Illumina is a leading provider of Next Gen Sequencing (NGS) instruments and consumables for research and clinical applications. The company is ubiquitously known as the worldwide NGS provider and holds a near-monopoly market share of 85%. The company is capitalizing on its first mover advantage by continually pouring hundreds of millions of dollars into R&D to maintain a competitive lead over any company looking to compete.
Low-priced genetic sequencing is the key to unlocking incredible medical advancements as we work to understand our genetic code. Research opportunities have dramatically increased over the last decade as Illumina has decreased the cost of sequencing a human genome. Clinical applications surrounding prenatal testing, cancer screening and monitoring, and tests to diagnose and treat genetic diseases have begun to sprout up.
After a botched acquisition of Grail which led to a forced spinoff and a wholesale management change, the company sits at the start of a new product launch and a valuation not seen in the last decade. We believe the risk/reward is compelling.
While Illumina’s offering is extremely complex, its business is a relatively simple razor/ razor blade model. The companysells instruments that sequence a human genome for bothresearch and clinical purposes as well as the consumablesneeded for each sequencing session. Instruments make up14% of total revenue while recurring consumables and services make up 86%.
Instruments: The company sells benchtop, mid-throughput, and high-throughput sequencing machines.Each machine is targeted for different use cases depending upon how much sequencing is needed by a customer. The low-volume benchtop machines sell for a slow as $40,000 while the higher end NovaSeq machines sell for nearly $1M.
Consumables: Illumina sells sample prep and reagents used throughout the sequencing process. As more use cases emerge, consumable growth will follow.
Services: The company also sells services related to maintenance of their machines as well as in-house sequencing for customers.
All facets of our healthcare system will be impacted by the coming use cases related to genomics. Understanding our DNA and how our bodies work will allow us to detect, treat, and even cure many diseases and medical issues that plague our healthcare system. Not only will countless lives be saved and elongated with these new treatment approaches, but we will be able to save hundred of billions of dollars per year by finding issues earlier, and creating better treatments.
Our DNA is incredibly complex and we still know very little about it. Part of the reason why is that it has historically been cost prohibitive to sequence a genome to study variations, mutations, and to understand what our genes actually do. The first genome wasn’t sequenced until 2003 at a cost of $1B. By 2008, Illumina was able to get the cost down to $150,000. Today, its less than $600. A new chemistry, Chemistry X, is expected to unlock the $100 genome. As these costs move lower, research funding will continue to pour into the space. The core areas of growth focus on:
<b.Reproductive Health: Noninvasive prenatal testing (NIPT) is a large and growing category of tests that help determine the risk that a fetus will be born with certain genetic abnormalities.
Oncology: As discussed above, cancer is a massive end market. The broad opportunity is comprised of several large markets. Early detection screening is the largest opportunity provide annual liquid biopsies for at-risk patients in an attempt to detect early stage cancers when they are most treatable. Other opportunities include companion diagnostic tests to help clinicians find optimal treatments as well as monitoring to track treatment progress.
Genetic Diseases: Development of diagnostic tests and treatment options for deadly and difficult to diagnose diseases.
First-mover Advantage: Illumina was able to gain traction with a high quality first generation product and has been able to hold onto a near monopoly market share over the past two decades. This has allowed the company to build out a massive installed base of >20,000 instruments with 8,000 customers. These are expensive machines that will not be easily replaced.
Patents & IP: The company has built up a massive trove of patents and internal IP around all aspects of their business. This includes how their machines function as well as the consumable chemistry used during the process.
Proprietary Consumables: Illumina manufactures their own proprietary chemistry that is used to run the sequencing. Their systems are locked into that chemistry. Publications & Industry trust – Illumina is cited in over 400,000 publications and is the industry standard for sequencing. The research and more importantly, the clinical communities have built substantial trust in Illumina’s machines and process
End-user Workflow: Labs that have adopted the technology have built their entire workflow and systems around Illumina machines. A new entrant would not be able to easily “drop in” to these workflows.
Given our continued cautious stance with deploying our capital, we now hold a 2.75% position. While not without risks such as a management team that needs to prove itself, and an increasingly competitive market, we believe the risk/reward at these valuation levels is compelling.
