biomérieux Short-term pain, long-term gain INDEPENDENT RESEARCH UPDATE Fair Value EUR69 vs. EUR66 (price EUR71.28) NEUTRAL Healthcare

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1 INDEPENDENT RESEARCH UPDATE 9th October 2013 Healthcare biomérieux Short-term pain, long-term gain Fair Value EUR69 vs. EUR66 (price EUR71.28) NEUTRAL Bloomberg BIM FP Reuters BIOX.PA 12-month High / Low (EUR) 78.5 / 68.4 Market capitalisation (EURm) 2,812 Enterprise Value (BG estimates EURm) 3,136 Avg. 6m daily volume ('000 shares) Free Float 36.0% 3y EPS CAGR 7.0% Gearing (12/12) 10% Dividend yield (12/13e) 1.37% YE December 12/12 12/13e 12/14e 12/15e Revenue (EURm) 1,570 1,592 1,706 1,784 EBIT (EURm) Basic EPS (EUR) Diluted EPS (EUR) EV/Sales 1.9x 2.0x 1.6x 1.4x EV/EBITDA 8.3x 8.9x 8.0x 6.9x EV/EBIT 11.2x 12.3x 11.5x 9.6x P/E 20.9x 18.3x 19.7x 17.1x ROCE /10/ We have been on the road with biomérieux following the H1 results and the BioFire acquisition for USD450m. There is no doubt that acquiring BioFire makes perfect sense strategically. biomérieux s focus on clinical microbiology (50% of sales) and infectious diseases will be complemented by the integration of BioFire. It brings to the group a plug and play solution in Molecular Diagnostics where it has historically been weak. So why do we remain Neutral? We have been arguing that margin expansion should remain muted over 2013 and 2014 given R&D and S&M investments. Despite having long-term potential, BioFire will add 2015 to the investment years. As a result and while acknowledging biomérieux s fundamentals, we remain on the sidelines for now. BioFire, a proven track record in MDx... Through the development of the LightCycler (licensed to Roche) and the commercialisation of FilmArray, BioFire has demonstrated its ability to be an innovative player in MDx. With 2014e sales of USD80m and more than 400 systems installed, we believe BioFire s offering has demonstrated its appeal and a perfect strategic fit for biomérieux. Focus on clinical microbiology/infectious diseases as well as on much broader geographic reach will help leverage BioFire s products. The MDx franchise will represent 12% of 2018 sales vs 4.5% in O N D J F M A M J J A S O BIOMERIEUX STOXX EUROPE 600 E - PRICE INDEX Source: Thomson Reuters Datastream Significant dilution in the short term, investments to continue over We calculate an (18%)/(12%)/(5%) dilution including PPA over while accretion should start in This is likely to impact negatively the EBIT margin until the same year, Valuation. Including BioFire, we have slightly raised our DCF-based valuation to EUR69. On a PPA-adjusted basis, the stock is trading at 18x P/E 2014 for an 8% EPS CAGR Analyst: Sector Analyst Team: Mathieu Chabert Martial Descoutures 33(0) Eric Le Berrigaud mchabert@bryangarnier.com r r

