Called it (Affymetrix-eBioscience)!

There's not much less interesting to read on a blog than a blogger giving themselves a pat on the back, but abandoning caution, here's mention that what I predicted would happen between Affymetrix and eBiosciences has come to pass, as AFFX and eBio have adjusted the purchase price downward in order to get their merger financed.

I predicted two months ago that their stalled merger would go forward with eBiosciences lowering the price slightly. Lenders financing the deal saw AFFX's performance slip enough in 2011 to make them wonder if the deal was dangerous. I stated that both AFFX and eBio lacked better alternative than a slightly lower price.

The previous deal - valuing eBio at $330M has been redone at $315M. A 5% price reduction doesn't seem like much (and indeed it won't bother eBio shareholders much), but annual debt service on the "extra" $15M for AFFX probably would equate to an additional annual interest expense of $1M. With $1M more cash flow at the $315M price, the lenders can sleep better.

I like the new deal, and so does the market -AFFX is up ~10% since the announcement, effectively meaning that AFFX added ~$45M in value ($15M price reduction, plus ~$30M in increased market cap.)

Based on the AFFX press release, pro forma 2011 for the combination of AFFX and eBio might look like this:

Revenue: $338M
EBITDA: ~$5M (swinging to a positive)

Make no mistake, AFFX wants/wanted eBioscience to pave over their declining genomics business. The deal extends the period for AFFX to turn this business around (I still think there's plenty of life left in Affy genomics hardware & consumables), and if so, multiples expansion (sales or EBITDA) will lift the stock substantially. Still, I predict that AFFX in a few years will be known more for their consumables business than their genomics business, and that's probably a good thing.

The M&A game….

…..featuring Illumina + Roche again and an addendum to my post last week about the Affymetrix-eBioscience non-deal. What do these 2 deals have in common?

Luke Timmerman @ Xconomy has a good piece this week with 5 reasons why the Roche + Illumina deal isn't right for Illumina. I shared reason #6 in the comments:

• "…..because the touted “total solution” provided by a Roche + Illumina combination is a fairy tale. Illumina sells equipment. Roche sells drugs and diagnostics. What tiny bit of equipment that Roche sells (454) hasn’t done well. I don’t see how selling Illumina equipment makes Roche’s drug or diagnostics businesses any better. What “total solution” becomes enabled by the combo that isn’t possible by Roche just buying a roomful of Illumina (or someone else’s) sequencers?" 

What the ILMN-Roche and AFFX-eBiosciences deal have in common is that both deals are now an exercise in game theory. Consider ILMN's options:

1. Accept Roche's bid. (notgonnahappen. Roche's offer is ~$6 below the current price) 
2. Adjust the terms: wrestle for a higher bid from Roche or find another bidder to up the price. 
3. No deal. Win a proxy fight by making the stand-alone scenario more real and financially attractive. 

Likewise, consider eBioscience's options:

1. Accept AFFX's likely revised downward terms, though still rich, in order to allow AFFX to win debt financing of the acquisition. 
2. Adjust the terms by selling to another suitor, likely at a lower price than AFFX's rich offer. 
3. No deal. No liquidity for investors. 

Timmerman argues Illumina shareholders should vote to remain independent for largely qualitative reasons. Unfortunately, I think the decision to be made by shareholders is much more cold and quantitative: what's the better risk-adjusted net present value?

1. Roche's $44.50/share bid, (again, notgonnahappen.) 
2. a sweetened bid, or 
3. the capital gains in future years from selling ILMN shares after the company stock re-appreciates. 

Putting some #'s to #3. Using round figures, ILMN is at $50/share, and had a previous high of $80/share. Holding ILMN stock for 2 years to see $30 in appreciation would require an annual return to equity holders of 26.5% - a not unreasonable scenario, particularly in such a growing industry. The problem is, the $30 gain offered in the future (over two years) can be made a lot less relevant with a sweetened bid 'now' by Roche.

What if Roche offered an additional $2B, which would raise the ILMN offer to $60/share, or about a third of the 2-year gain upfront? This might be hard for ILMN shareholders to turn down, especially if the offer is cash-heavy.

