Slower Growth In Diagnostics Stocks Except For NexGen Sequencing And Molecular

  • New technologies in diagnostics and tools are driving growth: NexGen sequencing, molecular and “point-of-care” testing platforms and veterinary testing.
  • M&A and consolidation should continue.
  • The sector is a laggard due to slowing  sales and earnings growth vs forecasts.

Rayno Clinical Diagnostics Portfolio Update

We initiated coverage of Clinical Diagnostic and Life Science Tools stocks in 2009 with five stocks :

Abaxis (ABAX), Alere (ALR), GenProbe, now owned by Hologic (HOLX), Illumina (ILMN) and Sequenom (SQNM). Since then we added several stocks, dropped a few, but kept most of our picks on the focus list. Despite all the volatility in the market holding positions over the long-term has been the best portfolio strategy. Several of our companies were acquired. Keep in mind that this sector has experienced slower growth and is more dependent on M&A and new technology. Most of these stocks are off their highs and down YTD.

The hot stock sector in the life sciences is biopharmaceuticals and clinical diagnostic stocks are lagging for several reasons:

  • Sales growth is slowing except for the hot DNA sequencing and genetic testing markets.
  • Overall market growth for most routine clinical diagnostic tests is slowing at 3% but molecular and genetic diagnostic tests are growing at 11%.
  • Reimbursement is tight with little pricing power.
  • Competition is increasing even in molecular assays with overlapping test menus.
  • Valuations are on the high side by Price/Sales, PE and PEG measures.
  • Many small cap emerging companies still do not have reliable earnings but revenue growth is expected from new products.

Stocks that outperformed over one year are in breakthrough technologies like DNA sequencing JPMorgan On Next Gen Sequencing 1/19/15 or have hot products/platforms (ABAX) or are acquirers (TMO) and consolidators.

  • Alere (ALR) was a “value play” with a ‘roll-up” strategy but now will undergo restructuring.
  • Hologic (HOLX) and Thermofisher (TMO) are doing well with great strategies and acquisitions.
  • Exact Sciences (EXAS) has done well with anticipation of the “roll-out” of its DNA screening test for colo-rectal cancer.
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