Earlier in the month, Illumina (ILMN) made an aggressive and surprising move: acquiring Pacific Biosciences (PACB), one of its direct competitors, for $1.2 billion. To date, this is the largest acquisition that Illumina has ever made.
Currently, Illumina is king of the hill when it comes to DNA sequencing, and despite intense competition from companies such as Thermo Fisher Scientific (TMO), Agilent Technologies (A) and QIAGEN (QGEN), Illumina has continued to steadily grow and expand into new markets year after year.
The reason for this growth hinges on tremendous advancements in speed and remarkably lower sequencing costs when compared to only a few years ago. To help add perspective to these advancements, in 2001 the first human genome was published by the National Institutes of Health and cost an estimated $2.7 billion in 1991 when funding for this initiative was established. Interestingly, this was less than the expected $3 billion that was allocated.
Using Illumina’s technology, the current cost to sequence a human genome is approximately $1,000 and takes approximately one day to complete. Illumina expects to bring this cost down even more in the near future. The importance of this modern advancement cannot be emphasized enough as it essentially allows anybody to complete a genetic test or sequence a genome without any significant barriers. The need for rapid DNA sequencing spans multiple markets including biotechnology, agriculture, reproductive health, clinical screening (such as oncology), university research as well as personal genomic testing for companies such as 23andme and ancestory.com. There is simply no shortage of demand.
The acquisition of Pacific Biosciences solidifies Illumina’s dominance. Until now, Illumina’s sequencing has been based on what is known as “short-read sequencing,” while Pacific Biosciences specialized in “long-read sequencing.” The strength of long-read sequencing is that longer strands of DNA are used for sequencing, making whole genome sequencing easier. This is especially useful when better understanding disease and “determining whether both copies of a gene are broken, or just one in two different places.” Long-read sequencing is also very powerful when needing to sequence plant genomes, which are challenging due to their large size and the high density of repetitive genetic sequences.
Now that Illumina is able to leverage both short- and long-read sequencing approaches, the company is able to play in both markets and continue to focus on market expansion. In the U.S., reimbursement for non-invasive prenatal test samples has accelerated, including average-risk coverage from Florida and Minnesota Medicaid along with Blue Cross Blue Shield Tennessee. Anthem (which covers 27 million people) also granted coverage for sequencing stage IV patients or those with current metastatic non-small cell lung cancer.
Last, according to Zacks Investment Research (published Oct. 24), nearly 100% of Europe is covered for non-invasive prenatal test, providing a wide-open market for Illumina to establish its presence. Revenues for Illumina within the USA last quarter was up 19%, Europe up over 30% and China over 40%. Growth in China also shows no sign of slowing down since Illumina just secured approval of the MiSeqDx system in late August of 2018 and is Illumina’s first system to be approved in China for in-vitro diagnostic testing. With over 20 million pregnancies in China per year alone and the dramatic drop in genomic testing costs, Illumina is in a great position to establish itself in a new and expansive market.
While the price of Illumina stock is arguably overvalued, it would be difficult to find a company with more growth potential. And if the price were to ever experience a pullback, it would be difficult to pass up taking a long position. Revenues have largely only increased quarter to quarter, and the company continues to invest in research and development, staying ahead of the competition.
More impressively, over the past 10 years, Illumina has easily outpaced the S&P 500 index, growing over 1000% compared to 270%
While timing is everything, it is difficult to ignore Illumina, despite the intense competition in this market space. Continued partnerships, strategic acquisitions, market development initiatives and increased demand around the world will only continue whether the global economy is in a bull or bear market.
While the overall price to sequence a genome will only get cheaper, causing concern to some investors, the sequencing machines themselves, necessary consumables and the expertise to understand the sequenced data and make it available to researchers and clinicians will always be needed and remain a lucrative service.
Last, as DNA sequencing prices drop, new markets open. It is safe to say that Illumina is very well positioned for years to come.
Disclosure: I do not have positions in the stocks mentioned.