Bull of the Day: Illumina (ILMN)

Illumina (ILMN) is the $45 billion leading developer of life science tools and integrated systems for large-scale analysis of genetic function and variation. Their technology is responsible for generating more than 90% of the world’s sequencing data.

 

You may have experienced Illumina technology if you ever ordered a DNA testing kit from a company like 23andMe or Ancestry.

 

ILMN is back in the upper tiers of the Zacks Rank after another beat and raise quarter that prompted Wall Street analysts to raise their estimates. More on the company's growth numbers coming up after we step back to see the scope of their efforts.

 

The Century of Biology Requires Powertools for Discovery

 

Ever since the human genome was mapped nearly 20 years ago, an explosion of scientific discovery has been unleashed with many hundreds of public and private companies, universities, and research institutes working to better understand life and cure disease.

 

According to the National Institute of Health (NIH), the cost to sequence a genome has fallen from $10 million in 2007 to under $1,000 today. And this economic access has fueled the rise of more scientists seeking to do more research that wasn't even thought of a decade ago.

 

When I think of role of this unique tool-maker in "the century of biology," I search for powerful metaphors to describe its reach and impact. If genetics is a great ocean, then Illumina is Queen Isabella of Spain, launching fleets of explorers to discover new worlds.

 

Once given the exploration, mapping, and conquest tools to do so, explorers would only need more of them to harvest and mine the riches of new lands. And that as we shall see, is exactly what has happened with Illumina's powertools -- the more reach and impact they give genetic explorers, the more exploration that is initiated and, thus, the more demand for its products occurs.

 

Honestly, I should have bought Illumina for Healthcare Innovators in 2017 when it was trading $200. But I didn't understand the company's impact, much less their valuation trading over 10X 2017 sales of $2.75 billion and 50X EPS of $4.00. Plus, Wall Street's (lazy) analysts underestimated the growth story too, with the average Street price target around $225 at the time.

 

Then the stock went on a tear in 2018 after a Q1 41% EPS beat in April, launching shares from $240 to $360+ in five months!

 

Every slight pullback was a tempting opportunity, even at 13-14X sales and 55-60X EPS. And we got a big second chance right before Q2 earnings when the stock got whacked from all-time highs above $315 back down to $290.

 

Time to Board the Starship Illumina

 

Then this past September, I really started paying attention to the Illumina story and doing my homework. At over $360 per share, ILMN was trading for over 15X next 12-month's sales (about $3.5 billion) and over 60X EPS (about $6). I told my followers "I don't think you need to rush out and pay that right now."

 

But I also advised "Long-term healthcare investors should be buyers between $320 and $340. And obviously, you would add on any bigger dips to $280-300 if a market correction of any magnitude should bless you with such an opportunity."

 

We obviously got those opportunities to start a position near $320 and add under $300 during the recent volatility and I would still recommend those buy levels. Especially as the stock now trades under 11X next year's projected sales of $4.3 billion.

 

The main reason we did is because the growth rates have slowed considerably. Last year saw 20% sales growth and a 40% EPS advance. But this year is projected to see only 13% topline growth and 17% on the bottom.

 

And yet long-term growth investors are still accumulating ILMN shares near $300 because the visibility for the next two years is so strong. Here is the Zacks proprietary Price & Consensus chart, which plots changes in annual EPS estimates (lhs) against the stock price...

 

 

Who Is Illumina and What Do They Do?

 

As a California startup in 1998, Illumina was born toward the tail end of the scientific revolution we call the Human Genome Project, an international collaboration of dozens of universities and research centers around the globe. That was the same year that Craig Venter of Celera Genomics started his quest to complete the massive sequencing task faster and cheaper.

 

Their initial products enabled researchers to explore DNA at an entirely new scale, helping them create the first map of gene variations associated with health, disease, and drug response. With each technological breakthrough, they helped scientists better understand genetic variation at all levels of complexity.

 

Ever since, Illumina has developed one of the world’s most comprehensive genomics portfolio of integrated systems, consumables, and analysis tools. The company provides a line of products and services that serve the sequencing, genotyping and gene expression and proteomics markets.

