Company Reports

Illumina announced first-quarter results that were slightly stronger than anticipated, and maintained its guidance for the year. At first glance, we do not plan to change our $228 per share fair value estimate, and shares continue to trade well below what we think the legacy business is worth, excluding Grail, which is $180 per share. Our moat rating on Illumina remains narrow, relating primarily to the intangible assets and switching costs in sequencing. As a reminder, Illumina plans to divest liquid biopsy maker Grail through a third-party or capital market transaction by late 2024, with terms to be settled by midyear.

Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. We believe Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions.

As highlighted in early January, Illumina announced fourth-quarter results that were slightly stronger than anticipated. At first glance, we are not changing our $228 fair value estimate, and shares continue to trade below what we think the legacy business is worth, excluding Grail ($180 per share). Our moat rating on Illumina remains narrow, relating primarily to the intangible assets and switching costs in sequencing. As a reminder, Illumina plans to divest liquid biopsy maker Grail through a third-party or capital market transaction by late 2024, with terms to be settled by midyear.

Illumina announced preliminary results for the fourth quarter of 2023 that looked stronger than anticipated. In early trading, Illumina shares rose in the mid-single digits on a percentage basis, but shares continue to trade well below our $228 fair value estimate. Our moat rating on Illumina remains narrow, relating primarily to the intangible assets and switching costs in its legacy sequencing business. As a reminder, Illumina plans to divest liquid biopsy maker Grail through a third-party or capital market transaction by late 2024, with terms to be settled by midyear.

On Friday, a U.S. court ruled that narrow-moat Illumina's acquisition of the Grail liquid biopsy company was likely anticompetitive, while also ruling that regulators did not adequately consider Illumina's plans to provide its legacy sequencing tools to other liquid biopsy makers at the same price it would provide Grail to alleviate those concerns. Facing a lengthy appeals process to prove the latter, Illumina announced plans on Sunday to divest Grail through a third-party or capital markets transaction, with terms expected to be settled by mid-2024. We already pulled Grail out of our Illumina model in late 2024, and we are not changing our fair value estimate, which is $228 per share including $180 on the legacy sequencing business and $48 on the Grail business. Illumina shares look steeply undervalued, even when just considering the value of the legacy sequencing operations, in our opinion.

Narrow-moat Illumina's third-quarter results exceeded profit expectations, but a challenging macroenvironment in life sciences and instrument transition issues cut into management's 2023 guidance again and led to a much lower initial view for 2024 than we were expecting. With a continued delay of normalized growth patterns for its legacy business and the potential for Illumina to realize a lower Grail valuation than we believe it deserves if forced to divest it in late 2024, we are lowering our fair value estimate on Illumina by 15% to $228 per share from $269 previously. Shares remain steeply discounted to fair value, however.

Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. We believe Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions.

The European Commission has ordered narrow-moat Illumina to divest the Grail liquid biopsy assets. Illumina has yet to respond to the most recent order, but in general, we suspect the firm's new management team will be more open to divesting Grail than the previous team. Our view of Illumina's narrow moat rating likely will not change if it divests Grail because the firm's legacy genomic sequencing business forms the foundation of its moat. Also, our $269 fair value estimate may not change until the spinoff is complete and may depend on how a potential divestiture is structured.

Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. We believe Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions.

Narrow-moat Illumina's second-quarter results exceeded expectations, but a challenging macroenvironment in life sciences, especially in China, has created more uncertainty in its near-term prospects and caused management to reduce its 2023 guidance. While disappointing, we have seen similar views from other life science companies this quarter, and our $269 fair value estimate does not look likely to change materially at first glance, given cash flows since our last valuation update.

On Sunday, narrow-moat Illumina announced that CEO Francis deSouza had resigned a couple of weeks after activist investor Carl Icahn won a seat on Illumina's board (Andrew Teno) and a week after new chairman Stephen MacMillan (Hologic CEO and former Stryker CEO) joined the board, along with Edwards CFO Scott Ullem. While we suspect the market may appreciate this CEO change, we are not changing our $269 fair value estimate and continue to view shares as significantly undervalued.

Life science toolmakers that enable drug production operate attractive businesses for two major reasons that investors often find compelling. First, regulation of the drug manufacturing process creates highly durable switching costs for end users and long potential revenue streams for life science toolmakers. Second, life science firms often benefit from broad exposure to biopharmaceutical growth without taking on much product-specific risk.

A proxy battle between narrow-moat Illumina and activist investor Carl Icahn generated mixed results, ousting the company's chairman, John Thompson, who has close ties to CEO Francis deSouza, but only adding one of Icahn's three nominees (Andrew Teno) to the board. Shares declined over 10% directly following this news, as investors may have been hoping for a more significant change at the embattled genomic sequencing leader. We are not making any fair value estimate changes and view shares as significantly undervalued.

Narrow-moat Illumina's first-quarter results mildly exceeded expectations, and management maintained its 2023 guidance and announced a margin expansion plan in its legacy sequencing business that appears roughly in line with our estimates. Overall, we are maintaining our $269 fair value estimate, and we continue to believe shares are undervalued. Activist investor Carl Icahn's interest in the name may hold management's feet to the fire, too, and provide options for long-term shareholders, if management's plans are not realized.

Activist investor Carl Icahn has revealed an interest in narrow-moat Illumina. While details are currently limited on the actions he might take, we would welcome any actions that lead to Illumina's market value increasing toward our fair value estimate. Even after this announcement lifted the share price in early trading on March 13, we view the stock as moderately undervalued.

After releasing preliminary 2022 results and 2023 guidance in January, narrow-moat Illumina released full quarterly results that represented a weak end to a miserable year. However, management maintained its guidance for 2023, and we retain our $269 fair value estimate. We still view shares as undervalued.

Illumina released its preliminary 2022 results with slightly better-than-anticipated sales but including a higher-than-expected tax rate for both 2022 and 2023. The company will likely disappoint investors again on the bottom line in the near term, despite an expected strong launch of the NovaSeq X Series. Also, Grail pushed back its FDA submission date by about a year and released a growth trajectory for the Galleri pan-cancer test that looks weaker than we had been anticipating. All in, we are reducing our fair value estimate to $269 per share from $307 previously, primarily on the reduced expectations for Grail (current value is $68 per share) and mild changes to our legacy Illumina valuation ($201 per share). The firm's leadership of the genomic sequencing business underpins its narrow moat with intangible assets and switching costs, but the Grail transaction continues to cloud the story. We've reduced our capital allocation rating for Illumina to Standard from Exemplary on these primarily Grail-related disappointments.

Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. We believe Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions.

Narrow-moat genomic sequencing leader Illumina turned in third-quarter financial results that were slightly better than expected. However, given external challenges and its own new product pipeline cannibalizing sales, the firm trimmed its outlook for 2022. At first glance, we are maintaining our fair value estimate, and we think investors with a long-term horizon should view any share weakness as an opportunity.

At its investor day, narrow-moat Illumina highlighted long-term growth aspirations in its legacy Illumina business that look closer to our expectations for the combination of Illumina and Grail, not just the legacy business, during the next five years. Given the uncertainty surrounding new competitive forces in the legacy sequencing business, near-term macroeconomic pressures that could be felt, and the potential unwinding of the Grail acquisition; we think it is prudent to stay put at our $307 fair value estimate, for now. However, we still view shares as cheap, and we think investors should realize that our high uncertainty rating includes upside potential, not just downside risks, relative to our long-term cash flow assumptions that drive our fair value estimate. In fact, if Illumina can meet management's lofty expectations, our fair value estimate may even prove too conservative.