Select Page

Shares of Illumina (ILMN) dropped 8.44% today, September 16, on reports by both Reuters and Bloomberg that the genetic sequencing marketing leader is in talks to acquire Grail, a still private startup focused on blood tests for the early detection of cancer.

I think it is the potential purchase price–$8 billion–that has stuck in investors’ craw today. The last valuation of Grail in its previous round of private funding was $6 billion. Grail had filed this month for an initial public offering this month.

And the fact that Grail was, until 2015, a subsidiary of Illumina.

And then there’s also the question of the way the deal would reverse a long-standing Illumina policy of not competing with the customers who use Illumina sequencers to run their own DNA tests. Illumina is the sole supplier of the sequencers that Grail uses to perform its own tests for cancer.

On the other hand, given all that past history and the depth of the business relationship, Illumina is likely to know exactly what it’s buying–and to see Grail as a way to grab a dominant share of the growing market for DNA-based cancer.

All those caveats aside (and with the likely opportunity in mind) I’m adding Illumina to my Jubak Picks portfolio on this (temporary, I believe) weakness. The stock has been a member of my long-term 50 Stocks portfolio since June 16, 2020. With today’s drop the shares are down 9.19% since that initial pick. Illumina shares are down 9.17% in the lat three months and down 2.79% for 2020 through the close on September 16. Which doesn’t seem too bad until you note that this performance trails the diagnostics and research sector by 25.59 percentage points for 2020. Another company in that sector, a member of my Jubak Picks Portfolio, Danaher (DHR) is up 35.14% for 2020 to date. (Illumina’s sales have been markedly hurt by the coronavirus downturn.)

So why buy this laggard?

Illumina is a giant in the DNA sequencing space. Since its acquisition of Solexa in 2007, Illumina has relentlessly driven the cost of sequencing a human genome down to less than $1,000 today from about $100 million in 2001. The company forecasts that its new NovaSeq machines will bring the cost to $100. That plunging price has created a market well beyond the few labs that began the sector with revenue for the sector estimated to grow to $25.5 billion by 2025.

And Illumina “owns” that market. More than 90% of the data generated from genome sequencing is produced on an Illumina sequencer and then collected, stored, and analyzed on Illumina software. (Illumina has also recently announced the acquisition of BlueBee, a company that creates software that increases the ability to analyze genomic data.)

The combination of the amount of data run on its machines and the analysis of that data on Illumina software has let the company increase its customer count 10 times since 2010 and the amount of data running through its systems by 50 times.

That has led Illumina to a dominant position in its market with the company’s $3.3 billion in 2018 sales twice the sales of its next nine largest competitors combined.

With the shares down to $322.47 at the September 16 close from a 52-week closing high of $400.74 back on August 5, 2020, I think this drop is an opportunity to acquire a great long-term growth story at a reasonable price. My target price is $410 a share.