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Leerink Initiates Coverage of Danaher With Outperform Rating

NEW YORK (GenomeWeb) – Leerink today initiated coverage of Danaher with an Outperform rating and a $93 price target on the firm's shares. 

"We believe the forthcoming company separation allows for a sharpened focus and expanded capital deployment opportunities," analyst Dan Leonard said in a report, adding that he also sees a margin expansion opportunity. All of those factors combined should drive Danaher's stock to outperform the S&P, he said. 

Danaher announced its plans in May to split into two publicly traded firms. The existing Life Sciences & Diagnostics and Dental segments, water quality and product identification platforms, and Pall, which Danaher acquired for $13.8 billion, will comprise one firm keeping the Danaher name.

The second industrial growth firm, currently referred to as Newco, will comprise Danaher's Test & Measurement instruments platform, as well as its specialty industrial businesses. The split is expected to be completed by the end of 2016. 

According to Leonard the separation will reduce volatility to Danaher and provide it a more consistent revenue stream. After the separation and including the Pall contribution, about 52 percent of Danaher's revenues will be based on the life sciences and diagnostics market, up from about 36 percent in 2014. Meanwhile, recurring consumables and services revenues will comprise about 60 percent of the new Danaher's annual revenue base, compared to 45 percent in 2014. 

Additionally, he said that he believes Danaher will be active in the mergers and acquisitions space, saying it "will remain the main pillar of Danaher's long-term growth strategy," and the company's separation "should broaden opportunities for M&A capital deployment." 

Leonard was also bullish about the firm's existing life science and diagnostic business. He noted that Danaher's purchase of Beckman Coulter in 2011 made the life sciences and diagnostics business Danaher's largest by revenue and transformed the company into one of the top five diagnostic companies. At the time of the purchase, Beckman faced multiple issues, including declining organic growth, quality problems, and challenges associated with warning letters from the US Food and Drug Administration.

Danaher has since resolved the problems and the Beckman Dx business has now returned to low- or mid-single digit growth during the past few quarters, Leonard said. "We believe these growth trends will continue in 2016 especially as the company continues to invest aggressively in customer-facing headcount in high-growth markets and new products," he wrote. 

He also took note of the launch of the DxN Veris MDx molecular diagnostic platform in Europe. While Danaher has not yet submitted the Veris product line for FDA clearance, Leonard said that recent results from a Leerink survey suggests a "good amount of interest? from lab directors." He estimated the Beckman tools business at about $1.2 billion.

Of the Sciex business, Leonard said that it is the mass spectrometry market leader with about a 22 percent share of the space, followed by Agilent (20 percent), Thermo Fisher Scientific (19 percent), Waters (12 percent), and Bruker (8 percent). 

He said that the parts of the mass spec space in which Danaher holds leadership positions have generally outpaced the growth of the broader tools industry, and Danaher's organic growth in mass specs have seen mid- to high-single digit organic growth, generally above its peers. "We expect 2015 could prove another year of healthy organic growth," Leonard said, adding the TripleTOF 6600 instrument, launched in June 2014, expands the firm's addressable market by $400 million. 

Sciex is using the platform in its partnership with Illumina, announced a year ago, to integrate proteomics and next-generation sequencing analysis.

Shares of Danaher rose 1 percent to $84.09 in afternoon trading on the New York Stock Exchange.