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Barclays Downgrades Life Tech on Expected NIH Funding Cuts, Portfolio Concerns

NEW YORK (GenomeWeb News) – Investment bank Barclays Capital today downgraded Life Technologies to an Equal Weight rating, citing the company's exposure to an anticipated soft academic and government funding environment and uncertainty about its sequencing portfolio.

In addition to downgrading Life Tech from an Overweight rating, Barclays also lowered the price target on the company's stock to $45 from $55; lowered 2011 EPS estimates to $3.71 from $3.73; and recalculated 2012 EPS estimates to $4.10 from $4.17.

In a research report that covered seven other companies operating in the life science tools space, analyst Anthony Butler said that he expects National Institutes of Health funding to be reduced by about 2 percent in FY 2012 compared to FY 2011, with a 5 percent to 7 percent cut in FY 2013.

Life Tech has about 45 percent of its revenues coming from the academic/government end market, Butler said, adding the firm's "organic growth outlook is particularly sensitive to prospects for aggregate research spending. … Given our cautious view on aggregate government and academic funding levels, we believe eking [out] organic growth … will be challenging for [Life Tech] in the near-to-medium term," he said.

Longer term, Life Tech is redirecting its focus to the faster growing diagnostics and applied markets, but that transition will likely take time and/or a large acquisition, he said.

Butler also expressed uncertainty about Life Tech's sequencing business, saying the SOLiD platform has "come under intense pressure" from Illumina's HiSeq system.

"Versus the rapid evolution of the HiSeq platform, the SoLID is now widely viewed as 'behind the curve,' and is rapidly losing ground as customers believe the company is shifting R&D resources to the Ion Torrent platform," he said.

Ion Torrent's Personal Genome Machine was launched late last year and recorded revenues of $13 million in the second quarter. Customer feedback on the platform has been "improving," Butler said, and Life Tech has made upgrades to the system in throughput and accuracy. As a first to market status, it also has a competitive advantage.

However, when Illumina begins shipping its MiSeq platform next quarter, the company "is likely to benefit from [its] dominant footprint in sequencing labs, which are early adopters of benchtop systems as well," Butler said.

He added that skeptics are saying the PGM is similar to Roche's 454 platform, and that even if PGM sales grow at a double-digit rate, it remains a relatively small product line that will be unable to substantially benefit Life Tech's growth.

Life Tech is a market leader in several product areas such as capillary electrophoresis sequencing and PCR, but may see increased competition or "technological obsolescence" in those spaces, Butler said. In CE sequencing, the company may see a decline in business as a result of market adoption of benchtop sequencers such as the PGM and MiSeq.

As the company's IP-based competitive advantage wanes, Life Tech may also lose market share in the PCR space.

"[H]igh margin PCR/qPCR royalty payments (est. to be $50 million by year-end 2011) have been declining over time with the steepest declines expected in 2011 ($20 million) and 2012," Butler said.

While he did not change ratings on the other seven companies covered in his report today, Butler lowered stock price targets for six of them.

For Affymetrix, the price target was unchanged at $3. Agilent Technologies was lowered to $49 from $54; Illumina to $65 from $74; Pall to $51 from $58; PerkinElmer to $22 from $23; Thermo Fisher Scientific to $69 from $74; and Waters to $95 from $110.

For 2011, Butler lowered EPS estimates for Illumina to $1.46 from $1.48; Pall to $2.78 from $2.91; and Waters to $4.84 from $4.91.

He increased Affy's loss per share to $.05 from $.03. Agilent was unchanged at $2.92, and PerkinElmer and Thermo Fisher were unchanged at $1.69 and $4.21, respectively.

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