1、North America Equity Research11 December 2019 Life Sciences Outlook 2020Reign of the Consolidators Looks Set to ContinueLife Science Tools&DiagnosticsTycho W.Peterson AC(1-212)622-Bloomberg JPMA PETERSON Tejas Savant(1-212)622-Julia Qin,CFA(1-212)622-Eleni Apostolatos(1-212)622-J.P.Morgan Securities
2、 LLCSee page 162 for analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.Investors
3、should consider this report as only a single factor in making their investment 2North America Equity Research11 December 2019Tycho W.Peterson(1-212)622- Table of Contents2020 Outlook.3Company Profiles Tools.5Agilent Technologies.6Avantor.10Bruker.15Danaher.19Mettler-Toledo.23PerkinElmer.27Thermo Fis
4、her.31Waters.35Company Profiles Genetic Analysis.39Adaptive Biotechnologies.40Guardant Health.44Illumina.48Intrexon.56Luminex.59Pacific Biosciences.62Quanterix.64Twist Bioscience.6710 x Genomics.71Company Profiles Diagnostics.75Accelerate Diagnostics.76GenMark Diagnostics.78Invitae.81Myriad Genetics
5、.86NanoString.91Natera.95Oxford Immunotec.100Qiagen.103Quidel.106Company Profiles SMid MedTech.110Accuray.111Dentsply Sirona.114Envista.118Hologic.119Intuitive Surgical.124Varian Medical.129Company Profiles CDMOs.133Catalent.134Charles River Labs.139Icon Plc.144IQVIA.147Repligen.152Syneos Health.156
6、3North America Equity Research11 December 2019Tycho W.Peterson(1-212)622- 2020 Outlook2019 sector review:The life science tools and diagnostics space again handily outperformed broader healthcare in 2019(S5LSTS+29%YTD vs.XLV+16%),as investors remain willing to pay a premium for stability offered by
7、the diversified tools and generally stable CRO companies,which remain an attractive(but expensive)“safe haven”in the context of continued volatility in other healthcare sub-sectors,including biotech,spec pharma,generics,hospitals,distributors and PBMs,in addition to improving reimbursement trends,in
8、creasing high growth biopharma/bioprocess exposure(for core tools)and M&A optionality(fueled more recently by GHDX-EXAS and ongoing discussions around a QGEN takeout).Against a backdrop of central bank easing and relief in trade tensions,we saw a growth-to-value rotation begin in 3Q,although more re
9、cently we have seen a reversal,likely driven by declines in global PMIs(except for recent stabilization in China)that present a lingering macro overhang,although,importantly,the group is much less cyclical today than in prior cycles(i.e.TMO 3x below toolsNTM EV/EBITDA average,which we expect will na
10、rrow over time),although with difficult 1H20 comps and leverage still at 4.8x,we believe it remains a better story for 2H20.Ratings changes:Along with our outlook,we are downgrading Dentsply Sirona(XRAY)from Overweight to Neutral.While we expect the company to continue benefiting from new products,r
11、estructuring-related cost savings and a generally conservative approach to guidance,comps get more difficult in 2020,with solid execution and an ongoing turnaround now accurately reflected in valuation(15xNTM EBITDA vs 11.5x as of YE 2018).On the Smid-cap front,we are also downgrading GenMark Diagno
12、stics(GNMK)from Overweight to Neutral,as our recent survey of lab managers points to a deteriorating reimbursement outlook for syndromic panel testing(respiratory and GI panels),within an increasingly competitive molecular diagnostics market(petition from larger players,including QGEN,LMNX,BioMerieu
13、x,etc.),leading to risk of possible erosion of market share and/or pricing,with limited upside relative to the rest of our coverage universe.Our Underweight ratings on several companies,in particular Waters(WAT),Myriad Genetics(MYGN)and Varian Medical(VAR),remain unchanged.5North America Equity Rese
14、arch11 December 2019Tycho W.Peterson(1-212)622- Company Profiles-ToolsCompany Profiles Tools6North America Equity Research11 December 2019Tycho W.Peterson(1-212)622- Agilent TechnologiesConservative FY20 Guidance Should Leave Plenty of Room for UpsideAgilent posted a solid FY19 with+5%core growth,le
15、d by+10%core growth at ACG and+9%core growth at DGG,while LSAG(-1%core)was weighed down by end market headwinds that impacted instrument demand.On the bottom line,the company also continues to deliver very impressive results,with+80 bps of OPM expansion also well above initial expectations despite a
16、 tariff impact,driven by a combination of gross margin expansion and healthy operating leverage.Looking ahead,we continue to like the setup for FY20 given a conservative guidance framework that leaves potential upside from both NASD manufacturing and the lapping of recent acquisitions,while longer t
17、erm we see multiple drivers for accelerating growth,including easier comps for instruments,a growing mix of recurring revenues(see recap of our ACG visit),new products(e.g.8860/8890 GC systems)and accelerating momentum in large-molecule(NASD facility and cell analysis portfolio expansion).Given proj
