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Credit Suisse Upgrades Illumina to Outperform

NEW YORK (GenomeWeb News) – Investment bank Credit Suisse today upgraded Illumina's stock, citing the firm's improved financial performance over the past two quarters and the potential of its tools for the clinical market in the longer term.

Analyst Vamil Divan upgraded his rating for the San Diego-based firm to Outperform from Neutral and increased the share price target to $55 from $48.

In a research note, Divan pointed to Illumina's return to sequential growth in Q4 2011 and Q1 2012 following Q3 2011 figures that sent the company's stock tumbling after they were preliminarily announced. In its third-quarter 2011 earnings release, the company also announced a restructuring that resulted in the elimination of 200 jobs.

Divan noted that the sequential improvements over the past two quarters were driven by pull-through on Illumina's consumables, as well as the launch of the MiSeq benchtop sequencer. Consumables make up about 60 percent of Illumina's sales, and "the annualized consumable pull-through that is being generated from [its] HiSeq machines is heading in the right direction as it climbs back up close to $300,000 per machine, from a low point of $270,000," in Q3 2011, Divan said in his note.

With government budgets still an open question, a cloud continues to hang over life science tools firms, and Illumina is especially vulnerable to adverse developments in that end market because 80 percent of its revenues are derived from government/academic customers.

But Divan noted that customer reaction to potential government budget cuts has largely stabilized after the sense of panic that swept through in Q3 2011. While cuts may still occur and the government/academic end market may see a slowdown in the second half of 2012, customers are better prepared for it.

Last year's debt ceiling debate and the S&P downgrade of US credit sent customers reeling, Divan said, and many either reduced their purchasing or stopped buying completely.

"For 2012, customers appear to have adjusted their buying patterns throughout the course of the year and have commented that they will not be as 'spooked' by what they see or hear in the media, especially because, after all of the debate and discussion, the NIH budget ended up getting a nearly 1 percent increase in 2012 as opposed to any significant cut," he said.

Divan said he anticipates the National Institutes of Health's budget for 2013 will be flat to modestly down, compared to 2012, though clarity will not be achieved until after the presidential elections in November. He cautioned that when the debate over the 2013 budget and potential sequestration heats up again, customer spending could slow down.

Longer term, Illumina's growth prospects will hinge on its ability to penetrate the clinical markets as well as new product development, he said.

The clinical space potentially represents a $626 million market for Illumina, assuming a penetration rate of 1 percent and the cost of sequencing a genome comes down to $1,000. Illumina's MiSeq, Life Technologies' Ion Torrent Personal Genome Machine and Ion Proton, as well as Roche's GS Junior, each address the clinical market, and while each platform has its own advantages and disadvantages, Divan said that superior data accuracy could make MiSeq the system of choice in the clinical setting.

He said that Illumina has "reasonable uptake" of the technology in the clinical markets, and during its recent first-quarter earnings results call, company officials said that more than half of its orders for the MiSeq were by clinical customers. Illumina President and CEO Jay Flatley added on that call that the company is on track to submit the platform to the US Food and Drug Administration by the end of the year for marketing clearance in clinical diagnostics applications.

According to Divan, Illumina is also developing its own biomarker-based diagnostic tests for a variety of cancers including ovarian, gastric, and colon cancers.

On the product development front, the company has indicated new chemistries are in the pipeline, and Divan said that Illumina's record of success in this area "provides us some confidence that they will be able to remain one of the leaders in the sequencing field over the next [three to five] years."

Lastly, on Roche's recent failed attempt to buy Illumina, Divan concurred with a consensus view that the Swiss drug maker and diagnostics firm still wants Illumina in its portfolio and said in his note that "in the coming months" Roche could revisit a possible deal with the company.

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