Based in San Diego, Illumina develops cutting-edge technologies used in disease research, drug development and molecular tests. Genome sequencing allows scientists to discover the genes associated with various diseases to develop improved treatments and even cures.
Illumina’s business works on the razor-and-blade model. After a lab purchases a gene sequencer, it must continue to purchase high-margin consumable reagents to run on the equipment. This allows the company to maintain its double-digit-percentage operating and profit margins.
Illumina’s systems are bought by academic and government labs worldwide, as well as corporate customers, including drug developers and other biotech firms. Now, sales are moving to hospitals and doctor’s offices. At today’s price point, health care providers can offer whole-genome sequencing to large patient populations at an affordable cost.
Every breakthrough in genomic science creates new possibilities to fight deadly diseases — including cancer. In 2016, Illumina founded Grail, a company charged with developing a blood test that can diagnose cancer early. Grail was then spun off as a private company a year later.
The company achieved its mission. Its blood test — Galleri — can detect 50 types of cancer with a false-positive rate of less than 1%. It became commercially available last June, as fast track approval from the Food and Drug Administration (FDA) is pending. The test is currently available on the company’s website for $950.
Cancer kills about 10 million people a year -- about 600,000 in the United States alone. A blood test that catches cancer early is a revolutionary, life-changing development.
Cancer patients who are diagnosed early are more than four times as likely to survive at least five years. And their odds are 10 times better for liver, lung and pancreatic cancer. Grail projects that its test could prevent up to 100,000 cancer deaths a year, if it were administered annually to all Americans ages 50 to 79.
The company has already formed partnerships with Bristol Myers Squibb (BMY), AstraZeneca (AZN) and Amgen (AMGN) to monitor for residual cancer cells after treatments. The blood tests would never have been possible, of course, without Illumina’s genomic sequencing.
Illumina and Grail agreed to a deal in August. Yet regulators oppose it. This is a vertical merger — the buyout of a company in a different industry — something the Federal Trade Commission (FTC) has never challenged before. Management at Illumina remains confident it will win.
Illumina enjoys 90% market share for its sequencing systems. Its products are protected by more than 1,500 patents and patents pending. And Grail’s blood test could prevent up to 26% of all cancer deaths annually.
Illumina just reported quarterly earnings that beat the Wall Street consensus by 19%. Revenue jumped 26% — and tops $4.5 billion over the last 12 months. Yet the market has been brutal to anything tech-related this year, and the stock is trading at the bottom of its 52-week range. This is an excellent buying opportunity. Pick up Illumina at market, and enter a sell stop at $185 for protection.