Life Acquires Ion Torrent - Analyst Blog

Over the past few years, Life Technologies (LIFE) has been expanding its product portfolio through acquisitions; the latest being privately held Ion Torrent, a DNA sequencing company, for $375 million in cash and stock. In addition, Life is also liable to pay $350 million if certain milestones are met through 2012. The transaction, expected to be completed by the fourth quarter, is subject to regulatory approvals.

The acquisition of Ion Torrent will further strengthen Life’s Genetic Systems, which contribute about 26% to the company’s top line. This segment includes sequencing systems and reagents, including capillary electrophoresis (CE) and the SOLiD system, as well as reagent kits developed specifically for applied markets, such as forensics, food safety and pharmaceutical quality monitoring. During the second quarter of 2010, this division recorded revenues of $235 million, representing a 7% organic growth.

The acquisition will be financed by Life’s available cash balance, credit lines and stock. Life exited the second quarter with $671.3 million in cash and cash equivalents, up from $596.6 million at the end of December 2009. Free cash flow balance at the end of the quarter was $203 million. Including the impact of cost saving initiatives, the transaction is expected to be dilutive to the company’s earnings in 2010 by 2 cents, neutral in 2011 and accretive in 2012 and beyond.

Following the release of second-quarter results, Life increased the lower end of its EPS guidance for fiscal 2010 by 5 cents to $3.35–$3.50 on mid-to-high-single digit organic revenue growth. The EPS guidance remains unchanged and Life expects to record double-digit EPS growth in 2011 including the impact of this transaction.

Our Recommendation

Life Technologies enjoys a strong position in the life sciences market. We believe robust performance from its core business along with new product launches will help drive revenues going forward. Meanwhile, lower expenses and cost cutting along with increased revenues should help drive the bottom-line. Additionally, the company is increasing its focus on China where major investments on healthcare are expected in the near future.

We are also impressed by Life’s focus on stem cell research, which holds immense potential in the long term. However we are also concerned about the situation in the European market where funding might be curtailed due to the economic slowdown.

Based on the long-term potential of the company, we maintain our Neutral rating on the stock, which also corresponds to the Zacks #3 Rank (short-term 'Hold' recommendation).