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Cowen & Co. Initiates Coverage of Genomic Health, Cepheid, Hologic, PerkinElmer, Quidel, and Meridian Bioscience

NEW YORK (GenomeWeb News) – In a nod to the growing influence of diagnostic products and services on clinical decisions, investment bank Cowen & Co. today initiated coverage of several firms operating in the molecular diagnostics and 'omics-related life science spaces.

Analyst Doug Schenkel began coverage of Genomic Health with a Neutral rating, Hologic with an Outperform rating, and PerkinElmer with a Neutral rating. Meanwhile, Shaun Rodgriguez initiated coverage of Cepheid with an Outperform rating, Quidel with a Neutral rating, and Meridian Bioscience with an Outperform rating.

Rodriguez also initiated coverage of Orasure Technologies with a Neutral rating.

Today's coverage initiations by Cowen focus on in vitro diagnostic testing for infectious diseases. Overall, technology in this space is gradually migrating toward molecular technologies and away from immunoassays and culture-based methods, the Cowen Med Tech Research Team said in a report. This move, they added, is progressively changing how testing is being done.

"Modern platforms are beginning to alter the association between technical sophistication and workflow complexity, and therefore driving a trend toward decentralization," Cowen said in its report. "The opportunity to capture economics and the increasingly lowered complexity of some automated and integrated molecular platforms are prompting more labs to consider molecular testing in-house. This is an important growth opportunity for the industry."

Cowen also noted that as consolidation ramps up in both the diagnostic business and hospitals and their laboratory operations in order to achieve economies of scale, this will likely "have profound implications on the industry."

Against this backdrop, Cowen initiated coverage of Genomic Health with a Neutral rating. In a research note, Schenkel noted the success of the Redwood City, Calif.-based molecular diagnostic testing firm's OncoType Dx test menu, saying it is positioned to continue double-digit revenue growth and has potential upside relative to consensus Wall Street expectations.

He said that the company has "unique clinical research, regulatory, [and] reimbursement expertise," but also said that Genomic Health's shares "already trade at a modest premium to comps" and Cowen's discounted cash flow analysis suggest that its stock is fairly valued.

"We believe material upside is dependent on revenue growth acceleration via new indications including prostate, continued penetration of the node negative breast cancer market opportunity, no changes in the reimbursement and/or competitive landscape, and improved operating leverage," Schenkel said.

In afternoon trading on the Nasdaq, shares of Genomic Health rose 2 percent to $36.63.

Schenkel also started coverage of PerkinElmer with a Neutral rating, and pointed to the Waltham, Mass.-based company's strong operational execution following the completion of acquisitions totaling more than $1 billion. In 2010 and 2011, PerkinElmer disclosed 12 purchases.

Schenkel also said that he is optimistic about PerkinElmer's growth outlook and sees the firm's product and end market mix as "relatively attractive." The company has become less cyclical and dependent on the academic market, and exposure to the National Institutes of Health and industrial end markets each is less than 10 percent of sales.

Instruments still comprise approximately 40 percent of total sales, but a significant portion of PerkinElmer products are sold to end markets that are generally resistant to economic cycles, including newborn screening, lab productivity enhancements and services, as well as water and food safety products, Schenkel noted.

However, he cautioned that "M&A-related operational 'low-hanging fruit' may have already been plucked just as comps start to get tougher." While valuation has space to improve "upside is not currently sufficient to support an Outperform rating," he said.
Shares of PerkinElmer were down a fraction of 1 percent on the New York Stock Exchange in afternoon trading at $29.28.

Schenkel was most enthusiastic about Hologic, giving it an Outperform rating and highlighting its recent $3.8 billion purchase of Gen-Probe, as well as new molecular diagnostic launches, which should position the company for above-average revenue growth in the developed and emerging markets.

He also noted a "promising replacement cycle" in digital mammography.

Schenkel called Bedford, Mass.-based Hologic's buy of Gen-Probe "one of the most attractive new product stories in molecular diagnostics." A main concern about Gen-Probe as a standalone business was an under-appreciation of the investment that would have been required for new product introductions and infrastructure building internationally.

"We believe the combination with Hologic addresses many of these concerns, and if anything, we believe the company's $75 million in year 3 synergy targets could prove conservative," he said.

