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Goldman Sachs Downgrades Life Tech, Affymetrix; Upgrades Myriad, Qiagen

NEW YORK (GenomeWeb News) – Goldman Sachs today downgraded Life Technologies and Affymetrix while it upgraded Myriad Genetics and Qiagen.

In a research note, analyst Isaac Ro made revisions to several life science tools and genomics-related firms to favor those "with high exposure to the US and strong [free cash flow] where capital allocation can improve." Changes were made also to reflect rising pressure in the European Union, continuing headwinds to the National Institutes of Health, and slower growth in China.

With the NIH budget for 2013 still a question mark, and the possibility of a 7.8 percent cut as a result of sequestration, there has been concern about its effect on life science tools firms, and Ro cited this in downgrading both Life Tech and Affymetrix.

He downgraded Life Tech to Sell from Neutral, saying that though the 7.8 percent cut to NIH funding next year is not certain, he believes academic spending will be curbed in order to protect jobs and continue ongoing experiments. Neither Wall Street nor Life Tech management, however, have allowed for such a scenario in its estimates.

Similarly, he is more cautious about the funding environment in Europe, which accounts for 30 percent of Life Tech's business, saying "we believe the operating environment has weakened since [the first quarter] and companies with significant European exposure face material headwinds in the back half of the year."

He added that he believes the Ion Torrent business to be a profit-and-loss drag through 2014 and beyond, noting that the elevated level of R& D investment, which he estimated at more than $100 million annually, makes the business unprofitable.

His 12-month price target on Life Tech is $38.

Ro also downgraded Affy to Sell from Neutral, noting pressure in the academic and European end markets, and added that even with the addition of the recently closed e-Bioscience deal, Affy's business remains heavily weighted — about 70 percent, he estimated — toward the research-based end market.

To finance the eBioscience deal, Affy had to raise about $190 million in debt, resulting in "limited balance sheet flexibility" which will restrict the company's ability to reinvest in the business at levels sufficient for it to grow at above Goldman Sachs' or Wall Street's expectations, Ro said.

Lastly, he said that further portfolio revision is needed. Although Roche is leaving the microarray business with the divestiture of the NimbleGen franchise, Affy's "opportunities for near-terms share gain will be limited as Illumina and Agilent [Technologies] are both stronger competitors in those niche areas," he said in his note. "Long term, AFFX needs increased balance sheet flexibility to continue realigning the product portfolio around the new eBio assets."

He lowered the six-month price target on Affy to $4 from $4.30.

In upgrading Myriad to Buy from Neutral, Ro cited four reasons. First, he said that recent reimbursement concerns are "overdone" and that patent concerns do not pose a near- or medium-term risk. He added that the firm's "highly US-focused business offers several new product catalysts."

Additionally, Ro sees potential for improved capital allocation to drive up its stock in the second half of the year, and "the scarcity value of established diagnostics assets warrants and M&A value in our price target methodology."

He raised the six-month price target for Myriad to $29 from $27.

In raising Qiagen's rating to Neutral from Sell, Ro said that he now views the company's full-year 2012 guidance and Wall Street estimates to be "reasonable. Qiagen has full-year sales guidance of between 6 percent and 8 percent sale growth at constant exchange rates. The company is guiding adjusted EPS to between $1.03 and $1.05. Consensus Wall Street estimates are for $1.24 billion in revenues for 2012 with EPS of $1.

Ro also noted that headwinds associated with Qiagen's human papillomavirus are "better understood," and incorporated an M&A ranking to the firm's price target "as we expect M&A premiums in diagnostics to persist."

He raised Qiagen's six-month price target to $17 from $15.

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