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Nanogen, Inc. and The Elitech Group, a private French diagnostics company, announced a definitive agreement to combine the two companies. The transaction combines Nanogen's technology leadership in molecular and point-of-care diagnostics with the strong revenue and profit base stemming from The Elitech Group's global manufacturing, sales and distribution of IVD products for the clinical chemistry and microbiology markets.
- Combination creates a global in vitro diagnostics company with brand identity and a strong financial profile
- Initial full year expectations for over $150 million in revenue, strong EBITDA and positive cash flow
- Transaction expected to be substantially accretive to Nanogen 2009 earnings per share
"The combination with Elitech will accelerate the transition of Nanogen into a global, profitable diagnostics company with the critical mass needed to bring our leading molecular and point of care technologies to customers worldwide," said Howard Birndorf, Nanogen's chairman and CEO. "I believe the resulting combination will create value for our shareholders, customers and employees."
"This is a true example of synergy between two companies in the in vitro diagnostics industry," commented Pierre Debiais President of Elitech. "We are delighted to be able to combine Nanogen's technology strength with our market reach in the international marketplace and collectively deliver the critical mass required to address the US diagnostic market."
Below please find answers to questions we have anticipated regarding this announcement for both investors and customers. You may also view the press release, individual and combined company fact sheets, and link to the Elitech website using the navigation on the right of the page.
Investors' Frequently Asked Questions
Question: How did you arrive at the purchase price, or valuation of Elitech as it relates to multiples of sales, EBITDA, etc. What were the internal benchmarks? Were there other justifications for purchase price and structuring?
Answer: The purchase price was determined based on a combination of factors including Elitech's past and projected revenue and EBITDA performance versus comparable companies in the diagnostics industry. An evaluation of the business synergies between Nanogen and Elitech was also taken into consideration. For example, the valuation of €66.5 million is approximately 1.3 times the last twelve months revenue. Other like companies in this market are valued at 2 to 5 times trailing twelve months revenue.
Question: When did you originally begin discussions with Elitech?
Answer: The discussions with Elitech grew out of business discussions that the two companies have had in the past regarding the potential for Elitech to license and/or distribute Nanogen diagnostic products. These discussions led to an appreciation of the mutual benefits that would come from a combination.
Question: What is the expected composition of the combined board of directors and management team?
Answer: The Board of Directors is expected to have seven members including four from or nominated by Elitech and three from Nanogen. The Chairman is expected to be Howard Birndorf, currently Nanogen's Chariman and CEO, and the CEO & President will be Pierre Debiais, currently Elitech's CEO, who will also be a board member. The management team will include members of both companies current management.
Question: How do you plan to fund Nanogen's current cash shortfall? What are the combined company's capital needs going forward?
Answer: We anticipate that the combined company will be cash flow positive in the initial year of operations. The share exchange agreement contemplates additional financing for the combined company resulting in an increase of at least $10 million in working capital. As part of the combination, Elitech and current Nanogen investors have agreed to fund $8 million for Nanogen's operations between signing and closing.
Question: What is the strategic direction of the combined company?
Answer: The combined company will continue to pursue the strategy of building an integrated, worldwide in vitro diagnostics company to enable better patient care. It will build upon the solid revenue base and cash flow from Elitech's clinical chemistry and microbiology product lines while leveraging the proprietary technology embodied in Nanogen's molecular diagnostics and point of care products to establish a leadership position in the fastest growing segments of the diagnostic industry.
Question: Noting Nanogen's microarray discontinuation, is there the potential for other non-core divestitures?
Answer: None are anticipated at this time as all current product groups are viewed as core and important to the revenue growth of the combined company.
Question: Even though this deal is driven by business synergies rather than financial synergies, are there any areas where you expect to achieve cost savings? What are the plans regarding the integration or consolidation of facilities?
Answer: While business synergies are the primary driver behind the combination, financial synergies are very important and will be part of our integration efforts in the first few years. The combined company anticipates significant financial synergies may be realized in three areas. First, there will be some consolidation of functions and headcount in the SG&A, development and manufacturing areas. Second, the stronger combined sales groups will generate increased revenues and improved margins as more products are sold directly to customers versus through lower margin distribution channels. Third, the combined company will realize revenue synergies through expanded sales contracts and product offerings to customers. The combined business plan is focused on realizing cost savings and margin improvements as the immediate path to accelerate profitability and cash flow.
