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By Jeremy Glaser and Alex Morozov, CFA | 08-30-2012 04:00 PM

Will Life Sciences Firms Fall Off the Fiscal Cliff?

Even if the NIH is drastically cut, we don't see a doomsday scenario for these companies, and some of the industry's stronger players are now trading at attractive valuations.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

We're over a year from the debt ceiling debate, and some of the budget cuts are now planned to happen in January. One industry where this is looming large is life sciences. I'm here with Alex Morozov; he is the director of health-care research at Morningstar. We're going to take a look at the industry and see if there is still any value there.

Alex, thanks for joining me.

Alex Morozov: Thanks for having me, Jeremy.

Glaser: So, let's start with the sequestration; let's start with the cuts. What could these potentially mean for life sciences companies?

Morozov: Well, first of all, let's remember that NIH, while a very important contributor to life science companies in terms of funding, is not the only source for funding. The NIH does account for sizable chunk of academic and government funding that is provided for life science firms, but it's still only a small portion of the overall funding.

In reality, when you look at the life science companies, less than a quarter of total revenue comes directly from academic and government sources. If you drill a little bit deeper, even less than that comes directly from NIH. So, even if NIH is drastically cut, as is quite a bit possible nowadays, it's still not going to be a doomsday scenario for a lot of life science firms.

Glaser: So, this has certainly been one of the big questions: What's going to happen at the fiscal cliff. Will there be some compromise after the election, before January, in order to actually fix it? When you are thinking about these companies, in some respects does it matter if it's fixed or not? Or does is really going to have a huge impact on the livelihood of these companies?

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