Image source: Illumina.

Analysis of genetic information continues to be a booming business, but some times are more booming than others. Leading genetic sequencing systems provider Illumina (NASDAQ:ILMN) proved the point with its third-quarter results announced on Tuesday. While earnings were solid, Illumina's sales fell short of expectations for the second quarter in a row

Illumina results: The raw numbers

 Q3 2015 ActualsQ3 2014 ActualsGrowth (YOY)
Sales $550 million $481 million 14.3%
Non-GAAP Net Income From Continuing Operations $120 million $114 million 5.3%
Adjusted EPS $0.80 $0.77 3.9%

Data source: Yahoo Finance!

What happened with Illumina this quarter?
Sales for the third quarter were 3% below what Illumina anticipated. Foreign exchange proved to be a major headwind. On a constant currency basis, sales grew 18% year over year. Other highlights from the third quarter include the following:

  • Gross margin held steady at 73.2% -- the same level as in Q3 of last year.
  • Illumina spent relatively more on research and development. R&D expenses as a percentage of revenue increased to 16.4% from 14.6% in the third quarter of 2014 excluding non-stock cash compensation and contingent compensation expenses.
  • Selling, general, and administrative (SG&A) expenses rose to $136.6 million from $119.9 million in the prior year period. This jump isn't quite as dramatic, though, when sales growth is taken into account. As a percentage of revenue, SG&A expenses increased to 20.9% from 19% in third quarter of 2014.
  • Illumina padded its cash stockpile somewhat. Cash, cash equivalents, and short-term investments totaled $1.44 billion at the end of the third quarter. That's up from $1.34 billion at the end of 2014.
  • Several new products were launched, including TruSight Tumor 15, a panel designed to identify potential cancer-related genetic variations, and Infinium arrays that help analyze genetic variation in populations.
  • On the partnering front, Illumina began a collaboration with Memorial Sloan Kettering Cancer Center to research the biology of circulating tumor DNA and another collaboration with Burning Rock and Amoy Diagnostics to develop clinical applications in China.
  • Illumina completed the acquisition of Laboratory Information Management System (LIMS) provider GenoLogics.

The company also provided an update on its fiscal 2015 guidance. Illumina now projects revenue growth for the year of 18%. That's a more pessimistic outlook than the 20% growth figure provided last quarter. The earnings outlook for fiscal 2015 was also lowered to $3.29-$3.31 per share from $3.39-$3.45 per share. 

What management had to say
Illumina CEO Jay Flatley acknowledged the disappointing results but insisted the overall picture remains bright. Flatley said, "The fundamentals of our business remain strong, despite a 3% miss to revenue expectations." As for the future, he emphasized the company's strong competitive position and product development pipeline.

Looking forward
This year might not play out as positively as originally hoped, with sales having weakened in the third quarter. However, investors should pay attention to at least one key potential development on the horizon that could impact Illumina's fortunes.

Giant health insurer Anthem (NYSE:ANTM) changed its medical policy in August to allow non-invasive prenatal testing (NIPT) for most pregnancies. In the past, Anthem only reimbursed for genetic testing for high-risk pregnancies. Anthem is the first major insurer to make this move. If other insurers follow its lead, there should be higher demand for Illumina's NIPT technology.   


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