Greater sharing of Illumina's (ILMN 2.74%) gene-sequencing machines in Europe took a toll on its first-quarter sales growth, but its growth in other regions of the world remained strong. Since trends that support increasing use of gene sequencing in the development of medicine remain, does it make sense to sell this stock? Find out in this clip from The Motley Fool's Industry Focus: Healthcare podcast.
A transcript follows the video.
This podcast was recorded on April 20, 2016.
Kristine Harjes: As promised, we are going to take some of this framework of thinking like a scientist and apply it to healthcare stocks. Where should we begin?
Todd Campbell: We have a few different topics that are probably fresh on the minds of listeners here. We can start with Illumina if you like.
Harjes: Yeah, we talked about Illumina last week on the show.
Campbell: We sure did. We talked about the future of healthcare. We discussed how gene sequencing and the use of gene sequencing could revolutionize the innovation of personalized medicine.
Harjes: If you had listened to our podcast last week and bought shares of Illumina after, of course, doing your own research on top of ours, you might have had a pretty strong emotional reaction to the news on Monday night of Illumina releasing their preliminary financial results, which ended up causing the stock to shed over 20% of its value on Tuesday.
Campbell: It was a big drop. Basically, their sales in the first quarter are lighter than what industry watchers were hoping for. They thought that sales would continue to grow by a higher percentage than they're actually going to grow. As a result, people got very nervous and the knee-jerk reaction was to press the sell button.
Harjes: When we were looking at Illumina, to go back to our scientific method, what is the hypothesis there? If you were an Illumina shareholder how would you have communicated the buy thesis?
Campbell: I think that the reason to own a company like Illumina -- and, spoiler alert, that reason hasn't changed just because of what we found out on Monday -- I think that what we're trying to communicate here is, where is medicine heading?
Is medicine getting more and more specific to the genetic makeup of everyone that's suffering from disease, be it cancer, or be it some sort of a rare disease, an orphan disease? The use of gene sequencing is going to allow us to transition from these small molecule drugs that just treat a whole lot of stuff and hopefully treats what's ailing you too, to these very specialized medications.
Harjes: Illumina is, by far, the leader in this space. If that's your buy thesis, and you look at these results and you say, "Oh well, it looks like Europe was a little bit weak," -- which, by the way, even with your having a little bit of weakness, we're still seeing double-digit growth projections for this company -- it seems like that doesn't really modify the thesis.
Campbell: No, it doesn't. There's a few things that we have to do. You have to do your background. You look at it and you say, "OK. They're saying that Europe was slower than the rest of the world." You've got Asia and the United States growing at mid-teens growth rates. You've got Europe growing at what they think is going to be low to mid-single digit growth rates. Growth, not a retrenchment, a growth still, but slower growth than the rest of the world.
Then you ask yourself, "Well, why is that? What are the things that could be going into the reasoning behind Europe growing more slowly than the other parts of the world?" Once you've asked that question, then you can start to seek out the answer, if you will.
Harjes: I think if you dig in, one of the things that you find is that it was competitive threat-related, which, to me, it doesn't seem like that was, but I do think that in my own personal thesis on this company, I'm not a shareholder, but if I were, that's a huge element to the thesis. Is this company going to remain the dominant player?
Campbell: Surely you've got a lot of companies out there who are trying to get involved in this space before, theoretically, it blows up and gets a lot bigger. You've got Thermo Fisher, which bought a company called Life Technologies a few years ago. They do a lot of work in the clinical space, in basically developing systems that can be used for targeted gene sequencing. You've got an upstart out of the UK called Oxford Nanopore. It's a brand new approach to gene sequencing. They actually market a handheld gene-sequencing device and have plans for a much larger device that could theoretically compete someday with Illumina.
Yeah, there are competitors out there in the marketplace that we have to be aware of. If you look at the reasons -- and they didn't go into a lot of depth, but if you listen to the conference call and you listen to the reasons -- one of the things that they said as far as why Europe is slowing is because of sharing of devices.
Maybe in Europe, you get more research teams sharing the devices than maybe you would get in other markets like the United States. That's not new. It's hard for me to understand why they didn't model for that appropriately. You still do have to consider the competitive aspect here. It's obvious that that, from their perspective, is having an impact.
Harjes: It'll definitely be something to look out for in May when they release their official results; listening in on that conference call and gather more evidence to test against the original hypothesis.