To me, and likely to both ILMN shareholders and Roche management, the outcome is determined largely by your appraisal of ILMN's NGS technology. If you think ILMN is in danger of being passed by Ion Torrent or Oxford Nanopore, you take a sweetened offer from Roche. If you think ILMN has the tech to stay on top, you probably hold your shares (or, if Roche, increase your bid.)

All of this says to me that we should be on the watch for a public unveiling of ILMN's future NGS tech, or their roadmap as such. (Via a press conference or an analyst day, or the like.) ILMN is currently touting NGS prices of ~$5,000 per genome. If they can demonstrate a technology (or path) that drives this number down into ONP's ballpark (~$1,000), expect ILMN to stay independent. If not, ILMN will take Roche's best offer.

Roche has already played their role in this game, as they played the "you know you're not the only fish in the sea" card - even though the whole world knows that there isn't an equivalent alternative NGS investment available. (Unless you think PACB or GNOM make for good back-up plans.) I interpret this as Roche saying that they're open to paying a bit more for ILMN - otherwise, they'd play either the "take it or leave it" card.

Nearly six weeks have passed since Roche's hostile bid and yet Illumina hasn't shown off any reason for shareholders to expect ILMN stock to pop as an independent company. Be on the lookout for either a sweetened Roche bid or a big ILMN tech exposé.


While ILMN is looking for paths to increased valuation, eBioscience must be looking for how to avoid too much decrease in valuation. It looks like AFFX can't do the current $330M deal, as lenders are pulling their financing. They could seek another bidder, but presumably they held an auction before accepting AFFX's bid, and know the possible range of offers. At 4.7X trailing revenue, the AFFX offer is very rich.

As a mostly-commodity provider, eBioscience probably still wants to get a deal done, even if AFFX can't honor the proposed terms. (btw: there are differing reports on whether AFFX's offer is all-cash or 50/50 cash/equity.) Would eBioscience rather take a tweaked deal from AFFX at say 90% of the value, or - as they are a growing company - sell a year or two later to someone else at a reduced multiple? (say $80m in 2012 revenue x a 3.75X multiple (=$300M.)) Chances are, this offer from AFFX represents the best and most lucrative chance for liquidity for eBioscience shareholders that they are going to see for a while.

The best outcome here for eBiosciences is to negotiate a sale at a point between their best alternative purchasers' price and the $330M, or to alter some deal terms to slightly reduce the value of consideration from AFFX. eBioscience could keep the same headline number, but accept a mix heavier on equity than cash, for example. Or, eBioscience shareholders could provide the debt financing themselves, in the form of an earn out or milestone payment from AFFX.

Unlike ILMN, I don't think that eBiosciences has to worry that their suitor will have a change of heart. If the financing gap can be bridged, the deal will happen. At this point, it seems to be a matter of how much less lucrative terms eBioscience is willing to accept and whether this figure works for AFFX's bankers.

Quick hits….

• Gleevec, is there anything that you can't do?  Gleevec and Tasigna may be effective against EBOLA! (NVS' finding: Abl regulates ebola viral reproduction. I wonder how many other viruses may rely on Abl.)

• 23andme & Muhammad Ali are partnering for Parkinson's research. I'm not an Ali fan (I think he is a product of some excellent p.r. over the years, covering up the fact that he was a tremendous a$$ when active as an athlete), but I'm very excited about any initiative that draws the general public's attention to genomics.

• Apparently the Affymetrix-eBioscience deal might not be happening. It looks like AFFX's disappointing 4Q2011 financial results is making the merger financiers think twice about underwriting the transaction.  (Tell me if this makes sense: acquirer AFFX enterprise value: ~$215M. target eBioscience purchase price: $330M (all cash). Debt financing required for the deal: $190M.) I still think this deal is driven by AFFX's desire to dilute their reliance on the microarray business and to buy some sales growth, as there's still only a tenuous topical connection between Affymetrix & eBioscience respective businesses. Such a deal makes sense at a bargain price, but it looks like the lenders are realizing it's actually a premium price. (Notice the roster of lenders are more merchant lenders than traditional bankers.) Also: if you're eBioscience intending to cash out @ a very rich 4.5X sales, you've got 2 questions to consider: 1) would you be willing to give a little on the terms to get the deal done? (I would), or 2) would you be interested in buying AFFX?