Decoding Illumina (Part 2)

 | Mar 11, 2014 | 10:30 AM EDT
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In the first part, I outlined a few of the reasons why investors are so in love with Illumina (ILMN) In Part 2, I'll talk about the company's addressable market and its future revenue projections.

 In 2012, Illumina's sales slowed as the company transitioned to a new type of reagent kit, called v3. Since labs had already stocked up on v2 kits, sales dived. A fully-tricked out HiSeq2000 can cost $740,000 and eats up $500,000 of consumables a year. But labs had plenty of v2 kits left and needed to use them up before ordering the new kits. Hence, the slowdown occurred.

Investors were also concerned by increased competition in the desktop sequencing space. Another company, Life Technologies (LIFE), has been making waves in the desktop market. But Illumina's MiSeq Personal Desktop Sequencer seems to have won the race for now. Illumina's MiSeq can rip through small DNA sequences, like E.coli, which has 4.6 million basis pairs, in no time flat.

Any concerns that investors had are long gone and it's off to the races. Last year, ILMN had record revenue. The company reported fiscal 2013 revenue of $1.42 billion, up 23.7% and earnings per share reached $1.80. For 2014, analysts expect another blockbuster year. Analysts are projecting revenue off $1.67 billion, up 17.8% and earnings of $2.05. And for 2015, the company is expected to produce revenue of almost $2 billion.

For the past two years, heavy investments in new equipment by big pharmaceutical and biotech companies have been driving sales. For the last five years, commercial sales have grown at a 34% rate.

Hospitals are getting into the action too. Company shipments to hospitals are up 24%. In the same period, sales to academic and governments have grown 14%. Investors were cheered when the NIH announced a 4% increase in its $29.9 billion budget. Plenty of those research grants will end up buying new equipment and consumables. In 2012, the Beijing Genomics Institute (BGI Shenzhen) bought 128 HiSeq machines, making BGI one of the largest genomic research centers in the world. The purchase helped to drive ILMN's revenue into 2013.

The genetic testing market has begun to take off, too. Individuals are increasingly wondering about their future and are willing to submit to genetic testing. The genetic testing market is estimated to be worth about $5 billion a year and it is growing about 15% a year.

The company believes its biggest opportunity is oncology. The oncology market is believed to be worth $12 billion. If you add up life sciences, reproductive health, emerging markets and forensics, the company believes the total addressable market for its products is $20 billion.

In the last seven years, Illumina has significantly outpaced the industry's growth rate of 5.9%. Illumina's revenue has grown at a consolidated rate of 25% and earnings per share are up 27%.

At the January analyst meeting management told investors the company should easily produce revenue growth between 15% and 20% over the next three years.

The technology is so compelling companies like Roche Pharmaceuticals and Thermo Fisher (TMO) want in. Thermo Fisher just bought LIFE for $13.6 billion. The Chinese government, which operates the Beijing Genomics Institute (BGI Shenzhen), purchased Complete Genomics in 2012 for $117 million. If Roche were able to swing it, they would have offer something north of $23 billion for ILMN.

While I love the company and the technology, the stock makes me nervous. The shares are up almost 53% year-to-date and over 200% for the year. With performance like that, Illumina is not undiscovered. I would wait until the shares cool off before making any kind of investment.

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