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Illumina's Next Big Move: Distributed Diagnostics

By Maxx Chatsko - Nov 1, 2019 at 7:00AM

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It's an inevitable step in the evolution of healthcare -- and one that could help Illumina grow into its premium valuation.

In recent years, investors have loudly cheered big announcements from DNA sequencing leader Illumina (ILMN -3.06%). From the introduction of refrigerator-sized sequencing machines capable of processing thousands of human genomes per year to reaching the symbolic benchmark represented by the $1,000 human genome, there's been no shortage of headline-grabbing updates. 

But the latest trajectory-altering move doesn't seem to be getting nearly the same attention. Illumina has been inking partnerships across and beyond the genomics industry to provide customers and competitors access to its global base of installed machines. Whether Illumina co-develops novel in vitro diagnostic (IVD) test kits or simply allows established tests to use its instruments, the goal is the same: to improve patient outcomes with distributed diagnostics.

Here's why the move deserves more attention from investors.

A pipette and a 96-well plate.

Image source: Getty Images.

Leveraging a global platform

Illumina is best known for developing and selling DNA sequencing instruments. Of course, selling machines only gets one foot in the door. The business model depends on generating recurring revenue by selling consumables -- the chemical reagents, test kits, and other items needed to run each machine. Case in point: In the first nine months of 2019, the company reported $1.73 billion in consumables revenue and only $390 million in instrument revenue.

The type and amount of consumables revenue that can be generated varies by machine. There are high-throughput systems such as the NovaSeq (the aforementioned refrigerator-sized machines), low-throughput benchtop systems such as the MiSeq, and mid-throughput systems in the NextSeq family. The latter are perhaps the most important for distributed diagnostics.

NextSeq machines offer customers a sweet spot of size, processing power, throughput (production rate), and price. That allows them to be increasingly used in regional and local hospitals. By contrast, the massive and expensive NovaSeq machines are typically only used in dedicated genomics centers. At the end of 2018, Illumina counted roughly 3,000 NextSeq systems installed around the globe.

That makes NextSeq perfect for distributed diagnostics. Instead of sending samples and IVD test kits back to central processing centers, any lab with an instrument can process approved tests and generate reproducible results. That can shorten the wait for results, improve quality, increase patient access to high-quality genomics tests, and potentially increase the value of each sequencing machine sold by the company. It could turn out to be a great growth opportunity.

A doctor and patient talking.

Image source: Getty Images.

These partnerships may only be the beginning

While Illumina has developed and sold IVD test kits of its own, the recent push into distributed diagnostics suggests the company is also willing to offer up its installed base of machines as a platform for other high-quality genomics tests. Why share the wealth instead of capturing all of the value for itself? Well, it makes sense given the changing dynamics of the field. 

Illumina's customers now increasingly include other omics companies, which develop diagnostic test kits for sequencing DNA, RNA, proteins, and even the adaptive immune system. But it doesn't necessarily make sense for all of these companies to be the ones collecting and processing their patient-focused tests. To do that, they'd need to purchase an army of Illumina machines, collect patient samples, and then report results back to doctors. 

It would make much more sense for all stakeholders involved -- clinicians, patients, omics companies, and Illumina -- if IVD test kits were processed closer to the point of care. That requires a little more cooperation, but more value is created in the process. That explains why the king of sequencing has recently announced distributed diagnostics partnerships with Qiagen (QGEN -0.34%) and Adaptive Biotechnologies (ADPT -4.19%)

Qiagen and Illumina inked a 15-year deal to develop IVD test kits for the MiSeq and NextSeq machines, although there's an option to extend the partnership into future Illumina instruments. The duo will initially focus on distributed diagnostics in oncology, including expanding the use of Illumina's TruSight companion diagnostic suite, which predicts if cancer patients will respond to specific therapies. They've also teased a willingness to explore gene panels in everything from cardiology to infectious diseases. 

Meanwhile, Adaptive Biotechnologies announced a partnership with Illumina to develop IVD test kits for NextSeq machines. The collaboration will initially focus on the newcomer's clonoSeq (a regulator-approved clinical test for cancers affecting white blood cells) and immunoSeq (aimed at researchers) products, but could expand to future tests as well. It's a good example of Illumina seeing the bigger picture to increase the utilization of its DNA sequencing machines, despite linking up with what some investors might consider an eventual competitor.

Illumina CEO Francis deSouza said on the third-quarter 2019 earnings conference call:

In combination with our TruSight Oncology program, we see a clear opportunity to accelerate clinical adoption of [next generation-sequencing]-based IVD tests to select partners, including Qiagen and Adaptive. Through these partnerships, we expect to see multiplier effects in our patient reach and access efforts, and you can expect Illumina to further collaborate with others to leverage our technology for clinical testing, ultimately improving patient outcomes.

In other words, the healthier the overall genomics and omics industries, the better for Illumina and patients -- even if the sequencing leader isn't the one supplying all of the tests. But if the company provides select partners with access to its platform, then that increases the likelihood regional or local hospitals will purchase one of its machines, which could also be used to process any of Illumina's wholly owned tests. It's a clear win-win strategy for everyone involved.

Simply put, Illumina's move into distributed diagnostics deserves serious consideration from investors, even if it's not quite as sexy as announcing a $1,000 human genome. 

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Stocks Mentioned

Illumina, Inc. Stock Quote
Illumina, Inc.
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QIAGEN N.V. Stock Quote
$46.83 (-0.34%) $0.16
Adaptive Biotechnologies Corporation Stock Quote
Adaptive Biotechnologies Corporation
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