Illumina Inc. (NASDAQ: ILMN) is a leading biotechnology company, based in San Diego, CA, that develops, manufactures and distributes genome sequencing and array solutions to academic institutions, molecular and genomics companies, agriculture and pharmaceutical companies, public and private laboratories, and research centers across six continents. Through intensive research and development, and strategic partnerships, Illumina is also a leading player in the cancer research and treatment industry. For FY2014, Illumina reported revenues of $1.86 billion, up 31% from $1.42 billion in FY2013.
On 11/12/15, after the close of trading, news broke that Illumina shares would be added to the S&P 500 Index after market close on November 18, 2015, and categorized in the health care sector under the life sciences tools & services sub industry. Shares jumped 10.3% the following day (11/13/15) to close at $165.65.
Illumina replaces Sigma-Aldrich Corporation (NASDAQ: SIAL) as the latter completes its acquisition by pharma giant, Merck. Companies whose stock is added to the S&P 500 typically see an increase in share price as they become eligible for investments by pension funds, etc., even though Standard & Poor notes that inclusion in the index does not indicate any investment preference.
At $165.65, Illumina shares are down 10.3% year-to-date, down 15% from the company’s 200-day moving average of $194.21 and below the middle of their 52-week range of $130 – $242.37. Shares sport a trailing 12-month P/E ratio of 45.3x and a market capitalization of $22.7 billion, with Debt/Assets of 0.30. The company is a high growth opportunity and does not currently pay dividends.
Analysts attribute this decline to two consecutive quarters of missed revenue estimates even though the company beat earnings estimates over the last four quarters. Based on management’s soft guidance for 4Q15 and FY2015 as a whole, Canaccord Genuity maintained Illumina with a Buy rating but lowered its price target from $250 to $205 (24% upside) while Piper Jaffray maintained the company with an Overweight rating but lowered its price target from $230 to $220 (33% upside). Despite recent cuts in Illumina’s share price target, the company still has a consensus price target of $193 which offers 17% near-term upside potential over its current share price.
On October 20, 2015, Illumina reported 3Q15 financial results for the three months ended September 27, 2015, with total revenue of $550.3 million, up 14% from $480.6 million in Q3 2014. Product revenue increased 13% while service and other revenue jumped 23%. Illumina missed management’s revenue estimates by 3% but consumables experienced revenue growth of 23% to $321 million from increased demand for sequencing consumables. Illumina had gross profit of $387.5 million and income from operations of $140.8 million. For 3Q15, Illumina reported net income of $118.2 million, or $0.79 per share, in line with analysts’ estimates and above earnings of $93 million and $0.63 per share in the year ago quarter. Management updated guidance for FY2015. Revenue growth for the year was lowered from 20% to 18% and earnings per share were lowered from $3.39-$3.45 to $3.29-$3.31.
Illumina continues to bolster its revenues as a leading player in the genomics field. In August 2015, Illumina completed its acquisition of GenoLogics Life Science Software Inc. GenoLogics specializes in laboratory information management systems (LIMS) which are used by over 120 genomic labs globally for improved analysis efficiency and accuracy. This acquisition strengthens Illumina’s genetic analysis portfolio for life sciences organizations. After the acquisition, GenoLogics technology will be incorporated into Illumina’s Enterprise Informatics segment.
In its just completed third quarter of 2015, Illumina announced several key partnerships that help it expand into new high growth markets, including China. Illumina is partnering with Amoy Diagnostics to develop precision medicine oncology solutions for use in China, a country that typically relies on cultural remedies for treatment of diseases like cancer. Illumina is also partnering with Burning Rock Biotech to develop molecular diagnostic and sequencing solutions to improve oncology treatments offered in China. Illumina already has a partnership agreement with Chinese genomic company Annoroad that is focused on leveraging gene sequencing technology. The company also announced a collaboration with Memorial Sloan Kettering Cancer Center on research to develop a comprehensive program that can diagnose, monitor and treat cancer using ctDNA as the key marker. The two companies hope to find less invasive and cheaper alternatives to current methods of cancer treatment.
On November 2, 2015, Illumina’s Board approved a new $250 million share repurchase program shortly after the completion of its previous discretionary share purchase program that favorably bought $96 million in shares as they fell after its Q3 2015 earnings announcement. CFO Marc Stapley noted that the company’s strong financial and cash flow position allows Illumina to capitalize on strategic investments as part of its long-term growth strategy while also opportunistically buying back shares to return value to shareholders.
Illumina has high profit margins and solid operating returns that should help the company grow faster than its peers. Historically, Illumina’s revenue growth has exceeded its peers with consistent double digits gains. Illumina’s biggest advantage comes from the fact that the company faces no real competition in the oncology sequencing industry. This allows the company to focus solely on the development of new products and benefit from its first-mover status. In 3Q15, Illumina spent the equivalent of 16% of total revenue on research and development which resulted in the launch of several new products including TruSight HLA, TruSeq library kits, Tumor 15 and Infinium arrays. The launch of more advanced products helps Illumina capture a larger portion of the multi-billion total addressable oncology market. Reportedly, 1 in 3 Chinese men will die from smoking so the market is ripe for Illumina and its oncology portfolio of treatments.
Overall, the company is solidly positioned for high margin growth. With shares down 10.3% year-to-date, investors could see sizable upside as results from China add solidly to growth over the coming quarters.