Deal Overview
Associate: Saumya Shah
Analysts: Callum Ewart, Joshua Green, Adityawardhan Gaikwad
Acquirer: Danaher
Acquiree: Abcam
Deal Size: $5.7 billion
Buy Side Advisors: Barclays PLC and Jefferies LLC (Financial), Skadden, Arps, Slate, Meagher & Flom LLP (Legal)
Sell Side Advisors: CitiBank (Depository Bank), Lazard & Co, Lazard Freres & Co and Morgan Stanley & Co (Fairness Opinion provider and Financial Advisor), Latham & Watkins (London) LLP (Legal)
Introduction
Life sciences firm Danaher is acquiring all outstanding shares of Abcam PLC for a price of $24 per share in cash, with a total equity value of approximately $5.7 billion. Danaher is confident that this acquisition will help accelerate in help in furthering strategy to map complex diseases and accelerate the drug discovery process. Chief Executive of Danaher, Rainer M. Blair added that Abcam’s long record of innovation, product quality and breadth of antibody portfolio, positions them as a key partner in the scientific community.
Danaher Overview
Founded in 1969, the firm designs, manufactures and markets professional, medical, industrial, and commercial products and services worldwide. Danaher has four main segments. The Biotechnology segment offers bioprocess technologies, consumables, lab-scale protein purification and healthcare filtration solutions. The Life Sciences segment provides mass spectrometers, flow cytometry, genomics and Gene and Cell therapy. The Diagnostics segment offers clinical instruments, reagents and services for hospitals, physicians and laboratories. The Environmental & Applied Solutions segment offers disinfection systems to analyse, and treat potable, industrial and ocean water used for different purposes. With approximately 81000 employees, the company has a rigorous pipeline. This includes a wide range of 728 products that it offers.
Danaher’s 2022 global sales were 6.85% up from the previous year at $31.47 billion.
Figure: Revenue in billion U.S. dollars
Source: Danaher 2022 Annual Report
The diagnostics segment generated the largest amount of revenue in 2022. The segment's sales increased by 46.5% over the past 2 years to $10.8 billion (not including the impact of foreign exchange). The company’s second highest revenue-generating segment Biotechnology has sales grow to approximately $8.8 billion, with a 2.1% year-on-year increase.
Danaher’s revenue by region for the annual year 2022 is shown below, with most revenue for the company being generated from the United States and Canada [44.4%], followed by EMEA (excluding Western Europe) and Latin America [29%] and Western Europe contributes 22%. The reason for this large difference between the US, Canada and other countries is mainly because of North America’s consumer demand for diagnostics and life sciences products.
Figure: Revenue by region, for the Annual year 2022 in billion U.S. dollars
Source: Danaher 2022 Annual Report
Danaher’s major competitors include 10x Genomics Inc., 4basebio PLC and Thermo Fisher Scientific. 10x Genomics specializes in providing chromium and chromium connects instruments, microfluidic chips and software for analyzing biological systems. 4basebio PLC focuses on gene therapy solutions and has recently received a grant from the Bill and Melinda Gates Foundation to advance its synthetic DNA and Hermes Nanotechnology platform. Thermo Fisher is a leading provider of medical equipment, reagents and consumables. Recently it acquired CorEvitas, which specializes in patient registries and curated data for $912.5 million.
Abcam Overview
Abcam Plc is a global life sciences company. The company was founded in 1998 and is headquartered in Cambridge, the United Kingdom. Abcam works on developing and distributing reagents and tools for scientific research, diagnostics and drug discovery. The company has over 5500 products and was named ‘Antibody Supplier of the Year’ by CiteAb. It acquired BioVision in 2021 for $340 million to enter the biochemical and cellular assay market and focus on research in immune-oncology and epigenetics. It has highly benefited from its Proprietary RabMab Technology which helps in developing monoclonal antibodies from rabbits rather than the conventional method of using mice. These antibodies have extensive validation and can be used for a wider range of applications including formalin-fixed and paraffin-embedded(FFPE) tissue
Figure: Net Income of Abcam PLC in US millions
Source: S&P Capital IQ, 2023
Abcam PLC has seen a consistent decline in net income in recent years. 2022 saw the lowest net income to USD -8.5 million, a decrease of 151.7%. This has been due to an increase in non-operating expenses, asset writedown, Merger and related restructuring charges. Abcam’s founder Dr. Jonathan Milner in an open letter to shareholders mentioned that the company needs to fix financial material weakness, with a new CFO and ensure that ROCE levels are above 20%.
