Recently, Bayer AG (ADR) (NASDAQOTH:BAYRY) has announced that it will acquire at an average of $31 per share in cash, with a total transaction value of $1.1 billion. The offering price represented a 20% premium to its trading level of $25.90 on April 26. Conceptus, Inc. (NASDAQ:CPTS)’ shareholders must be quite happy, as Conceptus’ share price has experienced a sweet gain of as much as 47.7% gain since the beginning of the year. Is a $1.1 billion a fair price for Conceptus? Let’s take a closer look.
Conceptus’ overview
Conceptus, Inc. (NASDAQ:CPTS) is a leading developer of innovative device-based solutions in permanent birth control with its proprietary Essure system. According to Conceptus, Essure system’s effectiveness rate was as high as 99.83% in the company’s clinical study, after five years of follow-up. The company sells the Essure system through several wholly owned subsidiaries and through its distribution network. The company had quite a diverse customer base, as no customers accounted for more than 10% of its total net revenue. In terms of geography, most of its revenue, 76% of the total, was generated in the U.S. France ranked second, representing 15% of total revenue.
In the past five years, Conceptus, Inc. (NASDAQ:CPTS) has experienced a decent growth in the top line, but the bottom line has fluctuated quite a bit.
As we can see from the table, Conceptus, Inc. (NASDAQ:CPTS) has been consistently generated positive operating cash flow in the past five years. The 2012 operating cash flow and free cash flow stayed at $15 million and $12 million, respectively. What I like about Conceptus is its strong balance sheet. As of December 2012, it had $174 million in total stockholders’ equity, $70 million in cash and short-term investments and only $48 million in long-term debt. The goodwill and intangible assets stayed at only $37 million. Thus, its tangible book value was $137 million.
Bayer’s move into the U.S. Healthcare business
Bayer AG (ADR) (NASDAQOTH:BAYRY), the big German healthcare and nutrition company, operates in three main sectors: Healthcare, Crop Science, and Material Science. Most of its revenue, around €19 billion, or 47.8% of the total 2012 net revenue, was generated from the Healthcare sector. Crop Science and Material Science contributed €8.4 billion and €11.55 billion in sales in 2012. According to Wall Street Journal, Bayer AG (ADR) (NASDAQOTH:BAYRY) has had to face costly lawsuits that claim the company did not sufficiently inform and make users aware of the risks of thrombosis and other side effects from its contraceptive pills Yaz, Yasmin and Yasminelle. The company had a reserve of as much as €1.2 billion in provisions for those lawsuits. Thus, the much easier way is to go shopping. Bayer’s CEO Marijn Deekers commented that Conceptus, Inc. (NASDAQ:CPTS) might be a great fit for Bayer AG (ADR) (NASDAQOTH:BAYRY)’s HealthCare business, especially in the U.S.
Conceptus seems to be expensively valued
At $31 per share, Conceptusis worth around $1.1 billion. The offer values Conceptus quite expensively at 37.3 times EV/EBITDA. Compared to its bigger peer, Hologic, Inc. (NASDAQ:HOLX), Conceptus has a much higher valuation. Hologic, Inc. (NASDAQ:HOLX) is the leader in developing and manufacturing premium diagnostics products, medical imaging systems and other surgical products for women healthcare needs including Breast Health, Diagnostics, GYN Surgical and Skeletal Health. Most of its revenue, $707.5 million, or 35% of the total 2012 revenue, were generated from the Diagnostics’ products while Breast Health products ranked second, with $572.5 million in 2012 revenue. In the middle of March, the company announced an impressive result of KLAS Research’s independent survey of Hologic, Inc. (NASDAQ:HOLX) 3D mammography.
People see “significant reduction in false-positive callbacks, an increase in new patients, and even workflow improvements.” From Peter Soltani, Hologic, Inc. (NASDAQ:HOLX)’s Senior VP and General Manager of Women’s Health:
“The ability to achieve a positive return on investment, while providing a leading-edge technology with demonstrated clinical advantages is a win-win situation for everyone. The recently published Oslo Tomosynthesis Screening Trial showed that screening with Hologic’s 3D mammography finds 40 percent more invasive cancers than traditional mammography alone. It is encouraging to have independent data from this report to confirm the positive business impact.”
Hologic, Inc. (NASDAQ:HOLX) is trading at around $20 per share, with a total market cap of $5.4 billion. It has a much cheaper valuation than Conceptus, at only 13.5 times EV/EBITDA. The acquirer, Bayer AG (ADR) (NASDAQOTH:BAYRY), has the cheapest valuation of the trio. At $79 per share, Bayer AG (ADR) (NASDAQOTH:BAYRY) is worth around $65.4 billion on the market. The market values Bayer AG (ADR) (NASDAQOTH:BAYRY) at only 9.11 times EV/EBITDA. In terms of profitability, BaBayer AG (ADR) (NASDAQOTH:BAYRY) yer is the most profitable company with more than 13% return on equity. While Hologic, Inc. (NASDAQ:HOLX) generated a negative return on equity of 3%, Conceptus’s return on equity stayed low at 3.27%.
My Foolish take
Bayer seems to place Conceptus at a very high valuation level. However, it is a good move for the company to penetrate into the U.S. healthcare market. I personally think that the German healthcare giant will be a good long-term investment, due to its consistent profitability and a reasonable single digit valuation.
The article A Strategic Healthcare Deal With an Expensive Price Tag originally appeared on Fool.com and is written by Anh HOANG.
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