Owing to a decline in revenue and slowing profit growth, Illumina (ILMN) had a type of nightmarish 2016 it couldn’t wait to wake up from.
Aside from weakened fundamentals, the maker of genetic sequencing machines also suffered some business disruption amid a change in leadership as longtime CEO Jay Flatley accepted a new role of executive chairman. All told, Illumina shares went dark last year, losing some 23% of its value.
But that was last year.
In 2017, the San Diego, Calif.-based biotech specialist is lighting the market. The company, whose innovative products allows researchers ways to better explore DNA, has seen its stock soar 10.5% year to date. The shares closed Friday at $141.49, gaining 5.15%. Friday’s stock gains were in direct response to the company announcing plans to “accelerate [the] path to independence” for its GRAIL joint venture.
A subsidiary formed by Illumina last year to enable cancer screening from a simple blood test, GRAIL — powered by Illumina's sequencing technology — develops a pan-cancer screening test by directly measuring certain types of acids in blood.
In plain English: Illumina formed GRAIL to help detect cancer more quickly, thereby giving it a better chance to defeat the disease.
Last week Illumina announced that GRAIL plans to raise a Series B financing round of over $1 billion some time in the first quarter.
Tim Evans, analyst at Wells Fargo, described Illumina’s plans as “incrementally positive.” Evans likes the dilutive effect the cash infusion will have on Illumina’s ownership stake of GRAIL — currently at more than 50% — which will fall to less than 20%.
“Illumina will now account for its GRAIL ownership as a cost-method investment,” Evans noted, according to Barron’s. “This is a positive surprise to us, since it was our belief that Illumina would not de-consolidate GRAIL.”
In Evans’ view, Illumina will now have the best of both worlds. Not only will it have an asset, whose valuation puts it on par with the other startups such as Uber, Illumina is also de-risking its position in the company as the valuation increases. Meanwhile, Illumina’s own operating fundamentals become easier to understand since it becomes more de-levered from a cash-burning start-up.
In that vein, the market has begun and should to take a more bullish view of Illumina's shares. The company is scheduled to report fourth-quarter fiscal 2016 results on Jan. 31. To the extent Illumina can provide upbeat guidance these shares should reach $170 in the 12 to 18 months, delivering 20% gains.