April 15, 2008 (Vol. 28, No. 8)

Analysts Applaud the Refreshed Focus on Molecular Diagnostics

Celera certainly isn’t acting like a stepdaughter about to be disowned, even though parent company, Applera, reported an SEC filing to spin off the firm. In fact, Celera has posted strong financial results for the last two quarters and closed two major acquisitions, which are already adding to its profitability.

Celera is a diagnostics firm that offers tests and services. Besides instruments that predict disease risk and optimize therapy selection, Celera also leverages its discoveries and pharmacogenomic tests in therapeutic development partnerships.

Year after year, though, the company seems to be refocusing its franchise on diagnostic. This includes fewer proteomics-based research activities and more company buy-outs to pad the diagnostic segment.

Celera’s standing is also improving in the eyes of investors and analyst. While the acquisitions are recent and some are holding out to see evidence of full integration, the immediate effect of creating a profitable company is definitely being lauded.

“We view Celera’s plan to shift the focus to its molecular diagnostics business as positive to the company,” says Grant Zeng, Zacks senior pharmaceutical industry analyst. “The diagnostics market will enjoy a high growth in the next few years. Also, personalized medicine has gained favor in the past few years, and the trend will continue in the future.” Zeng finds that the decreased focus in drug R&D is also crucial to the firm’s success.

Bruce Cranna, senior analyst at Leerink Swann, echoes this sentiment. He has an Outperform rating on the company and believes that the possible spin-off from Applera, expected to go through midyear, will work to its advantage. Celera will have better access to capital and will be able to attract more investors such as those who weren’t able to own tracking stock, he states.

While Zeng certainly sees the advantages of being an independent company, he has one trepidation. “The separation may hurt the cooperation with sister company, Applied Biosystems, or increase the cost of cooperation.”

For Zeng, Celera’s stock is labeled a Hold. In addition to the caution related to the spinout, he identifies other pitfalls related to its recent acquisitions. In October 2007, Celera closed two takeovers: Atria Genetics for $33M and Berkeley HeartLab (BHL) for $195M. These added to Atria’s line of human leukocyte antigen testing products and BHL’s portfolio of CLIA-certified cardiovascular tests and disease-management services.

“We would like to see evidence of the company’s ability to successfully integrate and leverage the commercial operations of Berkeley and Atria,” notes Zeng.

Cranna, however, finds that the acquisition of BHL gives Celera an interesting hybrid business model. BHL provides testing services, while Celera is developing the actual cardiovascular diagnostics. Though this could slow down the overall growth rate, BHL will add significant product sales, he points out.

Celera’s last financial statement is evidence of this fact. Revenues in Q2 saw an approximate 150% jump over Q1 to $40.3M. The acquired companies alone contributed $23.6M. Celera expects to be profitable on a non-GAAP basis in the second half.

“We anticipate an interesting growth story in the next one to five years,” comments Cranna. “We’re expecting to see about a 20% sales growth.” He points out that the FDA-approved m2000 technology shows potential and is still in the early phases of commercialization.

The company is not completely free from risks, Cranna notes. In terms of its marketed products, competition is the issue. “Celera is essentially going head to head with Roche.” Secondly, “the risk with its pipeline products will grow if the regulatory landscape changes such that FDA gets more involved in pharmacogenomic testing.”

As of December 31, 2007, Celera’s cash and short-term investments were approximately $342M. Cranna sets his price-target range between $18 and $20, which he expects in the next 12 months. Zeng’s target is slightly lower at $16. The company opened trading on March 27 at $14.62.

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