Abcam’s major competitors include Agena Bioscience Inc., CRISPR Therapeutics and Epigentek. Agena Biosciences mainly supplies the MassARRAY system for genetic analysis, CRISPR was one of the pioneers in gene editing and develops medicines for the treatment of rare and common diseases. Epigentek specialises in epigenetic kits and antibodies for DNA methylation and histone modification.
Implications of the deal: Jonathan Milner requested shareholders to reject the offer from Danaher as he believes the business is worth much more and Danaher’s offer represented a negative premium, severely disadvantaging shareholders. He mentions that a dual listing in the UK and US would benefit Abcam. Alan Hirzel continues as CEO and justifies the decision to move to the US by mentioning that 40% of Abcam’s business is in the US and the Waltham region (where Abcam is located) attracts a tremendous amount of investment. Abcam’s shareholders will be voting on the proposed deal on 6th November 2023 at the general meeting.
Industry Analysis
Both Danaher and Abcam operate in the Global Biotechnology industry. The industry researches and lends important insights into disease processes and provides novel therapeutics and innovative medical devices. Companies in this sector have experienced massive growth since the pandemic, the capital raised by companies in the US and European markets after COVID-19, increased by 75% to $119 billion, which remained constant in 2021 as well. However, access to capital declined in 2022 as debt financing reduced due to rising interest rates. Venture Capital and Private equity funding also declined by $9 billion as investors pursue de-risking strategies by targeting companies that deliver a sooner commercial validation. However, this remained well above the pre-pandemic levels.
Globally, North America is the leader in the market for biotechnology generating 37.76% of the sales revenue. They are followed by Europe and Asia Pacific. Latin America adds the lowest to the market’s revenue. By technology, tissue engineering and regeneration contributed to 20% of the total revenue followed by DNA sequencing and Cell-based Assay.
Figure: Biotechnology Industry in UK
Source: IBISWorld, 2023
The biotechnology industry has grown exponentially in the UK, with a CAGR of 8.3% in the past 5 years.
Figure: Global Biotechnology Market
Source: Precedence Research, 2023
The Biotechnology industry is expected to have a market size of $3.2 trillion by 2030. Key drivers that may contribute to this growth are increased research and development, investing almost 18.8% of revenue in it. This allows companies to innovate and develop new products that the consumers need and as awareness has increased, so has consumers' demand for high-quality products. Furthermore, an ageing population and favourable government policies are driving innovation in this sector. Due to rapid digitisation, a large amount of data (from EMR, clinical, genomics, wearables) is being used to develop and deliver the next generation of therapies.
However, the cost of processing and managing the data should be controlled. The industry, especially smaller firms rely on third-party subcontractors. Hence, geopolitical unrest, logistical issues, and inflation can lead to disruptions in the supply chain and lower profit margins. Another threat the industry faces is due to cyberattacks, which have increased by over 2,500% since 2009, with hackers aiming for IP theft and sensitive data breaches. In response, Companies are now using blockchain for anti-counterfeiting, clinical data sharing and materials transfer. Lastly, improper storage leads to the loss of sensitive biological materials.
Deal Valuation and Financial Analysis
WACC Calculation
The WACC calculation is here as usual and uses the sources and assumptions in the notes section.
DCF Model
The cash flow calculations here use the revenue build and construct the Unlevered Free Cash Flow (UFCF) for future periods.
Terminal Value, Share Price and Sensitivity
Through the DCF model method, we get that the present value of the Unlevered Free Cash Flows is $1,087,198,000. Moreover, using the exit-multiple method with the assumptions detailed below, we get a terminal value of $8,423,259 with a present value of $6,258,435. The terminal value using the perpetuity growth method is shown below, which undervalued the stock to an unrealistic level.
Furthermore, we used the EV/REV multiple instead of EBIT or EBITDA. This was due to the fact that an EBITDA/EBIT multiple overvalued the firm due to positive distortions of a high-growth industry and debt structure implications.
