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William Blair Initiates Coverage of Life Tech with Outperform

NEW YORK (GenomeWeb News) – Investment bank William Blair has initiated coverage of Life Technologies with an Outperform rating, saying that the firm's stock is relatively inexpensive considering its "stable earnings growth and robust cash flow."

In a research note, analyst Amanda Murphy said that recent headwinds — including a decline in sales for the SOLiD sequencing system, the roll-off of stimulus funds, and a reduction in royalty revenues from quantitative PCR — is expected to be offset by the firm's Ion Torrent benchtop sequencing platform as well as growth in applied and emerging markets.

She noted that around 80 percent of Life Technologies are derived from consumables, which are recurring, high-margin revenue streams and provide stable and robust cash flow.

"While the recent economic slowdown has depressed revenue growth, the underlying research consumables business is still growing in the low single digits," Murphy wrote, adding that although Life Tech's free cash flow has been affected by milestone payments of $193 million associated with the Ion Torrent acquisition, she expects the firm to produce free cash flow of around $660 million in 2012 and $810 million in 2013.

Murphy estimates that the decline in SOLiD systems sales, as Life Tech shifts its focus to sales of the Ion Personal Genome Machine and new Ion Proton sequencer, will be $60 million in 2012. The roll-off of stimulus funding is expected to shave another $40 million from its annual revenues, and the drop in qPCR royalties is expected to be around $30 million.

However, she said that the Ion Torrent platform has been rapidly adopted in the market and is expected to help drive revenue over the next two years. In addition, growth is expected to come from applied markets, which includes molecular diagnostics.

Life Tech has been building out its molecular diagnostics platform, and in addition to plans to seek US Food and Drug Administration clearance for the Ion Torrent platform, it recently acquired direct-to-consumer genetic testing firm Navigenics and lung cancer test developer Pinpoint Genomics. As part of the Navigenics deal, Life Tech obtained a CLIA lab that has been licensed in all 50 states as well as a curated physician portal that Life Tech will extend to help doctors interpret results of various genomic tests.

Today, Life Tech also announced the launch of its Pervenio Lung RS molecular risk-stratification test for early-stage lung cancer. The test, which was developed by Pinpoint, will be offered through the firm's CLIA lab.

Overall, Murphy has projected 2012 revenue growth of 2 percent and 2013 revenue growth of 3 percent for Life Tech. "We calculate that growth in Ion Torrent more than offsets the impact of SOLiD in 2012, contributing 115 percent of expected currency-adjusted revenue growth in 2012 and 78 percent in 2013."

However, she cautioned that Ion Torrent is also a "meaningful risk" to estimates. "The benchtop sequencing market is relatively new and increasingly competitive: Life launched the Ion Torrent PGM in early 2011, and Illumina launched its MiSeq platform in late 2011," she said. "Overall, we believe it is hard to call a winner in the desktop sequencer space and note that the various players, including Life Technologies, are early in the commercialization of these platforms."

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