Faced with a slumping stock and growing competition in the next-generation sequencing market it continues to dominate, Illumina this past week committed to delivering high single-digit revenue increases over the next three years as part of a strategy intended to accelerate company growth or, in its words, “value creation”—and for the most part received positive, if cautious, feedback from analysts.
In arguably Illumina’s most important initiative shepherded by CEO Jacob Thaysen, PhD, who marks a year in the position next month, the company committed August 13 to accelerate revenue growth next year through 2027, as well as boost its non-GAAP earnings per share between low double digit and teens during the period. Illumina said it planned to fulfill its goals through operational efficiencies, and allocating its significant free cash flow using a systematic and disciplined approach.
“Illumina built the foundation of the genomics industry, and we will continue leading innovation across total sequencing workflows to support the next phase of our customers’ success,” Thaysen said in a statement. “Over the next three years, we will bring to market impressive new innovations that will redefine the genome and drive significant, deeper biological insights through multiomics.”
Investors appear to have warmed up to the new strategy, albeit gradually. Indeed the day it was announced, Illumina shares actually dipped 4% from $124.54 to $119.72. But on Thursday, Illumina’s stock bounced back with a 2% gain, closing at $122.28. The bounce back continued in earnest Thursday, as Illumina shares rose another 5%, to $128.80 at the closing bell.
The increases appear to have followed somewhat positive commentary from analysts. Illumina’s most favorable feedback arguably came from Dan Brennan, a senior analyst covering Life Science & Diagnostic Tools for TD Cowen. Brennan upgraded his firm’s rating on the sequencing giant’s stock from “Hold” to “Buy” and raised by 14% Cowen’s 12-month price target on Illumina shares, from $126 to $144.
One key reason cited by Brennan is Illumina’s prospects of finally seeing increased revenue growth following years of declines. Earlier this month, Illumina lowered its investor guidance for this year to a 2–3% decline in projected 2024 revenue for “core Illumina,” compared with flat year-over-year revenue previously forecast by the company.
Core Illumina does not include revenue from its cancer blood test developer Grail, which Illumina spun out on June 24. On Tuesday, Grail announced plans to reduce its current headcount and planned 2024 hired totaling about 30% of its workforce of approximately 350 current full-time employees—about 25% of the existing workforce as of June 30. Grail said it will incur a restructuring charge ranging from $18 to $23 million during the third quarter in connection with the workforce reduction.
Core Illumina finished the second quarter with net income of just $66 million on revenue of $1.092 billion, down from $174 million on revenue of $1.159 billion in Q2 2023. After Grail is included, Illumina finished the quarter with a consolidated net loss of $1.988 billion on revenue of $1.112 billion, well down from a $234 million net loss on $1.176 billion in revenue in the second three months of last year.
“Numerous attractive features”
“We see ILMN as a combination of a self-help & product cycle story, where sentiment has been decidedly mixed (and the stock under-owned). Now, following the Grail spin, the thesis is much simpler/cleaner with numerous attractive features,” Brennan wrote Wednesday in a research note.
The commitment to revenue growth was one of three reasons Brennan said justified an upgrade. He went even further, observing: “We see a path for stronger growth ahead, though are more conservative (model ~7% by 2027) in part given ongoing impact from new competitors.”
Illumina faces a growing number of rivals—not only longtime competitors like Pacific Biosciences of California (PacBio; PACB), Oxford Nanopore Technologies (ONT), and Thermo Fisher Scientific (TMO), but Chinese-owned MGI Tech (688114.SS), and its U.S. subsidiary Complete Genomics, and newer companies that include privately held Element Biosciences, which launched the AVITI™ NGS platform in 2022; publicly traded Singular Genomics (OMIC), which markets the G4 NGS platform; and privately held Ultima Genomics, which has taken aim at the $100 genome.
“Illumina is likely to find itself competing with the largest companies in this space due to the significant market opportunities in genotyping, next-gen sequencing, and diagnostics.” Baird senior research analyst Catherine Ramsey Schulte wrote Tuesday in a research note.
Schulte cited other risks and caveats that include continued fallout (such as fines) from its effort to acquire Grail and defend the deal from regulators; the need to develop a sales and marketing force for new product launches; and reliance on government funding. Baird estimates that Illumina derives about 25% of its revenue from government and academic customers, with 15–20% of overall revenue believed to be linked to NIH funding.
Brennan’s second reason for TD Cowen’s upgrade was the prospects of rising operating margins—such as the 500 basis-point (0.5%) increase in earnings before interest and taxes projected from 2025 to 2027. Illumina plans to achieve that increase through cost cutting and operating leverage, with management also committing to reducing expenses by $200 million through 2027.
Illumina raised its core Illumina non-GAAP operating margin guidance to a range of 20.5% to 21%. The company has also given investor guidance for core Illumina this year achieving non-GAAP diluted earnings per share (EPS) ranging from $3.80 to $3.95.
10–19% CAGR for EPS
When combined with the sales growth forecast, Brennan wrote, Illumina can expect a compound annual growth rate (CAGR) of between 10% and 19% for EPS through 2027—a CAGR that TD Cowen projects will surpass those of other “large-cap” companies, defined as companies that have $10 billion or more in market capitalization, the product of the share price and the number of outstanding shares (Illumina’s market cap stood at $20.547 billion as of Thursday).
“By our math, ILMN’s EPS CAGR will be the best amongst large caps & together with better revenue growth, we see an improved risk/reward,” Brennan added.
Brennan’s third reason for the upgrade: “New products can create upside.”
