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Illumina Fettered With Losses: Can It Bounce Back in 2017?

Investors are constantly on the lookout for newer strategies to rake in market-beating returns. One easy way to gauge where the stock is headed in 2017 is to go through its performance in relation to the peer group or industry in the year gone by. However, the below-par performance by the stocks on the bourses may not seem as dreary if the markets have been subjected to economic downturns.

Meanwhile, this hasn't been the case for Illumina, Inc.ILMN . While the overall health care sector posted a steady performance in 2016, this renowned next-generation sequencing company saw a persistent decline in share price over the past one year. The stock, battered by legal, operational and funding issues, lost 29.4% over the period.

Below we discuss the reasons why investors have little to gain out of Illumina at present which is otherwise a great growth stock:

Downsides

During majority of the past one year, Illumina lagged the Zacks classified broader Medical - Biomedical and Genetics industry. The stock lost 29.7% over this period, wider than the broader industry's decline of 24.7%. We believe that the primary reason behind this is the unfavorable funding environment that Illumina has been facing for quite some time.

Notably, the National Institutes of Health's (NIH) grant for next-generation sequencing (NGS) grew 7% in 2016 in comparison to the 15% increase of 2015. The sequestration cut implemented by NIH is restricting investments in medical innovation by U.S.-based life sciences companies. Thus, in the absence of any catalyst, Illumina can continue to incur losses even in 2017.

The price trend in fact deteriorated after the company's mixed third-quarter 2016 results. Since the release, the stock lost 8.22% versus the sub industry's gain of 1.93%. While we await the release of fourth quarter and full-year results within a month or less, Illumina's lackluster earnings estimates for the full year fail to abate our fears.

In this regard we note that, on the bottom-line front, the company slashed its guidance for adjusted EPS to the range of $3.27-$3.32 from the previous $3.48-$3.58. GRAIL and Helix dilutions are expected to mar the company's performance.

The margin scenario is also bland, thanks to increasing investments in sequencing consumable and array manufacturing capacity as well as clinical capabilities. The higher employment at the company also resulted in margin contraction. We expect these factors to stay in 2017, dimming chances of a comeback any time soon.

For 2017, ten estimates moved south with no upward revision over the last couple of months. This resulted in a 20-cent drop in 2017 estimates to $3.69.

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Positives:

Favorable Zacks Rank and Industry Rank

Illumina currently carries a Zacks Rank #3 (Hold) which secures its place in the portfolio at least for now. This apart, the broader industry currently ranks an impressive 72 out of the 260-plus industries under the 16 Zacks sectors. The outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.' We also note that, in spite of the company's bottom-line debacle, the stock is expected to register 11% earnings growth in 2017, much higher than the S&P 500 index's expected growth rate of 8.7%.

Reproductive and Genetic Health Prospects Bright : Illumina is forging ahead with its goals to strengthen in the multi-billion gene sequencing market with some highly competitive products in its existing portfolio and pipeline. For market expansion, the company's primary focus has been on the reproductive and genetic health space where it seeks to expand its portfolio by providing the verifi laboratory-developed non-invasive prenatal test (NIPT). This market is rapidly developing on a global scale which has allowed the company to witness consistent growth in the number of NIPT samples in recent times.

Onchology Growth Continues : In the oncology business, the company has of late developed several pharma partnerships and is working on bringing custom panel tests to market. Such panels include TruSight Tumor 15, a research use-only and investigational use-only product, and TruSight Tumor 170, a research use-only product. Further, the company has partnered up with Amgen to develop a companion diagnostic test for Vectibix.

We are also looking forward to GRAIL, Illumina's recently developed company focused on the cancer screening market. Currently, the company is working on transferring its ctDNA programs, MSK partnership to GRAIL. Also, it has begun work on the detailed planning necessary to embark on a large-scale clinical trial in 2017 with the goal of demonstrating a stage shift in diagnosis. We expect GRAIL to expand Illumina's share in the multi-billion dollar oncology market.

Key Picks

While we remain on the sidelines with regard to Illumina, the medical stocks that are worth a look for now include NxStage Medical Inc. NXTM , Align Technology, Inc. ALGN and Haemonetics Corporation HAE . NxStage Medical and Align Technology sport a Zacks Rank #1 (Strong Buy) while Haemonetics carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

NxStage Medical gained 24.5% over the last one year compared with the S&P 500's 11.2%. The company has a four-quarter average positive earnings surprise of 46.3%.

Align Technology rallied 49.6% over the last one year, way better than the S&P 500's 10.1%. It has a trailing four-quarter average positive earnings surprise of 23%.

Haemonetics recorded a 28.6% gain over the past one year, better than the S&P 500. It has a trailing four-quarter average positive earnings surprise of 0.82%.

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NXSTAGE MEDICAL (NXTM): Free Stock Analysis Report

ILLUMINA INC (ILMN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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