Wall Street analysts are upbeat on California-based biotech Illumina (ILMN 1.02%) these days, estimating on average that the stock could climb by up to 27% over the next year. But without some serious and unexpected new developments, that composite estimate will probably not come true. Here's why.
Positive catalysts and growth are lacking
The most important reason why Illumina's shares are unlikely to rise that much in the near term is that nobody is anticipating an uptick in sales of the gene sequencers that Illumina makes -- or the consumable reagents that those sequencers need in perpetuity if they're to be usable by customers.
Analysts suggest, on average, that the company could bring in $4.7 billion this year and nearly $5.4 billion next year. But for 2022, Illumina's revenue was approximately $4.6 billion, so its pace of growth is probably not going to be very impressive. Management expects that core revenue will remain flat for the year, even as it says that the launch of its new NovaSeq X device is occurring at an "unprecedented magnitude and pace."
To make matters worse, its sales of consumables, which totaled $739 million in the second quarter, actually dropped by 1% year over year. That probably doesn't portend a larger dip on the way in consumables revenue, but it does indicate that existing customers are not using their installed sequencing devices more and more.
At the same time, management points to a lengthening sales cycle for its products while also suggesting that its customer base is reluctant to buy new hardware. When paired with ongoing economic issues in China, which was once slated to be a major growth market for the company, the picture darkens a little bit more once again. And there's not much in the way of new growth prospects that could turn things around, at least for now.
Illumina is planning on launching a new flow cell for its latest gene sequencer, as well as two new sequencing kits that are usable with its existing hardware. But most of its existing customers don't have the NovaSeq X yet, so they won't need the flow cell.
Plus, one of the new sequencing kits is only compatible with another device called the NextSeq, so it probably won't have a broad appeal within its target market. In other words, any new sales will be marginal for the time being, and there isn't anything else on the way for a while.
More downside could well be on the way
There's another major reason Illumina will struggle to hit Wall Street's target. It is likely that it'll lose the growth driven by Grail, its cancer testing business. In the second quarter, revenue from Grail was $22 million, up 83% year over year. But if regulators in the E.U. and U.S. have their way, the company will be forced to divest it, and soon.
The Federal Trade Commission and E.U. regulators have already ruled that it must divest the company due to monopoly concerns. Illumina has appealed their decisions, and it'll hear back in both jurisdictions in late 2023 or early 2024. It was already forced to pay a fine of $476 million to the E.U. in July. And management stated that it only needs to lose one of its court battles for it to proceed with the divestiture.
That means there's a negative catalyst waiting in the wings for this stock, right when its growth is lackluster and its profitability is long gone. It's also looking for a new CEO while onboarding its new CFO and chief technology officer. In short, it looks like the company is a bit rudderless while also being embattled.
And that's yet another reason it probably won't hit Wall Street's mark.
