Healthcare and Biotechnology stocks are underperforming the S&P YTD-Medical Devices and Equipment are a bright spot up over 4% YTD.

The Q4 2010 momentum in biotech stocks has ebbed in 2011 as the broad market rally continues. The S&P is up 5% YTD while the bellwether biotech ETFs IBB ($94.30), FBT($38.71) and XBI ($62.96) are up or down within 1%. The healthcare sector overall is down 2.9% despite the medical equipment and supplies sector being up over 4%. The latter group was boosted by additional premium in the buyout of Beckman(BEC $82.50) up 9.75% by Danaher Industries(DHR $49), an industrial and medical conglomerate with revenues in excess of $12B.  With Beckman revenues in the $3.6B range Danaher is betting on growth in the medical sector paying a 1.9x Price to Sales with 2011 sales growth estimates of 3.9%, but projected earnings growth flat. Danaher stock is up 38% over 12 months showing that their conglomerate model is working.

Beckman Coulter Valuation at 8.6 Ebitda Leaves LBO Crowd Frigid: Real M&A – Bloomberg

The Rayno Life Science Tools and Diagnostics Portfolio has outperformed the Rayno Biopharmaceuticals Portfolio in 2011 with many stocks up YTD:

  • Alere (ALR $39.89) up 9%
  • GenProbe (GPRO $64.10) up 5.78%
  • Illumina(ILMN $71.15) up 12.3%
  • Immucor (BLUD $20.38) up 2.77%
  • Microfluidics (MFLU $1.33) up 73% with buyout

Despite concerns about potential cutbacks in the NIH budget there is still good growth potential in sequencing and selective areas of molecular diagnostics. The Beckman deal at a premium illustrates the value from an M&A perspective.

We reiterate our portfolio strategy for early 2011:

  1. raise a little cash by taking profits in ETF’s and small cap speculative biotechs,
  2. no new buys until after earnings period in mid to late Feb,
  3. caution on laggards in the portfolio Celera(CRA), Micromet(MITI),Nektar (NKTR) and Sequenom (SQNM),
  4. Tools and diagnostics still look attractive,
  5. The “MO” season is over for now.

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