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Wells Fargo Begins Coverage of Illumina with Outperform Rating

NEW YORK (GenomeWeb News) – Wells Fargo Securities on Monday initiated coverage of Illumina with an Outperform rating, saying the company is "the clear market leader in next-generation sequencing, which we believe will be the primary tool enabling the application of personalized medicine."

The investment bank valued the San Diego-based company's shares in the $90 to $95 range and estimated its EPS for full-year 2013 at $1.72 on revenues of $1.38 billion.

In a research report, analyst Tim Evans was bullish about Illumina's sequencing business saying that its dominance in high-throughput instrument space is "practically unchallenged," while its low-throughput instruments are "the best platform for most customers" in that market.

While competitors exists for both high- and low-throughput sequencers, Evans said that he expects Illumina will be able to remain the market leader in high-throughput sequencing with platform enhancements, while in the low-throughput space, he believes the MiSeq will attain approval from the US Food and Drug Administration ahead of Life Technologies' Ion Torrent system, "which would likely give Illumina a stronger competitive position."

Illumina submitted MiSeq to FDA in December.

The MiSeq platform could be especially important to Illumina's future as Evans said that it addresses the part of the sequencing market that he believes will experience the most substantial growth during the next five years, driven by growth in the diagnostics market.

Specifically, he noted that molecular diagnostics could be the "most substantial growth opportunity" for next-generation sequencing during that time frame, though Evans acknowledged that the notion of a $1,000 genome — "a level at which we believe the clinical market would become very elastic" — faces many obstacles, and include regulatory issues, reimbursement, and the total costs of sequencing.

"From a cost perspective, we believe the diagnostics market will be focused primarily on targeted sequencing, which is currently the most understandable and cost-effective use of NGS in the clinic, though over the long run, we believe the market will migrate toward whole-genome sequencing as costs continue to fall," Evans said.

The most immediate opportunities for NGS include non-invasive prenatal testing, which Illumina broke into this year when it acquired Verinata, as well as oncology and infectious disease.

Smaller opportunities, Evans said, include HLA typing, idiopathic disease, and preventive medicine.

On the competitive front, he took note of Life Tech's delay in the launch of its PII chip, which has provided Illumina time to "consider a competitive response. In fact, Illumina recently launched reagent kits for the MiSeq to improve throughput."

Evans also said that Life Tech's eventual purchase by Thermo Fisher Scientific could prove disruptive to further development of the Ion Torrent technology and noted Jonathan Rothberg's recent departure from Ion Torrent. Rothberg founded Ion Torrent and was an "important influence" on the business, Evans said. He added that he believes Thermo Fisher will reduce R&D spending for Ion Torrent.

Meanwhile, Oxford Nanopore Technologies could be Illumina's biggest threat, but has yet to bring its technology to market, though it said in 2012 that it would within that calendar year, as In Sequence reported at the time.

"We believe the company has faced technological challenges bringing its error profile into competitive territory," Evans said. "As such, we believe the product is more likely to occupy a niche, much like Pacific Biosciences’ high-error sequencer, assuming it can be successfully commercialized."

He added that Adam Lowe left Oxford Nanopore in July to join Personalis. He had been VP of commercial operations at Oxford Nanopore, and Evans interprets his departure "as a sign that commercialization is unlikely in the near term."

Of Illumina's microarray business, Evans said it has held up better than expected in spite of predictions that it would decline as applications migrate to NGS. Illumina's core competency, genotyping arrays, has fared better than gene expression arrays, helped by a slowdown in the decline in its prices and a pause in the pricing drop in NGS, which has delayed genotyping arrays from reaching cost parity with NGS.

The business also has benefitted from a research market that has moved toward arrays with the capability to genotype large numbers of samples with moderate content at lower prices, as well as growing interest in direct-to-consumer genetic testing and growth in the cytogenetics market, which Illumina fortified with its BlueGnome buy a year ago.

Risks to Illumina's stock include continued government and academic funding pressure, from which the company derives about 70 percent of its revenues, and a diagnostics market that may not be interested in adopting genomics technologies such as sequencing, Evans said.

Also, if the FDA ultimately decides to move ahead in regulating laboratory-developed tests, "the penetration of sequencing into diagnostic markets could be delayed," he added.

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