2 Simplified Profit & Loss Account (EURm) e 2014e 2015e 2016e 2017e Revenues 1,357 1,427 1,570 1,592 1,706 1,784 1,877 1,978 Change (%) -% 5.2% 10.0% 1.4% 7.2% 4.6% 5.2% 5.3% Adjusted EBITDA EBIT Change (%) -% 1.6% 1.1% -1.9% -8.4% 13.2% 14.3% 12.0% Financial results (3.2) (4.4) (6.4) (18.7) (5.2) (4.3) (3.5) (3.5) Pre-Tax profits Exceptionals NM NM NM NM NM NM NM NM Tax (81.4) (77.2) (89.4) (81.8) (74.9) (84.8) (96.9) (108) Minority interests (0.10) Net profit Restated net profit Change (%) -% -0.3% -15.0% 14.3% -7.2% 15.3% 16.2% 12.9% Cash Flow Statement (EURm) Operating cash flows Change in working capital (41.9) (13.4) (38.8) (17.0) (65.9) (44.6) (53.2) (55.4) Capex, net (123) (102) (110) (119) (139) (125) (131) (138) Financial investments, net (47.4) Dividends (36.4) (38.7) (38.7) (33.6) (38.4) (35.6) (41.1) (47.7) Other NM NM NM NM NM NM NM NM Net debt (24.3) (119) (256) (393) (636) Free Cash flow Company description With sales of 1.357bn in 2010, biomérieux is the world s seventhlargest in vitro diagnostics (IVD) group. Indeed, biomérieux has been involved in the field of IVD for over 45 years, and is present in more than 150 countries through 39 subsidiaries and a large network of around 2,000 sales, marketing and service representatives. These features are really unique among the IVD sector. This achievement is clearly the result of its long-term presence and vision spearheaded by the Merieux family (representing 59% of biomérieux shareholder funds). The Merieux family itself, has been involved in the infectious diseases area for an impressive 115 years. The company boasts a wide range of technologies, the focus being on microbiology, immunoassays, and molecular biology, alongside theranostics. This has resulted in an outstanding installed base of some 60,000 machines. Balance Sheet (EURm) Tangible fixed assets Intangibles assets Cash & equivalents 34.0 (58.4) current assets ,104 1,270 1,445 1,731 Other assets NM NM NM NM NM NM NM NM Total assets 1,449 1,762 1,860 2,021 2,189 2,383 2,592 2,925 L & ST Debt Others liabilities NM NM NM NM NM NM NM NM Shareholders' funds 976 1,103 1,174 1,325 1,475 1,652 1,846 2,167 Total Liabilities Capital employed 1,040 1,190 1,258 1,412 1,562 1,739 1,933 2,254 Financial Ratios Operating margin Tax rate Net margin ROE (after tax) ROCE (after tax) Gearing Pay out ratio Number of shares, diluted Data per Share (EUR) EPS Restated EPS % change 7.5% -0.5% -15.0% 14.4% -7.2% 15.3% 16.2% 12.9% BVPS NM NM NM NM NM NM NM NM Operating cash flows FCF Net dividend

3 1. BioFire, a proven track record in MDx USD70m of sales in FilmArray technology Established in 1990 in Salt Lake City as Idaho Technology, BioFire employs around 500 employees. The company was initially founded around its work on the core technology of the LightCycler, a PCR instrument from Roche, for which the company receives royalties. But there is no doubt that the key achievement of BioFire and what has driven the interest of industry players is its FilmArray platform. In 2013, BioFire realised USD70m in sales (USD40m of which from FilmArray). FilmArray is an FDA-cleared multiplex PCR test that integrates sample preparation, amplification, detection and analysis all into one system. One of the key features of the system is its relatively simple interface as well as the ability to obtain results in one hour. Targeting decentralised labs More than 400 systems have now been placed mainly in decentralised labs. The fact that the price of the instrument is reasonable, we estimate USD25k, helps smaller labs to acquire the system and therefore explains the more than decent installed base for a company the size of BioFire. We believe that a significant portion of these decentralised, smaller hospital labs (c.80%) are currently sending samples to bigger labs in order to run the tests. FilmArray provides an attractive option for doing some MDx tests in house. Fig. 1: FilmArray, a simple-to-use system Source: BioFire Two FDA approved panels in respiratory and blood culture 1.2. Panels approach BioFire is currently offering two FDA approved panels in respiratory and blood culture while several others are in development such as gastrointestinal and meningitis. We believe that this approach is consistent with the desire to offer MDx testing capabilities to smaller labs. We estimate that the price of a panel is around USD120. The respiratory panel was first approved by the FDA in 2011 and has been expanded since then to include the detection of 20 viral and bacterial targets such as Adenovirus, Coronavirus, Respiratory Syncytial Virus, Chlamydophila pneumoniae. In the article Implementation of FilmArray Respiratory Viral Panel in a Core Laboratory Improves Testing Turnaround Time and Patient Care (Am J Clin Pathol. 2013;139(1): , physicians at Seattle 3