Overall, by summing the present value of unlevered free cash flows and the terminal value we calculated an enterprise value of $6,258,435. Using the equity and enterprise bridge, we calculated a share price of $26.59. This indicates that the stock is potentially undervalued, suggesting a discount over the intrinsic value of 11.1% (the current share price is offering an 11.1% discount over the implied modelled share price).
Comparable Company Analysis and Precedent Transactions
In a further valuation of Abcam, we compared the firm’s current valuation multiple to similar companies within the medical research and biotech space. We extended the range of firms used in order to gain an insight into the larger medical industry due to most comparable firms being private. Using the table above, we were able to calculate a range of values for the share price using an industry-comparable perspective that is shown within the football field diagram. The suitable range from this analysis was a share price of $15.49 - $28.15.
Furthermore, we also included a precedent transaction analysis to indicate a suitable range of multiple values that formed the background for the overall valuation and the football field diagram. It was challenging to get suitable transactions that would reflect the Abcam deal. This was due to most deals being private meaning the deals used above extrapolate to the entire medical industry. However, this is still a valid representation of where a suitable share price should sit within the industry. We used this to justify the other valuation methods above, it is included in the football field however given the range of values one should not rely solely on this analysis. We used the median EV/EBITDA multiple and the minimum EV/Revenue in order to create a realistic share price range (EV/Revenue here was highly positively distorted due to the size of the deals/firms used).
Football Field Summary
Given the valuation methods above, the football field analysis details all the ranges of implied share prices for Abcam. The values are given in the table below, the orange line is the current share price and the green line is the implied price from the DCF model (the most realistic estimate of the implied share price).
The figure above summarizes a range of implied values for Abcam’s share price given each valuation method.
Deal Rationale and Risks
Abcam Rationale
After completing an internal review of potential strategic alternatives, Abcam decided that the best course of action would be to find a buyer for the firm immediately. There are several key opportunities created by selling the firm to Danaher Corp which could ensure the firm continues to run successfully as a partially independent operation.
The first of these is outside support for any potential supply chain issues. In the past 2 years, there have been numerous issues across all industries, not just MedTech, surrounding keeping a reliable, sufficient, and affordable supply chain. Previously in 2023, we saw a semiconductor shortage that hampered lots of small MedTech businesses' growth. Whilst Abcam is far from a small company, it is also far off the size of industry leaders like their acquirer Danaher in terms of both market cap and operational size. Therefore, previously it has been vulnerable to any supply chain issues as it lacks the size to negotiate large contracts of which suppliers will it prioritise first. Therefore, by bringing their services within the Danaher umbrella, they have a higher chance of success in navigating this risk.
Equally, this deal is a best-case scenario. A key feature of the deal is that Abcam will continue to act as an independent firm just as before the acquisition. This is important as it enables them to retain company identity and prevent employees from feeling lost in a vast corporate structure, whilst simultaneously gaining a new source of investment to continue developing its existing products and begin new research on other drugs.
Danaher Rationale
A key reason for Danaher to acquire Abcam is that Abcam is fundamentally solid. Throughout the past year, Danaher has struggled to reach its revenue expectations, cutting its annual sales forecast multiple times throughout the year. Whilst it hasn’t been a great year for pharma in general, Danaher has struggled with sluggish demand towards some of its smaller biotech operations. Therefore, the deal is key for Danaher in creating solid, predictable, and safe revenue streams in the future. This will allow them to please shareholders both in the short and long term as they increase their chance of reaching their future revenue goals alongside providing short-term assurance to shareholders that they have their underperformance under control. Danaher has forecasted that they will see annual synergies of $75m after 5 years.
Another factor to consider on Danaher’s behalf is that Abcam offers an extremely complementary portfolio to Danaher that has almost no overlap. This allows for Danaher to capitalise fully on all of Danaher’s product offerings as they won’t have to attempt to merge consumer bases which can lead to a net loss in consumers as customers are prompted to look elsewhere. Equally, offering a more comprehensive portfolio will open Danaher to larger contracts that are looking for a sole supplier over segmented suppliers. Finally, this move also helps them diversify their portfolio as they reduce their exposure to market downturns that lead to the sluggish demand they are now experiencing. The deal has also been forecasted to be accretive partially due to this factor, it is anticipated share prices will rise by $0.20 per share 1 year after the acquisition has been completed.
