NEW YORK (GenomeWeb) – Goldman Sachs released its yearly outlook for the omics sector today, lowering its outlook of the life science research tools industry to Neutral from Attractive, and raising its rating on labs to Attractive. The investment bank also stayed Neutral on the diagnostics sector.
In a note to investors, Goldman Sachs analyst Isaac Ro said that while 2016 showed end markets improving for life science tools companies, "the 2017 outlook is less compelling." Production in biopharma will likely continue to be strong this year, but R&D is ramping down and may be further disrupted by M&A activity. Further, Ro said, academic funding has benefited from new legislation but the new administration may undo or reduce that funding.
"On valuation, the group trades below its historical relative multiple vs. the S&P which we think is appropriate given these factors," he added.
In the tools sector, Goldman removed Thermo Fisher Scientific from its Conviction List, but preserved the company's Buy rating. The bank's top pick in this sector is Agilent, which remains on the Conviction list. Goldman also maintained its Buy rating on VWR and its Sell ratings on Bruker and PerkinElmer.
Ro noted that there is a possibility for a black swan event in the tools sector in 2017. In one scenario, genomics makes a comeback through more widespread clinical adoption of next-generation sequencing. "Market adoption of NGS in the clinical setting has been slow to materialize due to sluggish reimbursement trends and rising challenges with bioinformatics software," Ro said, but added that "it is possible that a series of technological advances emerge faster than expected and set the stage for rapid acceleration in the adoption of NGS by the end of 2017."
Such advances would include breakthroughs in liquid biopsy testing, breakthroughs in bioinformatics tools, broader reimbursement for NGS, and strategic M&A deals.
But there's also the possibility that research budgets in the US and EU will decline in 2017 for the first time in decades, Ro said. This would lead to a decline in R&D spending.
Meanwhile, Ro remains more bullish on "the potential for share gains from hospital-based labs as PAMA reimbursement cuts loom," adding that "volumes should be relatively insulated from any potential changes from ACA."
Goldman currently sees a 12 percent upside for Quest Diagnostics, which has been upgraded to Buy, and a 9 percent upside for LabCorp, which is rated Neutral. Quest's upgrade is based on what Ro calls "improved focus" for the company after recent divestitures, which he believes could lead to share gains and better operating leverage.
Ro chose to remain Neutral on diagnostics "given reimbursement uncertainty in most areas of genetic testing." However, he also added Hologic to the Conviction list, noting its "underappreciated new products" and attractiveness as a possible acquisition target.