Illumina served up second-quarter results with higher revenues than expected, and played up growing customer shipments for its NovaSeq X. But investors and analysts remain far from reassured about the sequencing giant’s future given a sharply reduced revenue growth forecast for this year, challenges associated with rolling out the sequencing system, China’s softening economy, and increasing federal scrutiny into its purchase of cancer blood test developer Grail following activism by investor Carl C. Icahn.
During Q2, Illumina reduced its quarterly net loss year over year to $234 million from $535 million, reflecting a cost-cutting plan designed to reduce the company’s annual expenses by $100 million that was launched by former CEO Francis deSouza, who resigned in June. Illumina’s Q2 revenue rose nearly 1% from $1.162 billion to $1.172 billion, ahead of company guidance and analyst estimates.
But investors let their angst be known this week through a stock selloff that saw Illumina’s share price fall 9%, from $184.49 on August 9 just before the release of Q2 results, to $168.50 on Thursday at 10:06 am ET, before bouncing back to $170.69 at 1:32 pm. Eight analysts cut their 12-month price targets on Illumina stock, though the company could take some comfort in the fact none of the analysts downgraded the shares, instead waiting to see how all the drama and uncertainty play out in coming weeks.
Behind the price target cuts and selloff are a host of factors that explain why Illumina slashed its investor guidance for “consolidated” revenue growth—which combines revenues from core Illumina operations and its cancer blood test developer Grail—from a range of 7% to 10% to just “approximately 1%.”
“We were disappointed to see management push down guidance for 2023, especially given the easier comparable periods through the rest of 2023,” Julie Utterback, a senior equity analyst for Morningstar Research Services, commented Monday.
Utterback said that disappointment won’t change Morningstar’s $269 fair value estimate for Illumina’s shares since it depends on longer-term factors.
“High uncertainty” on Grail
However, Utterback added: “Investors should realize that high uncertainty surrounds Illumina’s future cash flows (compared with medium for most of its life science peers), mainly related to the uncertainty around the Grail liquid biopsy assets, although the risks in its core business were on display with this guidance change too.”
Illumina continues to fight U.S. and European regulators over its acquisition of Grail, with the company now appealing a €432 million ($470.5 million) fine imposed by the European Commission after Illumina breached European Union (EU) rules by agreeing to merge before receiving EC approval for the $7.1 billion deal. Illumina is also appealing an April Opinion and Order by the U.S. Federal Trade Commission (FTC) to divest itself of Grail on antitrust grounds.
The FTC contends that an Illumina merger would lessen innovation in the U.S. market for multi-cancer early detection (MCED) tests like those marketed by the cancer blood test developer, since Illumina is the nation’s only provider of DNA sequencing that is a viable option for MCED liquid biopsy tests. The FTC concluded that Illumina control of Grail “may substantially lessen competition in the relevant United States market for the research, development, and commercialization of MCED tests.”
Illumina has countered that its acquisition of Grail would accelerate the commercialization of its Galleri™ cancer blood test, which the company says can detect more than 50 cancers across all stages and has correctly identified the tissue of origin in 93% of positive results, with >99% specificity.
Illumina also argues that FTC leadership violates the U.S. Constitution because FTC commissioners can only be removed for cause in violation of the Constitution’s Article II, which vests executive power in the President, and that the FTC violated due process by depriving Illumina and Grail of a fair proceeding before an impartial tribunal.
SEC investigation
The U.S. government stepped up its pressure on Illumina over the Grail deal. Tucked within Illumina’s Form 10-Q quarterly filing was a terse acknowledgement that staffers from the U.S. Securities and Exchange Commission have begun an investigation.
The SEC has been “requesting documents and communications primarily related to Illumina’s acquisition of GRAIL and certain statements and disclosures concerning GRAIL, its products and its acquisition, and related to the conduct and compensation of certain members of Illumina and GRAIL management, among other things,” Illumina disclosed.
“Illumina is cooperating with the SEC in this investigation,” the company added.
