Does Illumina Have the Genes for Lasting Growth?

 | Jan 12, 2017 | 9:00 AM EST
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On Tuesday, shares of Illumina (ILMN) shot up 15% after the genomic sequencing powerhouse confirmed the introduction of a new line of products. In the last 30 days the shares have increased 32%. Still, Illumina investors have had a rough ride after the company cut guidance multiple times. Will these new products breathe new life into the stock?

This week's introduction of the NovaSeq Series of genomic sequencers caused the stock to jump on hopes the NovaSeq would restart the company's disappointing equipment sales. The NovaSeq promises to be the most powerful sequencer the company has ever launched.

In 2010, the company introduced the HiSeq line of products that enabled researchers to sequence an entire human genome for $1,000. The NovaSeq is expected to reduce that cost to $100 one day.

Recall that it took the Human Genome Project 13 years and $3 billion to do what these machines can now do in days. For example, the HiSeq X Ten machine can sequence 16 people's DNA in three days for $1,000 per genome and can sequence 18,000 human genomes a year.

Management said its NovaSeq 5000 would be priced at $850,000 and is expected to ship in mid-2017. The NovaSeq 6000 would carry a $985,000 price tag and start shipping to customers in March.

The NovaSeq line is a complete redesign of the company's sequencing products and is expected to generate three times the output of its current sequencers while being 20% more economical. Labs doing "deep genomics" are going to love these machines.

The NovaSeq is really the first step of something called "clinical genomics." The promise of clinical genomics (or clinical oncology) is to allow doctors to sequence a patient's particular type of cancer and design a custom treatment regiment in the office at an affordable price.

Some the company's largest customers, such as the Broad Institute of MIT and Harvard and Craig Venter's Human Longevity, Inc., have already placed orders. The Broad Institute is the largest producer of human genomic information in the world. Illumina said it has already sold 49 instruments, which is double what it can manufacture.

In addition to the new line of products, Illumina recently announced it would spin out GRAIL, a venture-backed start-up designed to develop a pan-cancer test to measure circulating nucleic acids (ctDNA) in blood. Illumina created GRAIL about a year ago, which has raised $40 million from Illumina and the rest from several venture funds.

GRAIL's goal is to enroll 10,000 participants and sequence their genetic information with the goal of commercializing its pan-cancer test within three years. Furthermore, the start-up also has the ambitious goal of screening hundreds of thousands of individuals which would make GRAIL a gigantic customer of Illumina.

Back in October, I was cautious on shares of Illumina because the company's numerous reductions to guidance. On Tuesday, the company announced preliminary fourth-quarter revenue of $619 million, slightly ahead of the previously announced guidance of $607 million-$612 million and adjusted earnings of $3.60-3.70 per share.

I have been largely positive on the company and its technology for a long time, but it has essentially run out of customers who can afford to throw down $10 million for a fully loaded HiSeq X Ten genomic sequencer and cough up $500,000 a year for consumable reagents.

For me to get more constructive on the stock, I would have to see Illumina post double-digit revenue growth. As early as 2014, the company was reporting revenue growth of 31% as the Chinese were buying machines like crazy. But in 2016, Illumina will report revenue growth of only 8% and earnings growth of 9.7%.

I am hopeful the NovaSeq series can rejuvenate the top line. If it does, 2016 will be the bottom and revenue growth should pick back up to double digits in 2017 and 2018. I remain cautiously optimistic on shares of Illumina.

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