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Leerink Swann Upgrades Life Technologies to Outperform

NEW YORK (GenomeWeb News) – Investment bank Leerink Swann today upgraded Life Technologies to Outperform, noting the potential growth of the company's next-generation sequencing business.

In addition to the upgrade from Market Perform, analyst Dan Leonard increased the valuation of Life Tech's stock to a range of $59 to $63 from an earlier range of $43 to $45. He left full-year 2011 and 2012 revenues estimates unchanged at $3.74 billion and $3.77 billion, respectively. The earnings per share estimate also was unchanged at $3.71 for 2011 and $3.97 for 2012.

In a research note, he said that while Life Tech's next-gen sequencing revenues are expected to comprise only about 4 percent of the company's total revenues estimated for 2012, they "will become increasingly appreciated," and pointed to Life Tech's recent launch of the Ion Torrent Proton benchtop instrument as a catalyst.

While Life Tech's stock has already seen an uptick from the launch, "we think there's room to go," Leonard said. The company plans on releasing two chips this year for the instrument, the Proton 1 for sequencing a few exomes per run or one five-fold coverage genome, and the Proton 2 for sequencing a whole human genome at 20-fold coverage or eight exomes per run.

Leonard said that though there is some skepticism around the Proton 2 chip, he called it "a bit misguided. … Sure, technical challenges to deliver the leap between the Proton 1 and Proton 2 chips are not trivial, but we don't think [Life Tech] would have shipped [$300 million] out the door this month to satisfy the Ion Torrent earn-out if it has not met these challenges," referring to a milestone payment Life Tech is making to Ion Torrent.

He added that Life Tech is expected to offer an upgrade program for the Ion Torrent Personal Genome Machine "and thus mitigate any sales cannibalization in the meantime."

Ion Torrent competes well against Illumina's competing MiSeq benchtop instrument, he said, and noted that in a survey conducted by Leerink Swann in late November, almost two-thirds of respondents who said they plan to buy a desktop sequencer said they would buy Ion Torrent.

Roche's $5.7 billion hostile bid for Illumina could also provide a boost for Life Tech as it "will increasingly enhance sentiment around the long-term opportunity in sequencing," and provide "some external validation that the desktop and diagnostic markets are real opportunities for next-gen sequencing," Leonard said.

Lastly, he said that a change in Life Tech's management compensation that rewards executives for meeting return-on-invested-capital goals would help the company's stock.

During the past seven years, there has been concern that the company would overspend on acquisitions. This year, ROIC targets have been incorporated into management compensation for the first time and the change "mitigates the risk of overpaying for acquisitions, and could thus help diminish [an] historical overhang on the stock, which we consider a material and underappreciated change," Leonard said.

In afternoon trading on the Nasdaq, shares of Life Tech were down a fraction of 1 percent at $48.98.

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