Rayno Diagnostics and Tools Revisited: Sector Outperformance That Tracks Biotech

Life Science Tools and Services Stocks Have Outperformed Biopharmaceuticals With Less Volatility

Large Caps Are Winners in 2017

We have not covered the Life Science Tools and Diagnostics sector since early 2016 when life science stocks abruptly sold off. We have focused on biotech ETFs and Biopharmaceuticals because the upside looked more promising due to drug breakthroughs, clinical news developments and top line growth. We did suggest a few names such as Hologic (HOLX), Illumina (ILMN) and ThermoFisher (TMO).  Here is a recap of positions we recommended in January 2014 after the JP.Morgan Conference and a second performance summary done at year-end 2014. Among our top long term picks were: Abaxis (ABAX)), Alere (ALR), Cepheid (CPHD)-acquired, Exact Sciences (EXAS), Foundation Medicine (FMI), Illumina (ILMN), Nanostring ((NSTG), Neogen (NEOG),Pacific Biosciences (PACB)and Qiagen (QGEN). 2014 was a great year with for the sector with several stocks having big runs. Revenue growth slowed for the sector in 2015 and early 2016 so stocks moved sideways.

Pure play clinical diagnostic companies showed tepid growth but a leader Cepheid was acquired. Unique business models have been rewarded most recently: EXAS and FMI. Exact Sciences (EXAS) rebooted after revenue shortfalls and is now up 247% YTD. Sequencing (NGS) is still a robust technology with many new applications.

On the positive side a report by Yardeni Research shows the Life Science Tools and Services Industry has soared since the early 2016 bottom with major players  A ILMN MTD PKI TMO and WAT in the Index. So it may be late but the longer term growth prospects  look good for this industry because of advances in molecular medicine with biomarkers and pharmacogenomics coming into play. Moreover M&A should be coming in 2018 so stick with large caps:

In 2017 Agilent (A) is up 40.7%, Illumina ILMN) is up 55% and Thermo Fisher is up 33%.

As can be seen from the chart below this sector took off around the same time as the biotech surge in late 2016 then accelerated in Q2 2017 as sales and earnings beat.

Here is a summary of selected stocks in our 2015 portfolio prior to Q3 earnings. None of these stocks are cheap. We are reluctant to get too bullish but here are some of our old favorites to track into Q3 earnings:

Winners over 2 years, 9 months: FMI,HOLX,NEOG,TMO.

Losers are ABAX,PACB.

Stock                             Price 9/26/17              Price 12/24/14  

Abaxis (ABAX) $43.89.                                                  $58.50

Foundation Medicine (FMI) $37.60.                               $24

Hologic (HOLX) $37.42.                                                  $26.90

Illumina (ILMN) $198.44.                                                 $186.2

Neogen (NEOG) $74.82.                                                  $48.2

Pacific Biosciences (PACB) $5.18.                                  $7.46

Thermo Fisher (TMO) $187.67.                                        $127

We will offer new ideas in the coming months after Q3 earnings are reported. We previously reported on biotech ETFs and the FBT First Trust Arca Biotechnology ETF holds more of the services and tools stocks (ILMN, CRL, Q, QGEN,TECH, PRXL) if you seek more diversification from biopharma (XBI). Most of these stocks have had a big run and are a strong hold but not a buy at current levels. This data does show the importance holding stocks for the long term. Two stocks have been on our buy list: FMI and HOLX. Roche ADR (RHHBY) a large cap diagnostics and biopharma is also on our buy list.

Disclosure: long HOLX, PACB, RHHBY,XBI, short EXAS.

 

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