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Growth for Life Science Market Expected to Continue, Wall Street Analyst Says

By a GenomeWeb staff reporter

NEW YORK (GenomeWeb News) – Despite the sluggish economy and an overall flat funding picture, the life science market will continue "to provide investors with attractive risk/reward opportunities" over the next several years, with the molecular diagnostics space one of the most attractive markets, according to an analyst report issued last night.

In the report from Wall Street investment firm Leerink Swann, Dan Leonard wrote that "In general, we believe those companies with leverage to high-throughput biology (research tools and automation in MDx), applied markets … emerging markets, and or compelling new product stories stand to enjoy the fastest growth rates in the coming years."

Like many others, Leonard singled out next-generation sequencing as a technology with the capability to transform life science research and to generate significant revenue.

"While new research tools meaningful enough to move the needle on a company's performance are few and far between, there are exceptions to the rule," he said in his report. "One prominent exception is next-generation sequencing, the fastest growing product category in life science tools."

Sales of next-gen sequencing products have spiked more than 10-fold from $50 million in 2006 to $520 million in 2009, according to data from Leerink Swann. Over the coming years, Leonard said, the growth is expected to continue at a strong double-digit clip, driven by increased use in research, and eventually adoption for clinical purposes.

His enthusiasm for the technology is reflected by the industry as a whole. During the summer, Pacific Biosciences, which is developing a single-molecule sequencing technology and Complete Genomics, a sequencing service firm, announced their plans to go public. Meanwhile, Life Technologies, in a bid to outpace its competition, acquired Ion Torrent, which is developing a chip-based sequencing platform for up to $725 million.

During the summer, GenomeWeb Daily News reported that while the IPO market in the 'omics space may still be limited, for next-gen sequencing businesses, it may be a different tale.

For molecular diagnostics, Leonard said that several areas show promise. In particular, molecular test for high-risk human papillomavirus and methicillin-resistant Staphylococcus aureus have been two of the most "prominent new product cycles."

HPV test sales have nearly tripled between 2005 and 2009, from $120 million to $350 million, he said, while MRSA-related test sales have more than doubled to $130 million in 2009 from $50 million in 2007.

The HPV market is still capable of sustaining double-digit growth over the next few years "driven by increased penetration of adjunct screening for women over 30 in the US, and adoption of HPV screening internationally," Leonard said.

He is less sure about the MRSA space. Though in theory, the market should be worth more than $1 billion "we think realistically it tops out at a much lower level."

He added that in the future, automated platforms may be the main catalyst behind growth in the MDx space. "Automation has been and will continue to be an increasing theme in the molecular diagnostics market, with most major companies offering or developing compelling platforms with broad menus," he said.

Lastly, Leonard noted companion diagnostics will "likely become more prominent" in the MDx space in the next few years, especially those that can be used to stratify patients for oncology therapies.

Life Science Funding: Fingers Crossed

Leonard also provided his take on government spending in life sciences.

In the US and Western Europe, Leonard called the funding situation a mixed bag. In the US, the American Recovery and Reinvestment Act of 2009 provided NIH with a $10 billion boost. The agency received a 3 percent increase in its base budget for FY 2010, which ended on Sept. 30, and for the current fiscal year, President Obama has proposed another 3 percent increase to NIH's budget.

Moving ahead, cuts to federal agencies cast a shadow over NIH, but Leonard said that because NIH was "left unscathed" during FY 2011 budget freeze efforts, "history could repeat itself."

For FY 2012 Obama has asked all non-security agency heads to submit budget proposals 5 percent below their FY 2011 funding levels, but Leonard noted, the president has advised the 5 percent cuts not to be implemented across the board but rather shifted from low-priority areas to higher priority areas, such as those that target dangerous diseases, reduce healthcare costs, and grow the economy.

"Specifically, the president has adopted a preference for technologies which enable high-throughput biology," Leonard wrote, and added "We expect that this support will continue, which provides a basis for our view that companies that supply high throughput biology (e.g. next-generation sequencing, mass spectrometry, and other multiplexing technologies) will grow faster than their peers."

In Western Europe, specifically the UK, Germany, and France, he similarly expressed a mixed outlook. He called the situation in the UK "a concern" amid a possible austerity movement. Biomedical research councils are scheduled for a 6 percent increase in funding for FY 2011, but the new David Cameron government has also said that it hopes to trim department budgets by 25 percent in order to shrink its budget deficit.

In fact, this week the UK government eliminated a number of health-related groups, including the Human Genetics Commission, in order to save money.

One bright sign, Leonard said, is that the government has pledged to continue its support for construction of the £250 million ($401 million) UK Centre for Medical Research and Innovation.

He is less worried about funding in Germany and France. In June 2009, the German government announced an €18 billion funding boost to universities and research organizations, spread over a decade, and this past May while the government announced a multi-billion euro cut in public spending, it spared the national research agencies.

In France, the government announced a large to stimulate research, resulting in €11 billion going to universities and another €8 billion directed specifically to research initiatives.

Leonard also cited a 12 percent increase in the budget for the Seventh Framework Programme for its 2011 budget. Though the program represents only 5 percent of public funding for research in the European Union, "the increase is, nonetheless, a positive development," he said.

In Portugal, Italy, Ireland, Greece, and Spain, countries that have been struggling with debt crises, research funding is expected to decline, "in some cases dramatically," Leonard wrote. He added, though, that their importance to the life sciences market is "rather small … and thus we do not believe these cuts will be material enough to destabilize aggregate research support in the Western European region."

Elsewhere, he said that the funding outlook in Japan is unclear. In China and India, government spending has been growing at about 20 percent annually for the past few years, and has been targeted by the life science industry as growth markets. However, the two countries still comprise only a small part of sales to the industry, Leonard said: "20 percent revenue growth on 5 percent to 10 percent of company revenue only adds 1 percent to 2 percent to the total top-line growth rate," he wrote.

His outlook for the pharmaceutical/biotechnology space is pessimistic. R&D spending by companies in the space have shrunk the past two years and could shrink again in 2010, he wrote, and recent "megamergers," such as the Pfizer/Wyeth linkage and Merck/Schering-Plough marriage, "have only exacerbated" reduced spending in R&D. After a decade of rising investments in R&D, starting in 2007, such spending has been scaled back, he said, citing statistics from the trade group, The Pharmaceutical Research and Manufacturers of America.

In spite of a patent cliff that has loomed for years, the industry has not been successful in replenishing its pipelines, and "we believe that large pharma/biotech R& D will struggle to grow until the major patent cliff subsides in 2014/2015," Leonard wrote.

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