Illumina, Inc. (ILMN Quick QuoteILMN - Free Report) has been gaining from strategic partnerships in the oncology space. The company ended the fourth quarter of 2021 with better-than-expected results. The robust performance in the reproductive health market buoys optimism. The growing uptake of the company’s VeriSeq v2 technology is another advantage. However, escalating costs and stiff competition raise apprehension.

Over the past year, the Zacks Rank #3 (Hold) stock has lost 27.7% against the 39.4% decline of the industry and the 6.1% rise of the S&P 500.

The renowned life sciences company, which provides tools and integrated systems for the analysis of genetic variation and function, has a market capitalization of $47.71 billion. Its fourth-quarter 2021 earnings per share surpassed the Zacks Consensus Estimate by 50%.

Over the past five years, the company’s earnings have registered 10.6% growth compared with the industry’s 19.3% 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 20.0% and the S&P 500’s estimated 11.3% growth.

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Let’s delve deeper.

Factors At Play

Q4 Upsides: Illumina exited the fourth quarter with better-than-expected earnings and revenues. The robust year-over-year improvement in Core Illumina businesses looks encouraging. Contributions from the recently-concluded GRAIL acquisition also buoy optimism. NovaSeq consumable and instrument shipments reached new highs during the quarter, led by oncology testing, population sequencing and drug discovery initiatives. The bullish 2022 guidance with strong growth projections over 2021 instills investor confidence in the company. A strong capital structure is an added plus.

Reproductive & Genetic Health Market Prospect Bright: Illumina saw substantial year-over-year growth in reproductive health in the fourth quarter. The company noted that the American College of Obstetricians and Gynecologists has revised its guidelines, enabling genetic testing coverage for all U.S. pregnancies as well as increasing adoption of its VeriSeq NIPT v2 product globally. In terms of genetic health, the company entered into a multi-year agreement with Nashville Biosciences in January 2022 to accelerate medicines development through large-scale genomics and by the establishment of a preeminent clinico-genomic resource. Further, Illumina also entered into an agreement with the Jean Perrin Center at the Clermont-Ferrand University Hospital to evaluate the clinical value of comprehensive genomic profiling in cancer therapy options.

Partnerships Strengthen Business: We are upbeat about Illumina’s slew of strategic partnerships with therapeutics and diagnostic services providers. In January 2022, the company entered into a multi-year partnership with Agendia to co-develop in vitro diagnostic tests for oncology testing. In the same month, the company partnered with Boehringer Ingelheim to develop companion diagnostics for several programs in Boehringer Ingelheim's oncology pipeline. Other notable partnerships include the ones with SomaLogic and Merck.

Downsides

Escalating Costs: During the fourth quarter, Illumina’s research and development expenses increased 75%, whereas selling, general & administrative expenses rose 42.9% year over year. This rise in operating expenses pushed up operating costs by 55.8%, resulting in huge operating losses in the quarter.

Tough Funding Environment: The timing and amount of Illumina’s revenues from customers that rely on government and academic research funding may vary significantly due to factors that can be difficult to forecast. This may lead to significant uncertainty concerning government and academic research funding worldwide.

Tough Competition: Illumina faces significant competition in the sequencing, SNP genotyping, gene expression and molecular diagnostics markets, with several large players already enjoying significant market share, intellectual property portfolios and regulatory expertise. To compete effectively, the company must upgrade its organization and infrastructure appropriately and develop products with superior throughput, cost, and accuracy.

Estimate Trend

Over the past 90 days, the Zacks Consensus Estimate for Illumina’s 2022 earnings has moved north by 3.9% to $4.25.

The Zacks Consensus Estimate for its 2022 revenues is pegged at $5.23 billion, suggesting a 15.5% rise from the year-ago reported number.

Key Picks

A few better-ranked stocks in the broader medical space are Henry Schein, Inc. (HSIC Quick QuoteHSIC - Free Report) , McKesson Corporation (MCK Quick QuoteMCK - Free Report) and AmerisourceBergen Corporation .

Henry Schein has an estimated long-term growth rate of 11.8%. Henry Schein’s earnings surpassed estimates in the trailing four quarters, the average surprise being 25.5%. It carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Henry Schein has outperformed the industry over the past year. HSIC has gained 23.4% compared with the industry’s 1.6% rise over the past year.

McKesson has a long-term earnings growth rate of 11.8%. McKesson’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 20.6%, on average. It carries a Zacks Rank #2.

McKesson has outperformed the industry over the past year. MCK has gained 48.9% against a 1.6% industry growth in the said period.

AmerisourceBergen has a long-term earnings growth rate of 8.2%. In the trailing four quarters, AmerisourceBergen’s earnings surpassed estimates in three and missed in one, delivering an average surprise of 2.3%. The stock currently sports a Zacks Rank #2.

AmerisourceBergen has outperformed its industry in the past year, gaining 26.9% versus the industry’s 1.5% rise.