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Goldman Sachs Downgrades Illumina, Waters amid Concerns over Academic and Government Spending

By a GenomeWeb staff reporter

NEW YORK (GenomeWeb News) – Goldman Sachs today downgraded Illumina and Waters, citing uncertainty in their end markets, including academia and government.

Overall, analyst Issac Ro lowered the investment firm's coverage view of the entire Life Science tools and Diagnostics group to Cautious from Neutral, saying headwinds in the US and European academic markets, lower organic growth outlook, and too-conservative consensus revenue outlooks in 2012 and 2013, could negatively impact the companies' stocks.

In changing Illumina's rating to Neutral from Buy, Ro noted "sufficient risk that academic funding pressure could limit material upside to consensus estimates."

His main concern with academic/government funding for the entire life science tools sector is a view that for fiscal year 2012, the best-case scenario for NIH funding could turn out to be a 0 percent increase.

"The lack of strong advocacy in Congress remains an issue and we continue to believe that without a strong voice of support or an argument that directly links NIH funding to job creation, the NIH will be at risk," Ro said in a research report.

He said that he has a more opaque view of the funding picture in Europe but is presuming that overall funding will remain flat.

In the case of Illumina, he said that the company generates 40 percent of total revenues from US academic laboratories. In addition one-third of revenues are tied to "low-growth microarray technology. As a result, we think near-term funding uncertainty will preclude material revenue beats that we view as essential to driving upside to shares."

Last week, Illumina reported second-quarter revenues grew 36 percent year over year, but offered cautious guidance for the second half of 2011.

Ro remains optimistic about adoption of Illumina's MiSeq benchtop sequencing platform, which the company just began shipping to early access customers, and he maintained earlier forecasts of 250 placements in 2011 and 800 placements in 2012.

Estimated placements of the high-throughput HiSeq platforms are expected to dwindle to 250 in 2014 from 492 in 2011, Ro said, but as MiSeq systems ramp up, Illumina's total next-generation revenues, including related consumables, are anticipated to grow to $1.2 billion in 2014 from $634 million in 2011.

During that period he forecast microarray revenues to shrink to $371 million from $409 million.

He lowered Illumina's 2011 estimated EPS to $1.47 from an earlier estimate of $1.50; 2012 EPS to $1.84 from $1.99; 2013 EPS to $2.40 from $2.62; and 2014 EPS to $2.83 from $3.06.

Ro also lowered the 12-month price target on Illumina's shares to $66 from an earlier target of $76.

In early afternoon trading on Nasdaq, shares of Illumina were down a fraction of a percentage point to $54.12.

Ro also downgraded Waters to Neutral from Buy and cited academic/government funding issues, which make up 18 percent of Waters' revenues. Those budget constraints could lead to delays in purchases of Waters' new products, including the Synapt G2-S mass spectrometer and Acquity UPLC I-Class.

In addition, he said that a disappointing second quarter, during which the company missed analyst estimates, makes Waters a "wait and see" story and lowered his 12-month price target to $93 from $105.

He brought down Waters' 2011 EPS estimate to $4.83 from $4.85. Ro's new 2012 EPS is for $5.50, down from $5.65, and 2013 EPS was lowered to $6.35 from $6.54.

Waters' shares were down on the New York Stock Exchange less than 1 percent to $78.12 in early afternoon trading.

In addition to a mediocre academic/government funding environment, Ro said that the life science tools sector, in general, could suffer from stagnating demand from the industrial end markets for products offered by life sciences tools firms.

Currently 28 percent of revenues to life science tools firms come from the industrial sector, Ro said, and while data suggests that spending from that sector is shrinking, "management teams [at life science tools companies] have generally cited no expectations for a similar deceleration in the cyclical components of their end markets."

Hospital budgets also are unlikely to improve, he added, and as spending shifts to products that improve efficiency and incremental economics to the hospitals, adoption of research tools such as mass spectrometers, sequencers, and genetic testing platforms could prove elusive.

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