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Goldman Sachs Upgrades Waters; Downgrades Agilent, Genomic Health

NEW YORK (GenomeWeb News) – Goldman Sachs today downgraded Agilent Technologies and Genomic Health, but upgraded Waters.

The changes to the three firms' ratings are part of a "recalibrating" of the investment bank's Life Science Tools portfolio in light of tighter credit in China and an "underappreciated risk" of renewed austerity as the US Fiscal Year 2014 budget and debt ceiling "come back into focus," analyst Isaac Ro said in a research report.

He downgraded Agilent to a Neutral rating and said that in previously giving the company a Buy rating in November, there existed near- and midterm growth drivers — including share gains by Agilent in the life sciences, acceleration in emerging markets, and improved wireless capital expenditures — that Ro no longer sees.

"[W]e see few fundamental catalysts to drive outperformance," Ro said.

In its life science business, Ro noted that Agilent's execution has been "disappointing and has included NMR share loss and mixed feedback on the new Diagnostics platform." Additionally, he called both Agilent's life sciences segment and its new diagnostics franchise "sub-scale relative to [Thermo Fisher Scientific/Life Technologies], and other leading competitors."

Thermo Fisher's has a pending $13.6 billion acquisition of Life Tech, expected to be completed in early 2014.

Shares of Agilent, he said are "fairly valued at this time," and while there has been some chatter in the investment community of breaking up the company — most notably separating the Electronic Measurement Group from the rest of the firm — based on comments from the company's management, it seems unlikely that a breakup will occur or that Agilent will pursue a large levered recapitalization program, "and therefore [Ro sees] a challenging path forward for potentially interested parties."

He maintained a 12-month price target for Agilent's stock at $47.

In afternoon trading, shares of Agilent rose a fraction of 1 percent on the New York Stock Exchange to $42.42.

Ro also downgraded Genomic Health to Sell from a previous Neutral rating, and cited challenges to the company's newly launched Oncotype DX prostate cancer test, as well as its established Oncotype DX breast cancer test.

Ro lowered the six-month price target on Genomic Health to $26 from $27.

He was especially skeptical about the commercial potential of the prostate cancer assay and said that reaction from urologists to the test was mixed at the American Urological Association's conference last month. Genomic Health, Ro said, faces a high burden of proof in driving adoption of the test.

In addition, the costs related to marketing the test may be higher than Genomic Health anticipates. Ro said that he believes the company based its operating expenses for the prostate cancer test on past experiences with Oncotype DX breast cancer.

But the prostate cancer test was developed against a "flawed benchmark," the Gleason score, and the prostate cancer product cycle will differ from the product cycle for the breast cancer test, he said, adding that the prostate cancer test "must be used in conjunction with conventional methods.

"We think the combination of these fundamental product differences vs. breast cancer will necessitate higher-than-expected R&D and marketing investment to drive adoption," Ro said.

On Oncotype DX breast cancer, Ro said that competitors, such as NanoString Technologies, which recently filed to go public and said it anticipates raising as much as $77.6 million, are in the process of raising capital and will likely have increased capital resources starting in the second half of this year.

"We believe this will require increased [operating expenses] by Genomic Health to defend the company's dominant market share position," he said. "We also see risk of marginal share losses."

Shares of Genomic Health on the Nasdaq were down 8 percent at $31.48.

Lastly, Ro upgraded Waters to Buy from Neutral and increased the company's 12-month price target to $120 from $92.

About 40 percent of Waters' revenue is tied to quality assurance/quality control processes by pharmaceutical companies, which in the coming years should benefit the company, Ro said.

Starting in 2014 and lasting for a few years, about 18 million Americans, who otherwise would be uninsured, will receive health coverage because of healthcare reform, Ro estimated. At the same time, an aging population in the US and increased spending on prescription drugs in emerging markets, "should drive increased usage of prescription in both the branded and generic market," and "an increase in pill volume should result in increased demand for Waters' offerings."

The company, furthermore, should benefit from its high exposure in Japan and India. Japan recently announced steps to stimulate its economy. Some of the stimulus funds have been allocated to directly benefit scientific research both on the academic level and industry level, and this should drive increased demand for Waters' products in the country, Ro said. Waters generates 11 percent of total revenues from Japan.

In India, meanwhile, where Waters' products are priced in US dollars, improving currency exchange rates with the Indian rupee and increased contract research organization spending "should drive above-average growth," Ro said.

He also noted efforts by Waters to increase demand in the applied markets for its mass spectrometry technology, and during the next year to 18 months, Ro said that he expects the company to launch application-specific mass spec offerings as part of that effort. Additionally, "adoption of Waters' core UPLC-MS technologies remains early in the early/mid cycle in the applied markets with considerable runway."

He also said there is "an increased likelihood" that Waters could be an acquisition target given the strategic value of its franchise, as well as the lack of other firms in the life science tools space with growth potential. Waters also has a low tax rate compared to other firms in its space, making it "strategically attractive," Ro said.

Waters' shares on the New York Stock Exchange were up 2 percent at $99.62.

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