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Goldman Sachs Downgrades Qiagen, Bruker

NEW YORK (GenomeWeb) – Goldman Sachs on Wednesday downgraded shares of Qiagen and Bruker to a Sell rating.

The investment bank also lowered its six-month price target for Qiagen to $19 from a prior target of $21 and the 12-month price target for Bruker to $15 from $21.

In a research note, analyst Isaac Ro said that he based his downgrade of Qiagen from a previous Neutral rating on what he sees as limited growth opportunities. "We believe the growth outlook for recently acquired assets is now mixed while investments in the core life sciences franchise have suffered as a result," he said. With resources being shifted to Qiagen's diagnostics business, the reduced investments in its tools business has led to diminishing cash returns for the overall business, "which we expect to continue."

Ro also said that the strategic appeal of Qiagen's assets have dulled as the company now is a "conglomeration of disparate product lines." Its "focused channel in life science tools and diagnostics has waned," while product development and growth initiatives, including its QuantiFeron technology, companion diagnostics, and bioinformatics "are in areas where the company has limited franchise value and lacks scale.

"We therefore believe [Qiagen] is more likely to be an acquirer than a target as industry consolidation continues."

In 2012, Qiagen acquired next-generation sequencing platform firm Intelligent Biosystems, but has yet to launch its GeneReader NGS platform, a cause of concern for Ro. The launch has been delayed to late 2015, and even if it becomes available then, "[w]e now believe [the instrument] will fail to gain commercial success," as other firms in the NGS space have moved to gain regulatory approval, introduce new tests, enhance their informatics offerings, and gain traction, Ro said.

Qiagen has a track record as a diagnostics firm, mostly with its HPV franchise acquired in its Digene buy. However, those assets "have largely been shuttered, and we, therefore, struggle with [Qiagen's] core competitive advantage in bringing NGS-based diagnostics to market," Ro said, further noting that NGS competitors, such as Illumina, are investing in the diagnostic end markets.

He added that Qiagen has said that the GeneReader will provide a sample-to-answer workflow, but he does not believe that this by itself will sufficiently differentiate the platform from others.

On the bioinformatics side, Ro said that Qiagen has made several acquisitions and inked partnerships to build its capabilities, but he is skeptical that the company's portfolio "is sufficient to build a reputable competitive moat: while the company has built a significant database of biomedical information, we are wary that the company will be able to create a complete bioinformatics solution as this is not [Qiagen's] core competency and there are numerous other deep-pocketed competitors entering the market," including Illumina and Google.

In afternoon trading on the Nasdaq, shares of Qiagen were up about 2 percent to $23.46.

Ro also downgraded Bruker to a Sell rating from Buy, saying that moves by the company's management to improve its margin profile have had mixed results.

"Accordingly, we now see risk/reward as skewed to the down side," he said. Last month, when Bruker announced its third quarter financial results, the firm lowered its estimates for full-year 2014 revenues, which followed lowered estimates provided in the second quarter.

In his note, Ro said that the firm "has struggled to meet its own internal forecasts over the past 10 quarters," and although Bruker's problems may be bottoming out in 2014, certain parts of its operations, such as achieving sales force rationalization and synergies, pricing initiatives, and supplier consolidation, "will take longer to manifest in financial performance."

He also forecast headwinds to top-line growth that include a lower yen compared to the US dollar, which could have more of an effect on Bruker that on its competitors because of the company's increased exposure in Japan. Also, while Agilent's departure from the nuclear magnetic resonance space in the fall was expected by some to be a positive to Bruker, a market leader in NMR, "we think the market underappreciates the importance of lengthy sales cycles" and a still-constrained government funding environment for big ticket instrument purchases, Ro said.

Lastly, as with Qiagen, he said that Bruker is an unlikely acquisition target. Other life science tools firms that he said struggled to turn around its operations, including Sigma-Aldrich and Life Technologies, have recently been purchased. But because Bruker is almost 40 percent owned by insiders of the firm, primarily the Laukien family, "we see [Bruker's] ownership structure as a hindrance to potential acquirers."

His prior Buy rating was based on the potential for management to turn the company around as Ro saw healthy organic growth and margin expansion profile coupled with low expectations and a modest valuation.

"While management has taken numerous steps to improve the company’s margin profile, including improved IT systems and non-core divestitures, results have been mixed and we still lack clarity on long-term earnings potential," he said.

Bruker's shares were up about 2 percent at $19 in afternoon trading today on the Nasdaq.

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