The topics being examined by the SEC align with arguments made this past spring by Icahn when launched his partially successful proxy to reshape Illumina’s board and management. He cited Illumina’s loss of $50 billion in market capitalization—the share price times the number of outstanding shares of a public company—since the Grail deal was finalized, as well as the board’s near doubling of deSouza’s total compensation last year, to nearly $27 million, much of that based on stock options.
Another issue raised by Icahn was the decision by Illumina’s board to increasing its insurance protection to board members before they approved the Grail purchase. In an open letter to Illumina shareholders, Icahn noted that the company’s board members appeared to have had misgivings over the Grail deal since they required Illumina to commit to giving them “an unprecedented level” of additional personal liability protection above existing protections before signing off on the acquisition. Illumina responded with a statement defending the board and its actions in approving the company’s purchase of Grail.
During his proxy campaign, Icahn nominated to Illumina’s board three allies—one of whom, Andrew J. Teno, was elected last month after Icahn stated his case for change in letters to shareholders and an exclusive GEN interview. The election of Teno, a portfolio manager at Icahn’s investment management firm Icahn Capital since 2020, led to the ouster from the board of John W. Thompson, a deSouza ally who had served on Illumina’s board since 2017, the last two years as chairman. deSouza resigned some two weeks later.
Remaining sidelined
While Utterback has not changed her firm’s projected pricing on Illumina shares, eight analysts did so. The biggest rollback came from Catherine Ramsey Schulte, a senior research analyst at Baird who cut her firm’s price target 21%, from $229 to $180 but maintained the firm’s “Neutral” rating on Illumina stock.
“While there are real global/industry-wide headwinds not unique to ILMN, we believe the challenges seen in year-one of an instrument launch (typically a time of strength for ILMN) may call into question the long-term growth outlook, and we remain sidelined here,” Schulte wrote August 9 in a research note.
Also lowering their price targets on Illumina:
- Ruizhi (Julia) Qin, a senior analyst and vice president-life science tools & diagnostics at J.P. Morgan, down 19% from $235 to $190, but maintaining a “Neutral” rating.
- Patrick Donnelly, a director, equity research at Citigroup, down 17% from $180 to $150, but maintaining a “Sell” rating.
- Dan Arias, a managing director, life sciences & diagnostics at Stifel, down 15% from $265 to $225, but maintaining a “Buy” rating.
- Shubhangi Gupta, PhD, analyst-equity research at HSBC, down 13% from $270 to $235, but maintaining a “Buy” rating.
- Dan Leonard, a managing director and research analyst covering life science tools, services, and diagnostics at Credit Suisse, down 11% from $225 to $200, but maintaining a “Neutral” rating.
- Kyle Mikson, CFA, a managing director and senior equity research analyst covering the diagnostics and life science tools sector at Canaccord Genuity, down 5% from $300 to $285, but maintaining a “Buy” rating
- David Westenberg, CFA, a managing director and senior research analyst covering life science tools at Piper Sandler, down 5% from $290 to $275, but maintaining an “Overweight” rating.
During the company’s quarterly conference call with analysts, Illumina interim CEO Charles Dadswell—who succeeded deSouza in June–blamed the guidance rollback on:
- A larger-than-expected “temporary” decline in high throughput consumables as more customers than expected are transitioned to NovaSeq X from older sequencing systems.
- Greater caution in spending by customers that purchase Illumina instruments and consumables.
- China’s slower than expected economic recovery and growth forecasts compared with the Americas and Europe, where Illumina still expects to see year-over-year growth this year.
Illumina chief financial officer Joydeep Goswami told analysts that Illumina’s consolidated and core revenue projections factor in a 200-basis-point (2%) reduction from COVID surveillance, a 100 basis-point (1%) reduction due to sanctions imposed on Russia because of its war in Ukraine, and year-over-year negative impact from foreign exchange rates.
