This story was originally posted on Dec. 1
Affymetrix last week announced plans to acquire eBioscience, a privately held firm that sells flow cytometry and immunoassay reagents for immunology and oncology research and diagnostics.
The Santa Clara, Calif.-based array vendor said it will spend $330 million in cash and debt to buy eBioscience, with the transaction expected to close before the end of this year.
Affy CEO Frank Witney in a conference call discussing the deal said that the acquisition of eBioscience will be "transformational" for the firm's business. "This expands our portfolio into the growing cell and protein analysis space ... and we can now offer a broad menu of reagents for cell biology and genetic analysis," he said.
San Diego-based eBioscience is expected to post $70 million in sales this year — around 22 percent of Affy's total 2010 revenue of $310.7 million — and the company's revenues are growing at approximately 15 percent annually, Witney said. Moreover, the addition of eBioscience's flow cytometry and immunoassay products will enable Affy to enter markets worth about $2.8 billion that are growing at an annual rate of between 10 and 14 percent, he added.
"We believe that this is a transformational acquisition that significantly expands our total addressable market [and] complements our genomics business and cell biology and protein-analysis products," said Witney. "Affymetrix has been moving downstream … and this is a very logical next step to add the capabilities of eBioscience, which can provide a much more comprehensive toolkit for translational medical research."
The deal will also alter the makeup of Affy's revenue streams, making the firm less dependent on expression array sales. The firm's expression array business is under pressure from next-generation sequencing-based applications. For the most recent quarter, expression revenues fell 22 percent year over year (BAN 11/8/2011).
As Chief Financial Officer Tim Barabe noted during this week's call, Affy expects that its 2011 revenue composition will be 43 percent expression; 29 percent genetics, mostly made up of the company's genotyping chips; 13 percent reagents; 7 percent instruments; 4 percent services; and 3 percent royalties.
If Affy completes the acquisition of eBioscience, its 2012 revenue composition will be 33 percent expression; 24 percent reagents; 22 percent genetics; 6 percent instruments; 4 percent services; and 2 percent royalties.
The acquisition of eBioscience will be the first for Affy since 2008, when it bought Bay Area startup True Materials; reagent maker USB; and genetic, protein and cell analysis firm Panomics.
At the time, none of those firms was producing revenues on par with eBioscience's expected 2011 sales. True Materials' liquid array technology still has not been commercialized since Affy paid $25 million to buy the firm more than three years ago (BAN 8/12/2008).
Affy has not disclosed USB's contribution to its revenues since it acquired the privately held Cleveland, Ohio-based for $75 million that same year, while Affy disclosed after acquiring Panomics that the firm had brought in $10 million during the first nine months of 2008 (BAN 2/24/2009).
In comparison, Witney said that eBioscience has 16 percent share of the $200 million North American flow cytometry market and an 11 percent share of the $450 million flow reagent market. Witney described eBioscience as a "solid number two player worldwide." In both North America and globally, the firm's main competitor is BD Pharmingen, a business unit of BD Biosciences.
Founded in 1999, eBioscience currently has 480 employees and an expansive menu of products, including its eFluor flow cytometry reagent kits and FlowCytomix Multiple Analyte Detection System, suites of reagents for enzyme-linked immunosorbant assays, and kits for immunohistochemistry and immunocytochemistry, among products for other applications.
Beyond its San Diego headquarters, eBioscience maintains offices in the UK, Austria, Germany, and France. It serves all other markets via distributors. In comparison, Affy has several US offices in California and Ohio and maintains regional hubs in the UK, Singapore, and Japan, with a representative office in China. Witney noted during the call that the firm is interested in expanding its resources not only into China, but also Brazil, where one of its main competitors, Illumina, recently opened a sales office (BAN 1/25/2011).
Don Tartre, eBioscience's CEO, said during the call that Affy's "global footprint" was one reason why he favored his firm's acquisition. He also said that eBioscience is "approaching a point of critical mass," meaning that it would require more resources to keep on growing, should it continue growing at the same pace.
"Our revenues in the next few years will be close to $100 million and it was just a natural inflection point," Tartre said of the deal.
Affy said it expects to maintain eBioscience's management team and operations in San Diego.
Cash on Hand
Affy has publicly expressed a desire for such an acquisition for several years. Discussing the firm's M&A strategy this week, Witney said that any potential deals had to be "large enough to make a difference in our overall business trend, be able to extend our strategic footprint, and have strong current financials and future prospects." According to Witney, eBioscience "meets all these criteria."
In a research note, RW Baird analyst Quintin Lai said last week that the deal is "a major step in transforming" Affy and "moving it away from a microarray business and into areas like translational diagnostics." At the same time, Lai said that the price Affy is paying for eBioscience "appears full" and "could limit the company's flexibility in the near term for future deals."
Barabe said that the purchase price of $330 million is roughly 4.5 times 2011 revenue and 14 times eBioscience's expected earnings before interest, taxes, depreciation, and amortization.
To "maximize value" for shareholders, Affy said it plans to pay the acquisition with 50 percent cash and 50 percent committed debt. The firm has obtained a fully underwritten senior secured financing commitment of $190 million, which includes a $20 million revolving credit facility, led by administrative agent GE Capital, Healthcare Financial Services, and includes lenders Silicon Valley Bank, CIT Healthcare, and CIT Bank.
Affy is required to keep cash on hand of about $95 million to cover its outstanding convertible debt that can be put to the company in January 2013. GE Capital Markets, Silicon Valley Bank, and CIT Securities will serve as joint lead arrangers and bookrunners on the deal.
As of Sept. 30, Affy had net cash of about $169 million. As Lai noted, the cash portion of the deal represents the majority of Affy's net cash on hand, leaving the firm with around $29 million. The $190 million of debt is likely to have an interest rate in the "high single digits," Lai said, though Affy executives said during the call that the cash flow from both its core business and eBioscience will help build that back up and pay down the newly acquired debt over the next five years.
Lai expects eBioscience could be "modestly accretive" to Affy's 2012 results and should be accretive to its 2013 performance, adding between an anticipated $0.08 and $0.13 per share.
Overall, Baird "came away positive on this deal." Lai said that Affy is "diversifying from being purely a microarray business and this deal will help drive other consumable opportunities in life sciences and diagnostics." He added that the transaction "could help build out more of a diagnostic presence, longer term," but did not elaborate.
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