He also pointed to Gen-Probe's launch of the Panther platform in Europe in late 2010 and clearance of the platform by the US Food and Drug Administration this past May. The introductions of the system and of the Aptima HPV and Aptima Trichomonas assays on the Tigris platform, Schenkel said, "take advantage of the trend of decentralization in molecular labs."

Shares of Hologic on the Nasdaq rose 1 percent to $20.61 in afternoon trading.

His colleague Rodriguez also began coverage of Cepheid with an Outperform rating, and noted the Sunnyvale, Calif.-based firm's market leadership in hospital-acquired infections as well as a robust test pipeline that is expected to leverage an installed base of more than 3,000 systems.

Cepheid management estimates that only about one-third of all hospitals in the US perform any molecular testing in-house, and according to Rodriguez, of the molecular diagnostic test firms Cepheid is best positioned take advantage of the opportunity. Outside of the US, the market remains largely untapped, he added.

Rodriguez also said that less than 20 percent of US hospitals have molecular methicillin-resistant Staphylococcus aureus surveillance programs, while the C. difficile market continues to grow at more than 20 percent. Both factors are potential growth drivers for Cepheid, he said.

In addition, the company is awaiting FDA clearance of its chlamydia/gonorrhea test. If that happens by the end of the year as Cepheid expects, it could launch the test in early 2013 and "decentralization economics could trigger rapid uptake in the $450 million market," according to Rodriguez. Deeper into the company's pipeline, he added, Cepheid has 14 tests in active development, which could expand the company's total addressable market by more than $2 billion.

Rodriguez said that Cepheid's High Burden Developing Countries Program, in which the company is selling its Xpert MTB/RIF test at a discounted price, could pressure gross margins and create near-term volatility, "but we believe this is reflected in expectations."

Cepheid shares on the Nasdaq were up 1 percent in afternoon trading to $34.93.

He also initiated coverage of Meridian Bioscience with an Outperform rating, saying he is "enthused about the early uptake" of the Cincinnati-based firm's illumigene molecular diagnostic platform. The company has placed about 900 systems following its launch in mid-2010 and FDA has cleared tests running on the system for C. difficile and Group A and Group B streptococcus. By the end of fiscal 2013, the illumigene test menu could reach seven tests, Rodriguez said, including tests for whooping cough, Mycoplasma, and two unidentified sexually transmitted diseases.

"Our checks suggest that illumigene can be a competitive molecular platform, especially for small- to mid-sized hospitals, a population we estimate exceeds 4,000," he said.

Rodriguez also took note of Meridian's "attractive" operational and returns profile.

"Although we believe management guidance for [fiscal] 2013 may prove aggressive, we believe this is already factored into expectations, and believe [Meridian's] unique and attractive profile will become increasingly appreciated in an uncertain macro-environment," he said.

In August, Meridian gave revenue guidance for fiscal 2013 of between $190 million and $195 million, and diluted per share earnings of between $.86 and $.91.

Meridian's stock was up 2 percent on the Nasdaq at $19.30 in Tuesday afternoon trading.

Lastly, Rodriguez started coverage of Quidel with a Neutral rating. Like Meridian, the San Diego firm is a newcomer to the molecular diagnostics space and has plans to launch its AmpliVue hand-held device later this year while it continues development of a fully automated, PCR-based testing system in partnership with Northwestern University and the NU Global Health Foundation.

Rodriguez supports the company's diversification of its business from being mainly a rapid flu test firm to one that provides diagnostics across platforms and disease states, but Quidel's finances and stock will be hostage to an unpredictable flu season "for at least the next couple of seasons."

In diversifying its business, Quidel set a goal of an incremental $100 million in new product revenues by 2015. But the company continues to have a 50 to 60 percent volume share of the US flu market, a position that makes it vulnerable to flu season gyrations, Rodriguez said. This was "clearly demonstrated in 2009-2010, when record revenues and earnings were driven by 2009 H1N1 pandemic, followed by dramatic [year-over-year] declines when a flu season failed to materialize in 2010," he said.

Shares of Quidel slid 2 percent to $18.56 in afternoon trading on the Nasdaq.

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