4 Children's Hospital describe their experience with FilmArray. There is no doubt that the feedback is mostly positive with the department having added up to four instruments. As mentioned earlier, there is also no doubt that one of the key features of FilmArray is the ability to run the test in house in a shorter amount of time as shown in the table below. With the shorter TAT, physicians were also able to place patients into cohorts effectively. In terms of pricing comparison, the cost of sending a sample to a reference laboratory for respiratory viral testing was USD98.26 (vs USD120 for FilmArray). It is worth mentioning that the main limitations were single-sample throughput and the relatively low sensitivity of detecting adenovirus. Quicker turnaround time Fig. 2: Comparison of turnaround time (TAT) for Respiratory Viral Testing between FilmArray and Direct Fluorescence assay Turnaround time (hours) % of Samples Completed in Method Total Volume Mean Median <2h <3h FilmArray 2, Direct Fluorescence assay 13,99 7 6,5 0 2 BioFire also received FDA approval in June 2013 for a second panel for testing blood culture and identifying 24 pathogens and 3 antibiotic resistance genes. This panel will help reduce the standard time required to identify a pathogen from days to hours. We believe it may take some time to convert microbiologists from using a blood culture method to an MDx one given the gap in cost. However, simplicity and the reduction in turnaround time could be two key advantages. All in all, we think that biomérieux will be able to offer to microbiologists a full range of options from traditional microbiology to MDx. At least two other panels in development Expect strong doubledigit growth BioFire is also developing two other panels in gastrointestinal and meningitis. While few details are currently available, we see BioFire replicating the same strategy as for the two other panels i.e. a simple and quick way to adopt MDx in decentralised labs. As shown below, we see very strong growth for FilmArray driven by the growing installed base and the continuing market penetration of the respiratory panels as well as introducing that of the blood culture one. Mid-term growth will be fuelled by expansion of the panel offering. Fig. 3: BioFire sales model BioFire 2013e 2014e 2015e 2016e 2017e 2018e Net sales USDm Organic Growth 15.7% 27.1% 29.1% 26.2% 27.1% Of which FilmArray Growth 30.0% 35.0% 35.0% 30.0% 30.0% Of which Others Growth -20.0% -5.0% -5.0% -5.0% -5.0% 4

5 2. Perfect strategic fit for biomérieux Offensive and defensive move at the same time Plug & Play contrary to Biocartis 2.1. MDx offering complementary to microbiology While biomérieux has been and continues to be the clear market leader in the microbiology market (c.50% of sales, north of 40% market share), many have been questioning the relative weakness of the MDx division. We believe there is a strong rationale for biomérieux to offer a full offering to customers with both microbiology solutions as well as MDx. First of all, the focus of biofire and biomérieux in infectious diseases is clear and integrating biofire will not change biomérieux s area of expertise. This move is at the same time a defensive and offensive one. Defensive because some labs might be willing to use MDx instead of traditional microbiology and offensive because, as detailed below, biomérieux will be able to offer a full range of options for infectious diseases to existing and new customers. With the announcement of the BioFire acquisition, biomérieux s management mentioned that it was looking to re-evaluate its agreement with Biocartis. As a reminder, both companies agreed to a strategic deal in 2010 to co-develop menus on Biocartis MDx platform with the aim to launch the platform in Given BioFire, we are more than questioning the future of the collaboration between the two companies. However, despite it coming at a price, we believe that acquiring biofire to strengthen the MDx division makes more sense. Indeed, it is much more a plug and play move with a 400 systems already installed while it would have been a much lengthier process with Biocartis. Fig. 4: Sales split We expect MDx to represent 11.7% of sales in 2018 compared to 4.5% in ,0% 50,0% 40,0% 51,1% 46,8% 30,0% 20,0% 22,6% 18,7% 11,7% 20,9% 22,3% ,0% 0,0% 4,5% 0,9% 0,4% Microbiology Immunoassays MDX Other lines Industrial applications Greater reach in the US as well as in other geographies 2.2. Leveraging biomérieux s commercial network and manufacturing scale Despite the FilmArray platform having been successful in the first years of launch as demonstrated by the installed base, we believe that commercial penetration of the system is far from being at a full pace. Combining BioFire and biomérieux in the US will help FilmArray to gain access to 4,800 additional hospitals which could then carry out rapid MDx testing. The sales force should be increased by 50% in 2014 versus BioFire has been comprehensively mainly focused on the US but as shown below biomérieux s global reach should help the platform to be deployed in other geographic areas such as Europe or some emerging countries. 5