 

Proteomics is the large-scale study of proteins, the basic building blocks of life. According to industry research firm MarketsandMarkets.com, "The global proteomics market is projected to reach $21.87 billion by 2021, at a CAGR of 11.7% from 2016 to 2021... significant growth is propelled by the increasing need for personalized medicine, R&D expenditure, technological advancements, and increased funding for proteomics projects."

 

Here's how Illumina describes their mission in all of their markets..

 

"While the rate of progress is accelerating exponentially, we are only beginning to understand the clinical significance of the genome. What causes a cancer cell to mutate? What is the origin of a puzzling disease? Is it possible to prevent the next outbreak? Or safeguard the world’s food supply? These are just a few of the challenges that inspire us to push the boundaries of our imagination.

 

"We strive to make our solutions increasingly simple, more accessible, and always reliable. As a result, discoveries that were unimaginable even a few years ago are now becoming routine – and are making their way into patient treatment.

 

"We now have the ability to sequence at an unprecedented scale. Collectively, this will give us a much deeper understanding of genetics than ever before. We will begin to truly unlock the power of the genome. These advances will trigger a fundamental shift in healthcare and beyond. Medicine will continue to become more preventive and more precise. We will be healthier, longer. We have only just begun.

 

"Our customers include a broad range of academic, government, pharmaceutical, biotechnology, and other leading institutions around the globe."

 

With less than half of one percent of the world's population touched by a genetic test of some kind, Illumina is filling a huge need with their fast and precise technologies.

 

Here's a look at the "array" of Illumina customers...

 

 

The NASA of Biotechnology

 

From the above perspective on Illumina's customers, maybe ocean exploration is too limited a metaphor. The better comparison might be space. And that would make Illumina the NASA of genetics, providing aerospace-grade discovery tools.

 

Let's look at a list of their different NASA-grade exploration powertools...

 

NovaSeq Sequencing Systems

HiSeq X Sequencing Systems

HiSeq Sequencing Systems

NextSeq Sequencing Systems

MiSeq Sequencing System

MiSeqDx Sequencing System

MiSeq FGx Forensic Genomics System

MiniSeq Sequencing System

iSeq System

iScan Array Scanner

 

The NovaSeq product (pronounced Nova-seek) is the company's latest advanced sequencing tool which costs over $980,000.

 

 

Here's how the excellent biopharma writer over Forbes, Matthew Herper, described the path of Illumina's business in 2017...

 

Illumina, the largest maker of DNA sequencers, is launching a new DNA sequencer with new architecture it says could push the cost of decoding a human genome from $1,000 to $100 -- although that decrease will not come for years.

 

“This is good news, affirming that the field is still so healthy that price-plummeting is still considered good for business,” says George Church, the Robert Winthrop Professor of Genetics at Harvard Medical School.

 

The new DNA sequencers, called the NovaSeq 5000 and the NovaSeq 6000, could be about 70% faster than existing machines, by Church’s math -- [which is not really a big increase in this exponential field as you can tell by the cost-drop of sequencing in the last decade].

 

But Illumina promises rapid increases as new parts and software upgrade the machines, meaning that by the end of the year the machines will be six times faster than its predecessors.

 

In fact, with special offers from some of the direct-to-consumer companies, we have seen the cost of limited genetic testing come down to $99. But these are not fully medical-grade diagnostic tests like those offered by Invitae (NVTA).

 

The Moore's Law of Biotech

 

So even as Illumina makes genome sequencing cheaper, their business still grows fast into a giant addressable market. This is similar to chip-makers like Intel creating empires even as semiconductors get smaller, faster, and cheaper.

 

You are living in the fourth industrial revolution where extremely rapid innovation and disruption are driven by exponential technologies like artificial intelligence and genetic sciences.

 

Bottom line: You could think of ILMN a lot like NVIDIA (NVDA). They make the powertools that get scientists, engineers, and other explorers really excited to go to work every day. And the more those folks discover in the outer reaches of their favorite frontier -- the earth, the brain, the galaxy, or the genome -- the more demand they have for the ever-evolving tools that got them that far.

 

Disclosure: I own ILMN shares for the Zacks Healthcare Innovators portfolio.

 

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