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Goldman Sachs Upgrades Thermo Fisher on Life Tech Buy, Improving End Markets

NEW YORK (GenomeWeb News) – Goldman Sachs today upgraded Thermo Fisher Scientific' stock, noting the firm's increased scale as a result of its purchase of Life Technologies, as well as improving end markets.

The investment bank lifted Thermo Fisher's shares to a Buy rating from a previous Neutral rating and increased the 12-month price target on its stock to $153 from $114.

"Outsized scale and pricing power should help drive long-term organic growth of 5 percent," Goldman Sachs analyst Isaac Ro said in a research note. "Also, [Life Tech] assets have languished and present an underappreciated source of upside in our view."

Thermo Fisher completed its acquisition of Life Tech earlier this month for $13.6 billion and the assumption of $1.5 billion in net debt, creating a "new large cap growth company with a dominant competitive position" in the life science tools space with almost twice as much revenue now as Danaher, the next largest firm in the space. (That comparison only applies to Danaher's life science tools, diagnostics, and environmental segments.)

Ro noted that the buy expands Thermo Fisher's offerings "into higher margin and more predictable consumable revenue streams, many of which saw underinvestment by Life's prior management."

While Life Tech's research consumables business generated about $1.6 billion in sales, it has been used to fund the company's R&D efforts for the Ion Torrent business. That along with a constrained funding environment has resulted in organic growth in Life Tech's research consumables business of between 1 and 2 percent during the past two years, compared to 6 percent growth between 2005 and 2008.

Ro also said that Life Tech's buy of Ion Torrent in 2010 was a costly strategy — including earn outs, Life Tech paid about $1 billion — that has, so far, not yielded the company competitive gains against Illumina in the next-generation sequencing space. Meanwhile, Life Tech has invested about $100 million in R&D into Ion Torrent annually, or one-third of Life Tech's total R&D budget.

In return, Ion Torrent delivered an estimated $185 million in revenues in 2013, or just 7 percent of Life Tech's total revenues, or 1.5 percent of Thermo Fisher's estimated revenues for 2014, Ro said.

Pointing to the future, Ro said that he is "optimistic that a rebound to mid-single digit growth is achievable in the current environment if given a renewed R&D focus and broader global reach under [Thermo Fisher's] ownership."

As end markets improve, he said, Thermo Fisher "emerges with a stronger position." In the US, the omnibus spending bill increases the National Institutes of Health's budget for Fiscal Year 2014, while in Europe "funding appears poised to rise in the medium term, though we do not expect a material change in 2014 funding over 2013

In Asia, stimulus funding in Japan could continue to feed demand for life science tools products through the early part of this year, and Ro believes "the country's long-term commitment to R&D remains intact."

China experienced weakness in the industrial end market recently, but funding for life science tools remains stable, and Thermo Fisher's scale is expected to help it take market share from competitors, he continued.

The pharmaceutical end market, meanwhile, has a positive outlook, based on comments by pharma company executives recently, and Thermo Fisher's size, reach, and "ability to offer significant supplier consolidation synergies will permit above-market growth in large pharma accounts despite somewhat constrained R&D budget growth," he said. The growth potential for smaller pharma/biotech accounts also remains robust.

Shares of Thermo Fisher on the New York Stock Exchange were up 2 percent at $124.51 in Thursday afternoon trading.