Bull of the Day: Illumina (ILMN)

Illumina ILMNis the $32 billion leader of genetic sequencing equipment for biotechnology companies and research labs around the world.

San Diego based Illumina provides tools and integrated systems for analysis of genetic variation and function. Using its proprietary technologies, the company delivers innovative sequencing and array-based solutions for genotyping, copy number variation analysis, methylation studies, and gene expression profiling of DNA and RNA.

Its customers include leading genomic research centers, academic institutions, government laboratories, hospitals and reference laboratories as well as pharmaceutical, biotechnology, agrigenomics, commercial molecular diagnostic and consumer genomics companies.

Illumina generates revenue from two segments – Product and Service.

Product revenues (87.7% of total revenues in 2021; up 45.1% from 2020) are primarily attributed to the partnerships and collaborations to develop distributable clinical in-vitro diagnostics (IVDs) for Illumina sequencers. Product revenues consist of sales proceeds from the Consumables and Instruments segment used in genetic analysis. This includes reagents, flow cells, and BeadChips based on the company’s proprietary technologies.

Service revenues (12.3%, up 10.7%) include genotyping and sequencing services as well as instrument maintenance contracts.

Next Generation Sequencing (NGS)

Illumina’s portfolio of sequencing platforms represents a family of systems that are designed to meet the workflow, output, and accuracy demands of a full range of sequencing applications.

The company’s MiSeq sequencing system is a low-cost desktop sequencing system that provides individual researchers with rapid turnaround time, high accuracy and streamlined workflow.

NextSeq 500 provides flexibility from whole genome sequencing to targeted panels in a desktop platform. The HiSeq 2500 sequencing system allows customers to sequence an entire human genome in approximately a day.

How ILMN Rose Up in the Zacks Rank

Illumina exited first-quarter 2022 with better-than-expected earnings and revenues. The robust year-over-year improvement in Core Illumina businesses looks encouraging.

Revenue contributions from the newly formed GRAIL business, primarily from Galleri test fees, bode well. NovaSeq consumable and instrument shipments reached new highs during the quarter as the company witnessed robust demand for NextSeq 1000, 2000 from new customers.

The company also saw significant growth in the installed base and a record backlog, instilling optimism. Orders for sequencing consumables surpassed $1 billion for the first time in the quarter, setting a new high for the company.

While there was a significant year-over-year decline in adjusted earnings per share, analysts have been raising estimates for next year. So while this fiscal year will see a 30% drop in EPS, next year bounces right back with a 30% gain.

And more encourage is the steady topline with projected 15% growth this year to $5.2 billion and next year is forecast to cross $6 billion for a 16.5% advance.

GRAIL Merger Controversy: It’s Complicated

Five years ago, Illumina spun off its GRAIL cancer-detection unit. Last year, management decided it would be better to have the company folded back in.

GRAIL’s Galleri blood test detects 50 different cancers before they are symptomatic. Illumina’s acquisition of GRAIL will accelerate access and adoption of this life-saving test worldwide.

Since the deal was announced last summer, it has been under tough scrutiny from the EU. This is unfortunate because as Illumina wrote last August…

The Galleri test is available but costs $950 because it is not covered by insurance. Reuniting the two companies is the fastest way to make the test broadly available and affordable. Illumina’s expertise in market development and access has resulted in coverage of genomic testing for over 1 billion people around the world already. This experience will help lead to coverage and reimbursement for the Galleri test.

Late last week Reuters reported that Illumina’s Grail deal was likely to be blocked by EU regulators. Illumina’s proposed takeover of Grail will likely be blocked by EU antitrust regulators amid worries about concessions offered by the US life sciences firm, Reuters’ Foo Yun Chee reported, citing people familiar with the matter.

There are doubts whether the concessions that Illumina offered last week to allay EU concerns about the transaction will increase competition, the author noted. The company has offered competitors-free global licenses for some of its patents and a three-year patent truce with China’s BGI in Europe in an attempt to address EU antitrust concerns.

Bullish Analyst Reaction Regardless of Merger

On July 14, Canaccord analyst Kyle Mikson noted the EU court ruled the Illumina merger with GRAIL can continue but he said the ruling is not a reflection of the merits of the merger. The analyst remains positive on Illumina’s outlook with or without GRAIL and believes investors underestimate the company’s strong core performance. Mikson reiterated his Buy rating and $520 price target on Illumina shares.

On July 13, Piper Sandler analyst David Westenberg observed that the EU regulatory uncertainty increased the probability that Illumina would have to completely spin off the asset, which would be a “net positive for the stock if it happened.” Westenberg, who views the EU ruling as a “head scratcher” since both companies are US-based, says the news delays a “clearing event” for Illumina. Nonetheless, he reiterates an overweight rating on the shares, saying the company has the most complete sequencing product line in a 20% growth market.

Reproductive and Genetic Health Markets

Illumina is currently keeping well with its goals to strengthen foothold in the multi-billion gene sequencing world-wide market with some highly competitive products in its existing portfolio and pipeline. This market is developing rapidly on a global scale which has allowed the company to witness a persistent growth in the number of non-invasive prenatal test (NIPT) samples.

Here’s how the company describes their position in this market…

Based on past experience, when Illumina enters a market, the market expands. When Illumina entered the non-invasive prenatal testing space, prices dropped, reimbursement expanded, the number of providers increased, and more expectant parents had access to testing.

I wholeheartedly agree with this view as I’ve been a frequent investor in Natera NTRA, a $4 billion diagnostics company which specializes in NIPS (non-invasive prenatal screening). This is a vital area that needs to be available to every woman and her baby regardless of cost.

Bottom line on ILMN: Be a long-term buyer near $200. This genomics leader will be doing exciting science and medicine for the next few decades in the Century of Biology.

Disclosure: I own shares of ILMN and NTRA for the Zacks Healthcare Innovators portfolio.

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