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Barclays Initiates Coverage of Life Science Tools and Diagnostics Firms

NEW YORK (GenomeWeb) – Investment bank Barclays on Tuesday initiated coverage of the life science tools and diagnostics industry with the start of coverage on five firms and the upgrade of another company in the molecular diagnostics and omics tools space.

In a report, analyst Jack Meehan initiated coverage of Thermo Fisher Scientific and Myriad Genetics with Overweight ratings. He also gave Equal Weight ratings to Illumina and Agilent Technologies, and an Underweight rating to Hologic, while he upgraded Qiagen to an Overweight rating.

Meehan gave Thermo Fisher a $160 price target on its shares and estimated full-year 2014 EPS of $6.90. He called the company his top pick in the life science tools and diagnostics space and noted the firm's consistency in areas including organic growth, management execution, capital deployment, and shareholder returns.

"Thermo Fisher has positioned itself as the market leader across a diverse portfolio of life science tools and diagnostics, with unmatched global reach across customer classes and end markets," Meehan said.

Its acquisition of Life Technologies, he added, gives Thermo Fisher additional scale, leverage, and exposure to the genomics space. As developing nations prioritize healthcare research and discovery, the company stands to benefit as a supplier of "market-leading brands and products" and through its unmatched scale and best-in-class distribution.

He also pointed to the recent listing of the Ion PGM Dx next-generation sequencing system as a Class II medical device by the US Food and Drug Administration as an important step to adoption of the platform in the clinical space.

In afternoon trading on the New York Stock Exchange today, Thermo Fisher's shares rose 3 percent to $128.49.

Meehan upgraded Qiagen to an Overweight rating from a previous Equal Weight rating and lifted the price target to $28 from $24, while maintaining a full-year 2014 EPS estimate of $1.08.

He said that while competition in the human papillomavirus space has dragged on Qiagen's revenue growth, the company "has reached an inflection point where we believe that 2015 should serve as a baseline for accelerating growth in molecular diagnostics."

The firm has leveraged its expertise as the leading provider of sample and assay solutions and developed or acquired "a compelling portfolio of instruments," resulting in "highly predictable" consumables sales. Moving forward, Meehan said, opportunities in companion diagnostics and the development of NGS capabilities could translate to near-term revenue opportunities of about $400 million.

"As the company's growth profile accelerates and headwinds abate, we expect investors to revalue the Qiagen thesis higher," he wrote.

Qiagen's shares rose a fraction of 1 percent on the Nasdaq to $22.51 in afternoon trading.

Meehan also gave Myriad an Overweight rating, along with a price target of $50 and a full-year 2015 EPS estimate of $1.90. The company's fiscal 2015 began in July.

He called the firm's investment thesis "unappreciated" and said that following competition in its legacy genetic screening products and the transition in its focus to the myRisk panel, investor sentiment for Myriad's stock turned bearish at the end of 2014.

"Investor nervousness stemmed from the company's [fiscal year 2015] guidance, which reflected a ramp in revenue growth not seen in recent history," he said, referring to Myriad's revenue guidance of between $800 million to $820 million, and adjusted EPS of $1.90 to $2.

The uncertainty, he added, has created an attractive investment proposition for Myriad, as the firm prepares for new product launches in the coming year. Meehan further noted that Myriad has "arguably the best track record of returning capital to shareholders through [share repurchases], and we expect the company to remain opportunistic given the recent pullback."

In afternoon trading, Myriad's shares were at $36.27, up about 7 percent on the Nasdaq.

Meanwhile, coverage of Illumina was initiated with an Equal Weight rating and a $210 price target. Meehan estimated the firm's full-year 2014 EPS at $2.64.

He noted Illumina's leadership position in NGS, a market that he projects to grow by 50 percent through 2018, and breakthroughs that the company has achieved in recent years, including gaining the first FDA approval of an NGS instrument, the MiSeq, in 2013, and "winning the race to the $1,000 Genome" last year with the HiSeq X Ten Sequencing System.

Investors have seen Illumina's annual revenues grow at 68 percent through 2014, including 30 percent last year, and while Meehan remains positive about the company's fundamentals and is impressed by its "ability to transform the genomics market, we believe that sentiment is well reflected in shares at this point."

Illumina shares rose 3 percent to $194.67 on the Nasdaq.  

Meehan also gave Agilent an Equal Weight rating, with a $44 price target. He estimated the firm's full-year 2015 EPS at $1.75. The company's FY 2015 began in November.

Agilent completed the spinoff of its electronic measurement business into a company called Keysight Technologies in November, a move that Meehan said should reduce Agilent's volatility and narrow management's focus. The electronic measurement segment has been markedly more volatile than the rest of Agilent's businesses, and the spinoff of Keysight could attract more investors into Agilent, according to Meehan.

However, the company's dependence on its instruments business limits its upside, as that business is more sensitive to economic trends. Additionally, its end markets are only just stabilizing across its customer classes, further providing obstacles to growth.

In afternoon trading, shares of Agilent were up 1 percent on the New York Stock Exchange at $39.62.

Lastly, coverage of Hologic was initiated with an Underweight rating. Meehan gave a $24 price target on Hologic's shares and estimated its full-year 2015 EPS at $1.52. The company's current fiscal year began in October.

Meehan said that near-term positives to the company's shares are already reflected in its current share price and the Underweight rating is based on fewer opportunities for capital employment, compared to its peers in the life science tools and diagnostics space. Hologic, he added, has limited exposure to companion diagnostics and genomics, the two fastest growing areas in diagnostics.

The company has undergone several management changes but the nearest-term opportunities for Hologic will be around restructuring, rather than moves to augment growth, Meehan said. 

Hologic's shares were up 1 percent at $26.08 on the Nasdaq.