Free Annual Reports
A Fistfull Of Life Sciences
As the whirlwind that is earnings season churns on, a host of life sciences companies have recently reported earnings. Although conditions were not quite as strong in general as a year ago, the sector continues to grow. Here are some of the major highlights and takeaways for investors.
IN PICTURES: 10 Tips For The Successful Long-Term Investor
A SOLiD Plan
Although Life Technologies (Nasdaq:LIFE) is often compared to Illumina, it is actually a considerably larger and more diversified company. True, sequencing is important here (and demand for the SOLiD 4 platform helped boost Genetic Systems growth into the low teens), but other businesses like PCR, reagents and flow cytometry are significant.
The third quarter was pretty good for LIFE, despite some challenging comps. Revenue rose almost 8% (6% on an organic basis), and very tight expense control fueled a 15% improvement in operating income.
LIFE could have some near-term growth challenges, but the long-term view is strong and the integration of Ion Torrent could give the company a boost in the next-gen sequencing market. Assuming that LIFE can average low-teens to high single-digit free cash flow growth, these shares are interesting.
Illumina: The Shining Light
Right now, it looks like Illumina (Nasdaq:ILMN) can do no wrong. This leader in next-gen sequencing and microarrays posted 50% revenue growth in the third quarter, with a 70% jump in sequencing orders and very strong pull-through of consumables. Although the company lost a bit of gross margin (down about 1.7% to 67.8%), that is likely a product of dealing with a sizable backlog, and operating earnings still jumped 82%.
Illumina is clearly flexing its R&D muscle these days - the HiSeq has proven to be quite popular, and the company is continually on the prowl for technologies and IP to round out its offerings. There is always a risk of "pulling an Affy" and alienating customers or losing its edge in innovation, but those are not concerns today. The exceptional valuation is another story, though, and Illumina will have to summarily trounce the competition for years to come to grow into today's valuation. (For more, see The Next-Gen Sequencing Pot Keeps Bubbling.)
IN PICTURES: 9 Simple Investing Ratios You Need To Know
Strong in China
Techne (Nasdaq:TECH) is many respects one of the most unusual life sciences companies out there. The company has a tremendous R&D effort, but it often takes years for new products to really reach their peak. On top of that, the company is very much in the business of its own business - it does not court Wall Street and runs itself for the long-term.
Performance this quarter was not very good. Sales were up just 2% as reported (4% excluding foreign exchange), while gross margin fell 300 basis points and net income dropped almost 2%. On a more positive note, results in China were strong and this really is the future for the company. Although near-term growth looks modest, this is a consistent company with a very wide moat and perhaps one of the best lower-risk ideas in life sciences.
Risk Vs. Reward
Like Techne, Thermo Fisher (NYSE:TMO) had a quarter that was okay, but not great. Total revenue rose 6%, with organic growth of 4%, and adjusted operating income climbed about 8%. Thermo was hurt in part by year-ago comps - the cyclical rebound that started last year, as well as the H1N1 panic, was a boon to the lab products segment, but played a role in the anemic-looking 1% growth this quarter. By comparison, the smaller (and more profitable) analytical technology business posted mid-teens revenue growth (up 14%) and strong segment operating income (up 23%). (For related reading, check out Feeling Better With Danaher.)
Thermo is another life sciences idea that is probably more attractive to the risk-averse crowd. Thermo has a good business, but it seems geared more towards consistent and persistent performance as opposed to breakaway growth.
Strong in the States
While reported revenue rose 7% this quarter for Waters (NYSE:WAT), organic growth was actually better (up 9%). Waters also saw some operating leverage, as operating income climbed about 10%. Continuing a familiar refrain, Waters saw good performance in North America and Asia, but Europe was weak. More specific to Waters, the company is seeing good uptake for its new liquid chromatography system (the ACCUITY H-Class) and the SYNAPT mass spec system.
Although the academic market isn't great (as stimulus rolls off), chemical companies are buying more and pharmaceutical/biotech (a major market for the company) is growing again - helped in part by Indian generics companies.
Waters carries a high multiple, but has historically delivered very good returns on capital and a sustained recovery in pharmaceutical and chemical industry spending would give this relatively consistent company a chance at growing into its current valuation.
