Thursday, March 8, 2012

UK company buys US company that's really a Chinese company.

Abcam bought Epitomics this week for $155M. These two companies are very good at what they do, and this seems like a good combination, though a bit rich in price.

Part of the reason why Epitomics fetched such a premium is that there is real antibody IP behind the company, as opposed to most reagent companies.

This deal also firmly establishes Abcam on the ground in China, as 2/3rds of Epitomics' employees are based in China.

Acquisition multiples:

6.3X ttm revenue
20.4X ttm EBITDA

While there are several reagent companies leveraging low cost production in China, Epitomics is arguably the most significant and with the greatest IP base, so this represents Abcam buying "Tiffany" assets instead of trying to just buy Chinese access on the cheap. I think this is the smart way for non-Chinese companies to leverage China. Abcam will win not only adding the production capacity, but Epitomics' Chinese operations should help Abcam sell more product into China.

So, while the Epitomics multiple of revenue is high, think about it as the regular acquisition of a reagents company at 4X sales, plus operating synergies, plus the purchase of novel IP, plus the expense of opening a 170 person facility in China so de-risked that it will be earnings positive a year after the deal closes. If you call the operating synergies worth $15M, the IP worth $15M, and the Chinese operation worth $30M, Epitomics is a good bargain for Abcam even at a headline 6.3X sales. (Provided that Abcam retains the Chinese personnel. It wouldn't be that hard for the Epitomics-China team to raise capital and start a competing operation. Or to be recruited to a competing entity like Origene.

The other good thing about this deal: it reminded me to take a look at Abcam's stock. I've only skimmed their 2011 results (published Monday), but so far it seems a solid company fairly priced. The big question: what's the endgame for Abcam? Would LIFE or TECH or another big player (GE?) be interested in scooping up Abcam in a few years at a premium to current valuations?

I think the answer to that question depends on Abcam's ability to expand into further value-add areas beyond reagents, like IVDs or drug discovery assays.

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