With shares of Illumina (ILMN -4.89%) down 37% over the last 12 months and underperforming the market over the last five years, shareholders have had a rough time. As of April 3, regulators in the U.S. were rebuffing its acquisition of Grail, a cancer-testing company that it originally founded and spun off. So growth may be hard to come by in the near future, and Illumina may need to pay fines.
Regardless, the company is still the biggest game in town when it comes to gene-sequencer hardware for use in clinics, genealogy centers, and laboratories. While some competitors make devices that do the same thing as Illumina's products, there's certainly no rising star anywhere in sight that could take its place.
So, is the latest bump in the road an isolated incident, or is it symptomatic of a wider decline that will continue to wreak havoc on its stock?
The status quo isn't good
Appreciating what's going on with Illumina requires a brief recap of how its biggest growth initiative over the last three years ended up foundering and creating an avoidable and regrettable mess for this leading gene-sequencing stock.
Seeking to differentiate its business, in late 2021 it acquired a company named Grail that makes liquid biopsy cancer tests. Illumina moved forward with the purchase without waiting to hear back from antitrust regulators in the United States and European Union regarding whether the acquisition was kosher in their books. Ultimately, it was not.
Regulators in the U.S. had already attempted to block the deal in early 2021. And by mid-2022, regulators in the E.U. did the same. By early 2023, the company was facing the high probability of fines from E.U. regulators that it expected to be as large as $453 million. By early April, regulators from both the U.S. and the E.U. were in agreement that Illumina would need to unwind its acquisition. So much for its plans for a growth-driven acquisition.
Now, Illumina faces a few new challenges. The first is spinning off Grail for a second time. Given that Grail's revenue is anticipated by management to expand at a minimum compound annual growth rate (CAGR) of 60% over the next five years, the company's top line will need a new driver. While it does plan to see sales of its new sequencing device ramp up throughout 2023, that might not be enough to move the needle. In the fourth quarter, its non-Grail revenue fell by 10% year over year, reaching a bit over $1 billion, which was caused by disturbingly sharp declines of 13% in its consumables segment and 24% in its sequencing-instruments segment.
In other words, Illumina's engine of recurring revenue is sputtering as customers are buying fewer new devices, and they're also using their installed devices less, thereby causing them to buy fewer consumables like reagents and sample-loading cassettes. And somehow, management's forecast for 2023 calls for top-line growth of between 6% and 8%, which looks increasingly out of reach. Shareholders are likely to be in for a bad time.
It isn't about to go out of business
As weak as Illumina's core segment looks, and as bad as the consequences of its ill-conceived attempt to acquire Grail without regulatory approval are likely to be, the company is far from total desolation.
Management estimates that the market for its sequencers in research applications is around $23 billion annually. In 2022, its sequencers and consumables brought in $4.5 billion in revenue, more than $3 billion of which was from consumables. Its global fleet of installed sequencer devices numbers more than 23,000, with more than 3,200 installed last year alone.
All of those freshly installed sequencers will need plenty of consumables for customers to use them, as will the base of existing hardware. Even if Illumina were to stop investing in research and development (R&D) and developing new products, it could still collect plenty of money every quarter because customers aren't about to stop using the units they already paid for. And to top it off, it still has a near monopoly on making next-generation sequencers (NGS) despite the name being a bit of a misnomer since they've been on the market for roughly a decade now.
So, rumors of Illumina's demise are quite premature. But it's probably a good idea to avoid buying the stock until there's a clear plan to stoke new growth.