Question: Will future acquisitions build on the molecular diagnostics platform or could they be in other areas of the business?
Answer: Both Nanogen and Elitech have successfully completed and integrated acquisitions. The combined company would expect to continue to look at acquisitions as a path for growth as well as technology and product expansion. The natural focus would be on products for small and medium sized laboratories and would not be limited to any single market focus.
Question: What's the strategy for getting Nanogen products into Elitech distribution channels, including overseas? Will Elitech's current distribution network need to change, or be trained, to accommodate Nanogen's POC and molecular diagnostics platforms?
Answer: Elitech has a very well established sales and distribution network, including direct sales offices in European countries where Nanogen has growth potential. These sales channels are capable and ready to handle most Nanogen products. The companies will begin to explore distribution opportunities immediately.
Question: Does Elitech have any R&D capabilities. If so, what is currently in Elitech's' R&D pipeline?
Answer: Elitech has strong development capabilities in instrumentation systems and reagent products. There are active development programs underway to renew and expand the clinical chemistry system offerings and also the microbiology system offerings. We are not anticipating making any immediate significant changes to either company's product pipelines.
Question: Given Nanogen's historical focus on innovation, how will this acquisition affect the amount and focus of future combined-company R&D spending?
Answer: The combined company will continue to focus on meaningful innovation, i.e. creating innovative products for clinicians and physician's that improve the management and health of their patients. The combined company will continue to invest in molecular diagnostic products, point of care products and new generations of proprietary platforms for the faster growing markets.
Question: Will this acquisition affect Elitech's current strategic OEM relationships with IVD companies?
Answer: Elitech has reagent and instrument supply relationships with Siemens and BioMeirieux. These will be unaffected by the combination.
Question: What agreements are in place to keep key personnel? How long do they last?
Answer: The combined company expects to blend the management capabilities of both entities into a strong management team. The companies plan to develop the organizational and related compensation, retention and incentive plans prior to closing of the transaction.
Question: What is Elitech's current revenue breakdown?
Answer: For the calendar year ended December 31, 2007, Elitech generated $45 million of revenue in clinical chemistry systems and consumable products and $25 million of revenue from microbiology systems, consumable products and other miscellaneous products.
Question: What is a sustainable revenue and earnings growth rate for the combined business?
Answer: In 2008, the combined company expects a 20% growth rate on a pro forma basis. The combined company expects to have 2009 revenues of more than $150 million and 10% EBITDA.
Customers' Frequently Asked Questions
Question: Will there be any changes for Nanogen customers as it relates to the ordering of point of care and molecular diagnostic products from Nanogen? Will this cause a delay or disruption in the receipt of my product orders?
Answer: The announcement of our plans to merge with The Elitech Group will have no effect on Nanogen product deliveries. You should continue to place your orders and purchase your Nanogen products from your current Nanogen sales representative or distribution agent. There will be no changes in the near-term to our distribution or delivery capabilities.
Question: Will there be any change to Nanogen's customer service or technical support?
Answer: The customer service and technical support teams in San Diego, Bothell or Turin are dedicated to supporting the current Nanogen products and will continue to do so. In addition, San Diego will be the North American Headquarters for the new combined company.
Question: Will there be any change to Nanogen's strategic direction or product development plans?
Answer: Both companies share the vision of being a global IVD company, bringing better diagnostic products to the market and enabling better patient care. Nanogen's point of care and molecular product lines have strong product pipelines and are expected to be an important part of the future growth for the combined company.
Question: How will the new combined company benefit me?
Answer: By combining forces with The Elitech Group, Nanogen customers will benefit in two key ways. Firstly, Nanogen will be a financially stronger and more stable business with greater resources to fund its operations and bring high quality, innovative products to market. Secondly, our combined Marketing and Sales organization will have more products to offer to you, our valued customer; fulfilling our brand promise of delivering improved ways for you to obtain time critical diagnostic results.
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