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Here's Why You Should Hold on to Illumina (ILMN) for Now

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Illumina, Inc. (ILMN - Free Report) has been gaining from robust performance in international markets. The growing uptake of non-invasive prenatal tests (NIPT) in and outside the United States appears promising. The company’s slew of strategic collaborations, including the recent companion diagnostics (CDx) with Merck, buoys optimism. However, mounting expenses and stiff competition raise apprehension.

Over the past year, the Zacks Rank #3 (Hold) stock has gained 6.2% against the 32.4% decline of the industry and the 26.3% rise of the S&P 500.

The renowned life sciences company, which provides tools and integrated systems for genetic variation and function analysis, has a market capitalization of $62.44 billion. Its third-quarter 2021 earnings per share surpassed the Zacks Consensus Estimate by 16.9%.

Over the past five years, the company’s earnings have grown 7.5% compared with the industry’s 14.4% rise and the S&P 500’s 2.8% increase. The company’s long-term expected growth rate of 31.2% exceeds the industry’s long-term growth expectation of 19.9% and the S&P 500’s estimated 11.9% growth.

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Let’s delve deeper.

Factors At Play

Reproductive & Genetic Health Market Prospects High: Illumina saw substantial year-over-year growth in reproductive health during the third quarter. The company noted that the prenatal screening program in California is being updated to include NIPT. Meanwhile, the Italian Ministry of Health released new guidelines in September 2021, promoting the use of NIPT in a contingent model. The NIPT is also gradually being incorporated into guidelines outside the United States, raising optimism.

Robust International Growth: We are upbeat about Illumina’s solid performance across the EMEA, Greater China and APJ regions. In the third quarter, EMEA revenues improved 47% year over year, driven by significant growth across all clinical markets and strength in emerging markets, population genomics initiatives, and COVID-19 surveillance testing. Revenues from Greater China (including China, Taiwan and Hong Kong) surged 47% year over year, while revenues from APJ (Asia Pacific and Japan) registered 45% year-over-year growth.

Partnerships Strengthen Business: Illumina has been engaging in a number of strategic partnerships with therapeutics and diagnostic services providers. In September 2021, the company entered into a CDx partnership with Merck to develop and commercialize tests that detect genetic mutations used to evaluate homologous recombination deficiency (HRD). The HRD tests will help identify ovarian cancer patients with positive HRD status who are eligible for treatment with LYNPARZA (olaparib). Earlier, Illumina confirmed the establishment of a global pathogen genomics initiative in partnership with the Bill & Melinda Gates Foundation to help make next-generation sequencing technology and expertise accessible in areas of need.

Downsides

Escalating Costs: During the third quarter, Illumina’s research and development expenses increased 153.5% year over year, whereas selling, general & administrative expenses rose a stupendous 357.8%. This rise in operating expenses pushed up operating costs by 261.3%, which led to huge operating losses in the quarter.

Tough Funding Environment: The timing and amount of Illumina’s revenues from customers who rely on government and academic research funding may vary significantly. While funding for life science research can be volatile during periods of economic uncertainty, government funding of research and development is subject to the political process.

Competitive Landscape: Illumina faces stiff competition from numerous large firms in the sequencing, SNP genotyping, gene expression and molecular diagnostics markets. These firms pose a significant threat to the company as they possess substantially greater financial, technical, sales, distribution, research and other resources.

Estimate Trend

Over the past 30 days, the Zacks Consensus Estimate for Illumina’s 2021 earnings has moved north by 0.9% to $5.66.

The Zacks Consensus Estimate for its fourth-quarter 2021 revenues is pegged at $1.15 billion, suggesting a 20.8% rise from the year-ago reported number.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. (AMN - Free Report) , Apollo Endosurgery, Inc. (APEN - Free Report) and Patterson Companies, Inc. (PDCO - Free Report) .

AMN Healthcare, carrying a Zacks Rank #1 (Strong Buy), has a long-term earnings growth rate of 16.2%. The company’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 19.5%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry over the past year. AMN has gained 47.2% against the 54.7% industry decline.

Apollo Endosurgery, carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 7%. The company‘s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 25.6%, on average.

Apollo Endosurgery has outperformed its industry in the past year. APEN has gained 60.3% versus the industry’s 0.4% rise.

Patterson Companies, sporting a Zacks Rank #2, has a long-term earnings growth rate of 9.9%. The company surpassed earnings estimates in three of the trailing four quarters and missed in one, delivering an average surprise of 3.7%.

Patterson Companies has underperformed its industry over the past year. PDCO has declined 12.7% versus the industry’s 5.3% rise.