Illumina (NASDAQ:ILMN) may be the undisputed leader of the gene-sequencing market, but company management doesn't take its dominance for granted. In the last 16 months, the company has made three large bets that are intended to sow seeds for growth long into the future. Let's look at where each of these potentially game-changing initiatives stands.
Helix, a genomic "app store"
In August 2015, Illumina announced the formation of Helix, an independent company 50% owned by Illumina, with the purpose of making genetic information more accessible to individual consumers in order to generate more demand for DNA sequencing.
The concept behind Helix is to sequence the entire "exome+" -- the portion of our DNA that's responsible for producing proteins, plus a few other potentially interesting areas -- and store that information in the cloud for future access. Scientists are constantly making new discoveries about our DNA, and the parts of the genome that could be most interesting in the future may be unknown today. Helix calls the concept behind its business model "sequence once, query often." The Helix vision is to take a loss on the initial sequencing of a customer's DNA and then to take a cut of the sales of apps developed by third parties that can access the user's DNA database in the cloud to deliver "a lifetime of insights." Full exome+ sequencing costs about $500, which is too pricey for consumers with a curiosity about their genetics. Consumer adoption only happens at $99 and below, according to Jay Flatley, former Illumina CEO and chairman of Helix. Helix bridges that gap by brokering DNA data to app developers and collecting a percentage of the app's price, in the style of the Apple app store.
Will the concept be a success? Apps are starting to appear on the site, but the company has remained tight-lipped about financial benefits to the business in the future, other than to say not to expect profits in 2017. Last month, the first app launched on the Helix web site, National Geographic's product Geno 2.0, tells the anthropological story of the user's ancestry. In the works is an app from Mt. Sinai Hospital that will inform parents of their risk of passing on certain inheritable disorders to their children, and an app that selects and delivers wines that are tailored to your DNA and taste.
One possible indicator of future success: the team that Illumina and Helix are assembling. The CEO of Helix, Robin Thurston, was the former chief digital officer at Under Armour, where he led the Connected Fitness strategy after founding and building MapMyFitness into one of the world's largest open fitness tracking platforms. This summer, Illumina announced that Apple Senior Vice President of Worldwide Marketing, Philip Schiller, will be joining the board of directors. One of Mr. Schiller's responsibilities: the Apple App Store.
The holy "Grail" of cancer screening
Illumina announced the launch of Grail in January 2016 with an audacious goal: the early detection of cancer through a blood test. There is strong evidence that most, if not all, tumors shed nucleic acids into the bloodstream called circulating tumor DNA, or ctDNA.
Present methods of cancer screening rely either on indirect methods of detecting the presence of cancers, such as measuring the body's antigens in a prostate-specific antigen (PSA) test, or looking for shadows on an x-ray, or require the invasive procedure of obtaining a biopsy. Often the cancer detected using current means of screening has already progressed to stage 3 or stage 4. But the detection and identification of ctDNA from a blood sample opens up the possibility of detecting cancer in its very stages, before it can be detected any other way.
As one might imagine, the potential market for such a cancer screening test is enormous. Management's "base case" is a screening test that could detect stage 2 cancer and would have an addressable market size of $20 billion to $40 billion. If Grail is successful designing a test that detects cancer in stage one, the market could be as large as $100 billion to $200 billion.
What are the prospects for Grail? Well, this story will take longer to play out than Helix will. On Dec. 1, Grail announced the commencement of its first clinical study, the Circulating Cell-Free Genome Atlas (CCGA) study. This initial study will enroll 7,000 cancer patients and 3,000 healthy individuals and will sequence blood samples and tumor biopsies to order to characterize the landscape of ctDNA.
Early results will be available by the end of 2017, but that's just the beginning. Since this project is largely a huge data puzzle, Illumina appropriately tapped former Alphabet executive Jeff Huber as CEO. Mr. Huber formerly ran Google's Geo division, which developed Google Maps and Google Earth. Now he's focused on a map of a different sort: the atlas of DNA in the blood.
In April 2016, Illumina announced the investment of $100 million to create a venture capital fund to invest in emerging companies that are advancing the field of genomics. The Fund is independently managed with a strategic partnership with Illumina, much like the relationship between GV (formerly Google Ventures) and Alphabet. The fund is currently invested in two companies, but before it was split off into a separate fund, Illumina invested in 14 start-ups, two of which were eventually acquired by Illumina.
Others were acquired by Roche, Amgen, and Adaptive Biotechnologies, and one had a successful IPO. The goal in the short run is to make gains on these capital investments, but in the long run to grow applications of genomics and create more demand for Illumina products. The company also has a business accelerator, Illumina Accelerator, which provides assistance and access to capital for start-ups in their early formation stage.
Investors will need to give these bets some time
Illumina has made an initial investment of $100 million in each of these three long bets and must show the company's share of losses from Helix and Grail on its income statement, knocking $0.40 off the projected 2016 GAAP earnings per share of $2.92 to $2.97 -- so these investments are not insignificant. With 70% market share in gene sequencers already, Illumina isn't likely to grow its market share so it is working to grow the entire market in the long run. And indeed it is the long run, as none of these initiatives will pay off in 2017.
Moves like these show that company management is willing to take some short-term pain to lay the groundwork to grow the entire ecosystem and therefore the market for its machines and supplies. But after several quarters of disappointing results, investors are more focused on how well the company is dealing with the immediate competitive threats. Until these concerns are allayed, it's unlikely we'll see much improvement in the stock price.