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IlIllumina A Bright Spot In Its Industry
Sometimes a theme can be completely valid, and yet most investors make no money from it. Investing in bleeding edge life sciences research is a good case in point. There is no question that researchers are gaining insights every day that have already led to changes in how the medical community approaches disease and how healthcare companies approach research into new drugs.
What is more questionable is whether individual investors have profited from it all. If you invested in Affymetrix (Nasdaq:AFFX), Caliper (Nasdaq:CALP) or Helicos (Nasdaq:HLCS), you might have a very different perspective on the industry. But, if you have invested in Illumina (Nasdaq:ILMN), you have done quite well over the last five years. And looking at the second quarter, it looks like those who have stuck by Illumina thus far still have a good reason to hang on.
IN PICTURES: 5 "New" Rules For Safe Investing
The Quarter That Was
Government stimulus and new product introductions can be a powerful one-two punch. Illumina saw revenue climb over 30% this quarter, with balanced growth across both consumables and instruments. New products like HiSeq and HiScan did well, and although the microarray business is not really shooting out the lights, certain segments (like bovine chips) are doing pretty well.
Below the top line, the company's performance was not quite as impressive. True, the company did hold the line on gross margin and saw a small uptick in operating margin, but there was not a powerful amount of leverage here in the second quarter.
The Look Ahead
Illumina management certainly deserves credit for not standing pat and playing the same hand over and over. The company is forming the Illumina Genome Network to offer low-cost whole human genome sequencing to potential customers who may not have the desire (or the budget) for their own equipment. Elsewhere, the company added low-cost/high-performance quantitative PCR technology with the acquisition of Helixis, and it continues to try to develop the BeadXpress platform for the molecular diagnostics market.
Of course, the biggest risk is whether Illumina can stay on the leading edge of its markets and continue to find the demand for its exceptionally expensive equipment and equally exceptionally profitable consumables. After all, there was a time when Affymetrix was one of the leaders in life sciences equipment and the company has fallen far from those heady days. (Find an investment that will give your portfolio a shot in the arm, see A Checklist For Successful Medical Technology Investment.)
There are some risks to Illumina from next-gen products from smaller private companies like Oxford Nanopore, Pacific Biosciences, and maybe Ion Torrent, as well as ongoing competition from chief rival Life Technologies (Nasdaq:LIFE) and perhaps a resurgence from Roche Holdings (Nasdaq:RHHBY) or new competition from an unexpected source like General Electric (NYSE:GE) or IBM (NYSE:IBM).
Strange as it may sound, though, new competition in its core markets is not my No.1 worry about Illumina. My bigger concern is that Illumina could get distracted by some of its efforts to compete in ancillary markets - does this company really want to compete with the likes of Luminex (Nasdaq:LMNX), Cepheid (Nasdaq:CPHD), Abbot Labs (NYSE:ABT), or Becton Dickinson (NYSE:BDX) in the molecular diagnostics markets? Maybe Illumina will just focus on niches where its technology can rise above the rest, but there is at least the risk that the effort fritters away time and management attention.
The Bottom Line
When the worst fear you have about a company is that it might try too hard to get into new markets, you are almost always talking about a company in good shape. While there is some risk to Illumina from the variability in government spending (a lot of Illumina's equipment is ultimately bought by the government, through various research and equipment grants), history suggests researchers ultimately find the money for the gear they really need.
I am not going to suggest paying up for Illumina's stock at these levels. I like the technology and the company, but paying any price for growth is just not my style. Momentum investors may be attracted to this investment, but I would wait for a better price.
What is more questionable is whether individual investors have profited from it all. If you invested in Affymetrix (Nasdaq:AFFX), Caliper (Nasdaq:CALP) or Helicos (Nasdaq:HLCS), you might have a very different perspective on the industry. But, if you have invested in Illumina (Nasdaq:ILMN), you have done quite well over the last five years. And looking at the second quarter, it looks like those who have stuck by Illumina thus far still have a good reason to hang on.
IN PICTURES: 5 "New" Rules For Safe Investing
The Quarter That Was
Government stimulus and new product introductions can be a powerful one-two punch. Illumina saw revenue climb over 30% this quarter, with balanced growth across both consumables and instruments. New products like HiSeq and HiScan did well, and although the microarray business is not really shooting out the lights, certain segments (like bovine chips) are doing pretty well.
Below the top line, the company's performance was not quite as impressive. True, the company did hold the line on gross margin and saw a small uptick in operating margin, but there was not a powerful amount of leverage here in the second quarter.
Illumina management certainly deserves credit for not standing pat and playing the same hand over and over. The company is forming the Illumina Genome Network to offer low-cost whole human genome sequencing to potential customers who may not have the desire (or the budget) for their own equipment. Elsewhere, the company added low-cost/high-performance quantitative PCR technology with the acquisition of Helixis, and it continues to try to develop the BeadXpress platform for the molecular diagnostics market.
Of course, the biggest risk is whether Illumina can stay on the leading edge of its markets and continue to find the demand for its exceptionally expensive equipment and equally exceptionally profitable consumables. After all, there was a time when Affymetrix was one of the leaders in life sciences equipment and the company has fallen far from those heady days. (Find an investment that will give your portfolio a shot in the arm, see A Checklist For Successful Medical Technology Investment.)
There are some risks to Illumina from next-gen products from smaller private companies like Oxford Nanopore, Pacific Biosciences, and maybe Ion Torrent, as well as ongoing competition from chief rival Life Technologies (Nasdaq:LIFE) and perhaps a resurgence from Roche Holdings (Nasdaq:RHHBY) or new competition from an unexpected source like General Electric (NYSE:GE) or IBM (NYSE:IBM).
Strange as it may sound, though, new competition in its core markets is not my No.1 worry about Illumina. My bigger concern is that Illumina could get distracted by some of its efforts to compete in ancillary markets - does this company really want to compete with the likes of Luminex (Nasdaq:LMNX), Cepheid (Nasdaq:CPHD), Abbot Labs (NYSE:ABT), or Becton Dickinson (NYSE:BDX) in the molecular diagnostics markets? Maybe Illumina will just focus on niches where its technology can rise above the rest, but there is at least the risk that the effort fritters away time and management attention.
The Bottom Line
When the worst fear you have about a company is that it might try too hard to get into new markets, you are almost always talking about a company in good shape. While there is some risk to Illumina from the variability in government spending (a lot of Illumina's equipment is ultimately bought by the government, through various research and equipment grants), history suggests researchers ultimately find the money for the gear they really need.
I am not going to suggest paying up for Illumina's stock at these levels. I like the technology and the company, but paying any price for growth is just not my style. Momentum investors may be attracted to this investment, but I would wait for a better price.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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