Flat expectation
Core Illumina revenue is now expected to be flat from 2022’s $4.553 billion, compared with the company’s earlier guidance of a 6% to 9% increase, though GRAIL revenue is still expected to fall between $90 million to $110 million as previously projected.
Core Illumina forecasts reflect both 3% revenue growth reflecting an expectation of higher NovaSeq X shipment volumes, and an anticipated 3% decline in consumables as customers reduce their spending and delay projects; cut back on NovaSeq 6000 sequencing as they transition to NovaSeq X; wait out expected delays in the ramp-up of consumables for NovaSeq X; and, in the case of Chinese customers, pull back on purchases, reflecting a slower than expected second-half recovery.
Illumina also slashed its GAAP diluted loss per share guidance from a range of $(0.28) to $(0.03), to a range of $(2.08) to $(1.93). The company also shrunk its non-GAAP diluted earnings per share (EPS) forecast from a range of $1.25 to $1.50 to between 75 cents to 90 cents.
The company also disclosed that chief medical officer Phil Febbo, MD, has departed, with CTO Alex Aravanis, PhD, following suit to become CEO at another as-yet-unnamed company. Aravanis is being succeeded by Steven Barnard, PhD, who is now Illumina’s vice president and head of global advanced science.
“We are the global engine of genomics innovation, positioning us today and in the future to maximize shareholder value,” Dadswell declared. “Illumina will continue to deliver impactful outcomes. We empower researchers and clinicians with the data and technology they need to make life-changing discoveries and decisions for patients. Our employees take pride in being part of Illumina’s mission to improve human health by unlocking the power of the genome.”
Taysha’s (nearly) triple play
Taysha Gene Therapies (TSHA) shares nearly tripled, zooming 188% on Monday from 74 cents to $2.13, after the company announced that it had entered into a private investment in public equity (PIPE) financing that is expected to raise gross proceeds of approximately $150 million for the company.
Taysha said it expected to use net proceeds from the PIPE, together with existing cash and cash equivalents, to extend its cash runway into the third quarter of 2025, in order to primarily support clinical development of TSHA-102 in Rett syndrome, fund program activities for TSHA-120 in giant axonal neuropathy, provide working capital, and address other general corporate purposes.
The stock bounceback, if it holds, would appear to remove the threat of stock delisting that Taysha faced earlier this year from Nasdaq after its share price fell below $1 a share for 30 consecutive business days.
Through the PIPE, Taysha will sell 122,412,376 shares of its common stock at $0.90 per share, as well as pre-funded warrants to purchase up to 44,250,978 shares of common stock at $0.899 per pre-funded warrant. The PIPE had been expected to close late this week, subject to customary closing conditions.
The pre-funded warrants will only be exercisable upon stockholder approval of an increase in the authorized shares of Taysha’s common stock, which Taysha said it will seek to obtain at an annual meeting of stockholders to be held by December 31.
Jefferies is the exclusive placement agent for the private placement.
The PIPE was led by a new investor, RA Capital Management, with participation from PBM Capital, RTW Investments, LP, Venrock Healthcare Capital Partners, TCGX, Acuta Capital Partners, Kynam Capital Management, Octagon Capital, Invus, GordonMD® Global Investments LP, B Group Capital, and an unnamed large institutional investor.
Taysha announced the PIPE on the same day it reported positive initial clinical data from the first patient dosed in the Phase I/II REVEAL trial (NCT05606614) with TSHA-102, a self-complementary intrathecally delivered adeno-associated virus serotype 9 (AAV9) gene transfer therapy being developed for Rett syndrome.
The data showed TSHA-102 was well-tolerated with no treatment-emergent serious adverse events as of a six-week assessment. A four-week post-treatment assessment showed improvement in key efficacy measures, including Clinical Global Impression–Improvement (CGI-I), Clinical Global Impression–Severity (CGI-S) and Rett Syndrome Behavior Questionnaire (RSBQ).
