r r

INDEPENDENT RESEARCH UPDATE bioMérieux

9th October 2013 Short-term pain, long-term gain Healthcare 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) 23.00 Free Float 36.0% 3y EPS CAGR 7.0% Gearing (12/12) 10% Dividend yield (12/13e) 1.37%

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 2013.

Significant dilution in the short term, investments to continue over 2015. We calculate an (18%)/(12%)/(5%) dilution including PPA over 2014-2016 while accretion should start in 2017. This is likely to impact negatively the EBIT margin until the same year, 2017.

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 2013-16.

YE December 12/12 12/13e 12/14e 12/15e Revenue (EURm) 1,570 1,592 1,706 1,784 EBIT (EURm) 260.4 255.5 234.1 264.9 Basic EPS (EUR) 3.41 3.90 3.62 4.18 Diluted EPS (EUR) 3.41 3.90 3.62 4.18 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 13.3 11.8 9.9 10.1

9/10/13

O N D J F M A M J J A S O 96

98

100

102

104

106

108

110

112

114

116

118

BIOMERIEUXSTOXX EUROPE 600 E - PRICE INDEX

Source: Thomson Reuters Datastream

Analyst: Sector Analyst Team: Mathieu Chabert Martial Descoutures 33(0) 1 70 36 57 45 Eric Le Berrigaud mchabert@bryangarnier.com

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Simplified Profit & Loss Account (EURm) 2010 2011 2012 2013e 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 342 346 355 351 337 372 415 458 EBIT 254 258 260 256 234 265 303 339 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 251 250 249 237 219 251 289 336 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 1.3 2.3 (0.10) 1.5 1.5 1.5 1.5 1.5 Net profit 159 158 134 154 142 164 191 216 Restated net profit 159 158 134 154 142 164 191 216 Change (%) -% -0.3% -15.0% 14.3% -7.2% 15.3% 16.2% 12.9% Cash Flow Statement (EURm) Operating cash flows 329 333 315 347 329 355 386 418 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) 17.3 24.3 17.7 26.4 30.0 25.4 19.8 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) 131 117 323 (119) (256) (393) (636) Free Cash flow 80.0 118 76.7 129 49.0 101 105 215 Balance Sheet (EURm) Tangible fixed assets 340 367 405 414 444 464 488 514 Intangibles assets 123 184 184 184 184 184 184 184 Cash & equivalents 34.0 (58.4) 57.3 211 293 430 567 810 current assets 706 778 811 974 1,104 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 47.1 174 174 534 174 174 174 174 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 409 572 602 609 627 643 658 670 Capital employed 1,040 1,190 1,258 1,412 1,562 1,739 1,933 2,254 Financial Ratios Operating margin 18.69 18.05 16.59 16.05 13.72 14.85 16.13 17.14 Tax rate -32.43 -30.89 -35.89 -34.52 -34.22 -33.83 -33.49 -32.33 Net margin 11.69 11.08 8.56 9.64 8.35 9.21 10.17 10.90 ROE (after tax) 15.26 13.29 10.68 10.87 9.12 9.45 9.87 9.56 ROCE (after tax) 16.48 14.95 13.27 11.85 9.86 10.08 10.41 10.18 Gearing -2.49 11.89 9.93 24.40 -8.05 -15.50 -21.28 -29.33 Pay out ratio 22.75 24.11 25.00 25.00 25.00 25.00 25.00 25.00 Number of shares, diluted 39.38 39.45 39.35 39.35 39.35 39.35 39.35 39.35 Data per Share (EUR) EPS 4.03 4.01 3.41 3.90 3.62 4.18 4.85 5.48 Restated EPS 4.03 4.01 3.41 3.90 3.62 4.18 4.85 5.48 % 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 8.34 8.44 8.00 8.82 8.37 9.02 9.81 10.62 FCF 2.03 2.99 1.95 3.27 1.25 2.56 2.66 5.47 Net dividend 0.92 0.98 0.85 0.98 0.91 1.04 1.21 1.37

Source: Company Data; Bryan, Garnier & Co ests.

Company description With sales of €1.357bn in 2010, bioMérieux is the world’s seventh-largest 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.

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1. BioFire, a proven track record in MDx

1.1. 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.

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

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):118-123, http://www.medscape.com/viewarticle/805584), physicians at Seattle

USD70m of sales in 2013

Targeting decentralised labs

Two FDA approved panels in respiratory and blood culture

bioMérieux

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.

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 2,537 1.6 1.4 82 95

Direct Fluorescence assay 13,99 7 6,5 0 2

Source: Company Data; Bryan, Garnier & Co ests.

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.

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 70.0 81.0 103.0 132.9 167.7 213.2

Organic Growth 15.7% 27.1% 29.1% 26.2% 27.1%

Of which FilmArray 50.0 65.0 87.8 118.5 154.0 200.2

Growth 30.0% 35.0% 35.0% 30.0% 30.0%

Of which Others 20.0 16.0 15.2 14.4 13.7 13.0

Growth -20.0% -5.0% -5.0% -5.0% -5.0%

Source: Company Data; Bryan, Garnier & Co ests.

Quicker turnaround time

At least two other panels in development

Expect strong double-digit growth

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2. Perfect strategic fit for bioMérieux 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 2014. 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 2013-2018

Source: Company Data; Bryan, Garnier & Co ests.

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 2013.

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.

