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XMFHelical (< 20)

Potential Takeover Candidates in Biotech Supply



March 27, 2010 – Comments (11) | RELATED TICKERS: AFFX.DL , DNEX.DL , TMO

I ran through a little exercise today in an attempt to look for value in the realm of the companies that supply instruments and services to biotechnology.  I recently purchased one such company, Caliper Life Sciences (CALP) on the impression that the company could make for an attractive takeover target.  There have been a number of musings in the industry trade pubs that I read considering that M&A could see a lot of activity this year, so I wanted to consider just who might be a target.

I started with an industry index compiled by Genome Web.  The GW news service tracks the news around the industry and companies in its index, which is comprised primarily of companies that do or supply basic / academic research.  These tend to be the instrument, tool, supply, and also genetic-diagnostic companies. One can register free with Genome Web for a list, but I also put such a list in a previous blog, and it is pretty much the same then as now.

I focused on the group I call 'Equipment and Supply' companies. I excluded the companies who primarily make and license diagnostics, as well as some software and others, as these companies operate with different margins than laboratory suppliers.   The designation is not always straightforward, as a company like Cepheid is clearly in the diagnostic business, but goes after that business with a razor / blade model of equipment and reagents.  Still I consider Cepheid primarily a diagnostic company from the viewpoint of how the market might evaluate them.  This left me with the following set of companies -- Affymetrix, Agilent, Becton Dickinson, Beckman Coulter, Bio-Rad, Bruker, Caliper, Illumina, Life Technologies, Millipore, Perkin Elmer, Pressure Biosciences, Qiagen, Sigma-Aldrich, Thermo Fisher and Waters.  I added Mettler-Toledo, Dionex, and Varian to the evaluation as well.  This set of companies all serve the biotech industry with instrumentation and services, but many provide additional product offerings to other industries as well

I did not try valuing the remaining companies based on discounted cash flow methods.  While that would be a useful measure form individual investors, it may not be what an acquiring firm would use to assign value.  Instead, when considering these as potential takeover targets, I am more interested in how profitable they could be.  So, I looked at a price / sales metrics (specifically, EV/revenue) and also at gross margins (3 year average).  I therefore assume that the acquirer would already have the infrastructure in place to sell the companies products and services i.e. would be able to achieve SG&A synergies.  I used yahoo data for the exercise.


The results are as follows (sorted by gross margin):

Name              Ticker        EV($B)      EV/Rev    GM (3yr av)

Qiagen            QGEN         5.46        5.4         66.6%

Dionex             DNEX         1.24        3.2         66.3%

Illumina            ILMN          4.29        6.44        66.1%

Luminex          LMNX         0.634       5.25        66.1%

Press. Biosci.   PBIO         0.002      2.23        61.5%

Life Technol.     LIFE           12          3.66        60.9%

Affymetrix         AFFX         0.482      1.47        60.2%

Waters             WAT           6.27       4.18       58.5%

Bio-Rad            BIO            2.81       1.57        55.0%

Agilent               A            12.45       2.75        54.0%

Millipore            MIL           6.68       4.04        53.7%

Becton Dickin.  BDX          18.82      2.56        51.8%

Sigma-Ald.        SIAL          6.69      3.11        51.0%

Mettler Tol.        MTD          3.91      2.26        50.6%

Beckman Coult. BEC          5.51      1.69        46.5%

Bruker               BRKR       2.33      2.09        46.1%

Varian               VARI        1.29       1.62        44.6%

Caliper              CALP      0.161       1.24        44.3%

PerkinElmer       PKI          3.19       1.76        42.2%

Thermo Fish.      TMO       21.26       2.1         39.6%



I built a scatter plot to look at EV/Rev vs. gross margins and laid down a trend line.  Not surprisingly, the market is willing to pay more in terms of EV/Rev for companies with higher gross margins.  Companies above the trend line i.e. those with higher GM's that were not being rewarded with compensatory EV/Rev ratios were considered as potential takeover targets (acquisition values) and worth further evaluation.  Companies below trend were being rewarded by the market with relatively high EV/Rev, not justified by merely  their gross margins (other metrics such as operating margins, ROE, ROIC etc. may well justify this however).  Self regulating this exercise to a degree is the inclusion of Millipore, a company currently selling near to an offered acquisition price from Merck KGaA (which has not yet closed).  Not surprisingly, Millipore is now slightly below trend, and no longer looking like a value.

Disappointingly, from the perspective of the undertaking, Caliper is also somewhat below trend, indicating it trades at a fair value by this metric.  The relatively low market cap and scope of product offerings may still make this an attractive acquisition to another company on the list (or other - I would put GE healthcare as the potential 900 lb gorilla in the niche, but GE has other things to focus on right now).  Furthest below trend , and least likely to be acquired using this evaluation is Thermo-Fisher.  I would note that as the largest market cap company on the list, it would be more likely to be the acquirer than acquiree in any case (and perhaps being over-valued should consider using stock a good to make acquisitions).  I'd note though that due to past acquisition, TMO has plenty to digest already and a book value that is already entirely intangible.

