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Cantor Fitzgerald Initiates Coverage of LS Tools Space; Gives Buy Rating to Illumina, PacBio, Others

NEW YORK (GenomeWeb) – Cantor Fitzgerald this week initiated coverage of the life science tools sector, saying it is bullish on the space in spite of uncertainty in the general global markets. 

Analyst Bryan Brokmeier initiated coverage of five firms with Buy ratings — Illumina, Pacific Biosciences, Affymetrix, PerkinElmer, and Waters — and started coverage of two firms, Bruker and Fluidigm, with Hold ratings. 

In a research note, he said that he was particularly enthusiastic about life science tools companies with less exposure to the industrial end markets and with strong balance sheets. While growth in the sector during the past year has been slower than usual, he said, "we expect the industry to reaccelerate to a mid- to high-single digit rate," driven by increased academic and government funding, strength in the biopharma end market, spending on environmental and food safety, and the continued adoption of analytical technologies by clinical laboratories. 

Brokmeier initiated Illumina with a 12-month price target on the company's shares of $265. He estimated the company to have an 80 percent share of the $2.3 billion sequencing market and 44 percent of the $800 million microarray market, and said that the oncology market could be Illumina's greatest long-term growth driver. 

The company has estimated it has a $12 billion market opportunity in that space, yet to date about $450 million to $550 million of its sales come from its oncology customers. Illumina is slated to release a cancer panel for research use only by the end of the third quarter, and Brokmeier anticipates that would accelerate its 30 percent oncology growth rate and take market share from Thermo Fisher Scientific's Ion AmpliSeq Panels. 

The panel is anticipated to comprise 15 genes "critical in oncology and sets the groundwork for other CE-IVD marked and [US Food and Drug Administration-approved] oncology panels," Brokmeier said, adding that Illumina is committed to delivering a 170-gene version of the panel to the RUO market by early 2016. 

In afternoon trading on the Nasdaq shares of Illumina were down almost 1 percent at $200. 

Brokmeier initiated coverage of PacBio with a $9 price target and estimated the firm to have about a 2 percent share of the sequencing market. PacBio has reiterated its plan to develop a clinical NGS platform by the middle of next year, although Brokmeier said that FDA approval of such a platform likely will not happen until at least 2017. 

He also noted the company's deal with Roche forged in October 2013 to develop a sequencing system and assays for clinical diagnostics using its single-molecule real-time sequencing technology. He estimated Roche has two RS II systems currently and may take delivery of more than 10 instruments next year as it finalizes assay development, validates the platform for regulatory approval, and places instruments in CLIA labs.

Brokmeier also said that he anticipates PacBio will launch a new research instrument in the next six to nine months that may be "significantly smaller" than the RS II platform and include "major" improvements in system performance and throughput. 

"In our view, this becomes more likely every time it earns a milestone payment through its Roche partnership," Brokmeier wrote. 

PacBio's shares were up 4 percent at $5.07 on the Nasdaq during afternoon trading. 

He started coverage of Affymetrix with a $13 price target and estimated that the non-invasive prenatal testing space will contribute about $10 million in revenues to the firm this year, a figure that will grow as NIPT technology continues to expand into the average-risk pregnancy population, especially if the American Congress of Obstetricians and Gynecologists changes its guidelines to recommend NIPT for that population. 

Nearly a year ago, Ariosa Diagnostics, now part of Roche, reported that it had developed a microarray-based method for running its Harmony NIPT, which was followed by a deal with Affy to supply it with arrays and instruments. Provided Ariosa keeps its 25 percent share of the US NIPT market, an opening up of the average-risk population to that technology following possible ACOG guideline changes could translate to $15 million to $20 million in revenues to Affy, Brokmeier wrote.

Affy's shares on the Nasdaq dropped about 3 percent to $9.41 in afternoon trading. 

PerkinElmer was initiated with a $62 price target. Brokmeier noted the firm's organic revenues have reaccelerated during the past year on improving birth rates, an expanded testing menu in the US, and geographic expansion. In particular, he said that PerkinElmer's newborn screening business will generate about $250 million to $350 million in revenues, or between 65 and 70 percent of the totalUSnewborn screening space. 

He also said that company management believes it has $1 billion of merger and acquisition capacity and that it feels optimistic about its M&A pipeline. "The company has not been buying back shares," Brokmeier said, "which we believe indicates that it may be gearing up for than just a tuck-in acquisition." 

PerkinElmer shares were down a fraction of 1 percent at $49.12 in afternoon trading on the New York Stock Exchange. 

In initiating coverage of Waters with a $163 price target, Brokmeier said that the firm is a key beneficiary of the strong biopharma end market, which he estimated at $12 billion and growing at a mid- to high-single digit clip. He said that clinical mass spectrometry is a $100 million to $120 million business for Waters with a growth rate of 20 to 30 percent. 

A year ago, the company acquired the rapid evaporative ionization mass spectrometry (REIMS) technology from MediMass and has since launched the REIMS Research System with iKnife Sampling, combining direct-from-sample ionization with high-performance time-of-flight mass spectrometry. The technology is initially targeted to food safety, but Brokmeier said that he anticipates it to "ultimately become a significant growth driver in the clinic, following the industry-wide adoption of mass spec in clinical labs for pain management, therapeutic drug monitoring, and for the diagnosis of various diseases and metabolic disorders." 

In afternoon trading on the NYSE, Waters' shares were trimmed 1 percent to $124.01. 

Coverage of Bruker was initiated with a $22 price target. Brokmeier noted that the firm has recently completed "numerous restructurings and improved IT systems," that are now beginning to pay off. But with margins that "significantly lag" behind peers, as well as a recent slowdown in growth, exacerbated by higher exchange headwinds than experienced by competitors, Brokmeier gave Bruker a Hold rating, saying, "We believe it is prudent to remain on the sidelines." 

On a positive note, he said that the company's leadership in the NMR space continues to strengthen on the departure of Agilent Technologies from that market. Further, he highlighted the MALDI Biotyper as a growth driver. With recent FDA approval for an expanded claim on the instrument and the recent launches of the MALDI Tissuetyper and MALDI Sepsityper products, that business's revenues could increase to $350 million to $400 million from an estimated $100 million today, Brokmeier said.

Bruker's shares on the Nasdaq slipped about 2 percent to $18.40 in afternoon trading. 

Lastly, he initiated coverage of Fluidigm with a $15 price target. While he said the firm has a strong patent portfolio and first-mover advantage in the single-cell biology market and could see double-digit organic growth in the next few years, near-term struggles are a concern. 

Brokmeier noted a reorganization of Fluidigm's commercial team and said that the firm remains in active discussions with additional sales executive leadership. The company has "dramatically decelerated" the rate at which it has launched new products — although it made available a new high-throughput single-cell mRNA sequencing workflow for the C1 system this week — and "core product sales opportunities were missed and the product pipeline was not cultivated for new near-term product sales," he wrote. 

He said, however, that he expects Fluidigm to return to double-digit growth in 2016, adding that such a rate is sustainable for at least the next five to seven years. 

In afternoon trading, shares of Fluidigm on the Nasdaq were up more than 2 percent to $11.64.