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UBS Upgrades Luminex to Buy

NEW YORK (GenomeWeb News) – UBS today upgraded Luminex to a Buy rating, noting uptake of the company's gastrointestinal panel, the Eragen acquisition, and a favorable profile amid macro challenges.

The investment bank upgraded the Austin, Texas-based company from a prior Neutral rating and lowered the 12-month price target on its stock to $22 from $25.

In a research note, analyst Daniel Arias said that Luminex's stock is "over-sold" following the dilutive acquisition of GenturaDx for $50 million, as well as negative news surrounding the federal government's BioWatch bioterrorist program.

"[G]oing forward, we see multiple expansion via execution on near-term catalysts/events," Arias said, including Luminex's gastrointestinal pathogen panel, which received CE marking in early 2011. The panel should begin to contribute to Luminex's balance sheet in the second half of this year, according to Arias, which would help drive sales of the firm's Assay Group. By 2015, the panel is estimated to comprise about 30 percent of Luminex's total assay sales, Arias said.

"[T]he expansion of the company's assay business, overall, is in our view, the most compelling portion of the [Luminex] investment case," he said.

Arias also noted a stronger than expected contribution from the Eragen purchase completed last summer. The deal provided $7.6 million in revenues to Luminex in 2011, above the $5 million to $7 million that had been forecast by management, and proceeding ahead, the business should see continued strength on growing demand for the Multicode RTx assay technology as a part of clinical RT-PCR workflows.

Meanwhile, customer purchases of bulk consumables — quarterly bead orders of more than $100,000 — remain volatile, a concern for investors. Though fluctuation from quarter to quarter will continue, the effect of this on Luminex's revenues is being compensated by the growth of the assay business, and the top line should stabilize in time, Arias said, adding that bulk consumables dropped to 17 percent of total sales in the second quarter from 34 percent in the year-ago period.

Thermo Fisher Scientific's $925 million purchase of One Lambda, Luminex's largest customer, should also play out positively for Luminex as a result of greater visibility on bulk order patterns from increased focus on inventory by Thermo Fisher.

With funding to the National Institutes of Health remaining in flux, Arias also cited Luminex's minimal exposure to NIH-funded academic and government spending as a "key attribute." Luminex has only 2 percent exposure to NIH funding, compared to 72 percent exposure to the clinical diagnostics market, which he said is rapidly expanding and less economically sensitive.

Luminex's business is weighted toward recurring revenue streams, and, "We believe these business/portfolio characteristics position the company well to navigate choppier customer purchasing trends that may emerge from a volatile macroeconomic climate and/or increasingly uncertain academic spending environment," Arias said.

Luminex's announcement of its acquisition of Gentura during the summer received a mixed reception from investors because of its dilutive nature. While competition in the RT-PCR assay market will be fierce, Arias said that Gentura's streamlined workflows and ease of use can be "potentially advantageous, and note that the freedom to choose random or batch testing is a key factor for those facilities with lower sample aggregation rates, but a desire for rapid time-to-results performance."

The ability to optimize EraGen assays on Gentura's system "could make for a compelling diagnostics offering due to workflow simplicity," he added.

Recently, media reports have questioned federal funding commitments to the BioWatch program, as well as the performance of the Northrop Grumman-Luminex Next-Gen Automated Detection System, noting false positive results being generated on the system.

While the future of BioWatch is uncertain, Arias said that he does not believe the program is dead, and after an update on timing earlier this week, a formal request for proposal for the next generation of a monitoring system is scheduled for release in the fourth quarter, "which would move this program forward to Phase II."

"We think it is likely that both the Northrop Grumman/Luminex team and the PositiveID team will receive RFP's for BioWatch Gen-3 Phase II participation," he said.

Luminex shares on the Nasdaq were up 5 percent at $19.39 in morning trading.

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