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.
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.
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.
ILMN’s 700 bps guidance reduction on 7/29 reflected headwinds in population sequencing (PopSeq), companion diagnostics, China, and microarrays/DTC – areas that are lumpy and in many cases difficult to diligence. To gain a better understanding of the volatility in PopSeq, we aggregated available information on 37 programs to estimate the impact from PopSeq program volatility on ILMN’s growth. We estimate PopSeq in ‘17-‘18 drove 180bps of ILMN sequencing growth per year on average, and comprised 6-7% of sales in ‘18. Had they emerged on schedule, we estimate PopSeq programs would have driven 220bps of growth and 6% of sales in ‘19. We estimate that delays to programs in the US, UK, and France cost ILMN $84mn of sales and were a 250bps headwind to revenue growth in ’19 relative to initial guidance; in total these programs drove a 40bps yr/yr headwind to ILMN growth as the GEL comp in ’18 was tough to grow on.
Rob Friel, who led PKI as CFO, COO, and CEO for 20 years, publicly announced his retirement today. Friel, 63, is succeeded by Prahlad Singh, COO and head of the Diagnostics business that organically accelerated by 480bps in the last three years vs. '12-'15. Under Friel, PKI stepped up new product cadence, trimmed slower growing non-core assets, restructured the commercial operations and the overall corporate reporting structure, drove greater focus on returns on capital invested to M&A, and took the company’s mix of sales into Diagnostics and Pharma/Life Sciences/Services from 48% to 75% of sales in just the last 4 years. Singh’s appointment as COO in January of this year made the CEO transition plan clear. Friel will remain in the CEO role until year-end, and in a consulting role into 1Q20. We are happy to be hosting Prahlad Singh at the inaugural Wolfe Healthcare Conference on November 6 in NYC.
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