NEW YORK (GenomeWeb) – Deutsche Bank has initiated coverage of 17 life science tools and diagnostics companies, noting the sector's high growth rate in recent years as well as its broad exposure to various kinds of customers and geographic locations.
The bank rated Thermo Fisher Scientific, Danaher, Agilent Technologies, Laboratory Corporation of America, Quest Diagnostics, Waters, Hologic, and Bio-Techne at Buy; Illumina, Mettler-Toledo, PerkinElmer, Bio-Rad Laboratories, Bruker, VWR, and Genomic Health at Hold; and Myriad Genetics and Luminex at Sell.
Of these firms, Deutsche Bank assigned the highest upside potential to LabCorp at 27 percent and the largest downside potential to Luminex at 13 percent.
Overall, Deutsche Bank analyst Dan Leonard wrote in his coverage document, the companies in this sector are "diversified, high quality, exposed to some secular macro themes (precision medicine, regulation), and have opportunities for consolidation." He further noted that the end markets for these companies appear "reasonable," and that their stock valuations were not "overly stretched."
Leonard also said that life science tools has consistently grown at a higher rate than worldwide GDP in the last two decades, and that the sector has well-balanced exposure to the four main end-market customers: academic and government institutions, biopharma, clinical customers, and industrial or applied markets customers.
These companies' highest exposure is in the US, but they are also seeing high growth trends in emerging economies such as China and India, which will remain major drivers of growth. Finally, Leonard noted that he expects mergers and acquisitions to continue throughout the tools and diagnostics sectors, and pointed to Danaher, Thermo Fisher, Merck KGaA, Roche, Quest, LabCorp, and Siemens Healthineers as likely consolidators.
Of the Buy-rated firms on his list, Leonard named Agilent, Hologic, Danaher, and Bio-Techne as his top picks, pointing to Agilent's balanced portfolio, Hologic's sustainable growth, Danaher's operating playbook, and Bio-Techne's accelerating revenue growth as attractive points.
His hold rating on Illumina is based on the view that the recent launch of NovaSeq is unlikely to boost Wall Street estimates for the company's earnings, which would be needed to boost upside in Illumina's stock. "We think the NovaSeq driven-replacement cycle is not straightforward. Customers have more instrument options than ever before and multiple factors to consider, including intended use, new instrument/legacy instrument swap ratio, and technical differences," Leonard wrote. However, he did add that Illumina is "the clear leader in the next-gen sequencing market," and noted that Deutsche Bank is "confident in Illumina's ability to maintain market share."