Qiagen (QGEN 0.64%) shareholders have had quite a ride recently. The stock price crashed $40 into the mid-$20s after the company forecast a slowdown in growth, citing a need to restructure its operations in China. Adding fuel to the fire, CEO Peer Schatz announced he is stepping down after 27 years to pursue other opportunities.
Qiagen also decided to discontinue making its next-generation sequencing machines in order to focus on making consumables used by those machines and competing machines. In parallel, it entered into a 15-year strategic partnership with Illumina (ILMN -1.36%) to market molecular diagnostics across the globe.
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Investors certainly disliked the uncertainty of the future growth prospects and the unknown of a new CEO. Investors with enough conviction to buy when there was "blood in the streets" or looking for a dead cat bounce have been rewarded. The stock crept back to nearly $30 before rumors of a potential buyout emerged.
At the end of last week, the rumor mill bandied about talk of a possible acquisition by Thermo Fisher Scientific (TMO -1.11%). Qiagen's stock shot up to $40 per share on the rumors. Then on Nov. 15, Qiagen announced it had "received several non-binding indications of interest" and elected to explore strategic alternatives for the company.
This basically means Qiagen hired investment bankers, legal counsel, and possibly other advisors to evaluate any potential offers, contact additional potential buyers or strategic partners, provide valuation analyses, and run an auction process among interested bidders in order to get the highest price possible for shareholders. Granted, this is predicated on Qiagen's board of directors determining that a sale is the best path forward.
Why Thermo Fisher Scientific?
Thermo Fisher Scientific develops and markets a broad offering of research tools through its four business segments: life sciences solutions, analytical instruments, specialty diagnostics, and laboratory products and services. Together these segments generate more than $24 billion annually.
In the third quarter, Thermo's specialty diagnostics segment brought in revenue of $0.88 billion or 14% of the total sales of $6.27 billion. An acquisition of Qiagen would bolster this segment. Qiagen reported earnings of $382.7 million in the third quarter.
With Qiagen's valuation currently around $9.2 billion, can Thermo afford an acquisition? Simply put, yes. Thermo's $123 billion market cap allows for a tuck-in acquisition like Qiagen. Thermo can afford to offer cash or a combination of cash and stock to Qiagen shareholders. Thermo can afford to take on debt to undertake the acquisition.
What other company could be a buyer?
While eyes are on Thermo Fisher, will Qiagen's strategic partner Illumina emerge as a white knight? The two have already embarked on a 15-year alliance to commercialize a portfolio of diagnostic test kits. However, Illumina already has a pending acquisition on its plate. On Nov. 1, 2018, Illumina announced its intention to buy Pacific Biosciences (PACB 3.93%) for approximately $1.2 billion. Completion of the merger agreement has taken longer than anticipated, and the deadline has been pushed to the end of this year with an option to extend until March 31, 2020.
A major diagnostics player such as Roche (RHHBY -0.10%) could also step up to the plate. In 2018, Roche's diagnostic arm acquired Foundation Medicine, hoping to bolster efforts to create truly personalized medicine approaches for cancer patients.
Other potential but less likely suitors are Becton, Dickinson (BDX 0.41%), and Danaher (DHR -1.30%). Both companies market a variety of research tools and instrumentation technologies globally and have the size and financial capability to buy Qiagen.
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In the end, investors will have to wait and see. Exploring strategic opportunities provides a lot of wiggle room for Qiagen's board to undertake different paths forward. It may decide on a sale of only part of Qiagen's business or a merger of equals with a smaller company. As outsiders, we do not get to see how attractive the offers are.
That said, the recent growth headwinds and lack of a named heir to the CEO position suggests a sale is the likely outcome. The money to be made is in the amount of premium to the current stock price. I think the sale will be priced at a 25% to 45% premium from here if it happens at all. Biotech investing can be risky and unpredictable, so stay tuned.
