Interest in companies that dominate DNA sequencing and genetic analysis is heating up again.
The leaders in the sector, such as Ilumina (ILMN), Life Technologies (LIFE) and Human Genome Sciences (HGSI), outscored most other biotechs last year. They gave up some of their gains this year as a result of profit-taking, but with the broader market again showing signs of strength, analysts are upbeat on the sector. They regard the decline as just a temporary pullback -- and an opportunity to buy shares at lower prices.
Since I last discussed Ilumina in May 2010, its stock rocketed from $42.16 a share to a 52-week high of $73.96 on Feb. 11, 2011, before retreating to $66. Life Technologies also hit a 52-week high of $57.25 on Jan. 3, but has since backtracked to $50.
Human Genome Sciences, which was languishing at 45 cents a share in 2009, stunningly skyrocketed to an all-time high of $34.49 in mid-April 2010. It retreated in the following months, but recently approached $30 again after the Food and Drug Administration approved its drug Benlysta for the treatment of lupus.
The one big laggard, Affymetrix (AFFX) -- once the pioneer and early leader in the group -- tumbled from a 52-week high of $8.38 in April 2010 to a low of $3.75 in July 2010. It has since edged back up to around $5 a share amid speculation that it will make an acquisition.
Two Wall Street Favorites
Some observers believe Ilumina and Life Technologies are also looking for acquisitions to buttress their pipelines and upgrade their technologies. A few of the big pharmaceutical companies, such as Merck (MRK) and Novartis (NVS), are also rumored to be looking at a number of companies engaged in DNA and gene analysis research, according to some analysts.
Ilumina, which develops research tools to analyze genetic variations and functions, continues to gain market share, with sales remaining robust despite tough economic conditions, notes Jeffrey Loo, analyst at Standard & Poor's. Ilumina's tools assist researchers in processing the billions of tests necessary to convert raw genetic data into medically valuable information in order to improve drugs and therapies, customize diagnoses and treatments, and potentially cure diseases. Loo rates Ilumina a buy, with a 12-month target of $78.
Loo also has a strong buy recommendation on Life Technologies, with a 12-month target of $68. The company makes instrument systems and software and other lab products that speed up and simplify gene cloning and expression and analysis.
Possible Buyout Target?
One company that is a possible buyout target among the DNA-sequencing biotech group is Wafergen Bio-Systems (WGBS), a leading developer and maker of systems for genomic analysis. Its chief product now on the market is SmartChip technology, which is used for analyzing gene expression. This is ideal for researchers seeking to confirm discoveries from the growing use of next-generation sequencing and to discover and validate biomarkers or gene expression patterns on a single platform, says Wafergen.
"The SmartChip is designed to provide lab researchers, clinicians, and technicians at Big Pharma accurate, highly sensitive and high-throughput gene-expression profiling capabilities," says Alnoor Shivji, chairman and CEO of Wafergen. The SmartChip enables scientists to know which genes or proteins are turned on or off in a given tissue sample in a cheaper, faster and more powerful way, he says. It helps researchers and scientists in their quest to develop new drugs that target specific genes affecting a given disease, adds Shivji. The SmartChip could become the new methodology of choice for industry and academic labs alike engaged in the study of gene expression.
With gene expression analysis now a focus in disease research and drug development, Wafergen could see significant growth in the sale of its SmartChip product over the coming years, says Raghuram Selvaraju, biotech analyst at Hapoalim Securities, in a report. Rating the stock a buy, he notes that with SmartChip's broad applicability, Wafergen "represents an attractive acquisition target for a number of established companies." The leading potential suitors, he believes, are Ilumina and Life Technologies.
Other analysts are betting that Affymetrix, which badly needs a new technology and a product such as the SmartChip, will make a bid for Wafergen.
Elemer Piros, senior biotech analyst at investment firm Rodman & Renshaw, is also bullish on Wafergen. "We remain encouraged about the commercial potential of Wafergen's SmartChip system," says Piros, who recommends its stock, currently trading at 88 cents a share, as outperform, with a 12-month price target of $4.
Wafergen's SmartChips produced revenues in 2010 of $2.2 million, beating Piros' estimate of $1.5 million. He expects Wafergen to invest heavily in research and development in the coming years to be able to offer more advanced products. For 2011, revenues could reach at least $3 million. Before then, Wafergen may get gobbled up by one of the larger companies in the group.
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