It seemed particularly asinine, even by Wall Street standards: Luminex Corporation (LMNX), which started the day with a billion-dollar market capitalization, falling nearly 18% after announcing the acquisition of privately held GenturaDx for $50 million. Luminex noted the purchase would add $6 million to annual operating expenses, with potential additional costs for integration and future milestones. Yet LMNX saw its market cap fall by some $180 million on the day -- a startling figure compared to the relatively small cost of the acquisition.
But there is more to the story. Luminex's acquisition led to a lowered price target from JP Morgan Chase (JPM), who noted that GenturaDx's product line -- a real-time assay for diagnostic testing -- would continue to lead Luminex toward lower-margin real-time testing products, versus its legacy "multi-plexing" xMAP technology. The analysts also noted the dilutive potential of the purchase; while small in terms of market capitalization, the acquisition would eat up over half of the company's $94 million cash balance, perhaps setting the stage for a secondary offering in 2013 and 2014. On the news, JP Morgan Chase cut its price target to $17 -- still 15% below Luminex's closing price of $19.99.
JP Morgan Chase wasn't the only firm to add to the bearish pressure on Luminex; Piper Jaffray (PJC) cut its price target to $18, from $21. Piper, however, was less concerned with the acquisition than with an article published on Sunday in the Los Angeles Times blasting the federal government's BioWatch program. The piece detailed the chaos caused at the state and local level by the program, which used sensors located across the nation to detect biological terrorist attacks. BioWatch sensors repeatedly sent out "false positives" at events such as multiple Super Bowls and the 2008 Democratic National Convention, forcing local officials to divert resources and make snap decisions on whether to evacuate crowds and cancel the events.
Luminex did not make the allegedly faulty sensors; however, its partnership with Northrop Grunman (NOC) is one of two teams under consideration for an expanded, updated version of the BioWatch project (known as BioWatch Gen-3). In March, analysts at William Blair argued that Luminex executives expected to win the contract. The potential contract would be lucrative indeed; in 2010, Luminex CEO Patrick Baltrop said a win would double his company's size.
With media coverage now detailing the abysmal failure of the pilot program, and pressure to cut government spending still dominating Capitol Hill, BioWatch Gen-3 looks far less certain, noted Piper. It maintained an "Underweight" rating on the shares.
In short, there was more to Luminex's fall than just the GenturaDx acquisition. The high-multiple (even after its steep drop, LMNX still trades at 62x trailing earnings), high-growth stock had some real questions raised about its future. LMNX investors must be hoping it's not a sign of more trouble to come.