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Goldman Sachs Upgrades Cepheid and Myriad, Restarts Thermo Fisher Coverage

NEW YORK (GenomeWeb News) – Goldman Sachs today upgraded Cepheid and Myriad Genetics and reinstated Thermo Fisher Scientific as the investment firm revised estimates on a number of life science tools and molecular diagnostics vendors.

In a research report, analyst Isaac Ro upgraded Cepheid to a Buy rating, Myriad to Neutral, and reinstated Thermo Fisher at a Buy rating.

In July Ro downgraded Cepheid to a Neutral rating, but today called the move "premature" in retrospect and cited impressive second-quarter results, new products announced at the American Association of Clinical Chemistry annual conference, and the "scarcity value for growth" in Goldman Sachs' coverage universe and across the healthcare space.

He increased the six-month price target for Cepheid's stock to $45 from $36 and full-year 2011 revenue estimates to $270.7 million from an earlier estimate of $269.6 million. EPS estimates were unchanged at $.13.

In his report, Ro called small- to mid-sized hospitals an untapped opportunity for Cepheid as it has a penetration rate of less than 10 percent for hospitals with fewer than 400 beds. During the next few years, he added, menu expansion and enhanced distribution resulting from a deal it announced in July with Labsco covering the GeneXpert Systems and tests, will increase market penetration to the small- to mid-sized hospitals to about 20 percent.

"We believe Cepheid's easy-to-use, automated rapid platform is positioned well to help small labs expand their testing capabilities into molecular diagnostics," Ro said.

He also noted that adoption of Cepheid's GeneXpert platform could benefit from the recent spreading of multi-drug resistant tuberculosis and other drug-resistant strains of TB in Europe. Cepheid's Xpert MTB/RIF test already has been endorsed by the World Health Organization for MDR-TB or HIV-associated TB, and Ro said that while it may be too early to predict the effects of the European outbreak on the company's revenues, it along with the WHO thumbs-up "will highlight the quick and accurate results [of Cepheid's] GeneXpert and increase European penetration."

Ro also upgraded Myriad Genetics to Neutral from Sell and raised the company's six-month price target to $21 from $19.

Revenue estimates for Myriad's fiscal-year 2012, which began on July 1, were unchanged at $454.2 million, but EPS was trimmed to $1.27 from $1.29.

While the company's current legal battle around the patents for BRCA1 and BRCA2 remains unclear and an appeal to the US Supreme Court is possible, Ro said that he sees no near-term downsides or changes to the status quo of Myriad's BRCA1 patents through 2014 and BRCA2 patents through 2016.

In addition, Myriad's third- and fourth-quarter earnings were better than expected, "underscoring [the company's] strong franchise," he said.

Ro also praised Myriad's use of capital, both its stock repurchasing programs and recent acquisitions, including its $80 million buy of Rules-Based Medicine, which he estimated will add $25 million to 2012 revenue growth.

Separately, Ro removed the "No Rating" designation from Thermo Fisher with a Buy rating and a 12-month price target of $65. He raised 2011 revenue estimates to $11.88 billion from $11.68 billion and EPS to $4.22 from $4.09.

He said Thermo Fisher's recent $3.5 billion acquisition of specialty diagnostics firm Phadia has "strategic merit" and provides the company with a "leading franchise in allergy and autoimmune testing with a fast-growing base of revenues."

The addition of the business is anticipated to add $.08 to Thermo Fisher's EPS in 2011 with the contribution incrementally increasing each year afterward to $.50 in 2014, Ro said.

He also cited the company's track record in achieving M&A synergies, saying it has a solid history in "delivering greater-than-expected revenue and cost synergies." On share repurchases, Thermo Fisher generates sufficient free cash flow — an estimated $1.62 billion in 2012 — and he expects the firm "to exceed our estimated $932 million in share repurchases for 2012."

Lastly, Ro said that the company has one of the most diversified and end-market mix in Goldman Sachs' portfolio of life science tools firms, which shields it from "isolated shocks to demand from specific end markets," such as cuts in National Institutes of Health funding or drops in industrial demand.

As a whole, Ro remained cautious about the life science tools space due to uncertainty surrounding NIH funding, as well as academic/government and pharma budgets, "and year-end R&D budget flushes."

As a result, he revised estimates on numerous companies in the space. He maintained 2011 EPS estimates for Agilent at $2.91 and revenue figures at $6.65 billion. The 12-month price target was lowered, however, to $39 from $41.

He kept Affymetrix's 2011 loss per share at $.02 for 2011 and the six-month price target at $5. Revenue estimates were lowered to $278 million from $280 million.

Bruker's 2011 EPS estimate was lowered to $.88 from $.90 on revenues of $1.62 billion, down from an earlier estimate of $1.65 billion. Its 12-month price target was trimmed to $15 from $16.

Ro maintained Illumina's 2011 revenue estimates at $1.15 billion but cut EPS to $1.44 from $1.46 and sliced the 12-month price target to $47 from $62.

2011 EPS for Life Technologies was trimmed to $3.71 from $3.72 on currency effect assumptions and lowered organic growth rate estimates, as well as reduced growth expectations for the company's high-throughput sequencing instruments. Revenue estimates were cut to $3.72 billion from $3.74 billion. The 12-month target price was also cut to $43 from $48.

He cut PerkinElmer's 2011 revenue estimates to $1.93 billion from $1.94 billion and EPS to $1.66 from $1.67, on currency effect assumptions and lowered organic growth rate estimates for the company's research business. The 12-month price target was dialed down to $22 from $25.

Ro revised Sigma-Aldrich's 2011 revenue estimates to $2.55 billion from $2.57 billion and EPS to $3.70 from $3.73. The 12-month price target was lowered to $69 from $72.

Waters' 2011 revenues estimates remained at $1.86 billion and EPS was unchanged at $4.83, but Ro took down the firm's 12-month price target to $86 from $91.

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