Illumina Beats, Spurns Roche Offer

Illumina (ILMN - Snapshot Report) reported EPS of 9 cents in the fourth quarter of 2011, well below the year-ago quarter EPS of 25 cents. However, after adjusting for certain one-time items, EPS came in at 35 cents, ahead of the Zacks Consensus Estimate of 30 cents and 20.7% higher than the prior-year quarter.

For the full year, adjusted EPS came in at $1.30, surpassing the Zacks Consensus Estimate of $1.25 and the year-ago figure of $1.06.

Revenues dipped 4% year over year to $250 million during the quarter. However, it was ahead of the Zacks Consensus Estimate of $248 million. This drop was primarily due to a 6.2% decline in product revenues, partly offset by a 25.5% rise in service revenues.

The company derives 92.1% of its total revenue from products while the remaining comes from services. Revenue for fiscal 2011 was $1.05 billion, up 17%, and almost in line with the Zacks Consensus Estimate.

Product revenues at Illumina are primarily attributed to the sale of Microarrays and DNA Sequencing products. Product revenues consist of sales proceeds from the Consumables and Instruments segment. Services and other revenues, comprise genotyping and sequencing services as well as instrument maintenance contracts

During the quarter, the company introduced HiSeq 2500, a new multi-mode next-generation sequencer. The existing HiSeq 2000 instruments are also upgradable through a simple, field-based upgrade. The company expects the new system and upgrades to be available in the second half of 2012. Illumina also declared significant development of its MiSeq platform.

The company entered into a partnership with Siemens Healthcare Diagnostics to use the MiSeq platform for Siemens’ molecular HIV tests. In addition, the company expanded its Genome Network with the inclusion of British Columbia Cancer Agency to its existing list.

Illimina also emphasised on strengthening its management by appointing Pfizer's Senior Vice President of Finance, Marc Stapley, as Chief Financial Officer and created the position of a Senior Vice President and General Manager of Translational and Consumer Genomics Business Unit.

The company’s gross margin came in at 68.2% during the reported quarter, up 460 basis points (bps) year over year. The adjusted gross margin was 70.2% in the fourth quarter of 2011 as opposed to 65.1% in the prior-year period.

The company’s selling, general and administrative (SG&A) expenses and research and development expenses edged down by 2% to $60.9 million and 1% to $45.5 million, respectively. As a result, operating margin expanded 330 bps to 25.6%.

Illumina exited the fiscal with cash and cash equivalents of $302.9 million, compared with $248.9 million at the end of fiscal 2010. The company generated $358.1 million in cash flow from operations versus $272.6 million in the prior-year period.

Outlook

Illumina expects fiscal 2012 revenues in the range of $1.10 – $1.175 billion (annualized growth of 4% –11%). The Zacks Consensus Revenue Estimate is close to the lower-end of the expected range. The adjusted gross margin is expected to be 70% for 2012. The company also expects adjusted EPS in the range of $1.40–$1.50 (the Zacks Consensus Estimate is $1.41).

For the first quarter of fiscal 2012, Illumina expects revenues in the range of $250 –$260 million ($258 million) with adjusted EPS of 29 cents–32 cents (31 cents) assuming approximately 133 million shares. Adjusted gross margin guidance for the quarter is 69%.

Illumina Rejects Roche’s $5.7 billion Offer

In separate news, Illumina unanimously declined Roche Holdings’ (RHHBY) offer of $44.50 per share (aggregate value $5.7 billion) in cash as it considers this offer to be grossly inadequate.

We note that Roche had made multiple efforts in the past to strike a deal with Illumina. However, Illumina was unwilling to participate in substantive discussions. This led Roche to commence a tender offer to purchase Illumina’s outstanding shares.

Presently, Illumina retains a short-term Zacks #3 Rank (Hold) which also corresponds to our Neutral recommendation over the long term.

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