What happened
Shares of healthcare company Guardant Health (GH +1.46%) are down 14.2% as of mid-session today on the heels of unconfirmed reports that it's interested in acquiring peer and indirect rival NeoGenomics (NEO 3.35%).
So what
Only citing "people familiar with the matter," Bloomberg reported on Friday that disease diagnostics Guardant Health is considering an acquisition of cancer-testing specialist NeoGenomics.
Although neither NeoGenomics nor Guardant Health has confirmed they're in such discussions, the suggestion has an air of credibility. Guardant's Lunar-2 and Guardant360 tests are designed to help oncologists identify the best possible treatment options for cancer patients. NeoGenomics also offers a wide array of cancer diagnostic services. Combining the two companies would translate into a large number of cross-marketing opportunities as well as a greater total market share.
Image source: Getty Images.
While the pairing makes sense, investors clearly have a problem with the premise. Price could be the stumbling block. NeoGenomics's current market cap stands at $6.1 billion, but the company has only done $489 million worth of top-line business over the past four reported quarters. Only a little less than $72 million of that revenue ultimately turned into net income. If Guardant Health intends to pay anything near the current market price for NeoGenomics stock, investors seem to fear it will be overpaying.
Now what
If you were eyeing an investment in Guardant Health prior to today's reporting, Friday's pullback is indeed a buying opportunity.
If a deal gets done, it's certainly going to be an expensive one, but if you own or want to own Guardant, you're no stranger to frothy valuations. Guardant Health is valued at more than 3.2 times its trailing sales, and that price is made even loftier by the fact that the company continues to lose money. Scaling up the operation by combining two complementary companies may well result in better profit margins. And, if a deal doesn't get done, if you own or were mulling a stake in Guardant, nothing's really changed about your prospects other than the current price.
Bloomberg's suggestion doesn't actually change anything about the bullish thesis for NeoGenomics either. It was and still is an expensive, speculative stock that has been bolstered by measurable (but uneven) fiscal progress in recent quarters.
