The first human genome was sequenced in 2003 after 13 years of work by teams of scientists all over the world contributing to the Human Genome Project. It cost over US$13 billion.

Today, a human genome can be sequenced in a few hours for a thousand dollars. Sometime in the next decade it will take an hour and cost US$100.00.

costpergenome

By unlocking the human genome and its DNA, scientists and medical researchers have made significant advances in medicine and biotechnology. Over the past decade, DNA screening tests have been developed for early identification of risk factors for colon and breast cancers. Researchers now have a clear idea of the role played by genes in many other cancers, cystic fibrosis, type 2 diabetes and even autism. Better treatments and, in some cases, outright cures have resulted.

However, in spite of the impressive results to date, genomics is still in its infancy and the real payoff, both humanitarian and economic, is in the future – hence the term “Next-Generation Genomics”. Not only will there be revolutionary breakthroughs in a number of serious diseases but also in the treatment of chronic diseases, 70% of which are totally preventable!

According to the McKinsey Global Institute in its influential 2013 study “Disruptive Technologies: Advances that will transform life, business and the global economy” the economic impact of next-generation genomics is estimated to be in the range of 700 billion to 1.6 trillion USD per annum by 2025: the majority of which would come from “extending lives through faster disease detection, more precise diagnosis, new drugs, and more tailored disease treatments”.

Next-generation genomics involves improved sequencing techniques, big data analytics and synthetic biology – the ability to modify organisms. One of the main drivers in next-generation genomics is the rapidly declining cost of sequencing genes and the huge amount of data that is made available for researchers.

High end computing power speeds up the process of analysing the data and finding patterns within, enabling researchers to understand how genes mutate and cause disease. The old research paradigm of lengthy hypothesis-driven trial and error testing has been thrown out the window

There are a number of public and private companies that are successfully operating in the genomics space, but first and foremost is San Diego, California based Illumina.

Illumina is a leading developer, manufacturer, and marketer of life science tools and integrated systems for the analysis of genetic variation and function. Using proprietary technologies, the company provides equipment for sequencing and array based solutions for genotyping, copy number variation analysis, methylation studies, and gene expression profiling of DNA and RNA.

In addition to selling instruments and consumables for high-throughput genetic analysis, the company maintains a service business that is comprised largely of whole human genome sequencing and non-invasive prenatal testing via the company’s 2012 acquisition of Verinata.

Illumina’s customer base is large and diverse. It includes leading genomic research centres, academic institutions, government laboratories, hospitals, and reference laboratories as well as pharmaceutical, biotechnology, agrigenomics, commercial molecular diagnostic, and consumer genomics companies. As machine prices come down, hospitals, doctor’s surgeries and even pharmacies will eventually participate.

Illumina absolutely dominates the gene sequencing space with a 70% market share and accounts for roughly 90% of DNA data produced. Its newest product, the HiSeqX Ten, is the most powerful sequencer ever created AND it can sequence genetic code for US$1000. It sells for 10 million USD. One of the first purchasers was Australia’s Garvan Institute of Medical Research. Management has flagged 97 installs of HiSeqX in 2016.

The addressable market for genetic sequencing and future growth opportunities is impressive. Illumina believes it is in excess of US$20 billion. Illumina sells the sequencing machines, necessary consumables, as well as the software to analyse the data.

The investment case for Illumina revolves around the size and structure of the total addressable market opportunity (see chart above) and the company’s demonstrated ability to capture and maintain significant share in the rapidly expanding genomics market.

Catalysts and drivers for Illumina over the next 12-18 months include:

  1. The establishment of new clinical standards toward NGS (next generation sequencing) billing and coding which will increase usage significantly in the largest addressable market of all for Illumina-Oncology. This market is growing at in excess of 30% Y/Y.
  2. Continued expansion of the NIPT (non-invasive prenatal testing) market. Non-invasive prenatal testing will be one of the primary drivers of growth for the company, with usage in the average-risk setting ramping into 2016 as insurers adopt more accommodative policies as per Anthem’s (a major health insurer) recent decision to deem NIPT medically necessary for most pregnancies. NIPT revenues are expected to grow 25% over the medium term.
  3. Growing interest in broad population testing. Illumina is well placed with its NextBio clinical and research platforms that allow for the gathering and interpretation of large scale genomic population data.

Longer term, Illumina will be a direct beneficiary of the proliferation of so called “personalized medicine” whereby course of treatment, medical decisions, pharmaceuticals etc are specifically tailored to the individual patient based on his or her individual genetic makeup. 

Illumina sees the consumer market as an opportunity so much so that in mid-August 2015 they formed a totally new company called Helix in conjunction with two major venture capital providers. The consortium will provide financing commitments in excess of $100 million.

The Mayo Clinic and LabCorp (a leading Life Sciences company) both have signed on to help develop applications and provide analytical infrastructure to Helix. Helix will aggregate massive amounts of genomic information on a large number of individuals, which could over time give consumers exclusive access and eventually be linked to their electronic health records. Helix should enable Illumina to meet one of its main goals by providing affordable sequencing and database services for consumers – a nascent but growing market.

A few months later, the company announced that it was spinning out a company that wants to develop a blood test that screens for cancer. The spin-off company, called Grail, also got backing from a group of Silicon Valley investors including Amazon’s Jeff Bezos and Bill Gates.

Grail’s mission is to enable the early detection of cancer in asymptomatic individuals through a blood screen by leveraging the power of Illumina’s “ultra-deep” sequencing technology. Illumina has a market capitalization of US$20.9 billion and has grown earnings at a 28% CAGR over the past 5 years. Analysts now forecast 18%+ revenue growth CAGR to 2019. As you would expect, it sports a nosebleed inducing PE ratio of 35 X 2017 EPS.

A couple of weaker than expected earnings reports has thrown up a buying opportunity for Illumina, as it is now some 40% off its all-time high of US$240 which it reached on July 2015. Analysts see a reacceleration of sales growth into 2017 and 2018 as Illumina continues to gain traction in clinical oncology and reproductive health.

Risks

Downside risks include:

  1. Greater than expected reductions in academic research funding in the life sciences/genomics area.
  2. Competition from potential disruptive sequencing technologies.
  3. Execution risk tied to the suite of new product introductions.
  4. Negative regulatory/reimbursement policies impacting the market opportunity for NextSeq 500 or MiSeq in clinical applications.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.