18、ected OPM expansion(50-75 bps annually)and capital deployment upside($1.4B cash and$1.0B repo authorization,with management recently noting an appetite for larger deals),we remain Overweight.End markets remain generally healthy,with strength in biopharma and environmental/forensics offsetting recent
19、 weakness in food.Looking back at FY19,biopharma(31%of sales)grew+8%core(on a+9.5%comp),with strength in both large and small molecule,including+DD growth in China,despite transient disruptions from the generic pharma reform(4+7 pilot drug tendering program followed by national rollout),while Enviro
20、nmental&Forensics also showed strong momentum,growing+10%core on a+8%comp,driven by the global opioid crisis and balanced strength between instruments and aftermarket revenue.Meanwhile,C&E(+2%core)moderated from a+9%comp,as expected,with consumables/services strength offsetting instrument declines,a
21、nd Food(-3%core)continued to be impacted by DD declines in China due to ongoing government agency consolidation and the privatization of food testinglabs,although F4Q did see signs of stabilization.Rounding out the end markets,Academia&Government(-1%on a+7%comp)has also remained stable,whileDiagnost
22、ics&Clinical remained healthy in FY19 at+7%core,led by Pathology and CDx.Initial FY20 guidance looks typically conservative.For the current year,the company is calling for core growth of+4.0-5.0%,which assumes continued strong growth in ACG(+HSD)and DGG(+HSD-LDD,driven in part by the NASD ramp),part
23、ially offset by a modest recovery in LSAG(flat)and no change in end market dynamics,including continued healthy growth in global pharma,improvements in China pharma and stabilization in Chinas food market following the DD declines seen in FY19.Moving down the P&L,the company expects modest operating
24、 leverage,partially offset by NASD site startup costs,with the bottom line further benefiting from a lower tax rate,resulting in an EPS range of$3.38-3.43.In light of solid performance in FY19 and multiple drivers to accelerate growth,including new product cycles,accelerating momentum in biopharma,a
25、nd lapping of recent acquisitions,we view the initial FY20 guidance as typically conservative,which should set the company up for“beat and raise”quarters throughout the year.7North America Equity Research11 December 2019Tycho W.Peterson(1-212)622- M&A engine gearing up.Since the onboarding of CFO Bo
26、b McMahon just over a year ago,FY19 has seen an accelerated pace of capital deployment,with$723M in share buybacks(+71%y/y)and$1.4B in M&A(almost 3x last years level),including the$1.2B acquisition of BioTek,which marked the largest transaction since the launch of New Agilent in 2015.Through BioTek,
27、along with other recent acquisitions(Seahorse Bioscience in 2015,Luxcel Biosciences and ACEA Biosciences in 2018),the company has significantly expanded its cell analysis portfolio(now 5%of sales,growing+DD),which should further strengthen its positioning in the biopharma R&D market and enhance the
28、long-term growth profile.Looking ahead,management has indicated clear ambitions for larger deals,followed by opportunistic buybacks($1B authorization remaining).Maintain Overweight.Putting it together,FY19 was a solid year on both the top and bottom line,and the continued recovery in small molecule
29、pharma spending(both in China and globally)is encouraging,while initial FY20 guidance looks conservative,leaving potential upside from NASD and the lapping of recent acquisitions.Longer term,we continue to see multiple drivers for accelerating growth,including easier comps for instruments,a growing
30、mix of recurring revenues(see recap of our ACG visit),new products(e.g.8860/8890 GC systems,along with a full R&D pipeline)and accelerating momentum in large-molecule(NASD facility ramp and cell analysis portfolio expansion).Given projected OPM expansion(+50-75 bps annually)and capital deployment up
31、side($1.4B cash and$1.0B repo authorization),we remain Overweight.Questions for Agilent ManagementEnd markets How much of your biopharma revenue is upstream R&D vs.downstream manufacturing?What is an ideal mix and how do you get there?Where in the pharma value chain do you see additional opportuniti
32、es to participate?You have seen+DD growth in China pharma despite headwinds from the 4+7 initiative.What has driven the strength?Given the ongoing national roll-out,do you expect incremental headwinds in China pharma business in 2020,or do you think most of the challenges are behind?What is the outl
33、ook for C&E in 2020?Are you seeing any improvement in C&E customer sentiment and purchasing activities?How much do you expect the broader C&E market to grow medium term,and how much do you expect to grow above market given new product launches?Food is a growing area and a target end market for Ultiv
34、o what do you think is a sustainable growth rate of the broader food testing market?Where do you see opportunities and how much can Agilent outgrow the market?How do you feel about your current positioning in light of a continuous stream of new competitor product launches into this market?Are there
