Illumina Inc (NASDAQ:ILMN) With a global expansion of a broad range of leading-edge sequencing equipment, consumable products, and services, in addition to the acquisition of Grail, Illumina is bound to see increased revenues and the upper hand among competitors in the genomic sequencing business.
Business Overview
Illumina is a US-based life science company that is a leading developer and manufacturer of tools and integrated systems for the analysis of genes and DNA. They provide the machines that allow people to do genomic sequencing - blood or saliva samples can be analyzed to figure out their DNA composition. An example of how this is used is to fight the pandemic. The first variant of the COVID-19 virus was sequenced on Illumina’s machines, and in the future, they will also sequence new variants that emerge. Illumina’s products are also used in cancer hospitals to match cancer patients with therapies or diagnose kids with genetic diseases. Their customers are leading genomic research centers, academic institutions, government laboratories, hospitals, and other companies involved with pharmaceuticals, biotechnology, agricultural genomics, and molecular diagnostics. The company has three main revenue streams - products, consumables, and services, and has reported $4.519 billion in revenues for 2021.
Growth Catalysts Worldwide expansion to foster growth and drive revenues. Outside of the US, Illumina markets and distributes its products directly to consumers in Europe, Latin America, and the Asia-Pacific region through direct selling and distributors that specialize in life science products. The company has seen year-over-year improvement in segmental revenues across all geographies in the year ended 2020 to 2021, with a 45% improvement in EMEA, a 47% increase in the Greater China area, and a 41% increase in the Asia Pacific region. Internationally, Illumina has also been heavily focusing on access to non-invasive prenatal testing (NIPT), which is already available in the US. In June 2021, Illumina launched their next-generation sequencing-based approach to NIPT in Thailand, and in Germany, national coverage of NIPT is set to be implemented in 2022. The expansion of NIPT will provide Illumina with wider patient access, and facilitate access to the DNA sequencing market, which is forecasting a 19% CAGR from 2020 to 2030. The completion of its long-standing acquisition of GRAIL will usher in a new era of cancer detection and expand clinical lab testing capabilities, thus increasing growth across the clinical value chain. This acquisition not only enhances Illumina’s position in clinical genomics but also provides them with the opportunity to accelerate the adoption of early multi-cancer detection. Specifically, access to GRAIL’s life-saving Galleri blood test that detects up to 50 different cancers before they are symptomatic. As Illumina expands worldwide, it plans to make the test available in doctors’ offices everywhere. They also plan to help patients get reimbursement for the test, and can reduce diagnostic workup costs by up to 65%. The expansion of Grail extends Illumina’s direct participation in the next generation sequencing industry - which is expected to grow to $75B by 2035. High accuracy and low cost of genome sequencing provides a competitive advantage over new entrants. Unlike competitors involved in genomic testing that use newer nanopore sequencing, Illumina uses short-read sequencing technology. This short-read technology involves breaking long strands of DNA into segments that can be analyzed in parallel, and as a result, allows them to provide higher-quality data at a much lower cost. For competitors, sequencing a genome is typically twice as expensive. Illumina has been able to cut the cost from $150,000 in 2007 to $600 currently and has a plan to cut this even lower to $100. Additionally, in the genome sequencing industry, economies of scale are hard to achieve, which makes it easier for Illumina, a company with a global presence in 90 countries, to have a cost advantage over new entrants. This, in turn, makes the threat of new entrants very low. As a market leader in genomic testing with a 75% market share, Illumina’s revenues are projected to increase at a 33% year-over-year growth rate, giving them an edge over the majority of competitors.
Financial Investment Review
Healthcare / Life Sciences Medical Diagnostics & Research
Yash Patel & Evan Goldstein yppatel@iu.edu & evagolds@iu.edu March 12, 2022
Recommendation OUTPERFORM Rating 368.16 Target Price 21.16% Upside
Key Metrics Current Price 303.87 52W H/L 303.5 - 526.00 P/E (TTM) 60.29 Market Cap ($B) 47.708 0.92 Beta EPS (TTM) 5.04
Revenue by Business Segment
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Investment Risks Some of Illumina’s revenues are contingent on customers that rely on government and academic research funding. Potential government budget cuts that fund research including reduced allocations to the National Institute of Health (NIH) funding or delays surrounding the approval of government budget proposals may cause Illumina’s customers to delay or cancel the purchase of products. The FTC and EU have both challenged Illumina’s acquisition of Grail. The FTC stated that if the vertical merger goes through, Illumina could underprice Grail’s products, giving the company an unfair advantage over competitors and decreasing competition. This, however, is an incorrect argument as historically, vertical mergers have increased competition. The EU challenge will likely have no standing because Illumina is a US-based company where the EU has no jurisdiction. Additionally, preventing a merger that would save millions of lives is also highly unlikely.
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Companies Using Illumina DNA Sequencing By Country
Industries Using Illumina DNA Sequencing
Prices as of October 10, 2021
Valuation We arrive at a price target of $368.16, implying a 21.16% upside, using a FY2023 consensus earnings per share of $5.27 and a forward price to earnings ratio of 69.86x.
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