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Illumina (ILMN) Sequencing Arm Grows, Margin Woes Linger

Illumina’s ILMN market opportunities continue to expand owing to accelerated demand from clinical and translational customers. Yet, regulatory issues surrounding GRAIL are putting huge pressure on the bottom line. The stock carries a Zacks Rank #3 (Hold).

Illumina delivered better-than-expected first-quarter 2023 earnings and revenues. Consolidated revenues were up 1% from the fourth quarter of 2022, exceeding the high end of the company’s guidance range. Building on strong global interests, the company executed robust shipments of NovaSeq X instruments, exceeding its first-quarter guidance of 40 to 50 shipments.

Core Illumina sequencing consumables revenues were up 1% sequentially. Total sequencing activity on the company’s connected high- and mid-throughput instruments grew 6% sequentially and 3% year over year. Research & Applied grew 7% sequentially. Clinical sequencing activity growth remained robust, up 7% from Q4 2022 and 15% year over year.

Geographically, Americas revenues grew 5% sequentially and exceeded Illumina’s expectations on stronger-than-anticipated NovaSeq X shipments.

Illumina, Inc. Price

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Illumina, Inc. Price

Illumina, Inc. price | Illumina, Inc. Quote

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GRAIL continues to witness demand from consumers, physicians, health systems and payers. GRAIL revenues of $20 million in the first quarter grew 100% year over year, driven primarily by the accelerated adoption of Galleri.

Illumina is currently keeping up well with its goals to strengthen its foothold in the multi-billion gene sequencing worldwide market with some highly-competitive products in its existing portfolio and pipeline. This market is developing rapidly on a global scale,  allowing the company to witness persistent growth in the number of non-invasive prenatal test  samples.

Genetic disease testing (GDT) had a record first quarter. GDT consumable shipments grew 7% year over year, driven by the broader adoption of whole genome sequencing globally and increased demand for rare disease treatment. Coverage continues to grow for whole genome sequencing in patients with rare and undiagnosed genetic diseases.

The company also saw additional evidence generation, with the European Society of Human Genetics updating its guidelines to recommend increased adoption of whole genome sequencing in diagnostics and increased coverage for rare and undiagnosed genetic diseases.

On the flip side, in the first quarter of 2023, the year-over-year performance remained sluggish. Core Illumina revenues fell 10% at CER. Core Illumina Sequencing Consumable revenues were down 12% year over year. Sequencing Instrument revenues for Core Illumina were down 27% from the year-ago quarter’s figure. The decline was primarily due to lower NovaSeq 6000 shipments compared with the previous year’s quarter and reduced mid-throughput shipments led by fewer NextSeq 550 placements in China.

An expected COVID-19 surveillance headwind affected Core Illumina’s revenues, including sequencing consumables revenues.

Further, contraction in both margins raises apprehension. Illumina emphasized its commitment to achieving higher adjusted operating margins from Core Illumina in the next two years.

Meanwhile, the chaos surrounding the GRAIL divestment is worrisome and is creating pressure on the bottom line. On the first-quarter earnings call, Illumina noted that GRAIL must be held and operated separately and independently from Illumina pursuant to the interim measures ordered by the European Commission, which prohibited the company’s acquisition of GRAIL under EU Merger Regulation.

In the past year, Illumina has underperformed its industry. The stock has lost 12.9% compared with the industry's 6.9% fall.

Key Picks

Some better-ranked stocks in the overall healthcare sector are Penumbra PEN, Lantheus LNTH and Neuronetics STIM. While Penumbra and Lantheus sport a Zacks Rank #1 (Strong Buy), Neuronetics carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Penumbra’s stock has risen 139.2% in the past year. The Zacks Consensus Estimate for Penumbra’s earnings per share (EPS) has increased from $1.55 to $1.56 for 2023 and remained constant at $2.56 for 2024 in the past 30 days.

PEN’s earnings beat estimates in each of the trailing four quarters, the average surprise being 109.42%. In the last reported quarter, the company registered an earnings surprise of 109.09%.

The Zacks Consensus Estimate for Lantheus’ 2023 EPS has remained constant at $5.60 in the past 30 days. Shares of the company have improved 39% in the past year against the industry’s 27.6% decline.

LNTH’s earnings beat estimates in each of the trailing four quarters, the average surprise being 25.77%. In the last reported quarter, the company recorded an earnings surprise of 13.95%.

Estimates for Neuronetics’ loss per share have narrowed from $1.32 to $1.29 for 2023 in the past 30 days. Shares of the company have declined 30.4% in the past year against the industry’s 6.7% growth.

STIM’s earnings beat estimates in each of the trailing four quarters, the average surprise being 19.61%. In the last reported quarter, Neuronetics delivered an earnings surprise of 2.56%.

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