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Fiscal Cliff Deal: A Short-Term Reprieve For Life Science Sector

 January 02, 2013 10:21 AM

(By Mani) The Senate passed a bipartisan plan (89-8) to delay sequestration-related cuts for two months. Despite opposition from the GOP including House majority leader Eric Cantor, the House followed suit and passed the Senate proposal (257-167) late Tuesday night.

In other words, the House of Representatives passed the so-called "fiscal cliff" bill that prevents tax increases and postpones spending cuts by two months.

With the sequestration deadline past, creating increased uncertainty around securing a Federal budget plan, last night's legislative measures should create a short reprieve from the volatility in the life science tools sector, particularly among names more heavily levered to National Institutes of Health (NIH) funding.

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"Importantly, this measure does not remove the overhang for life science tools names. Rather, it delays the inevitability of sequestration for another two months," Oppenheimer analyst David Ferreiro wrote in a note to clients.

It is now up to the 113th Congress to create a plan to avoid the worst-case sequestration scenario from occurring as the markets remain hopeful for a budget resolution in the coming months that protect NIH funding, and note President Obama's expressed support for research.

As has been the NIH policy under prior continuing resolutions, non-competing renewal funding has been cut by 10 percent. Over the past five years, non-competing renewals account for about 75 percent of NIH extramural grant funding. Extramural budget is over two-thirds of the total NIH budget.

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According to a recent statement by Francis Collins, NIH Director, sequestration would translate into about 2,300 fewer grants. However, this may underestimate the actual impact. The NIH will likely be forced to reduce the funding levels of non-competing renewals, in addition to a reduction in new grant awards.

"We anticipate a near-term slowdown in academic spending as researchers deal with the 10% cut to non-competing renewal funding under the continuing resolution and prepare for possible sequestration," Ferreiro noted.

Among the life science stocks, Life Technologies Corp. (NASDAQ: LIFE), Illumina Inc. (NASDAQ: ILMN), and Fluidigm Corp. (NASDAQ: FLDM) are the most exposed to NIH funding.



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