In 2016, Cathie Wood and ARK investment management described Illumina (ILMN 0.79%) as "the cornerstone of our Genomic Revolution theme, and one of our highest conviction stocks." Illumina became one of the largest holdings across several ARK ETFs, including the ARK Innovation ETF (ARKK +0.25%) and ARK Genomic Revolution ETF (ARKG 0.93%).
However, in 2020, ARK had a large change in sentiment and began selling Illumina. As of its July 2020 SEC filings, ARK held 812,714 shares valued at roughly $311 million. By the January 2021 filings, ARK had sold all its Illumina holdings. What was behind ARK's loss of conviction in Illumina?
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Don't break Wright's Law
One of the underlying themes across all ARK investments is Wright's Law and its effect on disruptive innovation. Wright's Law states that for every cumulative doubling of units produced, costs will fall by a constant percentage. As costs decline, affordability increases to the point where demand grows exponentially.
In the case of genomics technology, doubling the number of genes sequenced has historically led to 40% annual declines in cost. In 2000, the cost to sequence a genome was roughly $100 million. By 2015, the cost had dropped to $1,000 per genome. Since then the cost reductions seem to have stalled out. That's a big problem for the ARK investment thesis -- no cost reduction, no exponential growth, no genomic revolution.
Some industry observers blamed the slowing cost reductions on Illumina's inability to introduce the next generation of sequencing technology. This view was reflected in Illumina's financial results, which hit a speed bump in 2019 and continued to struggle through the first half of 2020.
Competition is heating up
To make matters worse for Illumina, other competitors using different sequencing approaches began to catch up. Just last week, Pacific Biosciences (PACB 1.46%) announced it had used its long read sequencing (LRS) technology to sequence the final 8% of the human genome that remained untouched after the initial sequencing effort almost 20 years ago.
This long-awaited technology advancement in LRS could set off a new round of scientific discovery and leapfrog Illumina -- particularly if Illumina's cost curve doesn't resume its rapid descent. This potential negative development was not lost on Illumina, as it tried to buy Pacific Biosciences in 2018 but was rebuffed by regulators who feared the combined entity would stifle competition.
Striking back
Illumina seems to be shifting gears in the face of mounting competition. To address the price point concerns, Illumina invested in new cost-lowering innovations and is shipping a new line of sequencers targeted at $600 per genome with a roadmap to achieve $100 per genome. The roadmap also calls for increased investment in artificial intelligence (AI) and support for leading edge "multi-omics," which use advanced sequencing to create a more comprehensive understanding of the biology underlying human health and diseases.
The revitalized approach seems to be paying off. In Illumina's Q1 conference call, CEO Francis deSouza reported orders reached an all-time high, with the company also making progress in penetrating new markets and receiving reimbursement for genomic treatments. For fiscal 2021, Illumina expects year-over-year revenue growth in the range of 25% to 28%, with GAAP earnings per diluted share of $4.72 to $4.97 and non-GAAP earnings per diluted share of $5.80 to $6.05.
Securing its leadership position
The renewed focus on achieving breakthrough price points and getting back on track with Wright's Law is a promising development. To ensure this talk translates into action, investors should monitor Illumina's progress on several fronts:
- Meeting and exceeding price targets at less than $1,000 per genome.
- Growing revenue 25% to 30% per year from the installation and upgrade of sequencing machines.
- Extending global leadership with new multi-omic advancements and relationships.
By taking a contrarian position to Cathie Wood and betting on Illumina's renewed focus, your portfolio could shine for years to come.
