Friday, May 18, 2012

Dako acquired by Agilent

Deals are getting done in the tools & content space, and valuations are jumping as shown by the Agilent-Dako tie up this week at 6X trailing revenues!!!* (and also the Gen-Probe acquisition by Hologic, at roughly the same valuation multiple.)

For perspective, the just re-done AFFX-eBioscience deal was at a ~4X multiple. So how is Dako 50% more valuable on the basis of revenue multiples? (Or ~7X more valuable on a gross valuation basis.)

-a bias towards higher value products in the sales mix. Per this article, reagents are only ~15% of Dako sales, while 85% is attributed to the anatomic pathology market. (Slippery, as much of the purchases for the path market are reagents in value added packaging (kits, etc)). The lesson here for life science tools companies: climb the value curve - even if just a step or two - and put a new label on your company. You're not a reagents company - you're a clinical diagnostics or molecular diagnostics company, even if none of your products have 510K approvals from the FDA.

-clinical lock-in. Once a clinician or pathologist learns to rely on a pathology product, momentum and familiarity are more important to follow-on sales than price.

-IP. Dako's assays and components are proprietary whenever possible, and quite likely patented in a minority of cases. (With trade secrets being more important than formal IP protection in most cases in this field.)

Note: the acquisition ISN'T driven by cutting edge technology. Much of Dako's products are related to immunohistochemistry (IHC) - a very standard, widely used assay technology. I suppose you could start an argument over whether or not Dako is a molecular diagnostics company - their pathology products help target molecular medicines on a by-patient basis, but these diagnostic assays are not particularly 21st century, relying on protein detection.

Also driving this deal: as noted in this story, Agilent's $4B cash hoard - half of which they are using to do this deal - is largely offshore. Agilent's choice was either to repatriate the profits and pay a huuuuuge tax to the US government (newsflash: the US has the highest corporate tax rate in the world), or re-invest the proceeds in overseas assets, like Dako. It sure would have been nice if that capital could have been re-invested in US life science companies.

The quick reaction from financial analysts is that Agilent paid full-price for Dako, but the deal will be immediately accretive to earnings, and, since Agilent used off-shore funny money to fund the deal, probably could have and would have paid more. (Plus, sizable companies in the clinical diagnostics space for acquisition are becoming scarce.)

I'd say this is a good buy by Agilent, and hope that no one mistakes the huge celebratory party Dako's Danish and Swedish owners are throwing (surely with copious amounts of aquavit, Tuborg, and Absolut), as anything other than just the way the Scandinavians roll. (Speaking from personal experience. Hei skål!)

* note that the Agilent press release refers to 2010 revenues for Dako at $340M. I bumped up Dako's sales by 10% to reflect 2011 revenues.

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