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Is it finally time to dump Illumina stock (ILMN)? It’s been a year since we asked that question, and since then we’ve decided that holding lackluster growth companies doesn’t mesh well with the goals of our disruptive tech portfolio. Today, we need to make a “fish or cut bait” decision on whether we continue holding Illumina in the face of stalled growth that continues to go nowhere fast.
DNA is the recipe for life. A company that builds sequencing machines which are used to read DNA is a great pick-and-shovel play on the growth of exciting themes like cancer testing, synthetic biology, gene editing, DNA synthesis, and a host of other exciting technologies. Better yet, investing in a company that has an 80-90% market share and over 70% of revenues coming from consumables is even more desirable.
Illumina fits the bill, and we invested in them well before their growth peaked in 2021. Based on next quarter’s guidance we’ll have seen two years of declining revenues, which points to a business that’s in dire need of a growth strategy. And fresh leadership. Famed activist investor Carl Icahn launched a bitter proxy fight against Illumina which led to a new CEO, Jacob Thaysen, taking over the reins. Now, he’s come up with a strategy that seems riddled with corporate platitudes.
With the GRAIL fiasco behind them, Illumina can now look forward to future prosperity. That translates to high single-digit growth by 2027 driven by the three factors seen below.
We consider disruptive growth to be at least double digits. For those willing to accept the possibility of 9% after a two-year wait, then we should evaluate Illumina’s plan to get there. “Deeper customer collaboration” is described as “shifting how we interact and collaborate with customers to support their ambitions,” while giving them a “clear line of sight to the significant innovations in our pipeline.” Seems like more buzzwords than substance. They should have been close to their customers all along given their leadership position.
The second plan of action is “continuous innovation” which is being “shaped by what customers tell us they need.” So, they’re already collaborating with customers then. And after spending nearly $4 billion in research and development over the past three years, one would hope they have a cadence of new products being released that generate more revenues as opposed to cannibalizing existing product lines. More detail is provided in a richer strategic presentation given last summer which sees Illumina dabbling in proteomics and single-cell sequencing (think 10X Genomics).
As for the third factor, “operational excellence,” that’s rich coming from a company that’s done nothing but drop the ball since their failed acquisition of Oxford Biosciences (ONT.L) through the complete mess that the GRAIL acquisition turned into. In short, the new plan to resume growth seems shallow. While they are “looking forward to returning to growth in 2025,” they aren’t providing guidance for next year while only expecting $1.07 billion this year or a decline of 3% compared to last year.
Macroeconomic headwinds seem to be afflicting all providers of life sciences tools including large names like Thermo Fisher (TMO) which saw growth stall last year across their entire diversified organization. This sector slowdown might mask competitors that are moving in to steal market share from Illumina. An article by GEN – NGS Upstarts Expected to Take On the Champion – talks about how startups like Element Biosciences, run by ex-Illumina employees with $680 million raised so far, plans to compete with Illumina on price while offering both short and long reads. You may recall that Illumina tried to acquire Oxford Nanopore’s long read technology and failed, so they debuted a “synthetic long read” technology called Infinity which doesn’t seem to be talked about much since its debut.
An article by Omics! Omics! talks about how Illumina’s new “total cost of ownership” talking point is in direct response to cheaper competitive offerings. After raising a cool $600 million in funding, Ultima Genomics has debuted the UG 100, a $1.5 million machine that can read up to 20,000 human genomes a year at a cost of $100 each. The $100 genome seems to have arrived. While Illumina has been fumbling the ball and battling activist shareholders, competitors have been encroaching on their turf. Still, some think dethroning the king won’t happen anytime soon.
GEN put out a good piece on Illumina and the State of the Genomics Market which notes murmurs at genomics conferences about Illumina’s 15 years of dominance finally coming to an end. Illumina manages to spend loads more on R&D than the competition – nearly $4 billion over the past three years – and that’s allowed them to thwart numerous upstarts that threatened their dominance. Their platforms “have become deeply embedded in many clinical companies” such as those offering non-invasive prenatal testing or precision oncology applications. “For now and the foreseeable future, the majority of these population tests will be run on Illumina.”
Any organization that decides to switch to an alternative sequencing platform will face any number of regulatory hurdles. Even a minor upgrade to an Illumina machine requires “extensive validation and approval” from the FDA. Basically, Illumina will continue to dominate in next-generation sequencing (NGS) over the next 10 to 15 years for three reasons:
Sure, Illumina might maintain their leadership position, but that doesn’t necessarily mean they’ll be able to resume the sort of double-digit growth they’ve realized in the past. Pricing pressures may lead to new machines that are cheaper to operate, which may cannibalize older more profitable equipment. And when it comes to execution, past performance may be indicative of future results. Investors should also note the importance of clinical revenues vs research revenues.
Illumina basically receives two types of revenues – research and clinical. The former is subject to the whims of national healthcare research spending while the latter provides exposure to many exciting growth themes. Here’s that revenue breakdown for Illumina.
Pay close attention to the evolution of research spending in the face of the new incoming Trump administration. As for clinical revenues, those should be growing in response to the rapid growth of companies like Natera (NTRA). So why aren’t they?
Illumina is one of our oldest disruptive tech holdings. Perhaps that’s why we pondered selling it a year ago because of stalling growth, and here we are a year later asking the same question. Now that the uncertainty behind GRAIL has cleared up, the company finally offered up a growth strategy this past summer which doesn’t seem overly compelling. The bottom line? Wait two years and they expect to show “high single-digit growth.” That’s not good enough.
It’s truly hard to cut a company loose when they have such a great opportunity in front of them, but we need to leave sunk costs and emotions out of this. Sure, there’s a new CEO, but what about the rest of the organization? The old CEO wasn’t acting alone when he made dreadfully poor decisions. Are we to believe the company’s 9,250 employees were all held back from being able to execute by an incompetent CEO? It’s reasonable to think the incompetency on display extends beyond the C-suite.
Maybe the new CEO is fit to turnaround this ship and they’ll exceed expectations. Maybe they’ll get acquired at a premium. Maybe they’ll suddenly see growth accelerate. Maybes and $5 might get you a Whopper Junior. Waiting for several years in hopes of seeing mediocre growth doesn’t seem like a very compelling value proposition. It’s hard to believe they wasted such a great opportunity, and even harder to believe that now they’ll suddenly start getting things right.
