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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

SEE: Analyzing An Acquisition Announcement

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.

SEE: Earning Forecasts: A Primer

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.

SEE: 5 Must-Have Metrics For Value Investors

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.

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center