With shares of the gene sequencing giant Illumina (ILMN 1.02%) collapsing by 53% over the last three years due to a combination of a botched acquisition attempt and weakness in its core business, shareholders are doubtlessly wondering whether the stock's decline is finished, or if it's just getting started.
With the naming of a new chief technology officer (CTO) on August 9 and a new CEO on September 5, at a minimum investors can have confidence that something about the company's strategy is going to change. But it's also easy to envision a failed attempt at a turnaround.
So let's ask whether the worst is over given what we know right now.
Things are looking up
First, let's focus on the positive. The new CEO will take over on September 25, which, in conjunction with the new CTO, will help Illumina break with the management team responsible for its acquisition of Grail, a cancer testing business. For the uninitiated, buying Grail in 2021 was catastrophic as the company neglected to secure approval from antitrust regulators in the E.U. and U.S. beforehand.
Now, it will need to pay massive fines and likely divest Grail too. The good news is that it already accrued enough cash over the last 12 months to pay the E.U. regulators, who fined it $453 million. So unless there are fines from U.S. regulators in the works, and there may be, the drag on its earnings growth could be in the rearview mirror.
Another reason to believe that the worst is over is the announcement in mid-August that Illumina is planning on expanding its presence in India, which will help it to grab a large share of the gene sequencing market there. Though the move is perhaps a bit odd -- in the first quarter management announced $100 million in spending cuts that'd require slashing headcount and its global real estate footprint -- growth is one thing that the company needs to find wherever it can.
Beefing up its positioning in the Indian market today could make for a long-term revenue tailwind, and it also indicates that the company isn't feeling tightly constrained with its resources despite striving for higher efficiency.
The issues with its core segment
To balance out the seedlings of a turnaround, let's turn to the problem that suggests Illumina's troubles are far from over. Simply put, the company's new gene sequencer machine, the NovaSeq X, is not driving top-line growth. While Illumina brought in $1.2 billion in Q2, that sum is nearly flat compared to a year prior. More concerningly, it actually registered a 1% decline in its quarterly revenue from sales of consumables, which totaled $739 million. Management expects more of the same stagnation for the full-year 2023 results.
Consumable sales are the company's lifeblood. Every time a customer uses one of the company's instruments to sequence something, it needs to use consumable reagents like sample prep kits and buffer fluids in the process. That generates recurring revenue for Illumina, and it also means that it's reasonable to take a loss on selling devices so long as customers can be counted on to spend big on consumables.
But short of developing new sequencing assays, analysis software, or sequencers, there isn't much that management can do to get existing customers to use its hardware more than they already do. And spending on research and development (R&D) for new products could take a while to pay off.
If the weakness in consumables continues for the rest of the year and beyond, it will spell big trouble as it may be a sign that the market is saturated. Still, Illumina didn't earn its reputation for being the gene sequencing hardware company by chance, nor did it ever stop investing in R&D during its regulatory troubles. Even if it takes a while, there is a very good chance that it will find a way to rekindle at least some growth on an ongoing basis, though it's unclear exactly how.
Illumina isn't out of the woods yet, and its stock could still fall further as more weakness in its core segment is revealed. Likewise, the final chapter of the Grail saga is not yet written, and it will probably not be a favorable one for shareholders. So it isn't possible to say with confidence that the worst is definitely over right at this moment. But by the middle of 2024, key court dates will have passed, and the new CEO's strategy will be in action -- so even if the worst isn't over now, it will almost certainly be pretty soon.
