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Bull of the Day: Illumina (ILMN)

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Illumina (ILMN - Free Report) is the $50 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.
In October, I chose Illumina for a Zacks Ultimate recommendation with a suggested buy range of $300 to $320. Here are several excerpts from that report to help you see the case for buying ILMN...
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.
Meet the Queen Isabella of Biotech
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 this year 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.
But I wasn't fast enough on the research, and the company's 29% EPS beat and raised guidance ignited shares back up to new highs above $325 on July 31. Management raised their 2018 revenue outlook to $3.3 billion and EPS guidance to $5.35-$5.45.
Time to Board the Starship Illumina
Then this 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."
I concluded "The purpose of this report is to put this important company on your watch list so that you are financially and psychologically committed to buying shares when the timing is right."
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 zones.
Who Is Illumina and What Do They Do?
Let's dive into the proprietary technology of Illumina to understand this year's 20% sales growth and 36% EPS advance.
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, "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."
Here's a look at the "array" of Illumina customers...
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 Boeing, Lockheed-Martin, or NASA of genetics, providing aerospace-grade 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.
The Long-Term Consumable's Path of Illumina
Illumina also makes supporting kits and clinical research products in categories called Library, Array, and Forensic Genomics. Many of these kits feed the consumer market.
In July, Amazon (AMZN - Free Report) reported that during its big Prime Day Event, 23andMe's DNA Test proved to be one of the top sellers in the US, as the kit was heavily discounted to $99. Sales of these consumer kits drive demand for Illumina microarray products.
Here's how Leerink Swann, a boutique investment bank that focuses on Healthcare and Biotech, described the business on July 31 when they raised their PT from $315 to $325...
"We remain Outperform on ILMN and believe that lower sequencing costs and competition among its customers continue to drive the NovaSeq product upgrade cycle -– now 1.5 years into its launch. ILMN delivered another strong quarter driven by exceptional strong consumables pickup broadly across its customer base -– from research to clinical settings. We believe ILMN is increasingly becoming a consumables story longer term as NovaSeq provides a path to $100 genome -– making flowcell upgrades far more frequently than instrument launches. And with every flowcell launch, cost per Gigabyte will come down, driving increasing sequencing volumes -– which is expected to drive overall consumables higher."
The Leerink team believes that Illumina has a potentially unbounded market opportunity, as the majority of the population in the developed and developing world will be touched by sequencing in some form of a test over the next 5-10 years.
They also like recent key appointments at the FDA and at a leading clinical center that they see as positive for the uptake of NGS (next-gen sequencing) as ILMN derives 45% of its revenue from clinical markets, primarily oncology. Dr. Timothy Stenzel was appointed as the Director of FDA's Office of In Vitro Diagnostics and Radiological Health (OIR), and Dr. Gianrico Farrugia was appointed as the CEO of Mayo Clinic – both physician scientists have strong experience with NGS based genetic testing with Dr. Stenzel recently being COO of Invivoscribe -– a CDx (Companion Diagnostics) and NGS Oncology focused company.
The analysts see Illumina's exposure to clinical markets as ripe for growth, with shipments rising from 30% in 2014 to 45% in 2017. The Leerink team sees clinical shipments potentially exceeding 70% longer term as genomics becomes part of routine clinical care. They say "Clinical sequencing has proven to be not only sticky, but also a high-margin business."
Update from Leerink Swann: The analysts put out a note in October during the American Society of Human Genetics meeting raising estimates and their PT to $351. 
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 - Free Report) . 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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