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Looking Up

What a difference time has made for Illumina Inc.

Things seemed dark to some a little more than two years ago when the San Diego-based genome sequencing equipment maker’s stock had fallen from the mid-$70s to the mid-$20s over about four months, and its doorstep was further darkened about three months later by the shadow of a hostile takeover.

By contrast, the mood at Illumina today is as bright as any company in its sector as it basks in the glow of soaring stock prices and the accolades of industry analysts.

It’s been downright, well, illuminating.

The company has seen extraordinary growth this year. Illumina’s revenue for 2013 exceeded $1.4 billion; its stock has been regularly closing at new highs, having risen roughly 50 percent since November 2013; and it just won the contentious and decade-long global race to bring the cost of sequencing the human genome to under $1,000. Lowering the cost to decode the intricacies of DNA has far-reaching implications, particularly in health care and agribusiness, and the market has taken notice.

Illumina (Nasdaq: ILMN) has been the clear leader in sequencing for several years, commanding about 60 percent of a market that’s projected to soon grow to $20 billion. It generates more sequencing revenue than competitors such as Carlsbad’s Life Technologies Corp., largely because it leads in the high-end sector, developing costlier but more efficient and accurate sequencing machines.

Illumina customers are typically government institutions, though its clientele is growing among private companies, nonprofit research institutions and hospitals. Name brand customers include genealogy tracking site Ancestry.com Inc. and personal genomics company 23&Me Inc.

From Takeover Target to Top Dog

Illumina was a young startup that employed just 25 when CEO Jay Flatley took the helm in 1999; there was a time in May 2003 that its stock traded for less than $1. Today, the company has some 3,200 employees around the world, and it’s San Diego’s highest-valued life sciences company.

Following announcement of its fourth-quarter earnings, the stock briefly hit an all-time high of $152.35, pushing its market value to more than $19 billion. A year ago, Illumina was trading at $48. Fiscal 2013 revenue grew 24 percent to $1.42 billion, up from $1.15 billion in fiscal 2012, and the company projects 15 to 17 percent revenue growth in 2014.

Several analysts upgraded their price targets for Illumina, including JP Morgan’s Tycho Peterson, who raised his valuation from $120 to $190.

“While [Illumina’s] stock is expensive, in our view, by any measure, we believe investors will be willing to pay $20 billion for a company visibly executing toward a $20 billion market opportunity in an enviable competitive position,” Dan Leonard of Leerink Research wrote in a client note.

This comes in welcome contrast to Illumina’s position two years ago, when its stock had plummeted and it was fending off a hostile takeover bid from Roche AG. The Swiss pharma giant approached Illumina in early 2012 with a bid that Flatley and many of Illumina’s investors felt devalued the company. Though Illumina’s shares were hovering in the mid-$20s at the time, Flatley and a number of investors who stood behind him believed that Illumina could grow its value independently. After a months-long public battle, Roche backed off from a $6.2 billion deal that valued the company at $51 per share.

Multibillion Market Opportunity

Sequencing a human genome cost $100 million in 2001, according to data from the National Institutes of Health. Today, the cost is about $1,000, and it’ll likely be lower tomorrow. Of course, to achieve an economic price point, Illumina customers have to make a heavy upfront commitment — $10 million for a factory-style installation of the next-generation sequencing machine. But since the product, called the HiSeq X Ten, was unveiled in early January, the company has sold five to research institutions and the private sector.

It’s no surprise that such a machine would be lucrative to large companies and research institutions, who have much to gain by sequencing large samples of human DNA. A fuller understanding of an individual’s genetic data can help researchers understand disease processes, for instance, and enable physicians to tailor patient therapies. And Illumina builds tools to make that possible.

“My view is that in the next 10 years we could see cancer become a chronic, not fatal, disease,” Flatley said. “With powerful gene sequencing technology, we really could make that possible.”

McKinsey & Co. cited a staggering figure in a recent report: Next-generation genomics could have a $1.6 trillion economic impact globally by 2025 in the fields of personalized medicine, agriculture and bio-based energy production.

“I firmly expect sequencing to be big business, ultimately reaching into routine clinical use all around the world,” said Harvard University geneticist Daniel MacArthur, adding that it will “drive a thriving ecosystem of companies” that provide ancillary support services for handling and interpreting large, complex reams of data.

Illumina has made a string of acquisitions recently to help ready itself for the impending expansion of the genomics market. It bought prenatal diagnostics firm Verinata Health Inc. last January for $350 million, digital microfluidics company Advanced Liquid Logic Inc. in July for $96 million and genetic data cataloguing company NextBio Inc. for an undisclosed sum. This last acquisition is perhaps the most interesting, as it marks a step toward helping integrate genomic information into electronic medical records — a growing sector in its own right.

Lower-Priced Competition

Illumina’s main competitor is Life Technologies (Nasdaq: LIFE), which announced last April that it would be acquired by Massachusetts lab equipment company Thermo Fisher Scientific Inc. (NYSE: TMO) for $13.6 billion; the deal has yet to close. The company will continue to operate in Carlsbad as a subsidiary, said Mark Stevenson, president of Life Technologies.

Life Technologies’ sequencing business brings in nearly $1 billion in revenue for the company, but only a small portion of that comes from its next-generation sequencing machine, called the Ion Torrent.

“Ion Torrent will be a very important part of the combined new company,” Stevenson said. “Next generation sequencing was one of the areas Thermo Fisher was most excited about. That market potential is tens of billions.”

Ion Torrent was an active contender in the global race to the $1,000 genome, and nearly made it. Though Illumina offers a number of sequencing options at a wide range of price points, Stevenson said Life Technologies expects to release a sequencing machine later this year that’s more affordable.

“Illumina’s $10 million instruments are OK for the top 0.1 percent, but 99.9 percent of researchers need something a little more affordable,” he said. “Our idea is to decentralize and democratize the sequencing business.”

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