credits, loss carry-forwards, and capitalized R&D at Celera, the effective price of the deal will be even lower. Nevertheless, the deal represents a nearly 28% premium for Celera, nearly five times trailing sales, and a little more than four-and-a-half times forward sales.

Tutorial: The Industry Handbook

At these prices, Quest is paying a premium similar to what Clarient received from General Electric (NYSE:GE) and superior to the deal Genoptix struck with Novartis (NYSE: NVS). Still, it might be a sobering reminder to MDx fans that the days of companies paying 10 times sales for molecular or esoteric test technology is long past.

What Quest Diagnostics Is Getting
As a national testing giant competing with Lab Corp (NYSE:LH), Quest is very much interested in getting as many proprietary tests under its roof as possible. To that end, Quest has operating leverage and scale that may allow it to do more with Celera's assets than Celera ever could.

Somewhat like Human Genome Sciences (Nasdaq:HGSI), Celera started out as a company looking to exploit the opportunity (and investor enthusiasm) in sequencing, genomics and proteomics around the turn of the century. Like so many other companies, though, Celera found that it couldn't quite make a go of it with its original business plan.

While some of these companies turned to their own technology to develop drugs, Celera turned toward testing (and split from Applied Biosystems, which merged with Invitrogen to become Life Technologies (Nasdaq:LIFE)). Even then, it was the acquisition of Berkeley HeartLab which really transformed the company and gave it a platform of cardiovascular tests that comprise most of its current value. Now the company offers a platform of testing services that includes advanced LDL/HDL testing, as well as tests for gene variants than can predict increased risk of heart disease, heart attack, aneurysm and so on.

Is This a Fair Deal?
I suspect that long-time Celera bulls will be disappointed with this deal. Cardiovascular molecular diagnostics is really just getting started and there are some big hopes for tests like Celera's KIF6 test. If everything had worked out according to plan, Celera could have been a mid-teens stock in five or six years.

On the other hand, not a lot has gone to plan for Celera. The company has worked with Abbott Labs (NYSE:ABT), a major diagnostics player, for years and the partnership has not brought great success to either company. On top of that, there is some doubt in the medical community about whether Celera's tests (including the KIF6) are all that useful. Add all of that to near-term challenges from the economy (fewer doctor visits and lower test volumes) and Celera was a company with some meaningful challenges.

The Bottom Line
Quest is clearly willing to play for the future. After buying AmeriPath, the company was willing to shell out nearly seven times sales ($740 million) to Thermo Fisher (NYSE:TMO) for the Athena Diagnostics unit. That is expensive, but if Athena's focus on neurological diagnostics can lead to good tests for Parkinson's, Alzheimers, and so on, it will be well worth it. That same logic applies to this Celera deal - cardiovascular molecular diagnostics is not a game-changing opportunity for Quest today, but it could be in the future and that is a gamble the company is willing to take.

While Celera shareholders may hope for a better bid, one is not likely to come. In the meantime, Quest shareholders may well wonder how much more buying Quest wants to do - cancer diagnostics would be a natural target, but how much debt does the company really want to take on in its search for the next great test? (For related reading, see Glaxo And Human Genome Find Rare FDA Success.)

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

Related Articles
  1. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  2. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  3. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  4. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  5. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  6. Stock Analysis

    Analyzing Porter's Five Forces on JPMorgan Chase (JPM)

    Examine the major money-center bank holding firm, JPMorgan Chase & Company, from the perspective of Porter's five forces model for industry analysis.
  7. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  8. Stock Analysis

    Analyzing Dish Network's Return on Equity (ROE) (DISH, TWC)

    Analyze Dish Network's return on equity (ROE), understand why it has vacillated so greatly in recent years and learn what factors are influencing it.
  9. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  10. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center