In the near-term, exposures to the following are concerning for non-therapeutic Healthco’s: discretionary healthcare (exposed to hospital resource reallocation), applied/industrial (see: cyclical end markets) APAC, and instruments. We attempt, with admittedly limited visibility and an appreciation that we are perhaps nearer to the beginning than the ending of a challenging period, to quantify exposures on these metrics and consider which companies’ consensus figures have adjusted to contemplate these exposures. Our effort is admittedly tactical in nature, and the extent to which structural changes emerge from the current COVID-19 challenges persist is an unknown.
Search Coverage List, Models & Reports
Search Results11-20 out of 123
Bioprocess category growth, now that we have final data from the full group, came in at 12.4% (slowing by 300 bps, mostly due to a weak qtr from GE LS) after the big 3Q, though on a much easier comp (by 400 bps). That said, bioprocess grew 13.5% for the year, accelerating by 300bps vs. ’18. TMO, SRT, and Merck KgaA led the way, with growth 300-500bps above the 12.4% 4Q weighted growth rate (Exhibit 17). We detail companies most exposed in Exhibits 3 and 12, most critical for TMO and DHR in our coverage.
We move to No Rating after TMO’s announcement to buy QGEN. We are moving to No Rating on QGEN from Outperform given that the stock is no longer trading on fundamentals due to the announced acquisition of the company by Thermo Fisher Scientific. For our thoughts on the deal, and our latest merger model, please see our TMO report.
Our acquisition model for TMO’s purchase of QGEN details accretion to EPS and EBITDA through synergies generated over a 5-year period, assuming a 1H21 close. We also break out the projected size of any Sample Prep divestitures that come as a result of the acquisition.
We update our M&A model (see Exhibit 1) relative to our thinking in our Upgrade to reflect refined expectations for synergies, timing, underlying margin trends, and financing. Assuming the acquisition closes at the end of 1H21, we assume TMO uses $1.5Bn cash and finances $10Bn debt at 2%, in line with TMO guidance; financing more in-line with DHR EU debt on GE Biopharma at <1% would drive meaningful accretion upside. We model cost synergies (elimination of public company costs, operational integration) at $156mn in year 3 vs guidance $150mn; predicate transactions with combinations of companies serving overlapping customer bases tend to see over 10% of sales saved at opex, implying over $120mn is achievable. TMO expect $50Mn in EBIT from revenue synergies by Yr 3, implying over $100mn in revenue synergies, we model $150mn. We now estimate the cash on cash return from the TMO deal at 5%-6% in 2022, and 4.2%/10.6% accretion to EPS/EBITDA.
Between Nov 14 and Dec 24 of last year, QGEN was effectively in an unplanned sale process, which introduced risk to execution and downstream complications. Today’s announcement (3/3/20) brings closure with the benefit of a more standard evaluation and diligence process, with greater certainty on deal close process and timing. The announcement introduces a 1-year time to 1H20 close, but with certainty preferred by QGEN. We do not expect other bidders to emerge, given QGEN’s indications that a clear and clean (balance sheet) process is key. High level, QGEN gets >20% premium on current trading, and TMO gets >5% accretion (our est.) by year 3 and immediate accretion in ’20; expect TMO to trade up modestly and emerge as a new upward revision story.
ILMN in 1Q will face an accelerated headwind from the NextSeq launch, a pop seq drag, and most acutely a decline in arrays from the DTC franchise decline. Bears point to weak growth headlines, but ILMN has made it clear NGS consumables growth should remain on trend, and our structural bull thesis is acutely tied to the data generation curve. Expect the stock to remain a challenge tactically on the optics. While it is a source of frustration, ILMN management is watching other indicators, as they observe the availability of NGS capacity and its efficiency unlocking methods that will drive accelerated NGS capacity demand in coming years by driving clinical and translational efforts. NGS data generation is up ~50% for ‘18 and ‘19, confirming NovaSeq is driving elasticity and building a vast moat. While AGBT diligence was muted on NGS spend growth, the growth lies elsewhere, as the data acceleration (Exhibit 6) confirms.
Dating back to our May ’20 launch on Agilent, we’ve had structural optimism for the story on share gains and operational efficiencies. The concern that kept us at Peer Perform was our view that the operating environment was likely to deteriorate in China and cyclical areas as signaled by the GTMIs, and that bioprocess players would be more insulated. Agilent’s F1Q result and commentary should mute the view that ’20 guidance is conservative and drive modest relative multiple compression, a helpful lowering of expectations. On GTMI stabilization we could be more optimistic, remain Peer Perform, PT to $105 from $98.
BRKR’s 4Q was previously known, and implied 400-500bps of slowing vs 3Q on a CAGR basis excluding UHF installs; the full 4Q top line release confirmed our view that the slowdown was likely Nano-related, and may have reflected pull-forward into 3Q from the Japan VAT. The 4Q result as-reported also had a benefit from UHF installs installs in the period, $5-10mn above our model and the base assumptions into ’19 (though likely in-line vs investor expectations). On the upside, BRKR’s 4Q ex-Nano held up well and confirmed the durability of diagnostic/discovery/pure research exposures. All-in, the results are generally confirmatory regarding our below-consensus outlook; our changes to the model are nominal and relate to offsetting macro pressure and high-field NMR momentum. BRKR looked overdone as a stock into ’20 with expectations set for accelerating growth on toughening comps, but the ’20 outlook is likely achievable and the pullback in the stock alleviates much of our concern. We continue to see the margin outlook as compelling and new product launches incremental; we remain Peer Perform and cut our PT to $50 from $51. Primary risks are now the aggregate Tools multiple and China.
In ‘17-‘19, China at ~10-20% of sales for Tools coverage accounted for 60-132bps of the 6.6% Tools organic CAGR. Slowing China since mid ‘19 (-1100bps of % growth on aggregate; Exhibit 5) prompted our analysis of federal revenue and spend trends to assess the long-cycle trends underlying the decel that was also flagged by our GTMIs last summer. We find that Govt spending in China health/science categories rarely decouples from spending aggregate growth, which has slowed, and appears at risk given a falloff in tax/tariff revenue growth as GDP slows and tariffs have an impact. Coronavirus likely confounds assessment of near-term trends, but the glide path is slowing on the back of macro, policy, and tariff concerns. We remain cautious on the group multiple on category deceleration; valuation details on page 7.