Is There Enough Growth To Really Push Life Technologies?

By Stephen D. Simpson, CFA | June 29, 2012 AAA

Investors are often surprised at the relatively low growth rates that are available in the life sciences industry. While there are indeed segments that offer exceptional top-line growth prospects (like genetic sequencing), the sheer size of the sector and the fact that many new offerings simply supplant older technologies and products means that the overall growth rates are more moderate.

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It's important to understand that backdrop when looking at Life Technologies (Nasdaq:LIFE). Life Tech is indeed a very good life sciences company, but serious competition in sequencing from Illumina (Nasdaq:ILMN) and Oxford Nanopore does challenge the company's ability to outgrow the broader market, as does the less-desirable state of government-sponsored research funding in the U.S.

Sequencing Is the Driver
Life Technologies gets about 40% of its revenue from its "Genetic Analysis" segment, and that segment is largely driven by demand for sequencing equipment and consumables. Life Tech's acquisition of Ion Torrent has definitely paid dividends, as this next-gen platform has grabbed solid share and reversed some of Illumina's former momentum in the space.

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Life Technologies reported 5% overall revenue growth in the first quarter, GA grew by 7% and helped offset the lower pace of business in the larger "Research Consumables" segment. Now some of that growth could be under pressure, as Oxford Nano looks to soft-launch new platforms later this year and Illumina continues to support its own rollouts. Keep in mind, too, that companies like General Electric (NYSE:GE) have also talked about getting into the next-gen space, while companies like Roche (OTC:RHHBY) and Pacific Biosciences (Nasdaq:PACB) are still in the market as well.

Is Life Tech Too Dependent upon the Grant Cycle?
Life Technologies gets nearly half of its revenue from academia, government, and NIH-funded spending. That's bad news now, as state governments are cutting university funding left and right and the federal government is cutting spending and allocations for grants as well. While it's tempting to argue that these budget difficulties are temporary (and that may well be true), the fact remains that a large percentage of Life Tech's business is vulnerable to political wrangling.

Of course, this is relative. Illumina and PacBio have even more at stake as they rely much more heavily on grants and government spending. Likewise, all of these companies have struggled to translate their research capabilities into viable commercial products for the lab/hospital space where reimbursement is much more stable.

On the other end of the spectrum, companies like Agilent (NYSE:A), ThermoFisher (NYSE:TMO), and Waters (NYSE:WAT) are benefiting from their lesser exposure to government/academic spending. While these companies were left out when pharmaceutical companies were cutting back sharply on R&D spending and national governments were pushing stimulus into academic research, they are now looking like more stable growth stories as their larger pharmaceutical and industrial businesses are picking up.

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The Bottom Line
While Life Technologies has an appealing mix of high-margin consumables in its business (roughly 80% of revenue), it also has less favorable exposure to Europe (30% of sales). Management is working on increasing the company's penetration in faster-growing emerging markets and also hoping to offset some budget pressures with new "must have" product introductions.

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Life Technologies is a solid long-term play, but one that needs to be bought right. A lot of hype has leaked out of this sector, what with worries about NIH budgets and disappointing sales growth from Illumina. That leaves Life Technologies today as a borderline buy candidate; low-to-mid single digit free cash flow growth would support a fair value above $50, while $60 could be possible if the company can continue Ion Torrent's success and develop a few other commercial winners in its pipeline.

Stephen D. Simpson owns shares of Roche since February of 2011.

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