Biotech/Health Care Investing: Selective Growth

We are introducing price targets for our universe of life science tools and diagnostic companies and maintaining our current ratings distribution and favorable outlook on consumable suppliers (Life Technologies, LIFE; Thermo Fischer Scientific, TMO) and companies targeting higher growth markets, such as genetic analysis (i.e., Illumina, ILMN).

End market demand [from pharmaceutical, biotech, clinical research organization and industrial customers] remains soft; although we remain encouraged [about academic demand] by the prospect of an increasing National Institutes of Health budget, which remains the largest academic funding body in the U.S.

Specifically, we expect that the Federal stimulus package could include a modest NIH component ($1 billion to $1.5 billion), although this may not begin to impact demand until the second half of 2009, and accordingly, expectations for the tools group remain low for the first half of 2009.

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Amit Hazan
Oppenheimer & Co.
212-667-6144
[email protected]

The Oppenheimer Midcap MedTech Index has commanded an average multiple premium of about 20 percent over the S&P for the past 15 years, 46 percent over the most recent five years and 36 percent today. But clear fundamental changes now under way dictate more scrutiny over the premium than at any time in recent memory, and the sustainability of valuations at least 20 percent above the market now looks at risk.

Earnings for this group will still likely be up in 2009 (a feat that most pundits argue the S&P will not enjoy), so some premium is surely warranted.

While the economy continues to dominate conversations in 2009, we highlight several issues to watch that may separate the rare buys from the sub-sectors and stocks to avoid: (1) pricing pressures and gross-margin pressures; (2) pipelines of new product; (3) merger and acquisition activity; (4) Street expectations and management guidance; and (5) foreign currency.