Now that Thermo Fisher Scientific (TMO 0.28%) has acquired Life Technologies, Illumina (ILMN 1.35%), it remains the largest pure play in life science systems. The company was nearly acquired itself late last year, but turned down a $6.7 billion bid from Roche. Investors are probably cheering that decision now that Illumina is valued at nearly $10 billion. Can it continue to power to new highs? The company's most recent earnings shed light on some important things to consider.
1. Product revenue growing, but...
Illumina has treated shareholders extremely well over the long term, and in the last year. Then again, peers Thermo Fisher and PerkinElmer (PKI 0.92%) have also outrun the index.
Is that torrid climb really sustainable, though? Let's see how sales from these three laboratory product suppliers fared in the second quarter.
|
Market cap |
Life science product sales, 2Q13 |
% of Total revenue |
Product sales as % of market cap | |
|---|---|---|---|---|
|
Illumina |
$10 billion |
$313.5 million |
90.6% |
3.13% |
|
Thermo Fisher |
$33.3 billion |
$2,787 million |
86% |
8.37% |
|
PerkinElmer |
$4.2 billion |
$235.9 million |
55.2% |
5.62% |
Source: SEC filings
This isn't a bulletproof comparison for several reasons. First, consumable products are included in the totals, but the dependence on such sales varies by company. Second, Illumina specializes in genetic analysis tools -- a quickly growing niche -- while the larger Thermo offers a much broader range of products. PerkinElmer has an enviable Human Health segment, but it generates 45% of total sales from its Environmental Health business. So the focuses and strategies of the peers are quite variable, to say the least.
The third reason for the discrepancy in the table above is simple: growth. Illumina grew product revenue 21% year over year. Thermo and PerkinElmer managed growth of just 4% each on the same basis. The acquisition of Life Technologies should help Thermo compete more readily with Illumina, but growth usually comes at a premium.
2. Growth through acquisitions
You couldn't tell by looking at the numbers, but Illumina actually operates in two segments: Life Sciences and (Molecular) Diagnostics. The company's Life Sciences segment includes sales of instruments, consumables, and services related to its gene-sequencing technologies. The segment is by no means done growing -- total sales grew 23% in the second quarter compared to the prior year period -- but there is a massive opportunity for Illumina to leverage its expertise in life sciences and expand into the emerging opportunity in molecular diagnostics. Currently, less than 10% of total sales are derived from the segment, which is why the company lumps it into Life Sciences financials.
Starting from scratch isn't much fun, which is exactly why the company has jumped on several acquisitions in recent quarters. Illumina acquired BlueGnome last September, and Verinata in January. Both purchases will start the growth party for the company's Diagnostics segment: BlueGnome in the screening of genetic abnormalities, and Verinata in prenatal genetic testing.
Verinata should be of acute interest to investors. The firm's prenatal genetic test, verifi, is perhaps the best available today in identifying chromosomal abnormalities. Illumina will now compete with Seqeunom (NASDAQ: SQNM), which began offering the MaterniT21 PLUS prenatal genetic test in October 2011. The test has allowed the company to increase revenue by 91% in the last year, although actual results still fell short of lofty analyst expectations. Things will only get more difficult with verifi -- and several other leading tests -- gaining steam on the market.
Foolish bottom line
Despite all of the progress being made at Illumina, investors will have to consider that the company trades at a sizable premium, with a P/E of nearly 100. Perhaps it deserves to be valued so highly (could you build a better company if I gave you $10 billion?), but you may want to consider that a lot of future growth has already been penciled into shares. Either way, Illumina figures to keep growing for the foreseeable future, and is well-positioned to capitalize on the improving accessibility of genetic sequencing.
