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.

Biotech needs more GE

My Dad sold industrial electrical supplies for GE, and from that exposure, I always thought that the drug discovery tools supply & services industry was similarly attractive to GE's for its' scale, business fit, customer base, and exposure to a growth market. (Many of GE's businesses can be described as supplying essential component technology to Fortune 500 business, be they jet engines, electrical transformers, or wind turbines.)

I had been saying that drug discovery was ripe for GE since 1998, when on the executive team at Upstate Biotechnology, at my suggestion, a GE acquisition was listed in our business plan as an exit scenario. In 2003, GE entered the drug discovery market by buying Amersham, and I felt vindicated, and hopeful that GE would continue investing in the drug discovery industry.

That generally hasn't happened, though things may be changing - GE today announced the acquisition of SeqWright, a Texas-based sequencing CRO.

(btw: a good overview of GE Healthcare businesses is available here.)

The press release for the SeqWright acquisition trumpets SeqWright's connection with GE's existing Clarient molecular diagnostics business. (Clarient having been acquired just a year and a half ago), but even together GE still only has its' toe in the molecular diagnostics water. (Especially since the always awesome World Map of High-Throughput Sequencers lists SeqWright as having only 3 machines - one each of 454, SOLiD, and HiSeq.)

The release also affirms that GE's business model in this space is SERVICE, not proprietary R&D/assay development. In other words, both GE and Roche have roughly similar M&A appetites in this space, but GE chose to buy modest capacity in SeqWright, while Roche wants to own an entire technology platform, if the Illumina deal were to close.

(Ironically(?), WSJ's coverage of the GE's acquisition of SeqWright says that Roche is a customer of SeqWright, which I'd bet wouldn't continue if Roche buys ILMN.)

The SeqWright deal reinforces GE's interest in the biotech industry (and more specifically, molecular medicine) not only as a validation statement, but for the fact that more big-league, results-oriented capital is being committed to biotech, as GE invested to generate tangible cash & EPS, whereas the majority of biotech investment is done to create speculative future value (and often only equity value, not cash-flow value.)

Let's face it: biotech needs more investors like GE, and more of their business mentality. GE's acquisition of SeqWright was, in effect, more capital voting for biotech businesses with customers and cash flow, as opposed to transformative technologies or "cool" tech platforms. VCs: why fund any technology company (i.e. company not developing leads) that you couldn't imagine selling to GE? As an example, consider a genetic engineering company like Amyris - sure, they can do proprietary biofuel R&D that might someday pay off, but isn't the highest NPV likely to come from selling the company's capabilities to generate cash flow?


One reason that GE hasn't been more active in the drug discovery industry is that there are not many acquisition targets available to provide scale. Only LIFE, QGEN, VWR, and ThermoFisher could add >$1B in annual revenue to GE, but in general, these companies have generally been valued at a price that would make difficult a non-dilutive acquisition for GE. Still, I can't ignore that LIFE CEO Greg Lucier is a GE-alum, and that QGEN would make a just about perfect complement to GE Healthcare's Life Sciences business.

I could also see GE getting involved in the pursuit of ILMN (it's the Amersham of 2012), but their lack of public involvement to date suggests to me that they either can't make the price work for them, or that GE invests in more predictable technology. (Why make a multi-billion dollar acquisition in Sanger sequencing if other tech platforms (like nanopore sequencing) might overtake Sanger tech?)

(btw: Roche upped their bid last week. ILMN didn't budge at all. I don't think this deal is getting done right now, but rather in 6-18 months time, after the ILMN board of directors experiences an unfavorable quarter.)

As for SeqWright, congrats to them and to any other CRO that manages to get liquid. Deal terms weren't announced, but if SeqWright was growing fast with the rest of the sequencing industry, and cash-flow positive, they probably got a decent price, though, on the flip side for GE, trading GE stock for an ongoing, competitive DNA sequencing lab is more EPS efficient and less risky than opening a lab using their own cash to buy equipment and hire staff, so there is a limit to what GE would pay. GE may have even made acquisition overtures to many sequencing CROs to see who would bite at the lowest price.

Let's hope that GE has a good experience with SeqWright, and further invests in the molecular medicine industry.