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| RIGHT Analysis |
Date |
5/13/2022 |
|
Current Price: $219 |
| Wisdom Global: ILMN: 1QCY22 result review |
| USD Mn |
1QCY22 |
YoY |
QoQ |
Remarks |
| Revenue |
1,223 |
11.9% |
1.7% |
 continued sample growth in oncology therapy selection; emerging applications such as single cell and proteomics; and pathogen surveillance initiatives. |
| Gross profit |
815 |
6.7% |
-0.9% |
higher freight costs |
| EBIT |
184 |
-4.7% |
300.0% |
acquisition of negative EBIT Grail |
| Net profit |
116 |
-21.3% |
44.1% |
higher taxes |
| GM |
66.6% |
(330) bps |
(310) bps |
Decreased yr/yr due primarily to increased freight costs attributable to broader global supply chain pressures |
| EBIT margin |
15.0% |
(270) bps |
(1120) bps |
primarily due to headcount growth and R&D investments growth as well as Grail acquisition |
| NPM |
9.5% |
(390) bps |
(280) bps |
additional costs from grail acquisition without commensurate revenues & higher taxes |
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| Major Segments Rev. (USD Mn) |
1QCY22 |
YoY |
% of Total |
Remarks |
| Consumables |
859 |
11.0% |
79.8% |
Yr/Yr increase driven by the growing NovaSeq installed base across clinical and research markets. Consumables had the UK Biobank, in Q1 of ’21 effect and China shutdown in march impacted the YoY growth; adjusting for those two items consumables growth would have been in high teens |
| Instruments |
218 |
21.8% |
20.2% |
driven by NovaSeq shipments resulting from accelerating demand in oncology testing, which accounted for almost 40% of the NovaSeq shipments |
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| Outlook |
| – Revenues: Expect 15% consolidated revenue growth in CY22 driven by 20% consumables growth mostly backloaded as China lock down restrictions expected to ease in 2H22. Sequencing instrument order backlog is almost 2x of what it was one year back and hence confidence level in revenue growth estimates is quite high. There’s additional competition in the market from two new players in CY22, however since the market is growing at such a rapid pace, it is only natural that the industry attacts more players. Moreover, there’s room in the industry for more than one player as of now and ILMN’s instruments are at par if not better than competition and ditto on costs. |
| – EBIT: We expect ILMN to grow adjusted EBIT at CAGR of 45% between CY21-23. EBIT growth is higher as it doesn’t account for share dilution from acquisition of GRAIL in CY21. |
| – EPS: ILMN’s financials have hit rock bottom. As we start looking forward to 2023 later this year, ILMN has two major factors supporting its earnings a) growth from Core ILMN (excluding GRAIL) b) lower operating losses at GRAIL due to higher revenues from Galleri cancer (50 types of cancers) early detection test commercial launch in US and GRAIL dilution gets in the base comparison from Q3CY22 since GRAIL was acquired in Q3CY21. We expect ILMN to grow Adjusted EPS at CAGR of 28% from CY21-23. Excluding GRAIL ILMN would be at EPS of $8 for CY22. |
| – TAM: a) B2B: ILMN is in the process of developing next generation of chemistry (Chemistry X) for genomic sequencing which will drastically reduce the price of each test. Last time they did such a chemistry update, it was in 2007 and the prices went from $150,000 to $600 today. We expect a minimum of 30% reduction in price of sequencing with the launch of chemistry X. As testing becomes cheaper, more insurance plans are likely to cover these tests whereby increasing addressable TAM significantly. Company is also in the process of developing a long read sequencing product (Infinity SLR), first of its kind for the company. This will open a new segment (long read sequencing) of genomic sequencing for ILMN and expected to launch in 2H2022. Global long read sequencing market is expected to clock a CAGR of 23.7% in the forecast period of 2020 to 2027. The DNA sequencing market was valued at approximately USD 10,410 million in 2021, and it is expected to reach USD 23,886 million by 2027, registering a CAGR of 18.61% during the forecast period (2022-2027). Currently, the major driver of commercial genomic testing growth is Oncology testing and we expect that to remain so for the new few years.                                                                                                                                                                                                                                                                                                                                   b) B2C: ILMN acquired GRAIL in Q3CY21 when GRAIL had a commercial product but close to zero revenues. Grail’s Galleri test is now available in the US which can detect (early detection) 50 types of cancers. In the last year (CY21), Galleri went from zero doctors to 2,400 doctors (as of Q1CY22) that are prescribing this test to patients. We expect $80 mm revenues from Grail in CY22, however, profitability from this business may be a few years away as it continues to hire and consequently spend on R&D at a fast pace to introduce more genomic testing products. |
| – GRAIL Acquisition: ILMN is a case of self inflicted wound in the short term. While the acquisition of GRAIL is a good long term strategic move, GRAIL’s operating losses wipeout almost all the EBIT of ILMN leaving the consolidated EBIT of ILMN in negative territory. Financials of consolidated ILMN (including GRAIL) saw this effect from Q3 of 2021 post closing of GRAIL acquistion and will be in the base from Q3 of 2022. So, there could be a this negative effect in the consolidated company financials through Q3 2022 (results in Nov 2022). Additionally, ILMN issued equity to pay for GRAIL’s acquisition which further diluted the per share earnings. |
| – Consumables pull through of more than $1.3 million per instrument in FY21 was the highest ever average, even with over double the placements compared to last year. Raised pull through guidance to a range of $1.2 million to $1.3 million for FY22. FY21 consumable shipments grew 42% Yr/Yr, driven in particular by oncology testing, where many customers are building out comprehensive genomic profiling, or CGP, and expanding into liquid biopsy and monitoring . |
| Valuation |
| – At 42x FY23 PE multiple, ILMN does look expensive at first compared to the current market multiples with S&P trading at 16x CY23 PE multiple. However, it’s the best franchise in the genomics space with a history of consistent growth and positive earnings. The current decline in stock price due to the GRAIL acquisition related earnings decline and consequently elevated multiples could be an opportunity to acquire a top notch franchise at a fair/bargain price. GRAIL will catapult ILMN into the B2C space as its one of the largest DNA based oncology testing franchise in the world. Ex-GRAIL, ILMN would be in the 22x fy23 PE multiple making it one of the highest growth and lowest valuation stock in the genomics space. |