6 Fig. 5: biomérieux s H1 geographic sales split Source: biomérieux Finally, we estimate BioFire s current gross margin to be slightly shy of 50% and combining the manufacturing scale and expertise of biomérieux with the BioFire teams should help drive the gross margin expansion to north of 60% in Full price...but in line with MDx multiples 3. Significant dilution in the short term, investments to continue over 2015 biomérieux will pay USD450m plus existing financial debt (c.usd17m) to acquire BioFire. Having praised the strategic rationale of the BioFire acquisition but with a 5.2x EV/sales 2014 multiple, the price looks not cheap, to say the least. However, we acknowledge that MDx deals have been made on a premium basis compared to the overall market (5.8x EV/sales 2014 for Hologic/Gen-Probe as an example). Fig. 6: Acceration/Dilution model EURm 2014e 2015e 2016e 2017e 2018e Revenues 1,706 1,784 1,877 1,978 2,090 EBIT EBIT margin 13.7% 14.8% 16.1% 17.1% 18.1% Interest Profit before tax Tax Profit after tax Net income Net income attributable sh EPS Accretion/Dilution -17.9% -11.7% -5.2% 1.3% 5.3% EPS adjusted ex PPA Accretion/Dilution ex PPA -9.9% -4.8% 0.9% 7.0% 10.6% 6

7 We derive an (18%)/(12%)/(5%) dilution including PPA and (10%)/(5%)/0.9% excluding PPA. The first year of accretion including PPA should start in 2017 as guided by the company. As shown below, we see BioFire adding 100bps of organic growth in 2015 and 170bps of organic growth in However, there will be a negative impact on margins until 2017 which will show an 80bps positive impact on the EBIT line from BioFire. Fig. 7: Organic growth contribution from BioFire 2015e 2016e 2017e 2018e Organic Growth ex-biofire 3.7% 4.1% 4.2% 4.2% Organic Growth adding BioFire 4.7% 5.4% 5.5% 5.9% Delta 100bps 130bps 130bps 170bps Fig. 8: Organic growth contribution from BioFire 2014e 2015e 2016e 2017e Recurring EBIT margin ex BioFire 16.1% 16.6% 17.1% 17.3% Recurring EBIT adding BioFire and ex PPA 15.0% 15.9% 17.1% 18.1% Delta -110bps -100bps 0bps 80bps 7

8 4. Valuation Following the integration of BioFire, we have raised our DCF-based valuation to EUR69 from EUR66 reflecting a higher growth and margins perspective over the long term in our DCF. Fig. 9: DCF with 8.6% EURm 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Sales Growth 1.4% 7.2% 4.6% 5.2% 5.3% 5.7% 5.7% 5.7% Recurring EBIT % of sales 16.0% 15.0% 15.9% 17.1% 18.1% 18.9% 18.9% 18.9% Taxes % -29% -30% -30% -32% -32% -32% -32% D&A %sales 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% Change in working capital % -3.9% -2.5% -2.8% -2.8% -3.0% -2.0% -2.0% Operational Cash-flows % growth -14% 21% 8% 10% 9% 10% 6% Capex % of sales 7.5% 8.2% 7.0% 7.0% 6.5% 6.5% 6.5% 6.5% Free cash-flows % growth -41.9% 77.0% 11.1% 14.1% 10.8% 19.4% 5.7% discount rate Discounted rate Cumulated FCF discounted 965 Terminal value 3,732 Discounted terminal value 2,092 Enterprise value 3,057 - Net debt 323 = Book value 2,734 - Minorities 8.0 Equity value 2,725.8 Number of shares 39.4 Share price (EUR)

9 We believe that biomérieux s share price should continue to trade sideways until the perspective of margin expansion gets closer, i.e. mid Between 2008 and2010, margin expansion was one of the key aspects of the investment case. Fig. 10: Share price and EBIT margin 20,0% 18,0% BIOMERIEUX Recurring EBIT margin (% of sales) ,0% 14,0% 80 12,0% 75 10,0% 70 8,0% 65 6,0% 4,0% 60 2,0% 55 0,0% biomérieux is trading at 18x 2014 ex-ppa versus 16.6x on a five-year average. Fig. 11: Average P/E 1year forward /09/08 23/09/09 23/09/10 23/09/11 23/09/12 23/09/13 BIOMERIEUX BIOMERIEUX - 12MTH FORWARD EPS 9

10 Price Chart and Rating History biomérieux 85 9/10/ BIOMERIEUX Source: Thomson Reuters Datastream Ratings Date Ratings Price 08/12/11 NEUTRAL EUR /09/07 BUY EUR70 Target Price Date Target price 17/01/13 EUR66 28/11/12 EUR64 26/03/12 EUR62 09/12/11 EUR65 21/10/11 EUR78 08/09/11 EUR83 06/07/11 EUR94 23/05/11 EUR92 09/03/11 EUR90 19/10/10 EUR95 17/09/09 EUR82 26/09/07 EUR79 10

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