Gen-Probe Wages Bidding War For Diagnostics Crown

(MoneyWatch)  Diagnostic tests traditionally haven't gotten a huge amount of respect within the drug industry. Until recently, at least, most diagnostics were low-margin, almost commodity products that couldn't command the high prices -- much less the repeat business -- that drugs themselves could.

That's started to change with the advent of sensitive "molecular" tests that analyze genes and their activity for a variety of uses -- determining the presence of viral pathogens in a blood sample, for instance, or predicting whether a breast-cancer patient is more or less likely to see her cancer return following surgery. Insurers and the federal Medicare program are increasingly willing to pay more for such tests, mostly because they seem to offer better guides to treatment based upon a patient's unique characteristics, potentially saving money in the long run. As medicine grows increasingly "personalized" this way, the role of diagnostics is only going to grow.

Unsurprisingly, some diagnostics makers are changing course in order to capitalize on the new opportunities. Yesterday, Gen-Probe, already a leader in DNA testing for infectious disease, launched a ?215 million ($334 million) tender offer for the Belgian test-maker Innogenetics, whose product portfolio includes a variety of tests for genetic conditions, Alzheimer's disease and cancer. As Gen-Probe puts it in its release:

The combined entity is expected to be the largest standalone molecular diagnostics company in the world, with pro forma 2008 sales in excess of $500 million. The combined company would offer a broad range of nucleic acid and immunoassay tests to identify bacterial and viral infectious diseases, genetic and neurological disorders, transplant compatibility, and cancer. These tube- and strip-based products could be sold to a diverse group of small, medium and large customers around the world.

What makes this deal interesting is the fact that Innogenetics was close to selling itself to Solvay Pharmaceuticals, the Dutch drugmaker, in a friendly transaction. Gen-Probe has outbid Solvay, but only by about six percent, and investors are convinced Solvay will counter, possibly setting off a bidding war.

The tender offer is a fairly risky move for Gen-Probe, partly because the weak dollar puts it at a disadvantage against a European competitor. Hostile deals are fairly rare among diagnostics makers, much of whose value lies in products still under development, and whose key employees may bolt after a takeover. Gen-Probe also doesn't have much experience in large acquisitions; its last big deal was an $11 million bid for Molecular Light Technology of Wales.

All of which just underscores the growing stakes in the diagnostics business, which probably won't be the ugly stepchild of the drug industry for much longer.