Morgan Stanley Sees Illumina Trading At Too High A Premium To Its Peers

Morgan Stanley’s Steve Beuchaw prefers to take cautious stance on Illumina, Inc. ILMN, following new data on targeted cancer drug trends, as well as checks in the clinical lab space.

Beuchaw downgraded the rating on the company to Underweight, while lowering the price target from $130 to $110.

Growth To Remain Muted

“We see risk to consensus, as a 2H recovery is assumed, and expect growth to remain muted relative to historical norms,” the analyst mentioned.

Beuchaw lowered the cancer franchise valuation from $4.9 billion to $3.8 billion to reflect expectations of lower growth.

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According to the Morgan Stanley report, “Negative recent diligence, CMS and private payor reimbursement rates and policies, and weakening trends in the use of targeted cancer therapies suggest growth is more likely to remain < 30 percent in the medium term.”

In addition, growth in the cancer franchise slowed from 35–40 percent to below 20 percent over 2015, and a recovery is unlikely before 2018.

Premium Unjustified

However, the 2H16 guidance implies the fastest dollar growth in Illumina’s history, “amidst increasing pressures in clinical and slowing trends in the core research lab channel.”

Beuchaw believes the persistent slowing in the company’s business does not justify the premium multiple and that the stock was likely to see multiple compression by mid-2017.