The Goonies. Università di Modena e Reggio Emilia. FactSet Ticker: DIA-IT. CFA Research Challenge Edoardo Nora Andrea Rigliano Laura Roncaglia - PDF

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Università di Modena e Reggio Emilia FactSet Ticker: DIA-IT CFA Research Challenge 2016 Milan, 29 th February The Goonies Edoardo Nora Andrea Rigliano Laura Roncaglia Highlights Basic Information DiaSorin

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Università di Modena e Reggio Emilia FactSet Ticker: DIA-IT CFA Research Challenge 2016 Milan, 29 th February The Goonies Edoardo Nora Andrea Rigliano Laura Roncaglia Highlights Basic Information DiaSorin develops, produces, and commercializes testing kits Immunodiagnostic (~99% of 2014 revenues) Molecular Diagnostic (~1% of 2014 revenues) 18% IVD 12% IVD Source: FactSet Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Basic Information Key factors: Wide menu Mainstream vs specialty tests Source: Company data and Team estimates Partnerships with competitors and commercial agreements with customers CLIA Vit.D vs CLIA ex Vit.D LIAISON installation Source: Company data Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Recommendation Recommendation: HOLD + Increasing demand in immunodiagnostic segment + Vitamin D prices have stabilized Target Price 50,60 13,2% Upside 44,69 5 th February Price High margins Positive NFP and high cash generation (possibility of external growth) Small dimension compared to peers Threats (expiration of agreements, increasing competition on specialty, high innovation) Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Company and Industry Analysis Immunodiagnostic market and Competitors Two main types of firms: - big and diversified - small firms Top four companies have 75% of revenues in immunodiagnostic market DIA s immunodiagnostic share is 5% Source: FactSet; data at end-2014 (in mln) Other market features: Mainstream (price taker) vs specialty (price maker) Costs of production None of main competitors is focused only on immunodiagnostic as DIA Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Immunodiagnostic: Porter s Five Forces Industry Rivalry Market dominated by few global and diversified companies (top 4 firms have 75% of market share) Bargaining power of buyers It depends on size of customers and kind of tests Threat of new entrance Several entry barriers: technological know-how professional skills authorities approbation patents Bargaining power of suppliers Few highly specialized suppliers Threat of substitutes No reliable alternatives to IVD techniques Source: Team estimates Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Drivers of profitability Dimension Big sized firms exploit economy of scale DIA dimension is medium A wide menu is fundamental to sign agreements DIA has a large menu (including specialties) Large menu R&D Efficiency An efficient R&D is essential to compete DIA has a good R&D productivity ratio (6-8 new test per year) Companies usually grow through M&A DIA realized M&A in the past External Growth Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Financial Analysis Historical and Forecast Revenues Source: Company data and Team estimates Increasing trend until 2011 Stable revenues in Increasing trend expected for the future Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Margins and Profitability Source: Company data and Team estimates Source: Company data and Team estimates High level of margins Target EBITDA ~36-37% Margins peaked in 2011 Margins and profitability affected by price erosion Highlights Source: Company data and Team estimates Company and Industry Analysis Financial Analysis Valuation Investment Risks NFP and Debt NFP positive since 2009 High cash availability Cash generating business Source: Company data and Team estimates Prevalent equity structure Bank debt is almost zero Low capital investment firm Source: Company data Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Valuation Target Price DCF 50,75 Best model to evaluate DIA s cash generating business and future growth opportunities 80% Deal Multiples 49,23 In this sector companies usually grow through M&A 10% Target Price 50,60 Market Multiples 50,76 It allows to consider market valuation of peers 10% Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks DCF Base Scenario First Stage ( ) Revenues CAGR 8% Stable growth in Europe and increasing revenues growth expectation in USA and China Stable impact of costs on revenues Source: Company data and Team estimates Second Stage ( ) Revenues CAGR 5,4% Stable position in the market Renewal of existing partnerships and agreements Source:Team estimates Cost of Equity assumptions: Risk free rate: 1,56% (BTP 10y) Erp: 5,70% (Credit Suisse YearBook 2015) Beta: 0,86 (Bottom-up approach) Coe = 6,46% Perpetual Growth Revenues CAGR 2% Inflation target rate DCF output: 50,75 Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks DCF Upside and Downside Scenarios Upside Scenario 60,01 (+18,2% Base Case Price) Downside Scenario 34,61 (-31,8% Base Case Price) Higher revenues growth rates in first stage Launch of LIAISON XS in 2018 Approval and commercialization of combined tests in second stage Missed renewal of existing partnerships and historical agreements Increasing competition on CLIA tests Upside and Downside scenarios do not contribute to DCF output Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Deal Multiples Slightly undervaluation of DIA Source: FactSet and Team estimates Source: FactSet Source: FactSet and Team estimates Weight on target price: 10%; DIA has higher margins than Beckman Coullter: how does the market evaluate these higher margins? Market would pay for DIA acquisition a premium of ~10,2% whereas in IVD transaction the average premium paid is ~45% Deal output: 49,23 Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Market Multiples biomérieux and Bio-Rad are the most similar firms for activity and dimension even if none of them is active only in immunodiagnostic Source: FactSet and Team estimates Source: FactSet and Team estimates Slightly undervaluation of DIA Weight on target price: 10%; DIA has higher margins than two selected peers: how does the market evaluate these higher margins? Market output: 50,76 Highlights Company and Industry Analysis Financial Analysis Valuation Investment Risks Investment Risks Risks Market Risks Operating Risks Strategic Risks Financial