Qiagen Is Next Deal Candidate With Tax Allure: Real M&ABrooke Sutherland
Qiagen NV investors are betting the busiest year for health-care deals in more than a decade will lure acquirers to one of the industry’s most expensive targets.
Shares of the maker of diagnostic tools to tailor medical treatments have climbed three times as much as peers since June
15. That day, Medtronic Inc. became the biggest firm to announce an overseas acquisition that allows it to escape the U.S. tax system by shifting its incorporation abroad. While Qiagen now trades at one of the highest profit multiples for life-science equipment companies, Bryan, Garnier & Co. said its Dutch domicile could make it the next tax-inversion target, with potential buyers including Sigma-Aldrich Corp. and Illumina Inc.
A takeover of Qiagen, valued at $5.7 billion, would add to almost $300 billion in health-care deals this year, the most since at least 2002, according to data compiled by Bloomberg. Qiagen’s growth prospects and lower tax rate may help attract companies such as Cepheid, JMP Securities said. General Electric Co. and Baxter International Inc. could also be potential buyers, according to Exane BNP Paribas.
“Qiagen is basically the only independent company with critical mass in molecular diagnostics, which is one of the fastest growing markets in diagnostics,” Mathieu Chabert, a Paris-based analyst at Bryan Garnier, said in a phone interview. Plus, “the tax rate of Qiagen could be attractive to some U.S. company.”
Thomas Theuringer, a Qiagen spokesman, declined to comment. The company is based in Venlo, Netherlands, with management offices in Hilden, Germany.
Today, the stock was unchanged at 18.065 euros.
Health-care transactions surged to more than $240 billion in the second quarter alone this year, fueled in part by the hunt for inversion deals that enable companies to reduce their tax bill by redomiciling in countries with lower rates.
About $291 billion of acquisitions have been announced or proposed in all of 2014, including Medtronic’s more than $40 billion takeover bid for Covidien Plc. While the combination won’t change Medtronic’s tax rate much, a new Irish address will free up almost $14 billion in cash that the company currently keeps overseas.
That deal marked the spread of major inversion-style acquisitions to the medical-device industry and helped fuel speculation that Qiagen could also be a target. Qiagen stock has climbed 4.5 percent since the Covidien takeover was announced, beating the 1.4 percent gain for the Stoxx 600 Health Care Index in the same period.
Qiagen, which makes sampling tools for next-generation gene sequencing and technology that helps determine which patients respond the best to certain drugs, has a tax rate of about 20 percent based on 2014 estimates, according to Paul Knight, an analyst at Janney Montgomery Scott LLC. Even though that’s higher than Ireland’s 12.5 percent, a takeover may appeal to a company in the U.S., where the corporate tax rate is almost double Qiagen’s, he said.
Sigma-Aldrich, the $12 billion life-science equipment company, is one of the main contenders for a tax-inversion deal with Qiagen, said Chabert of Bryan Garnier. Such transactions typically require the foreign company’s shareholders to end up with at least 20 percent of the stock of the combined firm.
Sigma-Aldrich was among companies that expressed an interest in Life Technologies Corp., before the maker of DNA-sequencing equipment agreed last year to sell itself to Thermo Fisher Scientific Inc., people familiar with the matter said at the time.
A takeover of Qiagen could also help Illumina and Cepheid lower their tax rates, while adding diagnostic businesses that would be complementary to their existing portfolios, said Jose Haresco, a San Francisco-based analyst at JMP Securities, a unit of JMP Group Inc. Illumina and Cepheid have market values of $23 billion and $3.3 billion, respectively.
“With all the interest in that type of activity, it makes sense,” Haresco said in a phone interview. “And it’s growing. We’re not talking about a business that’s not interesting.”
Qiagen is poised to boost sales by about 19 percent over the next three years, according to the average of analysts’ estimates compiled by Bloomberg. Revenue should rise as the company markets a new method for detecting latent tuberculosis, increases its foothold in tools for personalizing health care and expands its sequencing instruments, said Chabert of Bryan Garnier.
That means that Qiagen could still be an attractive target for companies that would have more trouble relocating to lower their tax rate, said Knight of Janney. Danaher Corp., a $55 billion industrial conglomerate, may be one of those companies, he said. Investors are antsy for the Washington-based company to make a big acquisition after its longest stretch without a deal of more than $500 million in 11 years.
Qiagen has “a very strong distribution platform, and they’re in the right future growth markets,” the analyst said. “It is one of the more attractive acquisition targets in the industry.”
GE or Baxter may also be potential suitors for Qiagen, Yohann Terry of Exane BNP wrote in a report last month that highlighted European companies that could be deal targets for U.S. firms seeking tax advantages, such as using overseas cash.
Representatives for GE, Illumina, Sigma-Aldrich and Baxter said their companies don’t comment on speculation when asked whether they would be interested in Qiagen. Representatives for Danaher and Cepheid didn’t respond to requests for comment.
Qiagen will probably want more than $30 a share in a takeover, a 22 percent premium to yesterday’s U.S. close of $24.65, said Vijay Kumar, a New York-based analyst at International Strategy & Investment Group LLC. That may give it a valuation that dissuades some buyers, Kumar said.
Qiagen already trades at about 20 times earnings before interest, taxes, depreciation and amortization in the last year. That’s a higher multiple than 77 percent of life-science equipment makers valued at more than $1 billion, according to data compiled by Bloomberg.
“The ask price is just too high,” Kumar said in a phone interview. “The sense I get is they’re looking for north of $30. I think buyers can stretch to $30, but can they go to like $35? I’m not sure whether we have buyers at those levels.”
Even so, Qiagen’s low tax rate and attractive businesses make it a potential target, said Haresco of JMP.
“There’s lots of interesting synergies where you can see U.S.-based diagnostics companies taking an interest,” he said. “You wouldn’t be wrong to think about that.”