The Bottom Line
Life sciences companies certainly depend upon relatively healthy research spending, but there appears to be little risk that interest will flag in researching human biology and pharmacology. Investors should be a little cautious of high valuations, but life sciences is one of the few economic sectors with a very good chance of above average growth for the next decade. (For related reading, see A Checklist For Successful Medical Technology Investment.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: 10 Tips For The Successful Long-Term Investor
A SOLiD Plan
Although Life Technologies (Nasdaq:LIFE) is often compared to Illumina, it is actually a considerably larger and more diversified company. True, sequencing is important here (and demand for the SOLiD 4 platform helped boost Genetic Systems growth into the low teens), but other businesses like PCR, reagents and flow cytometry are significant.
The third quarter was pretty good for LIFE, despite some challenging comps. Revenue rose almost 8% (6% on an organic basis), and very tight expense control fueled a 15% improvement in operating income.
LIFE could have some near-term growth challenges, but the long-term view is strong and the integration of Ion Torrent could give the company a boost in the next-gen sequencing market. Assuming that LIFE can average low-teens to high single-digit free cash flow growth, these shares are interesting.
Illumina: The Shining Light
Right now, it looks like Illumina (Nasdaq:ILMN) can do no wrong. This leader in next-gen sequencing and microarrays posted 50% revenue growth in the third quarter, with a 70% jump in sequencing orders and very strong pull-through of consumables. Although the company lost a bit of gross margin (down about 1.7% to 67.8%), that is likely a product of dealing with a sizable backlog, and operating earnings still jumped 82%.
Illumina is clearly flexing its R&D muscle these days - the HiSeq has proven to be quite popular, and the company is continually on the prowl for technologies and IP to round out its offerings. There is always a risk of "pulling an Affy" and alienating customers or losing its edge in innovation, but those are not concerns today. The exceptional valuation is another story, though, and Illumina will have to summarily trounce the competition for years to come to grow into today's valuation. (For more, see The Next-Gen Sequencing Pot Keeps Bubbling.)
IN PICTURES: 9 Simple Investing Ratios You Need To Know
Techne (Nasdaq:TECH) is many respects one of the most unusual life sciences companies out there. The company has a tremendous R&D effort, but it often takes years for new products to really reach their peak. On top of that, the company is very much in the business of its own business - it does not court Wall Street and runs itself for the long-term.
Performance this quarter was not very good. Sales were up just 2% as reported (4% excluding foreign exchange), while gross margin fell 300 basis points and net income dropped almost 2%. On a more positive note, results in China were strong and this really is the future for the company. Although near-term growth looks modest, this is a consistent company with a very wide moat and perhaps one of the best lower-risk ideas in life sciences.
Risk Vs. Reward
Like Techne, Thermo Fisher (NYSE:TMO) had a quarter that was okay, but not great. Total revenue rose 6%, with organic growth of 4%, and adjusted operating income climbed about 8%. Thermo was hurt in part by year-ago comps - the cyclical rebound that started last year, as well as the H1N1 panic, was a boon to the lab products segment, but played a role in the anemic-looking 1% growth this quarter. By comparison, the smaller (and more profitable) analytical technology business posted mid-teens revenue growth (up 14%) and strong segment operating income (up 23%). (For related reading, check out Feeling Better With Danaher.)
Thermo is another life sciences idea that is probably more attractive to the risk-averse crowd. Thermo has a good business, but it seems geared more towards consistent and persistent performance as opposed to breakaway growth.
Strong in the States
While reported revenue rose 7% this quarter for Waters (NYSE:WAT), organic growth was actually better (up 9%). Waters also saw some operating leverage, as operating income climbed about 10%. Continuing a familiar refrain, Waters saw good performance in North America and Asia, but Europe was weak. More specific to Waters, the company is seeing good uptake for its new liquid chromatography system (the ACCUITY H-Class) and the SYNAPT mass spec system.
Although the academic market isn't great (as stimulus rolls off), chemical companies are buying more and pharmaceutical/biotech (a major market for the company) is growing again - helped in part by Indian generics companies.
Waters carries a high multiple, but has historically delivered very good returns on capital and a sustained recovery in pharmaceutical and chemical industry spending would give this relatively consistent company a chance at growing into its current valuation.
The Bottom Line
Life sciences companies certainly depend upon relatively healthy research spending, but there appears to be little risk that interest will flag in researching human biology and pharmacology. Investors should be a little cautious of high valuations, but life sciences is one of the few economic sectors with a very good chance of above average growth for the next decade. (For related reading, see A Checklist For Successful Medical Technology Investment.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
Free Annual Reports
