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Biotech / Medical : Biotech Lock-Up Expiration Hell Portfolio

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To: tuck who wrote (991)	9/9/2004 1:19:14 AM
From: mopgcw	of 1005

Piper: TWTI :Initiating Coverage: Outperform And $8 Target 2004-08-31 07:12 (New York) Steven M. Hamill, CFA, Sr Third Wave (TWTI - $4.97) Price Tgt -- $8.00 Price: $4.97 52 Week High: $5.94 52 Week Low: $3.03 Shares Out (mil): 40.3 Market Cap. (mil): $200.3 Avg Daily Vol (000): 119 Book Value/Share: $1.57 Cash Per Share: $1.71 Debt to Total 13% Outperform Volatility: Medium Initiating Coverage: Outperform And $8 Target KEY POINTS: * We believe Third Wave has transformed its business strategy from a research tools company to a clinical diagnostics company and is poised for near-term success with that strategy due to the appeal of its Invader technology and a deep pipeline of next clinical assay launches based on Invader. * We believe Third Wave is poised to take substantial market share with its recently released cystic fibrosis (CF) and hepatitis C genotyping (HCVg) assays based on their competitive advantages and favorable customer feedback. * We believe the Third Wave model offers substantial opportunity for revenue growth leverage through the Company's P&L. We attribute this to the tremendous scalability of reagent production and to customer concentration within the molecular diagnostics market. * By combining these product launches with a leveragable cost infrastructure, we believe Third Wave can increase its operating margin from -3% in 2004 to +10% in 2005. Long-term operating margins approaching 30% are not unreasonable. * Near-term potential catalysts include: announcements of new customer wins for the CF and HCVg tests, commercialization of an HPV test and commencement of clinical trials for a hepatitis C viral load test. * In our opinion, recent deferred revenue bookings provide excellent visibility on 2H04 revenue and leave room for potential upside to estimates. INVESTMENT RECOMMENDATION: We are initiating coverage of TWTI with an Outperform rating and a price target of $8. Our target equals 25x our CY06 fully-taxed EPS estimate of $0.23 (not to be confused with our GAAP EPS estimate of $0.36) plus net cash and the present value of Third Wave's substantial tax NOL carry- forward. RISKS TO ACHIEVEMENT OF TARGET PRICE: Risks to our thesis on TWTI shares include: customer concentration, competition from larger companies, delays in TWTI's pipeline, and speed of uptake of new products. COMPANY DESCRIPTION: Third Wave Technologies Inc. is a developer and manufacturer of molecular probes and assays for lifescience research and clinical diagnostics.

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