Illumina Owns The Market For Gene Sequencers


It took researchers 13 years and almost $3 billion to unlock the secrets of the human genome. That first road map to the chemicals and base pairs that make up the human species was published in 2003.

Today, sequencing equipment makerIllumina 's ( ILMN ) most advanced hardware, the HiSeq 2500, can map out a person's entire genome in 27 hours and for just thousands of dollars.

As the speed of sequencing rises and the cost plummets, demand is growing outside traditional universities and institutions. Increasingly, doctors and patients are using individual's genetic codes to guide medical decisions and tailor treatments.

In just one high-profile example, actress Angelina Jolie announced in May she had had a double mastectomy because of a family history with breast cancer and genetic testing that a defective BRCA1 gene made her susceptible to the disease.

Jay Flatley, CEO of Illumina, sees a day when infants have their full genome sequenced at birth. With that base line, doctors could perform an array of lifesaving tests throughout a patient's life, including spotting cancer early with quick sequencing of a blood sample.

Whole New Field

"That's still several years away, but that's where the whole field is going to be headed," Flatley told investors during a Goldman Sachs health care forum in June. Company executives declined to comment for this article.

The San Diego-based Illumina is in the sweet spot of that sequencing wave. It owns the market for high-speed, high-throughput machines with the HiSeq 2500, a photocopier-size piece of equipment with a list price of $750,000. It also makes cheaper, less-capable machines. But demand for the high-end unit has outpaced analysts' models.

Its nearest competition, a desktop model fromLife Technologies ( LIFE ), isn't as fast or precise and can't handle the vast quantities of data found in a complete genome, analysts say. That firm is being bought out byThermo Fisher Scientific ( TMO ) in a deal slated to close early next year.

"Illumina has been in the right place at the right time. And its not just pure luck," said Doug Schenkel, an analyst with Cowen and Co. "There have been some bumps in the road, but for the most part they've done a really nice job having a vision of where this market was going to be four to five years down the road."

Shares of the company have climbed in recent months, in part on that market dominance, and on speculation that it remains a take-over target for Swiss giantRoche Holding ( RHHBY ) .

Illumina formed in 1998 to commercialize genotyping technology developed at Tufts University. Flatley came on in 1999 and led it through its 2000 IPO and subsequent growth. In early 2007, the company completed its acquisition of Solexa, which brought it into the sequencing business.

Today, 70% of its revenue comes from sequencing, a mix of services, hardware, and consumables used every time the machines are run. Sequencing revenue grew by 32% in the first quarter vs. just 21% for total company sales.

In February, it completed the $350 million acquisition of Verinata Health, a maker of noninvasive tests for fetal chromosomal abnormalities, another rapidly growing field.

Institutions, universities and others spent nearly $3 billion on gene sequencing in 2011, according to industry tracker BCC Research. It forecasts sales growing 17.5% a year through 2016, to $6.6 billion, with clinical, agriculture and other fields among the growing applications for the products.

"Sequencing is now becoming a routine part of research," said Jon Groberg, an analyst with Macquarie Securities.

Illumina's sales grew 9% last year to $1.15 billion. That's down from 17% growth in 2011 and 35% growth in 2010.

Earnings growth has also been choppy.

Q1 EPS climbed 28% to 46 cents, topping consensus estimates by 7 cents. But that followed a 20% hike in the fourth quarter, an 86% increase in the third, and just a 5% bump in last year's Q2.

Analysts' consensus estimate is for flat EPS in the current second quarter, due to be reported in July.

But Illumina guided for a 15% increase in 2013 revenue, despite the government sequestration budget cuts crimping grant funding to its major customers. In that June conference, Flatley said the impact of those cuts has been muted with the National Institutes of Health still funding out grants at 90% of their full amounts.

It's hard to predict how well that funding will hold up, though.

"What we heard loud and clear in our checks is that even the most prominent researchers at the biggest institutions don't have good visibility on funding beyond maybe six months and that's something we all need to be cognizant about," Schenkel said.

Analysts also worry that its success in selling its high-end sequencers -- demand outpaced Street expectations -- could make for tough comparisons in future quarters.

But the company generated 64% of its revenue in 2012 from consumables, up from 56% the year before.

Groberg also noted potential challenges for Illumina as it grows its services into new sequencing markets, such as noninvasive fetal tests, and suddenly becomes a direct competitor with some of its customers.

Pricing Power

While its large base of installed equipment has given it power to raise prices on the consumable parts, it is not clear how long it can continue pushing that envelope.

Also, its biggest customer in China, BGI-Shenzhen, in March completed the acquisition of U.S. sequencing firm Complete Genomics. What that will mean for its relationship with Illumina remains to be seen, though the firm says BGI still has a large installed base of its sequencing machines and will be a steady customer for consumables for the immediate future.

Illumina also lost a patent ruling in Q1 with Syntrix Biosystems, though appeals are ongoing.

Analysts also worry about Illumina's rich valuation. It sells at a high premium to its life-sciences peers.

Part of that could be due to takeover rumors, with Roche a likely suitor.

The Swiss pharma and health care giant made a $44.50-per-share hostile bid last year. It sweetened the offer to $51 a share before calling off the hunt in January.

Roche has since cut some of its in-house attempts to develop a sequencing business, but says it's looking for other ways to expand in that growth market.

With BGI grabbing Complete Genomics, and Life Tech going to Thermo Fisher, Illumina is an obvious target again.

"They've said that they've moved on, but people have seen Roche do this with other companies," Groberg said. "It's unclear what their alternatives are."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: ILMN , LIFE , RHHBY , TMO

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