If you're looking to invest in gene sequencing, Illumina (ILMN 5.82%) and Thermo Fisher Scientific (TMO 1.98%) are the two top options based on size. These two companies dominate the gene-sequencing market.
Thermo Fisher has been the bigger winner by far so far in 2019. Does that make it the better pick over Illumina? Not necessarily. Here's what you need to know about these two stocks to decide which is the smarter long-term investment choice.
The case for Illumina
Illumina ranks as a pioneer of gene sequencing. Its systems have been instrumental (no pun intended) in dramatically lowering the cost of sequencing the human genome. Along the way, Illumina has achieved tremendous financial success.
Investors accustomed to sizzling growth for Illumina were disappointed in the second quarter, though. The company's revenue growth practically screeched to a halt. Its adjusted earnings per share (EPS) even fell from the prior-year period.
But CEO Francis deSouza stated in Illumina's Q2 conference call that the sluggish growth wasn't "a new normal" for the company. The lower-than-expected revenue and earnings stemmed largely from delayed population genomics initiatives and weakness in the direct-to-consumer (DTC) personal genomics market. Those population genomics delays are only temporary. And that DTC market weakness isn't likely to be permanent, either.
Probably the most important growth driver for Illumina is an increased role of genomic testing in cancer research and treatment. Illumina's technology is already used in comparison diagnostics for personalized cancer drugs developed by Eli Lilly subsidiary Loxo Oncology and Bristol-Myers Squibb. Illumina's GRAIL spin-off is a leader in developing liquid biopsies, blood tests that detect cancer by finding DNA fragments from tumor cells.
The company should also benefit from a growing focus on rare and undiagnosed diseases (RUGD). Although more than 150 million Americans are covered for whole-exome sequencing when a genetic disease could be suspected, Illumina thinks that fewer than 1% of eligible patients have had their DNA sequenced.
Another major area of focus for Illumina is in noninvasive prenatal testing (NIPT). Despite significant growth in this market, the company estimates that it's penetrated only around 30% of the NIPT market in the U.S. and China.
Illumina could also soon become a leader in the long-read gene sequencing market, although it's iffy right now. The company hopes to acquire Pacific Biosciences of California, but regulators in the United Kingdom could squash the deal.
The case for Thermo Fisher Scientific
Thermo Fisher Scientific is a leader in the gene-sequencing market thanks to its 2014 acquisition of Life Technologies. But, unlike Illumina, Thermo Fisher is diversified into several other life sciences arenas and ranks as one of the top 10 biggest healthcare stocks.
The company operates four business segments. Life sciences solutions, which includes its gene-sequencing products and services, is Thermo Fisher's most profitable segment. However, the biggest revenue-generating segment is laboratory products and services, which provides (in the company's words) "virtually everything needed for the laboratory."
Analytical instruments ranks as Thermo Fisher's third-biggest segment in terms of both revenue and earnings. This segment sells instruments and consumables used by labs primarily for chromatography, mass spectrometry, chemical analysis, and structural analysis.
Last -- and least when it comes to financial performance -- is the company's specialty diagnostics segment. This business markets a wide variety of diagnostics kits and instruments used by labs.
Thermo Fisher Scientific's growth strategy includes a significant focus on acquisitions. One key deal completed this year was the acquisition of viral vector manufacturer Brammer Bio, which puts Thermo Fisher at the center of the fast-growing gene therapy market.
Over the last seven years, Thermo Fisher has demonstrated that its a nimble giant. The company delivered 11% compound annual growth rate (CAGR) for revenue, a 15% CAGR for adjusted earnings per share, and a 14% CAGR for free cash flow.
Thermo Fisher Scientific stands as a global leader in a $160 billion addressable market that should grow by 3% to 5% annually. The company should be able to grow much faster than the life sciences market, however, with its focus on innovation and an aggressive acquisition strategy.
If you're a more conservative investor, Thermo Fisher Scientific could be more to your liking. It's more diversified than Illumina and even offers a small dividend.
But I think that Illumina is the better stock to buy for aggressive investors. I'm confident that the headwinds that Illumina has experienced this year are only temporary. The long-term prospects for the company appear to be very good. As a growth stock, Illumina can be quite volatile. However, my view is that the potential gains over the next few years that Illumina will likely deliver make the high volatility worth bearing.