Despite Challenges, a Narrow Moat Still Surrounds Illumina in Sequencing and Grail Remains Promising

Business Strategy & Outlook:

Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions. Over the past decade or so, technological advancements in the sequencing industry have largely been led by Illumina and brought down the cost of assembling one genome from nearly $3 billion in the 13-year Human Genome Project completed in 2003 to $1,000 after Illumina introduced HiSeq X in early 2014.

Further innovation, like the NovaSeq, continue to push down these costs, and Illumina expects its new Chemistry X, to eventually enable the $100 genome, which could greatly increase the accessibility of genomic sequencing. At a lower cost, genome sequencing could have wide appeal in clinical applications beyond current strongholds in oncology and reproductive health. Threats from disruptive technologies may never fully disappear, though. For example, new or cheaper sequencing tools may eventually displace Illumina’s stronghold in genomic sequencing. Overall, emerging systems shall dethrone Illumina’s sequencing technologies, especially given the switching costs associated with its large installed system base and its own development initiatives. Additionally, the company’s recent bet on Grail’s liquid biopsy technology exposes the company to a new risk of disruptive technologies in the very large but nascent preventative care testing market for cancer. So while Grail’s technology looks like it will have a first-mover advantage and should have a decent runway to expand before competitive forces materially alter that target market, future entrants may eat into its liquid biopsy potential, eventually.

Financial Strengths:

Illumina’s financial flexibility has declined a bit to purchase Grail. Of the $10 billion cumulative purchase price, the company issued about $5 billion of equity, and cash for the remainder, including $1 billion in recently issued debt ($500 million due in 2023 and $500 million due in 2031). Illumina should be able to handle this mild increase in financial leverage. At the end of March 2022, the company held about $1.4 billion of cash and investments and owed $1.7 billion in debt, which the company should be able to easily manage. Additionally, a Delaware jury recently awarded BGI’s Complete Genomics $334 million in past damages related to a patent dispute. While Illumina plans to appeal that decision, the company should be able to easily manage that potential outflow and potential royalty streams, along with a potential fine from the EU antitrust regulator for jumping the gun on the Grail transaction.

Bulls Say:

Genome sequencing remains a relatively early-stage market, and expanding sequencing indications, including the nascent liquid biopsy applications, create large growth opportunities for Illumina’s legacy and recently acquired operations.
Illumina’s very large and growing installed base of sequencing instruments should translate into significant ongoing sales of high-margin consumables and maintenance services.
The Grail assets hold substantial promise, so even if antitrust regulators force Illumina to unwind the transaction, it should get a decent return on its investment.

Company Description:

Illumina provides tools and services to analyze genetic material with life science and clinical lab applications. The company generates over 90% of its revenue from sequencing instruments, consumables, and services. Illumina’s high-throughput technology enables whole genome sequencing in humans and other large organisms. Its lower throughput tools enable applications that require smaller data outputs, such as viral and cancer tumor screening. Illumina also sells microarrays (less than 10% of sales) that enable lower-cost, focused genetic screening with primarily consumer and agricultural applications.

(Source: Morningstar)

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