What certainly surprised me was the company furthest above trend on the list.  I always knew Affymetrix was a high GM company, but failed to appreciate how little they were being rewarded for it.  Other companies (Illumina) have been eroding the microarray market, as has next generation sequencing, but perhaps the market is now overcompensating for the loss of past growth and failing to recognize the companies earnings potential.  Pressure Bioscicences appears to be a value, and as an ultra micro-cap with a market cap of only 4M, would be an easy acquisition in theory for just about anyone.  It might be worth a deeper look to see if this could be a special ops candidate (might even be too small for them).  Another apparent value is Bio-Rad.  This company has a history of providing solid returns, so I'm surprised to see it as such a value.  I do not however know what products Bio-Rad offers that truly set it apart from some others in the field i.e. I've often thought of them as a 'me too' instrument provider.  Time to take a deeper look here as well, but if they are not truly innovative in and of themselves, may not be all that attractive as a potential acquisition.  Finally, the second most attractive company by this metric, and one that both appears a value, does indeed have its own niche product line (ion exchange chromatography) and could therefore be a very attractive acquisition candidate is Dionex.

I'd note that I was a bit surprised to see Life Technologies as appearing in value territory by this (admittedly limited) measure, as I've often thought them expensive, but that is probably just the merger (Applied Biosystems and Invitrogen) masking the actual metrics.


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Long Cepheid and Caliper

11 Comments – Post Your Own

#1) On March 27, 2010 at 12:45 AM, portefeuille (98.91) wrote:

you could look at HLCS as well ...

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#2) On March 27, 2010 at 12:50 AM, portefeuille (98.91) wrote:

some related stuff ...

Gene Machine Wars Get Ever Hotter

Genome Mania

Quake Sequences Personal Genome Using Helicos Single-Molecule Sequencing

The Single Life: Stephen Quake Q&A

Publications of the Quake Group

Single-molecule sequencing of an individual human genome (pdf)

Following genome sequencing, Helicos moving fast for partner, buyout

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#3) On March 27, 2010 at 12:56 AM, portefeuille (98.91) wrote:

Qiagen has a decent chance of becoming a DAX30 company someday. They currently have a market capitalisation of around 4 billion EUR and a free float of around 81%.

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#4) On March 27, 2010 at 1:15 AM, portefeuille (98.91) wrote:


Investment Bank Drops Coverage of Helicos BioSciences

March 08, 2010 

NEW YORK (GenomeWeb News) – Investment bank Leerink Swann has dropped coverage of Helicos BioSciences, citing both long-term and short-term challenges the firm faces in gaining market share.

Analyst Isaac Ro said in a research note published Friday that although the firm's flagship HeliScope single-molecule sequencer has shown improvement, "time is running out." He estimated that Helicos has placed around 14 of its instruments since its launch a little over two years ago.


"We think HeliScope is ultimately limited to a very small target audience at a price point of $800k that remains prohibitive to most customers," Ro wrote.

He also cited an increasingly competitive market, with new products recently launched by Illumina and Life Technologies, as well as impending competition from startups including Pacific Biosciences and Ion Torrent.

"We think [Helicos]' technology faces long-term competitive challenges," said Ro. "We also believe an acquisition of the company, while possible, is unlikely."

Prior to dropping coverage, Leerink Swann had a "market perform" rating on Helicos' stock, with a valuation of $1. It said that this rating "should not be relied upon" now.



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#5) On March 27, 2010 at 7:15 AM, ragedmaximus (< 20) wrote:

what about ABIO I made a quick trade monday and was wondering if it is goig to 50 soon.I want to buy more monday but am unsure and well scared of a large pullback from recent run up but looking at 2007 it was a 500 dollar stock and a few years back it was 3000 dollars but it is 8.5 now what do you think about next week I keep hearing on yahoo message boards that a severe SHORT squeeze may be in play as they will not be able to cover their shorts and the stock will at least go up a few bucks from that action alone,any thoughts! please you seem to know alot about the bio sector!

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#6) On March 27, 2010 at 7:16 AM, ragedmaximus (< 20) wrote:


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#7) On March 27, 2010 at 7:32 AM, XMFHelical (< 20) wrote:


Helicos was originally in the set, but I dropped it since it was  hard to get a handle on what their cost of goods sold and therefore gross margin actually were.  They have really just begun getting revenues by selling their instruments. I couldn't reliably place them on the chart.

I agree that they could potentially be an attractive acquisition if they can indeed prove out their tech as superior in this now crowded arena of next generation sequencing.



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P.S. - I used to report directly to Helicos' CTO Bill Efcavitch during my ABI days. I was also a PerSeptive guy back in the old days, the company founded by also Helicos co-founder Noubar Afeyan.  I worked on mostly PNA research during those days.

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#8) On March 27, 2010 at 7:33 AM, XMFHelical (< 20) wrote:



ABIO is a drug developer, these companies aren't.  I don't tend to gamble on drug developers.


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#9) On March 27, 2010 at 7:48 AM, ragedmaximus (< 20) wrote:


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#10) On March 30, 2010 at 7:04 PM, raptorguy85 (< 20) wrote:

Where is Pall Life Sciences in this list?

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#11) On August 12, 2010 at 12:53 PM, cwestfield (< 20) wrote:

This is a great list, but I could use one addition. Wafergen (WGBS) has jumped into the game with the commercialization of Smartchip. The gross margin on consumable is 80-90%, and their stock volume has increased 4x's and gained 14% in the last month. Take a look:

There's buzz that Wafergen, because of the smartchip's unique attributes, could be an acquisition target by next summer. I think this stock is going to blow up. Check out this IR video I stumbled accross. 

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