Illumina Jumps As Gene Sequencing Demand Drives Stronger Outlook

Shares of Illumina (ILMN) are on the rise on Tuesday after the company announced during the JPMorgan Healthcare conference a 2022 revenue outlook that beat analysts' estimates on strong demand for its gene sequencing business. The company also announced new partnerships with four health care companies. Following the news, Barclays analyst Luke Sergott upgraded the stock to Equal Weight as he now expects "strong" fundamentals and new instruments to help drive multiple expansion "back to tradable ranges." 

REVENUE OUTLOOK: Illumina sees fourth-quarter preliminary revenue of approximately $1.19B, compared to the consensus estimate at the time of its outlook of $1.1B. At the JPMorgan Healthcare Conference, Illumina CEO Francis deSouza said "Q4 2021 was another very strong quarter for Illumina, with record preliminary revenue of approximately $1.19 billion. […] We saw record total shipments, including record NovaSeq and record NextSeq 1000 and 2000 shipments. We also saw record consumable shipments across clinical and research and the highest ever quarter across our Americas, Europe and the Middle East, Asia Pacific and Japan regions. Turning to our full-year results, we finished 2021 with record revenue of approximately $4.517 billion, more than $0.5 billion ahead of our expectations at the beginning of the year. 2021 revenue was up 39% versus 2020 and 27% versus 2019, demonstrating the building momentum for sequencing across markets and geographies. We delivered a consolidated non-GAAP operating margin of approximately 23.75%, including a core Illumina operating margin of approximately 27.75%. We saw records across all regions and across our sequencing portfolio, with consumables up over 40% and instruments up more than 75% year-over-year."

Illumina also said it sees full-year 2022 non-GAAP earnings per share of $4.00-$4.20, with consensus at $4.03. According to deSouza: "We expect another strong year in 2022 with consolidated revenue of $5.15 billion to $5.24 billion, representing growth of 14% to 16%. We expect consolidated non-GAAP EPS of $4 to $4.20, which includes GRAIL dilution of $3.75. And we expect non-GAAP operating margin of 15.5% to 16%. For core Illumina, we expect 13% to 15% revenue growth and approximately 28% non-GAAP operating margin. And GRAIL expects strong revenue in the range of $70 million to $90 million as their gallery test gains traction. We'll provide additional detail on results and guidance on our earnings call in February." Full-year 2022 revenue consensus is at $4.89B.

PARTNERSHIPS: Illumina's CEO deSouza also announced new partnerships that "will accelerate the development of precision diagnosis and treatment medicines for patients with advanced cancer," namely with Agendia to develop genome-based panel tests for cancer diagnosis, and with Boehringer Ingelheim to identify which patients are best suited to the company's new medicines, based on the molecular profile of their cancer.

Additionally, Illumina announced a collaboration with Optum. Through the newly created Optum Evidence Engine, which uses Optum's real-world data and healthcare expertise to generate evidence of clinical utility, the companies are conducting studies to identify, validate, and demonstrate the efficacy of genomics-based testing. Optum is a pharmacy benefit manager and health care provider that is a subsidiary of UnitedHealth Group (UNH).

Illumina is also partnering up with Nashville Biosciences, a wholly-owned subsidiary of Vanderbilt University Medical Center, to engage a commercial alliance of pharmaceutical and biotech partners who can utilize the data analysis of 250,000 samples to drive improved therapeutic development. 

'STRONG' FUNDAMENTALS: Barclays analyst Luke Sergott upgraded Illumina to Equal Weight from Underweight with a price target of $400, up from $350, following the company's announcements that he said "dealt with a lot of his Underweight thesis." The analyst now expects "strong" fundamentals and new instruments to help drive multiple expansion "back to tradable ranges."

The analyst noted that the biggest surprise to him was Illumina's management guiding to $70M-$90M for GRAIL's 2022 revenue versus his $18M estimate. He acknowledged that he was "pretty bearish on GRAIL" as his channel checks did not support this adoption. Sergott gives management "the benefit of the doubt and will continue to dig in here" as he thinks 44% PPV is not good enough for broad adoption over the medium-to-long-term.

WHAT'S NOTABLE: Piper Sandler analyst David Westenberg kept a Neutral rating on Pacific Biosciences (PACB) with a $20 price target after the company announced preliminary earnings numbers and a number of new partnerships. The deals and new customers suggest Pacific "is trending in the right direction," Westenberg told investors in a research note. The analyst also reminded investors that Illumina announced on Monday that it will launch an offering that looks like a consumable that allows long-read sequencing on its analyzers. Westenberg thinks PacBio's technology is improving every day and that the company has a loyal customer base. However, it now has a new competitor, and the current valuation gives the stock a balanced risk/reward, contends Westenberg.

PRICE ACTION: In Tuesday afternoon trading, shares of Illumina have gained over 14% to $414.29. On the flip side, Pacific Biosciences' stock has dropped over 10% to $14.84.

Disclosure: None

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