Turn back the clock to early 2009, and, Illumina CEO Jay Flatley discusses one of the primary uses for mapping out the human genome in a Sunday Times of London posting, Genetic Mapping of Babies by 2019 Will Transform Preventive Medicine: "Every baby born a decade from now will have its genetic code mapped at birth...A complete DNA read-out for every newborn will be technically feasible and affordable in less than five years, promising a revolution in healthcare...a genome sequence should be available for less than $1,000 in three to four years.".
Well that time is now. 23andMe is a Silicon Valley company backed by Google (GOOG) that offers genomic sequencing for under $1,000. According to a September, 30th, 2011, Motley Fool story, The Real Winners of $1,000 Exomes, they use Illumina gene chips. The article also goes on to say: "The service will compete with Illumina's whole genome sequencing, which starts at $7,500 for medically relevant sequencing.". You can infer from the last quote that Illumina has the superior product, but for how long? Additionally, will the lower priced competition cut into profits and margins?
Granted, we are a long way from all newborns getting their DNA sequenced from not only a cost issue, but a privacy perspective. Think of the 1997 movie Gattaca. I'm a believer that each and every one of us will be getting our DNA sequenced in the not too distant future because the Pharmaceutical industry is probably lobbying for it. Personalized medicine is a byproduct of genomics where you can see if a patient is predisposed to certain diseases. It can save and extend lives, but there is a certain dystopian aspect to it if it isn't regulated properly.
My last article on Illumina was posted on March 1st, 2011, and, I discussed their dynamics as a player in personalized medicine, as well as my conviction that the stock was overpriced. At that date, the stock was selling for $70/share, and, has since come crashing down to $39, a loss of over 40%. It was taken to the woodshed. I'm not clairvoyant. It had a high, P/E Ratio, the market has corrected, Illumina missed an earnings number, and, now there are worries about government stimulus funding to their clients in the academic industrial complex. That spells spontaneous combustion on Wall Street.
The stimulus funding must make management break out in a cold sweat because 80% of Illumina's clients are in academia. However, you wouldn't know it from Dr. Flatley in the April 26th, 2011, Q1 conference call: "In general, we believe our funding environment is stable. We're no longer directly tracking stimulus-related funds as they become more challenging to parse out but believe that, that funding should benefit our customers through the end of next year.". That's a fairly significant cushion.
CEO Flatley goes on to say: "Recently, the 2011 NIH (National Institutes of Health) budget was passed with about a 1% reduction in spending from 2010 levels, but waiting the worst case scenarios product and congressional negotiations, and remaining in line with our expectations. Overall, we believe that the allocation within the NIH budget will continue to favor genetic analysis tool and in particular, next-generation sequencing.". To his point, earnings did increase from $1.06/share in 2010 to a projected $1.47/share in 2011 according to Yahoo Finance.
Illumina was selling for $70 at the time of that conference call, and, continued to climb until early July when it hit $76. I'm not a short-term momentum player (although it's nice to have momentum in your portfolio), and, there's a shopworn bit of investing wisdom that when momentum is working, it works, when it doesn't, it doesn't. Right now it's like the stock was invaded by an alien microbe, or, hit with a Biblical plague. In the snap of a finger investors cut it loose as a punitive measure.
Although the fire has gone out of Illumina, my take is that they are an excellent company, and, this may be a good entry point for patient investors. Based on earnings estimates for 2011 and 2012, the P/E Ratio for Illumina is 27 for the current year (which is almost over), and, 22 going forward. Earnings growth for next year is expected to be 25%, and, 31% based on a 5 year CAGR (compound annual growth rate). Just using the much more conservative growth rate of 25%, we get a PEG Ratio of under one. That's what you're looking for if you are a value investor.
Analysts seem to like Illumina. Out of the 22 analysts that cover the security, 15 have a buy or strong buy rating, 6 have a hold, and, only one says it is an underperform. However, these figures are about the same from three months ago when the stock was selling for twice its value, so take that for whatever it's worth. Buying the stock now may be an act of larceny, but only if the government gravy train keeps on rolling for their clients.