We have reaffirmed our neutral recommendation on Life Technologies (LIFE) with a target price of $51.00.
The company’s second quarter adjusted earnings of 96 cents per share missed the Zacks Consensus Estimate by a penny. Revenues increased 1% to $950 million, ahead of the consensus of $944 million.
We are encouraged by Life Technologies’ adoption of several initiatives to develop its diagnostics franchise. The company recently entered into a Master Development Agreement with Bristol-Myers Squibb (BMY) for companion diagnostic projects, who would work together in oncology and other therapeutic areas.
The collaboration with Bristol-Myers is in line with the company’s strategy to build partnerships with pharmaceutical majors for companion diagnostic development including participation in early-phase clinical trials. Further, we are optimistic about the company’s companion diagnostic partnership with GlaxoSmithKline's (GSK) MAGE-A3 cancer immunotherapy. Life Technologies also strengthened its diagnostics franchise with two tuck-in acquisitions – Navigenics and Pinpoint Genomics.
Meanwhile, as a result of Life Technologies’ increasing focus on emerging markets, this region now accounts for approximately 10% of total sales. The company has been experiencing growth in its emerging markets as well as Asia-Pacific, where it is currently expanding its operations.
After recording a temporary slowdown in its Greater China business about a year ago, the company augmented its dealer model and supplemented it with its own sales force. These efforts have successfully restored operations in Greater China to normal levels with high-teens growth.
Life Technologies’ Genetic Analysis segment sales received a strong boost from the Ion Torrent franchise. The company is satisfied with the progress Ion Torrent technologies has made so far and expects the growth momentum to continue. This growth will be supported further by the recent launch of Ion Proton system in September with the company continuing to take additional orders.
However, the company has adopted a conservative outlook and expects overall growth in the European region (which includes all of the Europe and emerging markets in Russia, the Middle East and South Africa) to be at the low end of the previous guidance — approximately at 1%. Originally, Life Technologies had expected growth in this region to be in the low single digits.
Moreover, the company now expects organic revenue growth for 2012 to be at the low end of the previously guided range of 2−4% due to slower growth in Europe. Unfavorable currency movement is another major headwind for the company.
To counter the various headwinds witnessed in its end markets and bolster the bottom line, Life Technologies is deploying a number of cost saving initiatives to strengthen its position. Accordingly, the company’s operating margin has also been expanding over the past few quarters.
Our recommendation is backed by Zacks #3 Rank (Hold) in the short term.
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