Risks Increased competition Missing innovation Social and political instability of emerging markets Replication by competitors Denied national authorisation Expiration of agreements Dependence on management Price erosion Limits of distributors MDx: a missing opportunity? LIAISON XS: two sides of the same coin Exchange rate risk Interest rate risk Credit risk Opportunity cost of cash Highlights Company Analysis Financial Analysis Valuation Investment Risks impact impact impact Main Risks Increased competition Main competitors develop and produce specialty tests Specialty tests market is not attractive for big companies probability Missing innovation Development of new tests and machines is required to compete in this market Expiration of agreements probability probability Missed renewal of agreements can imply huge losses in terms of lost revenues Agreements with customers are historical Highlights Company Analysis Financial Analysis Valuation Investment Risks Summing up Recommendation: HOLD Stable growth in an attractive market Dimension and main risks 50,60 Target Price 44,69 5 th February Closing Price Upside +13,2% Source: FactSet Thanks for your attention The Goonies Edoardo Nora Andrea Rigliano Laura Roncaglia Università di Modena e Reggio Emilia Slides Index HIGHILIGHTS Basic information Recommendation COMPANY AND INDUSTRY ANALYSIS Immunodiagnostic market and Competitors Immunodiagnostic: Porter s Five Forces Drivers of Profitability FINANCIAL ANALYSIS Historical and Forecast Revenues Margins and Profitability NFP and Debt VALUATION Target Price DCF Base Scenario DCF Upside and Downside Scenario Deal Multiples Market Multiples INVESTMENT RISKS Risks Main Risks SUMMING UP Q&A Q&A Index (1/2) Business Description Technologies LIAISON machines Main Acquisitions Main Partnerships Geographical presence Clients segmentation DiaSorin of tomorrow Industry Overview and Competitive Positioning IVD market IVD and immunodiagnostic market Main competitors SWOT analysis Financial Analysis Shareholder s Income Cash Flow Statement Income Statement Balance Sheet DuPont Analysis Working Capital Liquidity Ratios Leverage Ratios and Debt Composition Exchange Rate Margins Q&A Index (2/2) Valuation Bottom-up Approach Base Scenario First Stage Base Scenario Second Stage Base Scenario FCF Sensitivity Analysis Upside Scenario Downside Scenario Deal Multiples Market Multiples Investment Risks Risks Other Headings Board of Directory Top Management M&A deadlines Technologies Source: Company data Source: Company data LIAISON machines Source: Company data Main Acquisitions Source: Company data Main Partnerships Source: Company data Geographical presence Source: Company data Clients segmentation Source: Company data DiaSorin of tomorrow Source: Team estimates IVD market IVD market is worth 45bln at end-2014 Source: Markets&Markets Research Source: Company Data Main Growth Drivers: Global ageing population Evidence based medicine Emerging markets growth Headwinds: Safeguard of intellectual property Uncertainty and cut in reimbursements Source: Markets&Markets Research Source: Markets&Markets Research IVD and Immunodiagnostic markets Source: Company data Source: Company data Main Competitors (1/2) is a worldwide French IVD company; Two main applications: clinical diagnostics and industrial microbiology Source: FactSet is an American company that operates worldwide in two industrial segments: life science research and clinical diagnostics Source: FactSet Main Competitors (2/2) SWOT analysis STRENGHTS - Mainly focus on immunodiagnostic segment (high margins) - Strategic business relationships with important clients (Quest Diagnostic, Labcorps) - Wide range of specialty tests - Commercial partnership with bigger competitors (Roche, Beckman Coulter) - Efficient R&D division OPPORTUNITIES - Greater investments in MDx - Penetration in small size labs market through LIASON XS that will be launch in Development and acquisition of new patented markers - Possibility of external growth thanks to available cash - Development of new combined tests WEAKNESS - No hedging on financial risks - Small dimension compared to main IVD players - Dependence on an unique business - Cost of coordination of 6 industrial sites THREATS - Price erosion as result of the increasing competition. - Expiration of distribution agreement. - Missed approval of tests by authorities - Entrance of main IVD players in specialty test market Shareholder s Income Source: Company data Cash Flow Statement Source: Company data and Team estimates Income Statement Source: Company data and Team estimates Balance Sheet - Assets Source: Company data and Team estimates Balance Sheet - Liabilities Source: Company data and Team estimates DuPont Analysis Source: Company data and Team estimates Working Capital Source: Company data and Team estimates Liquidity Ratios Source: Company data and Team estimates Leverage Ratios and Debt Composition Source: Company data and Team estimates Exchange Rate Source: Company data Margins Source: Company data and Team estimates Bottom-up Approach Source: FactSet and Team estimates Base Scenario First Stage Source: Company data and Team estimates Base Scenario Second Stage Source: Team estimates Base Scenario FCF Source: Team estimates First Stage Second Stage Source: Team estimates Source: Team estimates Sensitivity Analysis Source: Team estimates Upside Scenario Source: Company data and Team estimates Downside Scenario Source: Company data and Team estimates Deal Multiples Source: FactSet and Team estimates Market Multiples Source: FactSet and Team estimates Risks Source: Team estimates Board of Directory Source: Company data Top Management Source: Company data M&A deadlines Market expansion Increasing market share through the access to customers of the target firm Acquisition of local distributors in countries in which market becomes relevant (sales 5mln) Geographical expansion Content driven Acquisition of companies with CLIA markers or raw materials protected by patents Acquisition of companies running tests on old technologies which can be converted to CLIA Technological conversion Source: Company data We tried to select potential firms target for DIA: Immunodiagnostic Systems Holding PLC (content driven and technological conversion) Epitope Diagnostics (technological conversion) Virion/Serion (technological conversion)
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