S&P's Outlook on Life Sciences

08/10/2015 9:00 am EST

Focus: STOCKS

S&P Capital IQ’s fundamental outlook for the life sciences' tools and services for the next 12 months is positive, asserts Jeffrey Loo in Standard & Poor’s The Outlook.

While global economic challenges have contributed to cautious spending levels within the pharma and biotech groups, we see improvement in 2015.

We also think government budget issues in Europe and the US have lessened and we see stability and gradual improvement as new products and innovation drive sales.

Academic spending accounts for about 40% of sales for life science tools companies, on average. However, we note that many life science companies are actively pursuing initiatives to their commercial, non-academic, and government revenue base.

Overall, we see mid-single digit sales growth in 2015. In our view, new products and the need for drug firms to advance their pipelines—particularly due to the pharmaceutical patent cliff—will drive life science sales growth.

Emerging markets such as Brazil and China remain robust growth regions and are growing at double-digit rates, helping fuel overall industry growth. China’s government funding slowed in 2014 but we anticipate a gradual improvement in 2015.

We believe demand for genetic sequencing instruments remains solid. Many equipment companies have also diversified their product lines to increase sales of consumables, which are typically immune to budget constraints.

Many of these firms have also expanded into other areas such as environmental and food safety and agriculture. Growth in these end markets is expected to be more robust than in the pharmaceutical or research end-markets.

Companies that provide services to pharmaceutical and biotech firms should see solid growth over the next 12 months, in our view.

We believe pharmaceutical and biotech firms will increasingly outsource services, as we think this increases efficiency and lowers costs. We also see an increase in strategic partnerships.

Four stocks in this industry earn S&P Capital IQ’s buy rating: ICON (ICLR), Illumina (ILMN), Parexel (PRXL), and Thermo Fisher Scientific (TMO).

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