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Bank Starts Coverage of Several Life Science Tools Firms

NEW YORK (GenomeWeb News) – Investment bank Madison Williams and Co., has started coverage of the life sciences tools industry, providing initial analysis on Bruker, Caliper Life Sciences, WaferGen BioSystems, and Waters.

Overall, analyst Greg Bolan said in a report that he is "bullish toward the secular theme of growing use of life sciences technologies and we feel the very recent contraction in [life science] valuations has created significant buying opportunities for several stocks."

In particular, those firms with "product pipelines laden with applications that improve screening specificity, accuracy, and throughput," are the ones best positioned in the market, and he singled out Bruker and Caliper as the most favorable companies in Madison Williams' initial coverage of the life science space.

Bolan initiated coverage of Bruker with a Buy rating and a $19 price target on its stock, and deemed management's EPS guidance for 2011 of $.90 to $.93 on revenues of $1.60 billion to $1.62 billion as conservative.

"Moreover, given [Bruker's] robust pipeline and focus on manufacturing efficiencies … we believe [Bruker] could generate high-single digit organic sales growth," he said.

Coverage of Caliper was begun with a Buy rating and a $10 price target, and Bolan noted potential rewards from "the fast growing" use of preparative and analytical microfluidics technologies for next-generation sequencing. In particular, Caliper's LabChip XT platform should benefit from a next-gen sequencing market expected to grow more than 30 percent during the next three to five years.

Late last year, Caliper inked a co-marketing deal with Illumina to provide LabChip platforms for use with Illumina's Genome Analyzer and HiSeq 2000 systems. With Illumina's 60 percent capture of the next-gen sequencing market, "we believe the uptake of Caliper's LabChip platforms could be quite substantial," Bolan said.

Caliper is now sitting on $34 million in cash with no debt, he added, and with its 2010 purchase of Cambridge Research & Instrumentation fully integrated, it may be ready to pursue other acquisitions.

He also noted Caliper's "strong market presence" in preclinical imaging and said that Caliper could benefit from wider use of such technology by biopharma sponsors.

Bolan estimated Caliper's adjusted EPS for 2011 to be $.07 on revenues of $151.3 million.

Bolan initiated coverage of WaferGen with an Accumulate rating and a $.62 price target, saying the company is "an emerging story with many risks of successful commercialization of its proprietary SmartChip system."

WaferGen, he said, "appears to be gaining solid traction within the academic research community and should benefit within the for-profit healthcare end markets as key academic opinion leaders publish an increasing number of studies" using the SmartChip technologies.

However, while the SmartChip technology is "intriguing," the jury is still out on WaferGen's ability to get key opinion leaders on board, Bolan said, and until that happens, "we find it difficult to stress test our WaferGen financial model to a point that would yield an incredibly steep trajectory for profitability, and thus, a compelling target valuation for WaferGen shares."

He estimated WaferGen's 2011 loss per share at $.25 on $5.3 million in revenues.

Lastly, Bolan initiated coverage of Waters with a Neutral rating and a $77 price target.

While the company has been a dominant presence in the liquid chromatography space and in the past generated "some of the highest operating margins in the life science space … we believe Waters has reached the summit of operational maturity, and thus, we see only marginal improvement in operating margins going forward," Bolan said.

He noted the potential sales growth of the company's Acquity UPLC and the Acquity UPLC H-Class systems, particularly in China and Latin America, but also said that Waters could suffer from its exposure to the "increasingly challenging business environment for biopharma companies."

With biopharma R&D expected to be essentially flat through 2014, "procurement departments … will likely come under increasing pressure to control costs, which may stretch out new and replacement purchases," Bolan said, adding that large pharma's use of contract research organizations may further "blunt the frequency of product placements."

Bolan forecast Waters' 2011 EPS at $4.80 with revenues of $1.85 billion.

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