Anyway I tried to pick things she knew about, she is majoring in molecular biology, so ILMN is not as strange as it sounds.
Flygal,
I also majored in molecular biology. Then I worked for 20 years in the molecular tools industry before focusing on primarily on investing while doing some consulting in my field. I recently finished an industry market research consulting project which included a deep dive into the DNA sequencing market. I also owned ILMN from 2012 until earlier this year. I had purchased at around $50 but sold out between $150 and $180 because I was getting nose bleeds from the sky high valuation.
ILMN’s business is probably 70% DNA sequencing and 30% microarrays. The DNA sequencing market (for research applications) will probably be about $1.4B and ILMN dominates this market. The market is growing at about 20%. The other companies just can’t compete on the high end and ILMN is continuing to take market share. The competitors are 1) LifeTech (called Applied Biosystems prior to 2008) which was recently acquired by Thermo Fisher and 2) Roche which is the number 3 competitor. Pacific Biosciences (a RB stock) is a third generation sequencing technology company with a system on the market but at $25M in sales and a market cap of $400M it’s a small player that has been relegated to niche applications after the cost of seqeuncing dropped rapidly to $800 per genome this year; Pacific raised more then $600M from private investors and its IPO and I don’t think investors and shareholders in PACB will do very well. ILMN’s HighSeq system has decimated sales of the Roche system (pyrosequencing technology from its 454 acquistion) and the LifeTech SOLiD system. Roche will discontinue its system and ABI hasn’t sold a SOLiD system in over a year. Roche has nothing left after failing to acquire ILMN in 2012 and failing to acquire LifeTech this year (it tried to get both). Roche acquired Genia recently and is now banking on another technology disruption (nanopore technology). Third generation sequencing technology like nanopore technology could disrupt current approaches but the technology still has several challenges to overcome and is still at least several years away. LifeTech’s IonTorrent system has had some success in the market for exome and targeted sequencing; however, it just can’t compete on the high end against ILMN’s HiSeq. ILMN recently launched the NextSeq system which is a midrange sequencing platform to compete against IonTorrent. IonTorrent could be in trouble because you don’t want to only have a midrange product. IonTorrent technology can still improve but the improvements are too slow to compete against ILMN in the high end. So it looks like ILMN will continue to dominate in the research market which is growing at 20%. The competitors are on the ropes and unless there is another major technology disruption ILMN will remain on top for the foreseeable future.
But the valuation of ILMN cannot be justified unless there is a major adoption of sequencing for clinical diagnostics applications. All 3 competitors are moving to be there with product solutions for sequencing applications for diagnostics. This is still a very small part of the market, maybe $100M/year versus $1.4B for the research market. There are many hurdles to adoption of sequencing for clinical diagnostics. The main hurdle is regulatory. I think this will be a major challenge for years to come and I would not bet that it will be solved anytime soon. So my opinion is that at a market cap of $23B, ILMN is waaaaaay overvalued. If you look at earnings and increase it at 20% per year, you will need a lot of years to get a reasonable valuation. Roche offered less that $6B to buy ILMN in 2012 and they might pay $10B now to own the DNA sequencing market…but that would mean a price of $75-80 which is less than half of where it’s trading now.
Your daughter is interested in the field has she learned how to analyze financials and projected growth rates and then compare these to the valuation to determine if a company is worth owning? If you and she are banking on sequencing being big in diagnostics then perhaps it would be wise to learn more about the regulatory, privacy, reimbursement, etc issues that could inhibit adoption.
Chris