Danaher strikes again with Cepheid buy
And like that, the holiday season is over. With a shark’s instinct for wounded prey, Danaher is to take out the poorly performing molecular diagnostics group Cepheid for $4bn in cash and debt. At $53 per share the offer is a 54% premium to Cepheid’s closing price on Friday, but the company’s shares have sunk badly over the past year: last September Cepheid’s stock was worth just shy of the takeout price.
Danaher clearly believes that it can wring more value out of the company than Cepheid's current management. But it is also a serial acquirer, keeping itself growing through deals big and small. Cepheid is Danaher’s 13th purchase in five years, and its fourth worth over $1bn.
Despite a nearly doubling of revenues over the last five years Cepheid has sunk ever further into losses - it reported a net loss of $48.5m in 2015 and as of December 31, 2015 it had an accumulated deficit of approximately $342.2m. Last year, it reported a 15% jump in its top line sales, to $539m.
Speaking on a conference call today, Danaher’s chief executive Thomas Joyce said that his company would benefit from Cepheid’s sales into small and medium-size hospitals and an increasing push into point-of-care testing. On the other side, Danaher will be able to bring Cepheid’s products to new, high-growth markets such as China.
Danaher also believes it can improve Cepheid’s “efficiency and profitability”. Cepheid had already instituted an efficiency drive in the hope of, if not attaining profitability, at least staunching its losses. Danaher will build on this and reckons it can squeeze $100m in cost synergies and another $100m revenue synergies out of the acquisition over the next five years.
That is a lot of cuts. But Danaher execs pointed to a prior acquisition as a potential model for how its incorporation of Cepheid might play out. In 2007 it bought Australian diagnostics group Vision Systems, and while this was a smaller deal – worth $520m – it had similar metrics and provides a “clear analogy” for Cepheid, according to Mr Joyce. He said that as part of Danaher, Vision Systems is an $800m business with 20% operating margins.
“It was a smaller business but the same type of opportunity,” he said on the call.
US vs Europe
There appears to be some advantage in combining the companies’ respective molecular diagnostics instruments. Cepheid is US-facing, and its GenXpert instrument has the largest installed base and most extensive test menu in the molecular diagnostics arena, running tests for viral infections such as HIV and hepatitis as well as hospital-acquired infections and tuberculosis, and also offering companion diagnostics for cancer drugs. Cepheid is “underpenetrated” in Europe, Danaher management believes.
Conversely, Danaher has CE mark for its Veris system and is building sales in Europe, but US approval could still be some way off.
|Danaher's acquisitions of the past five years|
|Date||Target||Target company focus||Value ($m)|
|September 6, 2016||Cepheid||In vitro diagnostics||4,000|
|August 31, 2015||Pall||Anaesthesia & respiratory; blood; drug delivery; endoscopy; general & plastic surgery; healthcare IT||13,800|
|June 8, 2015||Bioptigen||Diagnostic imaging; healthcare IT; ophthalmics||-|
|December 11, 2014||Nobel Biocare||Dental; diagnostic imaging; general & plastic surgery; orthopaedics||2,200|
|December 4, 2014||Devicor Medical Products||Diagnostic imaging; general & plastic surgery||-|
|June 27, 2014||DUX Dental||Dental; general hospital & healthcare supply||-|
|May 2, 2014||Unfors RaySafe||Diagnostic imaging; healthcare IT; patient monitoring||-|
|August 1, 2013||Flow Cytometry business of ReaMetrix India||In vitro diagnostics||-|
|July 8, 2013||Kreatech Diagnostics||In vitro diagnostics||-|
|April 9, 2013||HemoCue||In vitro diagnostics||300|
|November 16, 2012||Aribex||Dental; Diagnostic imaging||-|
|November 1, 2012||IRIS International||In vitro diagnostics||338|
|June 30, 2011||Beckman Coulter||In vitro diagnostics||6,800|
Molecular diagnostics is a fast-growing segment, but that is a threat as much as a promise: once a company has an instrument it can be reasonably easy to add new tests and thus competition in this space is fierce.
Danaher made great play of its ability to improve Cepheid’s efficiency. It will have much work to do if it is to drag it into profitability. Still, if it cannot manage to turn its new acquisition’s fortunes around, it can surely just move on to the next one.