Horizon Discovery’s (HZD) response to Abcam’s (ABC) proposed takeover is clear: “the board is highly confident in the future prospects for Horizon Discovery as an independent company.” In other words, ‘no thanks, we’re fine by ourselves’.
It’s true that when it comes to science, Horizon can hold its own. In its 11-year history the group has used genetics to develop a catalogue of cell lines that are used by scientists in drug development and diagnostics. And as gene therapies beginning to roll out of the pipelines of global pharma companies, the market for gene editing tools is set to explode.
In seeking to capitalise on that market, Horizon has invested heavily in both research and development (R&D) and mergers and acquisitions (M&A) – most recently buying Dharmacon for £65m to enhance its position in academic research. Thus, the product catalogue now consists of 23,000 cell lines and group revenues have risen at a compound annual rate of 42 per cent since 2013. But that expansion has not come cheap and operating cash outflows accelerated from £1.8m in 2013, to £7.5m in 2016. Peel Hunt doesn't expect these to turn positive until 2019.
By contrast, Abcam generated £41m of free cash in the financial year to June 2017, from £42m of net profits. True, Abcam has 10 years of experience on Horizon, but when it joined the Alternative Investment Market in 2005 – at the tender age of seven – it was already cash generative and profitable. In its early days, Abcam developed a relatively simple, catalogue based business model, which allows it to generate enormous amounts of cash from highly advanced scientific products.
R&D and M&A also played a big part in the Abcam story and have sparked compound annual revenue growth of 34 per cent in the last 14 years meaning the group is now one of the world’s biggest sellers and distributors of biotech tools. Adding Horizon’s suite of genetics products could propel it to greater heights. But the target’s board argue that shareholders have not yet seen the benefits of the early years of investment and Abcam’s offer materially undervalues the long-term potential.