Thaysen said Illumina was working to build new, scalable growth-focused businesses that will complement and accelerate its industry-leading next-gen sequencing (NGS) franchise. Among goals he articulated:
- WGS workflow: Revolutionizing its workflow with novel sample preparation and integrated software, designed to enhance the utility of whole-genome sequencing (WGS) to, in Illumina’s words, “Reinvent the genome.”
- Multiomics workflows: Developing complete multiomic workflows designed to integrate with one another through interpretation and visualization tools that facilitate deeper biological insight.
- NGS Improvements: Provide sample-to-insight workflow solutions, including best-in-class software and informatics capabilities, that are designed to improve ease of use in the lab for NGS.
- AI/software platform: Illumina vowed to deliver a software/AI platform designed to integrate and analyze large data cohorts, as well as decipher variants of unknown significance.
“Solid framework”
Brennan was one of two analysts whose firms upgraded Illumina stock following the strategy announcement. The other was Barclays, where analyst Luke Sergott observed that Illumina’s new strategy “lays a solid framework on how we can think about the business going forward,” as reported by Seeking Alpha. Barclays upgraded Illumina from “Underweight” to “Equal Weight” but kept its price target on the stock at $125.
While Piper Sandler’s David Westenberg lowered his firm’s price target 2.5% from $200 to $195, maintaining an “Overweight” rating, Jefferies’ Tycho Peterson raised his firm’s target 5%, from $115 to $121, but kept his firm’s “Hold” rating. Baird’s Schulte raised her firm’s rating 4%, from $119 to $124, maintaining a “Neutral” rating.
Why haven’t analysts been more positive, and the price target increases modest at best?
“Despite clear market leadership (~70% share) in attractive NGS space, uncertainty around near-term [key performance indicators] KPIs (e.g., order intake) has made our call on go-forward growth challenging,” Peterson acknowledged in a research note. “While we remain optimistic about the market’s fundamental growth drivers, increased competition and concerns about innovation (beyond NovaSeqX) leave us cautious in ILMN’s ability to deliver compelling new products and maintain market share.”
Illumina said it has installed 469 NovaSeq X sequencing systems from its launch soon after its unveiling in 2022 through June 30 of this year. Illumina attributes about 45% of its total high-throughput output in Gb to NovaSeq X, which the company calls its primary near-term revenue driver.
Peterson said many investors expected Illumina to use its strategy announcement to unveil an internally-developed spatial biology system, which did not occur (Illumina expanded into single-cell technology last month when it acquired Fluent BioSciences).
Another concern, Peterson wrote, was the company’s shift in emphasis from cost/Gb to total cost of workflow (“when you can’t innovate, change the market metrics,” he quipped), which he said could subtly signal efforts to raise prices for high end instruments. “We also question consumers’ elasticity, as prices continue to fall without concomitant increases in demand (i.e., at what price/margin do we see demand/growth truly inflect?).”
Added Schulte: “We believe pushback [by some investors and analysts has] included questions around the pace of revenue growth recovery in 2025–2026, which remains unclear. We believe visibility in to said recovery will likely remain a sticking point near term, though we remain constructive on the medium-term margin/EPS outlook.”
EPS in the mid-teens, added to high single digit (HSD) revenue growth, create a long-term outlook for Illumina that “appears achievable and very likely beatable,” Leerink Partners’ Puneet Souda predicted Tuesday. “HSD org[anic] growth by 2027, mid-teens EPS growth appears condservative given rising clinical volumes and new applications.”
“But we believe investors are likely waiting on core execution to gain more comfort,” Souda added.
On Illumina’s conference call detailing the company’s new strategy, CEO Thaysen said his company had made organic and inorganic investments to expand its reach into proteomics, single cell, and software that supports enhanced visualization.
“The bottom line is, Illumina will provide solutions for analyzing each omics layer—the genome, epigenome, transcriptome, and proteome—while making interpretation straightforward,” Thaysen promised.
Leaders & laggards
- Bluebird Bio (BLUE) shares tumbled 24% from $1.06 to 81 cents Wednesday, after the company acknowledged in its second-quarter earnings report that 19 beta-thalassemia patients started treatment with Zynteglo™ (betibeglogene autotemcel) while four sickle cell disease (SCD) patients started treatment with Lyfgenia™ (lovotibeglogene autotemcel). Investors expected more starts given the approximately 20 patients that as of mid-July started cell collection for treatment with Vertex Pharmaceuticals/CRISPR Therapeutics’ Casgevy™ (exagamglogene autotemcel; “exa-cel”), indicated for both diseases. The news touched off a stock selloff that continued into Thursday, when Bluebird shares fell another 15%, reaching a 52-week low of 69 cents before inching up to 71 cents at the close, then up to 73 cents in after-hours trading. Bluebird CEO Andrew Obenshain said the company expects 85 patients starts this year portfolio-wide—including Skysona™ (elivaldogene autotemcel), indicated for cerebral adrenoleukodystrophy (CALD).
- Revance Therapeutics (RVNC) shares rocketed 87% from $3.53 to $6.60 on August 12, after the company said it agreed to merge with privately held Crown Laboratories through a deal valued at $924 million. Johnson City, TN-based Crown will commence a tender offer to acquire all outstanding shares of Revance’s common stock for $6.66 per share in cash, a premium of 89% over Revance’s closing market price on August 9 and a 111% premium to Revance’s 60-day volume-weighted average price. Based in Nashville, TN, Revance markets Daxxify® (daxibotulinumtoxinA-lanm), a rival skincare product to Allergan Aesthetics (AbbVie)’s BOTOX® (onabotulinumtoxinA). Revance’s board has unanimously recommended that the company’s stockholders tender their shares in the tender offer.
