Illumina: Shining a Light on Gene Sequencing

10/11/2019 5:00 am EST

Focus: HEALTHCARE

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

For more than a decade now genomic medicine has been revolutionizing the way we diagnose and treat disease. Illumina (ILMN) has been at the forefront of that revolution, notes growth stock expert Ian Wyatt, editor of Million Dollar Portfolio.

A maker and provider of sequencing and array-based solutions for genetic analysis, there aren’t many genetic laboratories that don’t used Illumina’s equipment. That helped push the stock into massively overvalued territory — at least until this past July.

When Illumina announced its latest earnings, revenue growth had slowed substantially. Thanks to some recent technological innovations, newer, more efficient sequencers have been expected to hit the markets for some time now. Funding for basic sciences, a major source of demand for sequencers, has also slowed down, denting demand.

As a result, revenue was down 1% sequentially and only up 1% over the year-ago quarter. So, while EPS we up 27% sequentially and 41% year-over-year, investors got antsy and sent the stock plunging. I believe that sets up a rare opportunity to buy Illumina at a discount to itself and many of its peers.

Illumina had been trading as high as 65 times earnings, as are many of its peers, but it has come to do a relatively more reasonable 48 times. That because investors still have high confidence in its growth prospects, despite the recent setback.

And this is only a setback. Right now, Illumina and Pacific Biosciences (PACB) are in the midst of a merger, which is expected to close before the end of the year.

Pacific has made it a goal to reduce the cost of reading a human genome and, so far, it’s been successful. Sequencing a genome had cost $12,000 as recently as early last year but fell to $7,000 by the end of 2018. This year, the cost has fallen to just $1,000.

That’s mostly thanks to improvements in Pacific’s Sequel II system. Sequel II allows for long-reads, effectively sequencing an entire genome.

Illumina’s equipment is designed for short-reads, which are fine for speed and accuracy when you’re looking at specific parts of a gene sequence, but it can’t read as much as 9% of a human genome. And it’s not good for non-human genomes at all.

So, by combining Pacific Bioscience’s and Illumina’s technology, you’d have the best of both worlds, radically improving efficiency and accuracy while cutting cost. And, despite Pacific’s excellent technology, it’s struggled to achieve profitability, making the merger an ideal situation for both companies.

And while demand for sequencers for applications like ancestry testing may be slowing down as the machines become more efficient, it isn’t going away. Medical and research use, despite lumpiness in government funding, isn’t going to go away either.

So, while I understand a $300 stock may be a bit rich for some, this is an excellent buy opportunity, especially if your portfolio could use some exposure to next-generation technology. Recommended Action: Buy up to $350.

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