35、any capability gaps you are looking to fill?Cannabis testing is drawing increasing attention and interest what is your strategy and positioning around cannabis testing?China Food Ministry reorg how much longer do you expect the headwinds to persist?As part of the future demand will come from decentr
36、alized testing sites,how much of that channel do you expect to capture?Do you foresee any 8North America Equity Research11 December 2019Tycho W.Peterson(1-212)622- challenges or needs for channel investment as you pursue decentralized opportunities?Can you talk about specific offerings and go-to-mar
37、ket initiatives for expanding market share in the Academic segment?How soon do you expect these initiatives to generate meaningful revenue contributions?LSAGCan you comment on the competitive dynamics in triple quads?We are seeing more instruments launched for routine applications with improvements
38、around automation and workflow how do you feel about Ultivos competitive positioning,and how does that factor into expectations for the Ultivo ramp?One of your competitors has recently launched a high-resolution LC/MS for bioprocessing process development and QA/QC what do you think of the market op
39、portunity?Do you think high-resolution LC/MS testing for bioprocessing will become democratized and take place at the production line in the near future?How is Agilent positioned in biologics process development and manufacturing?Can you update us on your cell analysis portfolio how big is the portf
40、olio post BioTek acquisition and how fast is it growing?How is the progress in driving revenue synergies between Seahorse and ACEA?Is there a larger blueprint around the cell analysis portfolio or broader cancer research offerings?ACGACG has been growing nicely what kind of growth trends are you see
41、ing for consumables vs.services vs.Lab Enterprise Solutions,and what are the underlying drivers for each?What percentage of instruments now come attached with Agilent service contracts?Are there any variations by instrument type?How have service attach rates trended over the last few years,and how d
42、o you improve this metric?In which customer classes are you seeing the greatest opportunity?How does the cadence of planned new product introductions add to ACG growth in 2020?Strong ACG growth has been an important source of margin accretion what is the margin profile like for consumables vs.servic
43、e revenues?DGGCan you unpack the underlying drivers for pathology,NGS and NASD?Are you doing anything differently in terms of go-to-market?What do you think is the long-term sustainable growth rate for the three businesses and DGG overall?How large is your CDx business?Can you talk about your CDx st
44、rategy?What are the major opportunities for Agilent in this market?How do you view the competitive landscape?How do you feel about the current NGS portfolio?Are there additional capability gaps you are looking to fill,either organically or inorganically?On Lasergen are there any development mileston
45、es to watch for before the expected launch in 2H20?How do you think Lasergen will be positioned in the market against existing clinical NGS systems?How much unmet demand will remain for GMP oligo manufacturing after the new facility comes online?When will you make a decision on further capacity 9Nor
46、th America Equity Research11 December 2019Tycho W.Peterson(1-212)622- expansion?What is the margin profile for the NASD business?How should we think about the margin impact once the business scales up?Do you expect any near-term impact from the Medicines Company sale to Novartis?How are you thinking
47、 about DGGs regional expansion in China?What do you view as the most significant opportunities for DGG in this region?Given your low penetration in that market,can you talk about the competitive dynamics and how you plan to gain share?What is your expected time frame for getting more products approv
48、ed/registered in China?Operating model and capital deploymentYou are targeting 50-75 bps annual OPM expansion can you break down the respective contributions from pricing,new product accretion,consumable and service mix,supply chain and SG&A efficiencies?How should we think about phasing of these in
49、itiatives?Specifically,can you elaborate on the pricing initiative?Which product categories present the greatest opportunities for pricing discipline?You committed to$1B+of R&D spend over the next three years can you talk about focus areas and the pipeline?You have noted M&A as a priority in terms o
50、f capital deployment how would you characterize the current M&A environment and your pipeline?How about deal size given your$1B net cash position and couple billion debt capacity?Is a$3-4B deal the largest you would do,or could you do something more significant?Would you issue equity for an acquisit