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Leerink Swann Upgrades Illumina; Revises Estimates for Life Tech, Thermo Fisher, Others

NEW YORK (GenomeWeb News) – Leerink Swann today upgraded Illumina to an Outperform rating, saying the demand for its HiSeq next-generation sequencing platform has normalized, while interest among researchers in sequencing has remained high.

Separately, the investment firm revised estimates for Life Technologies, Thermo Fisher Scientific, Affymetrix, PerkinElmer, Bio-Rad Laboratories, Bruker, and Waters.

In a research note, analyst Dan Leonard upgraded Illumina from a Market Perform rating and increased the valuation on the San Diego firm's stock to a range of between $54 and $56 from an earlier range of $46 to $50. The midpoint of the new estimate would represent a 29 percent increase from Illumina's Friday closing price of $42.71.

Leonard also increased his full-year 2012 revenue estimates on the firm to $1.12 billion from $1.11 billion and 2013 revenue estimates to $1.23 billion from $1.15 billion. He kept 2012 EPS at $1.52 and increased EPS for 2013 to $1.72 from $1.69.

Consensus Wall Street estimates call for $1.14 billion in revenues for full-year 2012 and $1.23 billion in revenues for 2013, and EPS of $1.51 for 2012 and $1.72 for 2013.

Leonard said in his note that the possibility that demand for the HiSeq platform has normalized "is the biggest driver in our thinking that [Wall Street] estimates for 2012 and 2013 are achievable."

In particular, he said that a survey conducted by Leerink Swann and released earlier this month indicated that HiSeq purchase expectations among respondents for the coming 12 months was not meaningfully different from the number of instruments purchased during the prior 12 months — 17 vs. 19.

This stands in sharp contrast to a survey in March when respondents said they planned to purchase 10 HiSeqs in the coming 12 months, compared to 75 actual purchases in the prior 12 months.

Leonard also said that surveys indicate interest among researchers in sequencing technology continues to grow. In a June survey, 56 percent of lab directors in the US said they are are using NGS, with that figure expected to increase to 75 percent in two years, "suggesting that [Illumina] could grow its business (approximately 65 percent of which is sequencing) even in a tight funding environment."

In another survey released last week of European diagnostic laboratories, Leerink Swann also found that among 21 respondents, seven said they have NGS platforms, a higher percentage than expected. Four respondents also said they plan to buy new instruments in the coming year. Leonard said, however, that that survey may be biased toward those with some opinion leadership "and thus not indicative of the broader market."

He added that the use of sequencing for diagnostic applications is not expected to have a meaningful impact on instrument vendors for some time, but some early examples of commercial clinical applications of the technology, such as Foundation Medicine's launch of its FoundationOne pre-cancer test — which is based on NGS technology — in May could accelerate clinical adoption of sequencing methods.

Also, US lab directors have indicated that while they will be conservative in their spending during the second half of 2012, they do not expect to be noticeably more tight-fisted than in the second half of 2011.

"Thus we are less concerned about a repeat of [Illumina's] big miss" in the third quarter of 2011, Leonard said, when the company reported a 1 percent decline in revenues. Soon after, Illumina restructured its operations, including laying off 200 workers.

In addition to changes to Illumina, Leonard changed estimates for several other life science tools firms operating in the 'omics space, including Life Technologies. Leonard lowered his 2012 revenue estimate for Life Tech to $3.79 billion from $3.82 billion, while estimates for 2013 were lowered to $3.93 billion from $4.00 billion.

Leonard also reduced his EPS estimate for 2012 to $3.93 from $4.01 and EPS estimate for 2013 to $4.29 from $4.47.

The reductions reflect weaker foreign currency as well as a more conservative funding environment in 2013, he said, though he is not assuming sequestration and a cut in funding to the National Institutes of Health of 7.8 percent.

He maintained an Outperform rating for Life Tech as the launch of the Ion Proton bench top sequencer in the third quarter of this year could provide a catalyst to sales, he said. His 12-month valuation on the company's stock is in the range of $58 to $62.

Leonard also kept an Outperform rating for Thermo Fisher Scientific but shaved 2012 revenue estimates to $12.13 billion from $12.34 billion and 2013 estimates to $12.37 billion from $12.72 billion. EPS estimates were trimmed to $4.78 from $4.79, but he increased 2013 EPS estimates to $5.26 from $5.22.

The 12-month valuation for the company is between $60 and $64.

In a note, Leonard said that while he has modeled the purchase of Doe & Ingalls and the sale of Thermo Fisher's lab workstations business into his new estimates, he has not incorporated the One Lambda deal, which he anticipates will add between $.09 and $.11 to EPS in 2013.

A recent stock repurchase program of an additional $500 million in shares for 2012 is also expected to add to Thermo Fisher's EPS for 2012 and 2013, but headwinds that the company will encounter include weaker foreign currency as well as a more difficult macroeconomic environment, Leonard said.

Meanwhile, Affy's purchase of eBioscience is expected to benefit the Santa Clara, Calif.-based firm's bottom and top line. Leonard raised 2012 revenue estimates to $307.7 million from $268.2 million and revised the net loss estimate to $.03 per share from a net loss of $.14 per share.

He also increased 2013 revenue estimates to $347.5 million from $266.6 million, and revised the EPS estimate to $.17 from a net loss per share of $.05. The 12-month valuation on Affy's stock stayed at $4.50 to $5.50 and the rating remained at Market Perform.

On PerkinElmer, Leonard lowered his estimates due to foreign currency challenges and macroeconomic conditions. He cut the 2013 revenue estimate to $2.17 billion from $2.19 billion, while the 2013 revenue estimate was cut to $2.26 billion from $2.30 billion. The EPS estimate was reduced to $2.04 in 2012 from $2.06. He also lowered 2013 EPS to $2.36 from $2.41.

Leonard kept an Outperform rating on PerkinElmer, while his 12-month valuation on the company's stock is between $32 and $34.

Weaker foreign currency was the basis for Leonard's lowered estimates for Bio-Rad as well. In 2012, he anticipates revenues to be $2.08 billion, down from $2.12 billion, while in 2013 he estimated revenues at $2.14 billion, compared to an earlier estimate of $2.19 billion. The EPS estimate for 2012 was taken down to $4.81 from $4.94, and the 2013 EPS estimate was reduced to $4.89 from $5.07.

Leonard has a Market Perform rating on Bio-Rad and kept the valuation on the firm's stock between $100 and $106.

He also lowered revenue and EPS expectations for Bruker based on weaker foreign currency and macroeconomic conditions. Leonard said that 2012 revenues are expected to come in at $1.75 billion, down from $1.80 billion, while 2013 revenues are expected to be about $1.85 billion, down from $1.92 billion.

He trimmed the 2012 EPS estimate to $.93 from $.94, and for 2013 EPS was lowered to $1.09 from $1.12. Leering Swann has an Outperform rating on Bruker's stock with a valuation of $17 to $19 per share.

Lastly, Leonard cited similar factors in lowering Water's 2012 revenue estimates to $1.87 billion from $1.91 billion and 2013 estimates to $1.96 billion from $2.03 billion. He sliced the 2012 EPS estimate to $5.02 from $5.10 and the 2013 EPS estimate to $5.51 from $5.67.

Leonard cut the valuation on the company's stock to a range of $84 to $86 from a previous range of $93 to $97 but maintained an Outperform rating, saying Waters has limited exposure to government funding, while its H-class product cycles "could enable some outperformance versus peers."

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