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Fitch Places Life Tech's Ratings on Evolving Watch Following Acquisition Speculation

NEW YORK (GenomeWeb News) – Fitch Ratings today placed Life Technologies' ratings on Rating Watch Evolving following a report two weeks ago that the Carlsbad, Calif.-based firm may be looking for a buyer.

A Rating Watch Evolving indicates a heightened possibility that a company's ratings may be changed though it is unclear whether the changes could be raised, lowered, or affirmed. Fitch placed Rating Watch Evolving on Life Tech's Issuer Default Rating BBB; senior unsecured credit facility BBB; and senior unsecured notes BBB.

Fitch placed Life Tech on the watch saying, "There is an overhang on the credit profile related to the heightened potential of a transformational credit event," which could be manifested as a leveraged buyout of Life Tech, an acquisition by a strategic interest, or a restructuring of its operations.

Of the three scenarios, Fitch said that a leveraged buyout may not be in the cards, however. While Life Tech is an "attractive acquisition target for private equity … Fitch thinks that there is a lack of an obvious business strategy behind a [leveraged buyout] transaction, such as cost-cutting opportunities. Furthermore, resultant high leverage could limit the [purchasing] company's financial flexibility to invest in growth opportunities in the evolving life sciences industry."

The ratings firm added that due to opportunities for cost synergies, an acquisition by a strategic interest could be more likely, and noted the growth potential of Life Tech's next-generation sequencing assets. However, Fitch said that that business remains a small part of the company's total business, even though Life Tech has sought to build it out.

"The realization of strong uptake of the next-generation [sequencing] assets in clinical end markets will require financial flexibility to make incremental investments," Fitch said.

Beyond a possible sale of Life Tech, Fitch said that the biggest risk to the company is continued pressure on government and academic funding. That end market represents about 35 percent of Life Tech's business, Fitch said. And while consumables sales make up about 85 percent of the company's revenues, cuts in funding to government/academia could compromise that business, as well, it added.

Fitch said that it believes that demand for life science tools and products in the developed markets in the US and Eurozone will rebound "slightly" this year, and added that Life Tech's best growth potential is in the clinical end market "based on its growing portfolio of next-generation DNA sequencing assets." Uptake of the technology is in its nascent stage, however, and "[t]here remains risk related to obtaining the regulatory and government approvals necessary to support wider application of the technology in clinical settings."