Potential Takeover Candidates in Biotech Supply
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