If you've ever had your genome sequenced, there's a very high chance that your DNA has found its way into one of Illumina's (ILMN -1.48%) gene sequencing machines.
Biopharma companies, consumer genomics companies, and even primary care practices also use Illumina's products to perform research, diagnose illnesses, and inform the proper course of treatment. But does its ubiquitous presence in healthcare make its stock a good investment? Let's dive in and investigate.
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Equipment sales will continue to drive future returns
Thanks to a massive base of more than 17,000 analysis machines in operation globally, a majority of Illumina's revenue is highly recurring. When customers use its hardware, they also need to use the compatible sequencing kits or genotyping arrays each time. As a result, sales of these consumables made up 71% of the company's total revenue in 2020, and the proportion is slowly increasing over time relative to instrument sales and service contracts. This also means that every instrument sale implies a significant amount of additional revenue over time. Plus, once customers are comfortable and trained to operate within the Illumina product ecosystem, they're less likely to defect to a lower-cost competitor.
Management expects revenue to grow by as much as 20% in 2021. This growth may be driven by new sequencing hardware sales, which could rise by as much as 33% year over year. If that actually happens, investors can look forward to even more revenue growth over the next few years as customers burn through consumables for their newly acquired machines. In the meantime, Illumina's quarterly earnings will likely bounce back to its pre-pandemic norm.
Is it worth buying before the GRAIL acquisition?
Aside from the upcoming expected revenue growth, investors should be aware of Illumina's latest acquisition. Late last year, the company disclosed that it was purchasing GRAIL, a cancer diagnostics company that it founded in 2016, for $3.5 billion in cash and $4.5 billion in stock. The transaction should close sometime in the second quarter. So investors are likely wondering whether to purchase stock in Illumina before the deal proceeds or whether it'd be better to wait until afterward.
Central to this question is the immediate revenue potential of the acquisition, not to mention the impact on free cash flow. GRAIL is planning to launch a multi-cancer screening test called Galleri in the second half of 2021, meaning that it will now likely launch under Illumina's name after the deal closes. The test can purportedly detect around 50 different cancers at once, with more planned for future versions. It's also the company's first product to hit the market, so there's no history of revenue data for investors to draw upon. However, given the scale and power of Illumina's marketing and distribution capabilities, it seems unlikely that Galleri will be a commercial flop.
March might not be the best time
The lack of concrete estimates for the near-term revenue potential of Illumina after the GRAIL acquisition makes it tough to have faith that the deal will pay off quickly, even if it's probable that it will in the long run. In my opinion, investors shouldn't be in any rush to buy Illumina stock this month.
While I have full confidence in the stock's long-term growth potential, I think the safest time to invest will be in a quarter or two, after the acquisition has concluded and GRAIL's new product launches. At that point, there will be some information about how the market is receiving the purchase, not to mention how much additional revenue Galleri is bringing in at the start of its product lifetime.
