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Putting the Life Science Niche Under a Microscope

Our expectations for 2011 as well as our view of potential acquisition targets.

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While it is easy to visualize what pharmaceutical firms or medical device firms produce, the life science segment seems a little hazier to investors. We do not encounter its products in daily life, nor do we usually see them in the doctor's office. Life science firms produce equipment and consumables (such as tests and reagents) for use in research, applied markets, and diagnostic labs. Research customers come from government and university laboratories as well as from the development arms of large pharmaceutical and biotechnology companies. Life science products also trickle down into the applied market for use in forensics, agriculture, and environmental testing. These firms also make products for molecular diagnostics to detect mutations or strains of viruses, like the H1N1 flu. While we don't currently have any 5-star calls in our life science coverage universe, we still view the market as attractive and have outlined our broad expectations for 2011 as well as our view of potential mergers and acquisitions targets.

Weak Overall Health-Care Spending Will Persist in the Near Term
A broad consumer pullback in health-care spending didn't spare life science firms with exposure to health-care end markets, especially those with diagnostic test offerings. The suppressed demand is likely to linger for several more quarters as high unemployment figures, loss of COBRA benefits, and general macroeconomic uncertainty are unlikely to dissipate quickly. We believe physician visits and lab testing will remain low until the insurance coverage and employment situation improves, though some industry giants like  Becton Dickinson (BDX) have reported stabilization in demand the last few quarters. On the upside, the health-care reform provision that eliminates a deductible for preventative services in 2011 should be a catalyst for the industry, and we anticipate lab volume to pick up starting in the first quarter.

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Meera Venu does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.