RS Investment Management Comments on Life Technologies
We saw a compelling entry point to purchase the stock during the summer of 2011 as investors became increasingly concerned about potential National Institutes of Health ("NIH") funding cuts. In our opinion, these concerns were overstated given that a potential 8% cut to NIH funding would only translate to about a 1% headwind to Life's overall business, given that NIH funding only accounted for ~15% of Life's revenue. Importantly, NIH funding has doubled over the past 12 years to $30 billion and has historically received broad bipartisan support. Moreover, we felt that a reasonable cut to NIH funding would be more than offset by the increasing growth prospects from the emerging markets. At the time of our investment, emerging markets made up just 10% of Life's revenue but were growing at an annual rate of 25%. China alone was a $180 million revenue business growing at 25%, partially in response to the Chinese government's announcement that it was determined to invest $125 billion in health care and science over the coming years. Other growth opportunities that we felt were under-appreciated by the Street included sequencing product launches that exceeded expectations as well as applied markets in bio-production and forensics.
Having completed several large acquisitions in the past, management was increasingly focused on maximizing returns on its existing asset base, and return on invested capital ("ROIC") was added as a performance metric for the senior management team. We saw several positive signs that the company was more disciplined in its capital allocation strategy and remained keenly focused on improving ROIC. In fact, the company began publishing its ROIC metric and publicly set an ROIC target of 10% for 2012 (compared with just 7.7% in 2008). Margin expansion opportunities of 50−75 basis points a year were identified and could be realized by improving efficiencies and leveraging fixed assets. In fact, the company improved its efficiency and productivity by shutting down six manufacturing facilities in 2010, while moving 50% of its purchase transactions online. After successfully rationalizing the Company's cost structure and discontinuing unprofitable product lines, Life announced plans to use its free cash flow to aggressively repurchase stock and deleverage the Company. While we like its long-term prospects, when Life announced that it had hired consultants to help the Company pursue strategic alternatives, the stock price reacted by increasing by roughly 20%. As such, at this more aggressive valuation, we felt that we lost sufficient downside protection that we decided to exit our position in the company during the first quarter of 2013.
From RS Investment Management's first quarter 2013 letter.