Illumina (ILMN 5.04%) announced its fourth-quarter results on Tuesday evening. And Wall Street wasn't too happy that the company missed the consensus earnings estimate. Shares of the gene-sequencing pioneer slipped more than 4% after the Q4 results were released.
But the fourth quarter is history now. What happens now with Illumina is much more important for investors. Illumina's management team talked about the company's future on the Q4 earnings conference call. Here are five things you can expect from Illumina in 2019.
Image source: Getty Images.
1. Strong sequencing consumables growth
lllumina CFO Sam Samad stated the company expects sequencing consumables sales to grow by more than 20% in 2019. That;s definitely great news for Illumina, considering that sequencing consumables generate more than half of the company's total revenue.
CEO Francis deSouza said this growth will be broad based across Illumina's portfolio. NovaSeq is certainly a big growth driver, with around 600 system placements at the end of 2018. However, the company also expects consumables growth from its NextSeq systems. deSouza noted that increased use of non-invasive prenatal testing (NIPT), especially in Europe, was another key factor behind the strong sequencing consumables growth.
2. Slowing direct-to-consumer market
One area where Illumina isn't quite as optimistic is the direct-to-consumer (DTC) market. Samad stated that the company has "taken a more cautious view" on DTC growth in 2019.
deSouza said the DTC market experienced "really spectacular growth" in 2017, followed by strong growth last year. After this huge boom, Illumina's top consumer genomics customers think things will slow down. However, deSouza said the slowdown should only be temporary. He thinks growth will reaccelerate as customers' interest in health-focused DNA testing ramps up and as international markets expand.
3. Closing the deal for PacBio
Illumina announced in November that it plans to acquire Pacific Biosciences of California (PACB 6.30%), frequently referred to as PacBio, for $1.2 billion. The move paves the way for Illumina to get its foot in the door in the long-read sequencing market.
But the deal isn't done yet. deSouza said Illumina is in the process of responding to its second request for information about the proposed acquisition from the Federal Trade Commission. However, he added that "the process, in general, is going as we expected." deSouza stated that Illumina still expects the PacBio deal to close in mid-2019.
4. Targeting low-throughput customers
deSouza mentioned several ways that Illumina will target low-throughput customers in 2019. The company will launch its S Prime flow cell for NovaSeq in February. It's also lowering the list price of its S1 and S2 flow cells by around 25% and 10%, respectively. All of these initiatives should attract lower-throughput customers to NovaSeq.
Around 30% of NovaSeq orders so far have been from customers who are new to the high-throughput sequencing NovaSeq offers. deSouza said that Illumina expects that this trend will continue into the future, with the S Prime launch and lower prices for the S1 and S2 flow cells making NovaSeq even more appealing to lower-throughput customers.
5. Better second half of the year
Don't expect Illumina to hit its stride in Q1 and Q2. However, the second half of 2019 should be considerably stronger than the first half. Samad stated that Illumina thinks that revenue in 2019 will be "more back-end loaded than it was in 2018."
deSouza listed several reasons the second half of the year will be better than the first half. The U.S. government's fiscal year ends in Q3. That tends to drive higher systems orders and consumables sales as labs funded by the federal government spend what's left in their budget. Customers that don't rely on federal funding also tend to place more system orders and increase consumables spending toward the end of the calendar year. In addition, there are several population genomics efforts that will really crank up in the second half of 2019.
Check out the latest Illumina earnings call transcript.
Putting it all together
All of these factors should enable Illumina to increase its revenue in 2019 by 13% to 14% and its adjusted earnings per share (EPS) by close to 15%, based on the company's guidance. This translates to slower overall growth for Illumina this year than it achieved in 2018 or 2017.
However, reading between the lines points to Illumina's growth accelerating after 2019. More NovaSeq systems sales will drive consumables revenue even higher. Momentum in the consumer genomics market should pick up again. PacBio will begin contributing to Illumina's top and bottom lines. And population genomics initiatives will boost Illumina's growth even further.
On top of all this, the oncology market should heat up for Illumina. The NIPT market could also benefit tremendously if the American College of Obstetricians and Gynecologists puts more favorable guidelines in place for average-risk NIPT testing. Illumina's launch of its VeriSeq NIPT Version 2 system this year is another potential catalyst.
Investors would probably be wise to view 2019, especially the first half, as a kind of breather for Illumina. But after that breather will come another fun race for this top healthcare stock.
