Davidson Kempner Letter to Qiagen NV
LONDON, July 10, 2020 /PRNewswire/ --
Dr. Håkan Björklund (Chairman of the Supervisory Board)
Stéphane Bancel (Supervisory Board Director)
Dr. Metin Colpan (Supervisory Board Director)
Prof. Dr. Ross Levine (Supervisory Board Director)
Prof. Dr. Elaine Mardis (Supervisory Board Director)
Lawrence A. Rosen (Supervisory Board Director and Chairman of the Audit Committee)
Elizabeth E. Tallett (Supervisory Board Director and Chairwoman of the Compensation Committee)
Thierry Bernard (Chief Executive Officer)
Roland Sackers (Chief Financial Officer)
Hulsterweg 82, 5912 PL Venlo, Netherlands
Dear Members of the Supervisory Board and Management Board,
Davidson Kempner European Partners, LLP is the sub-adviser to Davidson Kempner Capital Management LP which acts as the discretionary investment manager to various funds which hold in aggregate, as of close of business 10 July 2020, 6,853,458 shares of Qiagen N.V. (the "Company"). This aggregate holding represents 3.0% of the share capital of the Company.
We have greatly appreciated the opportunity to have a dialogue with you. In our two letters, dated 11 June and 19 June 2020 and on our most recent call with Dr. Håkan Björklund, Thierry Bernard, Roland Sackers and John Gilardi that took place on 26 June 2020, we set out our concerns with respect to a number of key issues.
We are writing this letter to express our view that the Board of the Company should issue an Adverse Recommendation Change. We believe the offer of €39/share from Thermo Fisher Scientific ("Thermo") is inadequate as it fails to reflect the Company's fundamental standalone value and offers shareholders no premium for control.
Qiagen's Prospects as a Leading Franchise in Molecular Diagnostics and Life Sciences
Under the leadership of former CEO Peer Schatz and the founders, the Company has over the last 36 years built a leading franchise across molecular diagnostics and life sciences. In particular, COVID-19 has highlighted and amplified the strength and importance of the Company's business in diagnostics and testing and has positioned the Company to be a major beneficiary of the key secular trends in this industry. The Company's products have become increasingly important to governments and healthcare institutions as they seek to mitigate the risk of future pathogens and protect their citizens and economies. Many industry experts expect that spending on this previously small part of the healthcare industry will increase substantially in the coming years given the cost effectiveness of these capabilities in managing pandemics. These developments should create significant long term value and benefits for all the Company's stakeholders.
We also think the proposed acquisition of Qiagen by Thermo presents a highly strategic and complementary opportunity. The deal has become even more attractive as the impacts of COVID-19 and the broader implications have become significantly clearer since the initial announcement on 3 March 2020.
Our Assessment of the Current Offer
We believe the strategic review announced on 15 November 2019 was conducted at a particularly disadvantaged point in time for the Company, following shortly after a profit warning and the departure of the longstanding CEO, Peer Schatz. This undermined the Company's ability to extract fair value for its shareholders from the process, as reflected by the opportunistic approach from a number of parties immediately following the departure of the CEO in October 2019. Following discussions with five parties during the review period, the Company terminated talks with all parties on 24 December 2019. Interestingly, the Company Board quickly re-initiated discussions with only Thermo in mid January 2020 and announced a deal on 3 March 2020. We note that the recommended offer announced on 3 March 2020 at €39/share is effectively the same as the $43/share (equivalent to €39.09/share) proposal made by Thermo on 22 November 2019.
The Board did not incorporate any impact of COVID-19 into their evaluation of the Company's standalone value when agreeing the €39/share deal on 3 March 2020. The Board's view at the time was that they were apparently unaware of the impact on the business. While the Board now acknowledge its materiality, they have so far decided not to update the transaction documentation (Offer Document, Fairness Opinions, Reasoned Position Statement, Guidance and any ad hoc disclosures) or their recommendation based on the impact now being considered too uncertain.
We believe COVID-19 has a material long term impact on the diagnostics industry. We have spent a substantial amount of time and effort speaking to your peers, industry experts, procurement experts and have conducted significant proprietary research in order to understand the short, medium and long-term trends for the diagnostics industry, that have been highlighted by COVID-19. We believe these trends are going to be a significant driver for the Company's prospects and fundamental value over the short and long term, regardless of the uncertainty around COVID-19.
The Current Offer Undervalues Qiagen
We believe the standalone fair value to be around €50/share. The offer of €39/share for the Company is therefore inadequate as it fails to reflect the Company's fundamental standalone value and offers shareholders no premium for control.
Since 2 March 2020, the day prior to the transaction being announced, the share prices of the Company's closest European peers have increased in value by an average of 61%, which more than reflects the 51% increase in the average earnings that these peers are estimated to generate over 2020 due to the tailwinds of COVID-19. The Company's preliminary Q2 earnings reported on 09 July 2020 show that the Company delivered adjusted EPS of $0.55-0.56/share – a 68% increase over the same period in Q2 2019. Since 2 March 2020, the Company's share price has increased by only 21% following the Thermo offer, while we estimate the Company will see its earnings increase 67% for the full year 2020. It seems reasonable to conclude, that if the Company was not in a bid situation and was trading freely, the significant increase in earnings they have experienced alongside the similarly affected European peers would see the stock price trading well into the mid €40s.
