Looking for Value in a Slow Growth Market

Life Science stocks took a big hit over the past summer and many have not fully recovered. The important metric to watch is sales growth because many of the smaller cap companies are still lagging in earnings growth so the PE tells you very little. The major technology driver has been molecular testing platforms many of which are still so called LDTs (Lab Developed Tests) that are not approved by the FDA. We are focused on smaller cap companies that have sales growth and/or M&A potential in several interesting markets such as infectious diseases, oncology, cardiovascular, genetic diseases, pre-natal, agricultural and environmental.

Personalized medicine (Precision Medicine) is an important therapeutic initiative that takes individual variability into account. Over the near term new targeted cancer drugs will require biomarkers or companion diagnostic tests to assure the best treatments, i.e.”the right drug at the right dose to the right patient”. NGS or Next Gen sequencing from companies such as Illumina (ILMN) and Pacific Bioscience (PACB) provide important tools for drug development and molecular medicine and growth will continue albeit at a slower pace.

Molecular diagnostics are expected to grow 9-10% over the next 3 years so there will be more winners in this group in 2016, but hypergrowth in the sequencing market may be over.

Of course the most famous story in clinical diagnostics is a unicorn called Theranos but we will not go into that. The Company claims to have a unique “nanotainer” technology that can perform a multiplicity of blood tests with a small sample. One question is how it avoided scrutiny in a high-profile industry.

Many stocks have limited revenue growth and this is reflected in stock prices, but some stocks have already bounced big from recent September lows: Abaxis (ABAX), Cepheid (CPHD), Illumina (ILMN), Neogen (NEOG) and Pacific Biosciences (PACB).

Top Winners YTD

• Hologic (HOLX) up 47.8%
• Luminex (LMNX) up 10.8%
• Neogen (NEOG) up 10.7%
• Alere (ALR) up 9.8%
• Qiagen (QGEN) up 6.6%

Top Losers YTD

• Cepheid (CPHD) down 33.7%
• Quidel (QDEL) down 27.2%
• Foundation Medicine (FMI) down 22.1%
• Genomic Health (GHDX) down 17%
• Illumina (ILMN) down 13.8%

The fourth quarter should provide clues to real sales growth and consolidation has always offered M&A potential. These stocks have been good trades off the bottom but long-term value will depend on Q4 results. Recent technicals look good on ABAX, CPHD, HOLX, LMNX, NEOG, QDEL and TMO.

LONG Cepheid (CPHD)