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We recently reiterated our Neutral recommendation on Life Technologies Corporation (LIFE - Analyst Report), a global biotechnology tools company. Following the announcement of its impending takeover by Thermo Fisher, Life Technologies’ shares have already reached its justified high and as a result, the further upward potential of the stock seems restricted. The stock currently carries a Zacks Rank #3 (Hold).
Why at Neutral?
Life Technologies reported a mixed second quarter 2013 with adjusted EPS of 98 cents, 2 cents ahead of the Zacks Consensus Estimate as well as the year-ago adjusted EPS. Although revenues increased 1.1% at CER to $943.6 million, it remained below the Zacks Consensus Estimate of $952 million.
Given Life Technologies’ expansive line of consumables for genomic, and molecular and cell biology, the acquisition by Thermo Fisher will effortlessly strengthen the combined company’s global foothold and commercial reach. As part of the larger Thermo Fisher group, we expect improved revenues and cost synergies for both the companies.
Life Technologies enjoys a strong position in the life sciences market and we are impressed with the strong momentum of its Ion Torrent franchise. Moreover, the company is working on expanding its portfolio with several product launches.
In Jul 2013, Life Technologies entered into a five-year agreement with the Food and Drug Administration (FDA) to accelerate and advance food safety testing of E. coli and Salmonella, two foodborne contaminants. Recently, the company entered into a collaboration agreement with RainTree Oncology Services to work on personalized care for cancer patients.
In addition, the recent acquisitions of BAC BV, Navigenics, Pinpoint Genomics and Compendia along with new distribution agreements in China, South Korea and Chile would enable LIFE to strengthen its diagnostics franchise and extend its footprint in emerging markets.
However, Life Technology’s exposure to the U.S. government funding lies between 10% and 15%, depending on the level of funding. The recent sequestration cuts (implemented with effect from Jan 2, 2013) that curbed the NIH (National Institutes of Health) budget by 8% are expected to restrict the company from opting for medical innovations.
The company earns 50% of its revenues from international operations, which exposes it to unfavorable currency movement. Based on the prevailing rate as on Jun 30, 2013, currency is expected to have a negative impact of $75 million on fiscal 2013 revenues and 17 cents on the yearly-adjusted EPS.
Other Stocks to Consider
While we prefer to remain on the sidelines on Life Technologies, other medical device stocks worth a look are Affymetrix Inc. (AFFX - Analyst Report), Alere Inc. (ALR - Snapshot Report) and Gilead Sciences Inc. (GILD - Analyst Report). All these stocks carry a Zacks Rank #1 (Strong Buy).