Illumina (tkr: ILMN) is the global leader in DNA sequencing and array-based technologies, serving customers in research, clinical and applied markets. Products are used for applications in an ever-widening number of fields, including life sciences, oncology, reproductive health, and agriculture. The global market for sequencing products and services reached $3.5 billion in 2012, grew to $4.5 billion in 2013 and is projected to reach $11.7 billion in 2018, a compound annual growth rate of 21%. Macquarie and Morningstar forecast that the market this year could actually be nearly twice that size, or about $20 billion.
Illumina is estimated to have 70-80% of the current market and analysts think that 90% of all genomes sequenced so far have been done on Illumina machines. As Illumina’s installed base increases, so does its revenue from consumables and services. Illumina has nearly 800 U.S. patents, 402 owned and 383 pending. Although there are several other companies using different technologies for sequencing, thus far they have had little impact in the in the DNA sequencing market. Current sequencing technology is called “next-gen sequencing.” The biggest medium-term threat to Illumina is “third generation” sequencing technology, which could be lower-cost, easier to use, and faster. Some of the new technologies being studied would also increase “read length” (the number of base pairs that could be sequenced in one run), which would decrease the need for complicated data management and software to line the sequences up after completing the runs. However, Illumina is pursuing its own research into new sequencing methods and will likely dominate the market with its current technology for the next five years.
Our thesis for owning the company is that as the cost per genome declines from $1,000 to $100 eventually, demand will jump, increasing sales of Illumina’s machines and associated consumables. An expanding number of indications for sequencing, most notably in oncology and noninvasive prenatal testing (NIPT), will also drive volume.
Illumina introduced its new high-throughput sequencing instrument, the NovaSeq, in January of 2017. NovaSeq represents a major advance and kicked off an upgrade cycle that will run for three to five years. Sales of NovaSeqs and the associated consumables have exceeded initial projections. Management also noted in the most recent quarter that one-third of NovaSeq purchasers were customers new to Illumina or customers transitioning from much smaller, benchtop units. Many of these new customers reflect growth in the clinical market. In oncology, customers are using Illumina’s machines to sequence tumor DNA, which then allows a much more targeted treatment approach. NIPT has largely eliminated the need for previous, much more invasive prenatal testing.
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