Crucell (U/N): Novartis backs away from
Berna, leaves field open for Crucell
Novartis has announced that after conducting due diligence, that it will not proceed with a
bid for Berna Biotech (NC). This leaves the door open for the agreed all equity bid from
Crucell to go ahead, assuming shareholders approve the deal (Crucell?s shareholders have
already given their approval). Although Crucell?s rationale is sound, in our view, the
near-term risks are: potential selling by Berna?s shareholders of over- valued Crucell
equity, the acquisition price, the apparent lack of cost savings and execution risk for the
integration of the two groups. The consolidation in the vaccines area in the last year,
however, does mean that there is now a dearth of independent vaccine companies. That
may narrow the valuation gap between the rest of the vaccine companies and Crucell.
Impact for Crucell Now that Novartis has ruled itself out as a potential bidder for Berna,
in our view, there remains a very low probability that there will be a counter bid to
Crucell's. There will inevitably be questions as to whether Novartis declined to bid due to
price (unlikely, in our view, as Novartis generates prodigious amounts of cash) or whether
Novartis found something in its due diligence that gave it pause for thought. It could,
however, simply be that Berna was simply not a high enough quality asset for Novartis.
As we have previously noted, in our view, the Berna deal makes a lot of strategic sense for
Crucell. It provides the group with product revenues, integrated sales and marketing
capabilities, in-house commercial scale manufacturing and a clinical-stage R&D pipeline.
Those are capabilities that likely would have taken Crucell a significant amount of time
and cash to build organically. However, we have several concerns:
1. Crucell's equity value is around 3.5x higher than other emerging vaccine companies. In
the short-term, given that Crucell proposes to pay for the Berna acquisition with - in our
view - highly over-valued equity, there is a risk that Berna shareholders sell after the deal
closes. That could put pressure on Crucell's shares.
2. Crucell has indicated that the acquisition of Berna is not driven by the potential for cost
cutting. In our view, to make the deal work, significant cost savings have to be realised
from the combined group. If that does not occur, you simply have the combination of 2
loss-making companies. We remain sceptical that Crucell, an R&D-based company, can
accelerate the sales of Berna's products to make up for the lack of cost reductions.
3. In the absence of cost cutting, an acquisition price of around 4.5x annualised 2005 sales for a loss
making business, in our view, is high. That said, it is relatively easy to justify from Crucell's
viewpoint with highly rated paper.
4. There is execution risk attached to any acquisition. For a small company such as Crucell with no
pre-existing expertise in manufacturing or sales and marketing, integrating a company such as Berna
which has those capabilities in several countries in Europe and in Korea may be more of a challenge
than it would be for a company with similar capabilities and similar geographic spread to Berna.
Impact for other vaccine companies; not many independents remain. Novartis has indicated that
after the acquisition of the remaining Chiron stake, long-term, it may look to grow Chiron's vaccines
business by acquisition; that was no doubt part of the rationale for conducting due diligence on
Berna. That could have implications for independent vaccine companies (assuming none of the
larger players would plan to divest their vaccines businesses). In Europe, other quoted independent
vaccine companies are Acambis (OP/N), Intercell (OP/N) and Bavarian Nordic (NC). Even amongst
the private universe, there is a dearth of vaccine players, which suggests that independent vaccine
companies - given their relative scarcity - may attract a valuation premium going forward.
Proposed acquisition of Berna Biotech: deal terms and timing. The recommended all share offer for
Berna, which has been approved by Crucell's shareholders, is at an exchange ratio of 0.447 shares
of Crucell for each Berna share. The initial offer represented a +27.3% premium to Berna's closing
price on 30 November 2005. Before the offer from Crucell, Berna's shares had risen by +54%
during 2005 and Crucell's by +109%.
There are no protection mechanisms in place should Crucell's share price change significantly, nor
are there significant termination costs should the acquisition fail to complete. The offer was
launched in mid-December 2005, with an expected closing of the transaction around 22 February
2006. The offer will be declared unconditional when 67% of Berna's shares are tendered. If the
offer is declared successful, Crucell's shareholders will own 73% of the enlarged group and Berna's
shareholders, 27%. Crucell will maintain its Euronext and NASDAQ listings and will also apply for
a Swiss market listing. Approval for the transaction will be required from the Swiss and Dutch
regulators, but we do not envisage any significant issues that should de-rail the process.
Berna profile: revenues, but also losses Berna Biotech generates revenues from sales of vaccines
mainly in Europe. It has integrated R&D at 3 sites in Switzerland, Germany and Korea,
manufacturing and a sales and marketing organisation in Europe. However, it is also a loss making
business and posted a net loss of -SFr23.3mn in 2004; it has guided - somewhat vaguely - that the
net loss in 2005 will be an improvement on 2004, after previously guiding to the same level of
losses for 2005. Although the offer values Berna at 2.9x 2004 revenues, as Berna exits some non
core areas during 2005, sales are below the 2004 level and so the offer values Berna at around 4.5x
annualised 2005 total revenues and 5.4x 2005 annualised vaccine sales. We view these as
substantial multiples given that the business remains loss making. Further, in the absence of
measures to return Berna as a standalone entity to profitability (i.e. significant cost cutting), intrinsic
value can reasonably be estimated to be well below the proposed acquisition price by Crucell (in
Crucell's Circular to shareholders, Crucell estimates an annual cost for the acquisition of intangible
assets associated with the Berna transaction as EUR13.9mn).
Berna's vaccine revenues for the first 9 months of 2005 were SFr78.7mn (+11%); total revenues
from its core business were up +4.5% to SFr99.8mn; total group revenues, including revenues from
non-core businesses were down -9% to SFr114.5mn. The group posted a pre-tax loss of -SFr7.1mn
and a net loss of -SFr7.4mn. As of end-September 2005, Berna had SFr152mn in cash and had
SFr64.8mn in debt (net cash SFr87.2mn, around EUR56mn).
I, Stephen McGarry, PhD, hereby certify that all of the views expressed in this report accurately
2 Goldman Sachs Global Investment Research
January 10, 2006 Analyst Comment
reflect my personal views about the subject company or companies and its or their securities. I also
certify that no part of my compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed in this report.