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Cowen & Co. Initiates Coverage of GenMark, Nanosphere with Outperform Ratings

NEW YORK (GenomeWeb News) – Investment bank Cowen & Co. today initiated coverage of molecular diagnostics companies GenMark Diagnostics and Nanosphere with Outperform ratings.

In a report, analyst Shaun Rodriguez said that GenMark "presents a unique and compelling long-term value proposition in the diagnostics industry," and that the Carlsbad, Calif.-based firm is "a story with open-ended growth potential, a solid management team, superior technology, and targeting attractive markets."

He noted, in particular, GenMark's eSensor technology, which he said could provide the company a "sustainable competitive advantage … offering best-in-class analytical sensitivity and specificity, combined with rapid processing."

eSensor forms the backbone of GenMark's XT-8 platform as well as its NexGen system, which is expected to launch early next year outside of the US and in the second half of 2014 in the US. Unlike XT-8, NexGen will feature fully integrated and automated nucleic acid extraction and amplification, as well as eSensor detection technology, Rodriguez said, and the simplified workflows should allow GenMark to "significantly" expand its technology footprint further into the hospital and reference laboratory market from about 1,200 laboratories currently to more than 5,000 just in the US.

Rodriguez also noted that GenMark management twice increased its guidance in 2012 and "we see continued upside potential relative to 2013 expectations." He pointed to an uptick in recent reagent use trends to more than $160,000 per site in 2012 from $50,000 per site in 2011, as well as momentum in the company's respiratory virus panel and hepatitis C virus genotyping business.

While a "significant" portion of GenMark's revenues are concentrated in one customer — a specialty reference lab in Washington made up 58 percent of the company's total revenues in 2012 and 70 percent of the year-over-year revenue growth, Rodriguez said — he added that "management is doing what it can to mitigate these risks."

Specifically, GenMark has a long-term contract with the lab, which guarantees a certain amount of consumables sales. Also, management has taken a conservative view of contributions from the customer to 2013 guidance, and recent trends of customers excluding the lab have tracked "impressively," Rodriguez said.

In afternoon trading on the Nasdaq, shares of GenMark were up 2 percent at $15.05

Rodriguez also initiated coverage of Nanosphere with an Outperform rating, and in a separate report said that the Northbrook, Ill.-based firm's first mover status in the blood stream infection testing market should "provide an anchor test to lift the rest of the menu."

The US Food and Drug Administration gave de novo clearance to Nanosphere's Gram-Positive Blood Culture Nucleic Acid Test on its Verigene System last summer, making it the first FDA-cleared molecular multiplex test for blood stream infection testing, Rodriguez said.

He wrote that the company has hit some bumps recently, including a revenue miss in the 2012 fourth quarter, as well as a miss on system placements during the quarter. Nanosphere also lowered its guidance on system placements for the first quarter of 2013, and shook up its management team, replacing William Moffitt as president and CEO with Michael McGarrity, and made changes to its board.

Investors have reacted nervously to the company, and since the start of 2013, shares of Nanosphere have retreated 17 percent.

Rodriguez said that the lowered system placement guidance and the management changes, though, are not "reflective of anything fundamentally changing for the worse," but instead make "sense for Nanosphere's evolution towards a company focused on commercial execution, as opposed to product development, and is also an acknowledgement that the company carried the perception of being a serial disappointer."

On the company's blood steam infection test, he agrees with Nanosphere's claim that it requires an "extensive validation/implementation process" which can be "frustratingly lengthy." The potential upside to this is "a sticky customer base with reliable utilization." Positive leading indicators, including more than 100 labs in some stage of the validation process, suggest "a significant revenue inflection in the coming quarters," Rodriguez said.

"We believe this will pave the way for uptake of the forthcoming tests for enteric pathogens and lift the respiratory panel and [C. difficile] tests, already cleared in the US. This could remain a show-me story in the near term, but we believe Nanosphere offers a compelling risk/reward opportunity," he said.

In afternoon trading on the Nasdaq, shares of Nanosphere were up 9 percent at $2.72