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Stifel Initiates Coverage of Thermo Fisher, Illumina, PerkinElmer, and Waters

NEW YORK (GenomeWeb) – Investment bank Stifel this week initiated coverage of four life science tools firms operating in the omics market and said that, overall, the space is poised for growth in the coming years as major end markets have stabilized and are improving for the first time in years.

Analyst Miroslava Minkova began covering Thermo Fisher Scientific with a Buy rating and a $150 price target on the company's stock, calling it the top pick of the four firms on which she initiated coverage. Additionally, she started coverage of Illumina with a Buy rating and a $200 price target; PerkinElmer with a Buy rating and a $53 price target; and Waters with a Hold rating, but without a price target.

In a report, Minkova noted that the four major end markets — academia and government, pharma/biotech, industrial and applied, and healthcare and diagnostics — for life science tools firms have stabilized for the first time since 2006/2007, setting the stage for a positive outlook.

Against that backdrop, as Thermo Fisher integrates Life Technologies, leverages its scale, pays down its debt, and continues optimizing expenses, "we believe [Thermo Fisher] is uniquely positioned to continue delivering low-teens EPS growth – exceeding the growth profile of the S&P 500," Minkova said.

She estimated sales from Life Tech to grow at about 3 percent between 2014 and 2018 and revenue synergies of about $150 million by the third year of the acquisition.

In afternoon trading today shares of Thermo Fisher were up a fraction of 1 percent at $121.20 on the New York Stock Exchange.

Minkova was also bullish on Illumina and said that the company is the "clear leader" in the rapidly growing next-generation sequencing market, which she estimated at between $1.5 billion and $2 billion today and growing at a double-digit pace. Illumina has about 4,600 to 4,800 systems placed, representing more than 70 percent of the market, she added.

Additionally, NGS has a vast potential addressable market — roughly $20 billion — providing further opportunities for Illumina. Minkova also noted the company's history of innovation and said that it is in the midst of a new product cycle. "Over the next [four to six] quarters, new product uptake should continue to drive upside to near-term sales and EPS projections," she said.

Lastly, she said that depending on how quickly NGS technology is adopted in emerging diagnostic applications, long-term opportunities to sales and EPS growth could be "meaningful." Cancer diagnostics in the US alone could contribute $1.5 billion to $2 billion in revenues, while worldwide high-risk prenatal testing could add another $1 billion.

Minkova estimated that in 2018 Illumina's revenues could reach $3.2 billion, but that figure could be significantly higher if the cancer and prenatal testing opportunities materialize by then.

Illumina's shares were up 2 percent at $166.64 on the Nasdaq in afternoon trading on Wednesday.

On PerkinElmer, she acknowledged that the company has had an uneven performance for several quarters, but for the second half of 2014 and beyond, she expects the firm's organic growth to rebound into the 4 percent to 6 percent range as end markets stabilize and new products launch.

Minkova wrote that as birth rates start to inch back up, especially in the US and China, PerkinElmer's diagnostics business, expected to comprise about 28 percent of the company's 2014 total sales, could benefit.

"Looking ahead, we expect conditions in [PerkinElmer's] research, pharma, and environmental businesses to continue to stabilize and improve," she said.

She further said that the company has a lineup of new products that could add an incremental $15 million to $20 million to its top line for the second half of this year. "For [the company] this is a step-up in the pace of new product introductions, after a much slower 2013," Minkova said.

Additionally, PerkinElmer could once again be active on the M&A front as cash flow improves this year and in 2015 after two years of weaker cash generation. Minkova estimated the firm's free cash generation in 2014 to be about $300 million, or nearly triple the cash generated during the prior two years.

PerkinElmer's stock rose a fraction of 1 percent at $45.23 on the New York Stock Exchange in afternoon trading today.

A year ago, Waters announced the planned retirement of Doug Berthiaume from his position as CEO within a two-year time frame. In putting a Hold rating on the company, Minkova cited Berthiaume's pending departure, as well as John Ornell's retirement as CFO earlier this year.

Waters' senior leadership team "is in a period of significant transition," she said. "Coming at a time of uneven growth results, with no appointments yet announced, this too raises some uncertainties [about] what the company's 'next chapter' may look like."

Also, the company is highly dependent on the pharmaceutical industry, with about 52 percent of its total sales going to biopharma. Large pharma's growth and R&D investment prospects, while stabilizing, "remain subdued," raising questions about Waters' current strategy and whether its end market exposure can sustain its historical growth path.

During the past decade, Waters' sales have almost doubled, while EPS has tripled, and operating margins are consistently in the 28 percent to 29 percent range, among the highest in the industry, Minkova said.

Shares of Waters were up a fraction of 1 percent at $103.08 on the New York Stock Exchange in afternoon trading today.

Broadly, she said, the life science tools and diagnostics space still faces challenges but trends are "mostly favorable."

Along with better economic trends and improved government budgets, companies continue to turn out new innovations in technology, while tools that have traditionally been used in research settings are making their way into the diagnostic and applied markets. Mikova added that the emerging markets have strong demand for such products, and noted industry consolidation and expanding operating margins as tailwinds.

Still, while an economic recovery is underway, it remains slow, she said. Meanwhile, consolidation in pharma and ongoing restructuring is a challenge. Recently, the US Food and Drug Administration said it will move ahead with plans to regulate laboratory-developed tests. Those factors, along with any continued slowdown in the Chinese market and the potential for sales volatility driven by capital equipment purchases, could put a damper on businesses in the life science tools and diagnostics space, Minkova said.