0,0%

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60,0%

Microbiology Immunoassays MDX Other lines Industrial applications

51,1%

22,6%

4,5% 0,9%

20,9%

46,8%

18,7%

11,7%

0,4%

22,3% 2013

2018

Offensive and defensive move at the same time

“Plug & Play” contrary to Biocartis

We expect MDx to represent 11.7% of sales in 2018 compared to 4.5% in 2013

Greater reach in the US as well as in other geographies

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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 2018.

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 234 265 303 339 378

EBIT margin 13.7% 14.8% 16.1% 17.1% 18.1%

Interest -15 -14 -13 -13 -14

Profit before tax 219 251 289 326 364

Tax -75 -85 -97 -108 -121

Profit after tax 144 166 192 217 243

Net income 144 166 192 217 243

Net income attributable 142 164 191 216 242

Nosh 39 39 39 39 39

EPS 3.62 4.18 4.85 5.48 6.15

Accretion/Dilution -17.9% -11.7% -5.2% 1.3% 5.3%

EPS adjusted ex PPA 3.97 4.50 5.16 5.79 6.46

Accretion/Dilution ex PPA -9.9% -4.8% 0.9% 7.0% 10.6%

Source: Company Data; Bryan, Garnier & Co ests.

Full price...but in line with MDx multiples

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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 2018. 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

Source: Company Data; Bryan, Garnier & Co ests.

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

Source: Company Data; Bryan, Garnier & Co ests.

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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 WACC @ 8.6%

EURm 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e

Sales 1592.3 1706.3 1784.2 1877.3 1977.7 2090.0 2208.7 2334.2

Growth 1.4% 7.2% 4.6% 5.2% 5.3% 5.7% 5.7% 5.7%

Recurring EBIT 255.5 255.1 283.9 320.7 357.0 395.9 418.3 442.1

% of sales 16.0% 15.0% 15.9% 17.1% 18.1% 18.9% 18.9% 18.9%

Taxes -81.8 -74.9 -84.8 -96.9 -108.5 -120.9 -133.9 -141.5

-32% -29% -30% -30% -32% -32% -32% -32%

D&A 95.5 102.4 107.1 112.6 118.7 125.4 132.5 140.1

%sales 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%

Change in working capital -17.0 -65.9 -44.6 -53.2 -55.4 -62.0 -44.2 -46.7

-1.1% -3.9% -2.5% -2.8% -2.8% -3.0% -2.0% -2.0%

Operational Cash-flows 252.3 216.7 261.6 283.3 311.8 338.3 372.8 394.0

% growth -14% 21% 8% 10% 9% 10% 6%

Capex -119.4 -139.4 -124.9 -131.4 -138.4 -146.3 -143.6 -151.7

% of sales 7.5% 8.2% 7.0% 7.0% 6.5% 6.5% 6.5% 6.5%

Free cash-flows 132.9 77.2 136.7 151.9 173.3 192.0 229.3 242.3

% growth -41.9% 77.0% 11.1% 14.1% 10.8% 19.4% 5.7%

discount rate 1.00 0.92 0.85 0.78 0.72 0.66 0.61 0.56

Discounted rate 132.9 71.1 115.9 118.5 124.5 127.0 139.6 135.8

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) 69.3

Source: Company Data; Bryan, Garnier & Co ests.

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We believe that bioMérieux’s share price should continue to trade sideways until the perspective of margin expansion gets closer, i.e. mid 2014-2015. Between 2008 and2010, margin expansion was one of the key aspects of the investment case.

Fig. 10: Share price and EBIT margin

Source: Company Data; Bryan, Garnier & Co ests.

bioMérieux is trading at 18x 2014 ex-PPA versus 16.6x on a five-year average.

Fig. 11: Average P/E 1year forward

Source: Company Data; Bryan, Garnier & Co ests.

0,0%

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12,0%

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Recurring EBIT margin (% of sales)

50

55

60

65

70

75

80

85

90BIOMERIEUX

10

12

14

16

18

20

22

23/09/08 23/09/09 23/09/10 23/09/11 23/09/12 23/09/13

BIOMERIEUX BIOMERIEUX - 12MTH FORWARD EPS

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Price Chart and Rating History

bioMérieux

Ratings

Date Ratings Price

08/12/11 NEUTRAL EUR61.92

26/09/07 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

9/10/13

2011 2012 201350

55

60

65

70

75

80

85

BIOMERIEUX

Source: Thomson Reuters Datastream

bioMérieux

11

Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating

BUY Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

NEUTRAL Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

SELL Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

Distribution of stock ratings

BUY ratings 56.5% NEUTRAL ratings 27.8% SELL ratings 15.7%

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Bryan Garnier & Co Limited or another company in its group (together, the “Bryan Garnier Group”) has a shareholding that, individually or combined, exceeds 5% of the paid up and issued share capital of a company that is the subject of this Report (the “Issuer”).

No

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The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more members of the Bryan Garnier Group.

No

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No

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No

11 Analyst has short position The investment analyst or another person involved in the preparation of this Report has a short position in the securities or derivatives of the Issuer.

No

12 Analyst has long position The investment analyst or another person involved in the preparation of this Report has a long position in the securities or derivatives of the Issuer.

No

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No

14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Yes

15 Other disclosures Other specific disclosures: Report sent to Issuer to verify factual accuracy (with the recommendation/rating, price target/spread and summary of conclusions removed).

No

A copy of the Bryan Garnier & Co Limited conflicts policy in relation to the production of research is available at www.bryangarnier.com

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