We believe the Company could deliver $2,074m in Sales and EPS of $2.54 in 2020, which is a 32% and 67% uplift vs. sell-side consensus pre COVID-19. For 2021, we believe the Company could deliver $2,433-2,756m of Sales (48-67% uplift vs. sell-side consensus pre COVID-19) and EPS $2.91-3.33 (76-101% uplift vs. sell-side consensus pre COVID-19). After the Q2 update, we have even more confidence that the Company can deliver these numbers or better.
We have considered the US life science peers given many were included by the Company's financial advisors in their fairness opinions as part of the Reasoned Position Statement. However, we note that their earnings trajectory is materially worse than the Company given that the COVID-19 tailwinds do not offset the declines in the rest of their businesses. For this reason, we believe this is the wrong peer set and we would expect the Company's stock price to materially outperform these companies given the abovementioned very different earnings trajectory. Despite the negative earnings revisions in 2020, we note that the broader US life sciences peer set have still seen their share prices rise by an average of 23% since 2 March 2020.
1) Using Company forward P/E multiple range of 19-21x (this is based on the conservative end of the historic multiple trading range). Multiples are applied to Davidson Kempner's estimate of the Company's 2020 EPS. See Appendix for further details.
2) DCF based on Davidson Kempner analysis of the Company's COVID uplift streams (see Appendix for further details) as well as carrying out proprietary research.
Concerns About Corporate Governance and the Rights of Minority Shareholders
The Offer is conditional on 75% of the Company's shareholders tendering their shares into the Offer. We also note that this threshold can be lowered further if the Company Board were to acquiesce to Thermo's request to do so.
The Offer also has a top-up mechanism, which providing Thermo satisfies the acceptance condition (or any lowered acceptance condition), enables the Company to issue shares directly to Thermo to ensure that they end up holding a minimum of 80% of the Company's shares and Thermo can then squeeze out minority shareholders. Consequently, Thermo will be able to acquire 100% of the Company's shares and force out minority shareholders potentially representing a significant percentage of the Company's share capital. In addition, this would enable Thermo to achieve tax benefits it might otherwise not obtain.
The combination of these two mechanisms is aggressive, highly concerning to us and undermines the ability of shareholders to protect their interests. If the Company's Board agrees with Thermo's request to reduce the acceptance condition, Thermo could effectively squeeze the Company's shareholder out at a level substantially less than the 95% standard squeeze-out threshold stipulated by Dutch corporate law and generally accepted standards in that jurisdiction.
We urge the board to exercise extreme caution when considering their support for any request to lower the acceptance condition.
Davidson Kempner Considers the Current Offer to be Wholly Inadequate and Will Not Tender Its Shares
The offer of €39/share for the Company is inadequate as it fails to reflect the Company's fundamental standalone value and offers shareholders no premium for control. Accordingly, we will not be tendering our shares into the offer.
In addition, we note last Friday's Reuters article suggesting another substantial shareholder shares our views. We encourage other shareholders to likewise make their views clear to the Board of the Company and reject the offer.
Furthermore, we note that you have stated on 22 June 2020 that the Company will update the market on many of the issues above and expect that you are doing this as you too have reached the conclusion that the Offer is no longer attractive to the Company' shareholders. We urge the Board to issue an Adverse Recommendation Change.
Please reach out to our team with any questions you may have.
cc: Risto Koivula (Partner)
Davidson Kempner Financial Forecasts
RNA Reagents - Assumptions:
- 2020 RNA reagent kits sold
o Q3: 14mn (per month) / 41mn (for quarter)
o Q4: 19mn (per month) / 58mn (for quarter)
- 2021 RNA reagent kits sold
o Q1: 20mn (per month) / 60mn (for quarter)
o Q2: 14mn (per month) / 41mn (for quarter)
o Q3: 10mn (per month) / 28mn (for quarter)
o Q4: 5mn (per month) / 14mn (for quarter)
- Average selling price: $4.50 per kit
- Profitability: 50% EBIT margin
Third Party Reagent Manufacturing - Assumptions:
- Trends based on RNA reagent volume sales trajectory
- Profitability: 30% EBIT margin
QiaStat Machines & Associated Consumables - Assumptions:
- Machines: an incremental 225 machines (above and beyond what was expected at the beginning of the year) are sold across 2020. No incremental machines sold in 2021
- Consumables (COVID syndromic panels): incremental machines used at 100% capacity utilisation through 2020 before dropping to 50% in 2021
- Profitability: 35% EBIT margin on consumables
Base Business Performance - Assumptions:
o Q3: -15% vs Q3 2019
o Q4: -10% vs Q4 2019
- 2021: 6% growth vs 2019 levels
Davidson Kempner DCF Assumptions
- RNA Reagents:
o Kits sold
- Low end of range based on aforementioned assumptions
- High end of range assumes ramp up to 30mn at peak in 2021 reducing to 15mn in 2022 and zero thereafter
o Average selling price: $4.50 per kit
o Profitability: 50% EBIT margin
- QiaStat Consumables
o Low end utilisation on incremental machines of 50%
o High end utilisation on incremental machines of 100%
- WACC range: 6%-7%
- Terminal value:
o RNA kits: based on a residual tail of RNA kits which we believe will remain as a result of governments needing to ensure preparedness for any future outbreaks
o QiaStat: terminal value based on the incremental machines sold during COVID and associated consumables from these machines
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Andrew Honnor, Rob White, Fanni Bodri
Email: [email protected]
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