We compiled revenues and expenditures for 220 biopharma companies with a total of $127bn in sales, isolating biotech and biosimilar revenues, to evaluate relationships between biotech company trends and Tools bioprocess-related sales, as well as the near- and long-term bioprocess outlook. Bioprocess drives 5% of sales for TMO and 20% for DHR including GE proforma, but is less material for others in the group. Our analysis confirms recent bioprocess acceleration for Tools has support from underlying biotech acceleration, and suggests bioprocess should accelerate further medium term, even if macro headwinds accelerate, driving 50bps of growth for TMO (pharma services including trial services and CDMO are incremental drivers that benefit from acceleration in biotech) and 200bps for DHR; we remain Outperform rated on both. Details in 11 exhibits inside.
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We deconstructed ILMN NGS consumables revenues to their system-level and unit data drivers and analyzed the mix of systems and implied aggregate data generation. We also reviewed growth trends pre and post historical system launches (Exhibit 1) to compare to the progression of the ’17 NovaSeq launch to precedents. Our analysis indicates that the drag from the Nova launch should fade in ’20, considering: 1) The base of legacy HiSeq 2000-4000 consumables to wind-down is nearer to immateriality as a % of sales (Exhibits 2 & 3), 2) 5 of 6 historical precedents saw accelerated NGS consumables growth in year 4 (2020 for the Nova cycle) of a product cycle. While this dynamic is less critical than Pop Seq/CDX/Consumer as a driver of year/year growth variation, it stands as one of the likely ’20 tailwinds. While China and Consumer give us near-term pause, we remain Outperform on structural appeal.
QGEN is launching 4+ new systems in ‘18-‘20, introducing a complex array of moving parts – Incremental growth, incremental spending, sales force transition, and uncertainty around new system traction. The long term for QGEN looks intriguing, but gaining comfort with the model is uniquely challenging. We attended a lunch with CFO Roland Sackers and IR John Gilardi; incremental granularity added bits of clarity, and EPS should accelerate in ‘20 on fading divestiture/exit headwinds and R&D acceleration, but the catalyst path remains hard to map; we are Peer Perform rated, PT $10/31% upside to year-end ‘20.
We hosted CEO Marc Casper and IR Rafael Tejada with investors in NYC. TMO remains confident in the 5-7% medium-term organic growth outlook and share gain trajectory, and optimistic about China. Market growth 3-5% remains the baseline assumption, slower than ’18’s 6% but supportive of TMO +5-7% on accelerating share gains. Capital deployment remains an upside driver relative to consensus models, a key to our TMO thesis. TMO’s concerns regarding the impact of macro uncertainty remain limited/isolated and observations regarding the demand trend are consistent with the July call. Our outperform TMO thesis remains tied to estimate achievability, including capital deployment upside, share gains, and insulation from areas of greater concern in the backdrop.
A riddle wrapped in an enigma. ALGN’s volume growth in 2Q slowed by 400bps sequentially considering the comps and guidance implies growth in 3Q slows by another 80-400bps on this same basis. While we are mindful of the issues, including competition, macro, and US-China relations, and remain Peer Perform rated given the low visibility on these dynamics, the guidance for 3Q left us perplexed by the magnitude of implied incremental slowing. We provide incremental diligence as we aim to evaluate the 3Q guidance and drivers of 2Q slowing.
Entering a phase of slower Pharma demand. Global drug acquisition policy is impacting planning by drug companies WW. While US generics trends are known to be persistently tough on price (Exhibit 13) and China’s 4+7 program is now better understood (Exhibits 22 and 23), a slower lineup of new Gx opportunities are ahead (Exhibit 6) in the near term and international buying groups are driving accelerated deflation in recent months (Exhibit 10). None of these issues is catastrophic, but deflation trends are worth watching and a weak FDA approval trend (Exhibit 17) and limited new generic opportunities introduce the risk that Pharma demand for Tools looks likely to slow in ’20. We continue to expect organic growth deceleration and multiple compression vs the S&P, as flagged in our 2H Tools Outlook; we forecast 200-400bps deceleration in ’20 vs ‘18. DHR and TMO have better offsets with bioprocess, Agilent has an NASD counterbalance that drove 25bps of growth in their July quarter, Waters and Perkin are more net-exposed without bioprocess; detailed matrices in Exhibits 1 and 26.
Revenue growth in F1Q20 was below even our expectations and 300bps below consensus as dental consumables growth remained negative, dental equipment was weak as it is now clearer there was pull forward into the April quarter, and production animal end markets were challenging as flagged most recently by PAHC. Details in Exhibits inside. While management expects dental consumables trends to continue to improve, we see risk to this view as comps get tougher prospectively and trends across the space in 2Q validated our diligence which found tougher price/mix over the summer. Full year revenue growth guidance goes lower on the production animal market weakness. We are lowering our F2020 revenue forecast by 70bps (Exhibit 2) to reflect the weaker production animal market and continued caution on dental sales. We maintain our Underperform rating and reduce our PT to $17.
Wolfe Research Senior Life Science & Diagnostic Tools Analyst, Steve Beuchaw, hosted a webcast to discuss ILMN population sequencing and his Tools 2H outlook.
Slower growth and lower leverage leave risk, albeit smaller than into 2Q, to the multiple – Tools sector organic growth in 2Q slowed by 70bps relative to 2H18, and the S&P-relative P/E multiple is down to a ~40% premium (see sidebar) or 2000bps lower vs July 1st. The historical norm closer to 30% remains a likely destination as group organic growth returns to the 3-5% range that many companies assume is the norm through the cycle vs ‘18’s 7%+. We lower our PTs by 1-2% in anticipation of this shift as we expect more persistent slower growth. The counter-case to our view is that EV/EBITDA multiples are already back to historic norms relative to the S&P (Exhibit 68); the group could lever from the current 1.7x EBITDA back to the historic norm ~2.2x to close the valuation gap on P/E. We expect P/E multiple compression followed by a recovery of capital deployment as target multiples come in.
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