Illumina (ILMN) Rallies On Exact Sciences Buyout Rumor

Lately, things have been looking up for Illumina Inc. (NASDAQ:ILMN) – a leading provider of genomics-based diagnostics solutions – particularly in the multi-billion dollar cancer therapy market. First the company inked a strategic partnership last month with MolecularMD Corporation to co-develop and commercialize sequencing-based companion diagnostics to support biopharma drug development programs.

Now a rumor has surfaced that Illumina willtakeover Wisconsin-based molecular diagnostics provider –Exact Sciences Corp. (EXAS) (as informed by Seeking Alpha and The Street).

This comes as a great news for investors of both the companies, as is obvious from the substantial uptick observed in their share prices yesterday.There wasa 6.7% surge witnessed in both the stocks’ valuation yesterday.

With this buyout, if it takes place, Illumina will gain control over Cologuard – the sole marketable product that Exact Sciences currently offers. Notably, Cologuard is the first-of-its kind and only FDA approved non-invasive screening test that uses stool DNA technology to detect colorectal cancer. Furthermore, Exact Sciences is currently collaborating with the Mayo Foundation for Medical Education and Research to develop DNA tests involving screening of lung, pancreatic and esophageal cancers, going ahead.

No doubt this acquisition will improve Illumina’s oncology business, with the current market opportunity for Cologuard estimated to be $4 billion. Moreover, to establish itself more firmly in the cancer therapeutic space, earlier this yearIllumina created a new company, Grail, with a special focus on early cancer detection through a blood-based biopsy test and it aims to reduce global cancer mortality.

We believe the takeover of Exact Sciences reflects a further initiative on Illumina’s part in successfully serving the purpose for which the company developed Grail.

Although the market has apparently reacted positively so far to this buyout rumor, it is a bitdifficultto draw a definite conclusion as to whether this deal will bring the desired outcome for Illumina. This is because Exact is still in the early stages of commercialization of Cologuard and fears that due to insufficient experience along with seasonal variabilities may affect the company’s revenue growth.

Over the recent past Exact has been performing sluggishly as is evident from the company’s weak operating cash flow and disappointing return, which further supports the doubt revolving around this deal.

Further, Illumina has been staggering significantly from the very start of this year, with its operating results not showing encouraging figures. In fact, the company witnessed a double-digit rise in operating expenses on account of a higher head count, investments in Grail and Helix, as well as development projects like Project Firefly during the last reported quarter.

We fear that if its investment in Exact does not turn out to be at par with management’s expectation, this buyout will become a drag on Illumina’s operations thereby affecting its growth.

Zacks Rank

Illumina currently holds a Zacks Rank #4 (Sell). Better-ranked medical stocks are GW Pharmaceuticals plc (NASDAQ:GWPH) , Nxstage Medical, Inc. (NASDAQ:NXTM) and TG Therapeutics, Inc. (NASDAQ:TGTX) . All these stocks sport a Zacks Rank #1 (Strong Buy).