Illumina Shines Light on Grail

05/25/2016 8:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

In January, a brand new startup announced a $100 million round of financing, and the company’s financers included two of the richest entrepreneurs in the world: Bill Gates and Jeff Bezos, explains Ian Wyatt, editor of Million Dollar Portfolio.

Gates and Bezos were two of the lead investors in a new company is called Grail, a company that has potentially life-changing technology.

That’s why Bezos and Gates – alongside venture capital firms ARCH Venture Partners and Sutter Hill Ventures – invested in this early-stage startup.

Grail is developing a new tech that it calls “liquid biopsy.” The test will screen patient’s blood for early signs of cancer DNA.

Just imagine being able to have an annual blood test determine if you had any small and growing tumors. For anyone who has experienced a battle with cancer, the promise of this new technology is astounding.

Grail plans to begin a large clinical trial in 2017. And its CEO is optimistic that the tests could be available as early 2019. With the tests requiring FDA approval, there is obviously considerable risk related to the approval and timing.

Yet unlike most startups, Grail also has the backing of a large biosciences company. That’s because it’s a spin-off from Illumina (ILMN).

When Illumina spun off Grail, it retained a majority stake. At the same time, Illumina brought on outside investors to help finance the new endeavor.

Since 1998, Illumina has been a market leader in DNA sequencing. Specifically, the company’s gene sequencers examine a DNA molecule.

Illumina sells these machines at a starting price of $50,000 to researchers. Large-scale machines can cost $10 million or more. The company generates 90% of its revenues from the sale of machines and sequencing kits. The balance of the revenue comes from ongoing warranties and servicing.

Illumina has been instrumental in driving down the cost of mapping the human genome. In 2007, the cost was $1 million. Today, it’s less than $1,000.

While long-term shareholders have been rewarded, the short-term performance hasn’t been so impressive. Over the last year, shares of Illumina have plunged 31%.

In April, shares of Illumina fell 23% in a single day after the company reported poor quarterly results. The reason for the shortfall was poor sales in the European market, coupled with slower upgrades the company’s newer products.

For 2016, the company is now projecting 12% revenue growth (revised down from 16%). Even after trimming expectations, the company’s growth remains impressive.

2016 sales are expected to grow 12%, while EPS ticks up 2.4%. Analysts forecast accelerating growth in 2017, with sales rising 14% and EPS increasing 18%.

Right now, it appears that Illumina investors are placing little or no value on Grail. That seems to be a mistake, since Bezos, Gates and a couple top venture capital firms just invested more than $100 million in the deal. 

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By Ian Wyatt, Editor of Million Dollar Portfolio

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