Quick Take

Genetic information company Invitae (NVTA) has announced agreements to acquire two companies, privately-held Good Start Genetics and CombiMatrix (CBMX).

The target companies offer a range of prenatal and post-pregnancy genetic-based screening services for clinicians and their patients.

Invitae is acquiring these two firms as part of an ongoing strategy to create a genetic information cafeteria that provides a wide range of diagnostics options.

Target Companies

Cambridge, Massachusetts-based Good Start was founded in 2008 to develop prenatal screening tests for persons wishing to have children.

Management is headed by CEO Jeffrey Luber, who has been with the company since 2014 and was previously CEO of EXACT Sciences (EXAS) during its turnaround and recapitalization. He was also co-founder and Vice President Corporate Development at SynapDx.

Below is a brief overview video about GoodStarts carrier screening:

(Source: Motivity Video)

Good Start has developed three types of tests:

Good Start had raised $32 million in investment from top tier investors such as OrbiMed, Safeguard Scientifics (SFE) and SV Health Investors.

CombiMatrix, which held its IPO in 2002, provides miscarriage analysis and advanced DNA testing for in-vitro fertility screening and determining genetic abnormalities involved in miscarriage & pediatric developmental disorders.

Prior to the acquisition announcement, CombiMatrix had a market capitalization of approximately $14.4 million.

Acquisition Terms and Rationale

For Good Start, Invitae intends to pay cash of $18.3 million, 1.65 million shares of Invitae stock ($15 million worth) and the assumption of Good Starts obligations, for a total transaction value of approximately $39.3 million.

For CombiMatrix, Invitae intends to pay up to $27 million in NVTA stock for CombiMatrix stock, RSUs and in-the-money options, plus up to $6 million in NVTA stock for Series F warrants, which were originally sold in 2016 as part of an $8 million financing. If holders of less than 90% of outstanding Series F warrants tender, then Invitae has the option to terminate the acquisition.

Notably, the deal announcement states that the cost to Invitae of those warrants may increase as follows,

To the extent the Series F warrants are not exchanged and are either exercised or assumed as part of the acquisition, the consideration payable by Invitae could increase by up to approximately $15.0 million in shares of Invitae, or approximately 1.58 million shares, subject to adjustment based upon a net cash calculation for CombiMatrix at the time of the acquisition.

Thus, Invitae is on the hook for up to an additional $15 million in stock consideration for CombiMatrix pertaining to what the Series F warrant holders choose to do.

So, to sum up both transactions, Invitae is spending $18.3 million in cash, issuing $48 million worth of stock and is potentially on the hook for an additional $15 million in stock, for a total combined deal value of $81.3 million.

Invitaes most recent 10-Q for the quarter ended March 31, 2017, indicated cash and marketable securities of $96.7 million and total liabilities of $70.3 million, so it appears the company has ample resources to pay for these two acquisitions since they are mostly paid for with stock.

The rationale for Invitaes moves to acquire both companies is to expand its offerings to families both before pregnancy and after childbirth or miscarriage.

This in turn is part of Invitaes strategic approach of providing genetic information to individuals throughout their life span.

As Invitae CEO Sean George stated in the deal announcement,

This is a transformative moment for Invitae, for our industry, and importantly for patients. By acquiring Good Start and CombiMatrix, Invitae intends to create the industry's first comprehensive genetic information platform providing high-quality, affordable genetic information coupled with world-class clinical expertise to inform healthcare decisions throughout every stage of an individual's life. We believe the strength of our existing platform, strategic acquisitions like these and our network of partners will fuel continued growth and further establish Invitae as a leading genetic information service provider.

Invitae management hasnt been shy about acquiring companies as it sees fit. I previously wrote on the companies last acquisition in June in my article, Invitae Acquires CancerGene Connect for Patient Family History Collection.

Invitae appears to be assembling a veritable cafeteria of options for genetic information for consumers, healthcare providers and other market participants.

Investors like what they see so far, although Invitaes stock in the past year has largely moved within a range of $6.00 per share to $11.00 per share. The stock is up 7.75% on the current two acquisition deal announcement:

(Source: Seeking Alpha)

It is likely that both acquisitions will be a drag on EPS in the near term, but promise to increase Invitaes breadth of service offerings as management appears to intend it to become a one-stop shop for genetic information.

The big question is whether or not that is a viable model in the nascent market for genetic information. Acquiring companies on the cheap certainly helps, although Im not convinced that these acquisitions are necessarily cheap.

So, the jury is out, and management will need to prove the value of these transactions over the next 12 to 18 months.

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Invitae To Acquire Good Start Genetics And CombiMatrix - Seeking Alpha