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Illumina (ILMN) is uniquely placed to offer long-term returns. Here’s why

Having started shipment of COVIDSeq, which got the green signal from the FDA, the company expects to monetize the coronavirus test in 2H

Illumina, Inc. (NASDAQ: ILMN), a pioneer in genome sequencing technology, has strived to strengthen its unique position in the healthcare sector through strategic partnerships and technological innovation. Its performance so far this year shows that despite being affected by the virus crisis, the company’s long-term prospects remain intact.

Statistics show that the biotech firm’s tools account for more than 90% of all DNA sequencing data processed across the world, and the market is expected to double in the next seven years. The fact that the bulk of the opportunities remain untapped justifies the bullish outlook for that healthcare segment, which bodes well for the company that enjoys more than 70% market share. With product prices declining steadily, Illumina is poised to broaden its customer base in the coming years.

Unbeaten

The California-based healthcare firm’s greatest advantage is its dominance in the genomic space, with hardly any direct competitor out there. The technology that supports the business is so advanced that it would not be easy for rivals to catch up. Also, better affordability and accessibility will make genomic testing more commonplace in the future, setting a new paradigm in medical research and diagnostics. Recently, the FDA cleared the company’s advanced sequencing test COVIDSeq, which is expected to translate into revenue in the second half and beyond.

Related: Humana can offer long-term returns

“Studies including GEL’s 35,000-patient study in the U.K. could ultimately accelerate the adoption of genomic tests into routine clinical use for infectious disease and surveillance. Looking to the second half of 2020 specifically, sequencing consumables, which make up most of our revenue, remain correlated with shelter-in-place activities, and recovery, therefore, depends on how quickly our customers get back into their labs,” said Illumina’s CEO Francis deSouza in a recent interaction with analysts.

In Expansion Mode

While technological innovation has helped in easing the apprehension over the future of the diagnostics business, especially liquid biopsy, COVID-related disruptions are posing fresh challenges for companies operating in that area. After acquiring Netherlands-based software firm BlueBee a few months ago in a deal aimed at boosting its data processing capacity, Illumina reiterated its commitment to innovating and investing in the pipeline, and the company is probably working towards achieving its growth targets.

Recently, a report published by Bloomberg said Illumia is planning to re-acquire liquid biopsy firm Grail that was spun off a few years ago. It seems the $8-billion buyout did not go well with investors, as Illumina’s stock pulled back this week from its recent highs. The stock still looks overvalued and the consensus target price signals a further uptick. Though experts’ cautious call for patience makes sense, given the volatile market scenario, Illumina is one of the best options currently in the offing for long-term investment.

Grail Coming Home?

The main benefit that can be expected from the rumored deal is an improvement in competitiveness, since the combination of Illumina’s sequencers and Grail’s genomic testing capabilities would give the former an edge over companies that use its products for liquid biopsies. The unconfirmed report came a week after Grail filed for a $100-million initial public offering.

Related: Medtronic revisits business strategy amid recovery

Earlier, Illumina clinched a 15-year partnership with Swiss firm Roche in the field of genome-based cancer treatment. The promising collaboration brought cheer to the market, easing the pessimism that crept in after the company terminated the acquisition of Pacific Biosciences of California (PACB) at the beginning of the year due to regulatory hurdles.

COVID-hit Q2

After several quarters of strong bottom-line growth, the company’s earnings more than halved in the June-quarter. Suffering from the pandemic-related headwinds, revenues contracted 25% to $838 million. Disheartened by the lower-than-expected results, the management withdrew its full-year guidance. The pre-earnings excitement gave way to gloom in the market, even as several of Illumina’s research customers remained closed or operated in a limited capacity.


Read management/analysts’ comments on quarterly earnings reports


After hitting a record high, the stock has been in a soft patch since last month’s unimpressive earnings report. It has lost about 26% since then. On Friday, the shares traded slightly below the $300 mark, after closing the previous session lower. They are down 1% so far this year, while the S&P 500 Index gained about 6% during that period.

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