“We are pleased by the support from this prestigious group of new and existing investors, which we believe highlights the enthusiasm of the early clinical readout of the first patient treated in our REVEAL trial and reinforces the potential of gene therapy to transform the lives of patients suffering from devastating diseases,” Sean P. Nolan, Taysha’s chairman and CEO, said in a statement. “With this capital infusion, we believe we are well positioned to continue to execute across key program milestones.
Leaders & laggards
- Alaunos Therapeutics (TCRT) shares plunged 64% on Monday, from 39 cents to 14 cents, after it announced plans to eliminate about 60% of its workforce—about 20 jobs, based on the 34 reported as of February 15—in a restructuring intended to refocus the company on advancing its human neoantigen T-cell receptor (hunTR® TCR) discovery platform, wind down its TCR-T Phase I/II Library trial (NCT05194735), and explore strategic alternatives. Alaunos cited a review of its funding needs and the current state of financial markets. In January 2022, Alaunos rebranded from Ziopharm Oncology, narrowed its focus to TCR-T cell therapies, opened an in-house cell therapy manufacturing facility, and moved its headquarters from Boston to Houston.
- Design Therapeutics (DSGN) shares nosedived 70.5% on Tuesday, from $7.33 to $2.165, after the company acknowledged that in its Phase I multiple-ascending dose clinical trial (NCT05285540) of its lead GeneTAC™ small molecule DT-216 in patients with Friedreich ataxia (FA), patients across dose cohorts experienced “injection site reactions associated with the formulation excipients.” Design said it expects to begin a multiple-dose Phase I trial in the second half of 2024 with initial data expected in the first half of 2025. “That pushes back the timeline in which Design could potentially launch its lead pipeline therapy to as late as fiscal 2029,” The Motley Fool contributing writer Jim Halley observed. Design cited exploratory analyses showing that DT-216 achieved a significant and dose-related increase in frataxin mRNA levels in skeletal muscle, confirming clinical activity in patients with FA in an affected tissue.
- Galecto (GLTO) shares cratered 71% on Tuesday, from $2.34 to 67 cents, after the company announced it was ending development of GB0139 and refocusing on development opportunities for the treatment of severe liver diseases. GB0139, a small molecule inhibitor of galectin-3, failed the Phase IIb GALACTIC-1 trial (NCT03832946) assessing the safety and efficacy of inhaled GB0139 for the treatment of idiopathic pulmonary fibrosis. GALACTIC-1 missed its primary endpoint of change from baseline in rate of decline in forced vital capacity (FVC). “We are currently evaluating resource allocation with the goal of extending our cash runway into 2025,” said Hans Schambye, Galecto president and CEO.
- PhenomeX (CELL) shares more than doubled, jumping 136% on Thursday, from 40 to 95 cents, after the company agreed to be acquired by Bruker for approximately $108 million. PhenomeX is a functional cell biology company that provides single-cell biology research tools that aim to deliver deep insights into cellular function and new perspectives on phenomes and genotype-to-phenotype linkages. PhenomeX was formed when Berkeley Lights acquired IsoPlexis for $57.8 million,in a deal completed in March. PhenomeX said it currently has an installed base of more than 400 instruments.
- Zynerba Pharmaceuticals (ZYNE) shares nearly quadrupled, soaring 298% from 33.9 cents to $1.35 on Tuesday, after Harmony Biosciences announced it had agreed to acquire Zynerba for up to $200 million. Harmony will launch a tender offer to acquire all outstanding Zynerba shares for $60 million ($1.1059 per share) cash, plus one non-tradeable contingent value right per share, representing the right to receive up to $140 million in potential additional payments. Zynerba says its lead asset Zygel is the first and only pharmaceutically manufactured synthetic cannabidiol, a non-euphoric cannabinoid, formulated as a patent-protected permeation-enhanced gel for transdermal delivery into the circulatory system. Zygel is under study in the pivotal Phase III RECONNECT trial (NCT04977986) in Fragile X syndrome patients. The deal is expected to close by Q4.