Revenue Synergies
Within healthcare markets, larger corporations will often use predatory sales techniques such as selling their whole product portfolio to hospitals as opposed to allowing them to pick and choose the best products in each sector. As Abcam’s products don’t overlap with any of Danaher’s current products, they can easily be added to this comprehensive portfolio when Danaher is negotiating future contracts. Hence this will likely lead to an increase in sales, therefore boosting Abcam’s revenue without increasing expenditure on advertisement.
Despite the proposed independent nature of Abcam post-deal, Abcam will receive investment from Danaher. The increase in cash available to Abcam will be crucial as it will allow them to increase the rate of development of their current projects. Once this passes through regulatory approval, Abcam will therefore be able to offer more products, boosting the overall company revenue through the individual revenue earned by the sale of these products.
Cost Synergies
By joining Danaher’s global network, Abcam can significantly reduce the cost encountered due to the purchase of raw materials. Due to Danaher’s size and volume of their orders, they can negotiate better contacts in procuring necessary materials than Abcam was able to independently. The implications of this will be that we likely see the independently run Abcam arm report greater profits after the deal assuming demand for their products remains at least similar in the following year. This should make the deal accretive for Danaher.
Equally, where before the deal if Abcam required outside consulting or knowledge when they encountered a business problem relating to a lack of expertise within the firm, they would have to shell out lots of cash for these services. However, this cost can now largely be cut off as by joining Danaher’s global network they gain access to these necessary services from other areas of Danaher’s global portfolio which will now come free of charge as it would make no change to Danaher’s overall operating profit.
Risks
The geographical differences between the two companies pose the largest risk in this deal. Despite Danaher being a worldwide organisation, there is always a risk when it comes to purchasing a company over 5,000 miles away from the head office. The key challenge this poses is it provides complications in the process of integration as communication links are slowed down. Despite completing due diligence and extensive research, an acquirer can never be sure that they are purchasing a fundamentally solid business that has little to no problems that need to be solved immediately, therefore if problems in Abcam’s operations do arise then they will be hard to solve and could be the potential factor that would cause this deal to be unsuccessful. Fortunately for Danaher, they do have operations based in the UK which will largely mitigate some of the potential issues, however, any communicational inefficiency between the head office and the UK office will only be amplified in these potential scenarios.
As evident by the condition that Abcam will remain as an independent firm in principle, it’s evident that there is a strong sense of identity and independent spirit at Abcam. Whilst for now, the deal suits this culture, Danaher will reserve the right to incorporate Abcam into its global general business operations if it sees fit to at any point in the future. Therefore, there is a long-term risk that the culture of Danaher may clash with that of Abcam, in this situation Abcam would likely have been much more suited to pursue a private equity acquirer. Equally, this could also limit the potential of the long-term success of the deal for Danaher, putting them in a position where they should continue to keep Abcam’s operations independent. if they are to respect and understand this element of the acquisition then they will reduce the flexibility of its portfolio. This would make their potential to undergo restructuring much tougher as they have an invariable component in their portfolio. Therefore, this deal poses a large potential clash between the dynamics of a large company and a small company whatever business decisions they take.
Conclusion
Overall, Danaher’s acquisition of Abcam is a significant milestone in the Biotechnology industry. This is also one of the best examples of how M&A can produce value for both parties to grow their businesses and attract a larger market share. Danaher will mainly benefit from a larger product portfolio and reduced exposure to the market downturn, while Abcam will continue to act as an independent firm and successfully navigate the supply chain risk. In addition to this, the acquisition at a discount of 11.1% over the implied share price. This indicates that the stock is potentially undervalued and that Danaher obtained a good deal on Abcam.
Revenue and cost synergies will arise due to an increase in the number of products, higher sales and a reduction in direct costs, mainly by purchasing raw materials at better prices. This would boost shareholder profits and the share price is expected to rise $0.20 per share. Although geopolitical tensions and tricky market conditions continue in 2023, favourable policies, increase in R&D funding and rapid digitisation are resulting in faster innovations that are adding value to the biotechnology and life sciences industry. However, rising inflation and logistical issues that could arise due to geographical differences could lower the profits. The management is responsible for seamless integration and efficient communication, despite the geographical and cultural differences, to ensure the long-term success of the deal.
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