gs: ILMN(IL/N): Robust Q1. Raised 2006-08 EPS
52-Week Range US$28-8
YTD Price Change 82.62%
Market Cap US$1.2bn
Illumina reported Q1 EPS of $0.07, $0.04 & $0.06 better than our est & cons, resp.,
mainly due to higher consumable sales. On 4/6/06, ILMN pre- announced that it would
exceed initial Q1 guidance. We believe the upside further support the increasing presence
of ILMN in the genotyping market. In Q1/06, ILMN (1) signed 6 agreements for large
scale genotyping studies (2) launched a 550K SNP genotyping chip & (3) shipped 24
genotyping systems. ILMN also raised 2006 revenue and EPS guidance. We raised our
2006 EPS (ex-ESO) by $0.15 to $0.35, 2007 EPS by $0.13 to $0.56, & 2008 EPS by
$0.15 to $0.79. Our 2006-08 EPS (inc. ESO) are $0.10, $0.32 & $0.57, respectively. We
continue to rate ILMN In-Line based on broad technologies, rapid sales growth, &
increasing competitiveness in the genotyping/expression markets. Risks are weaker sales,
manufacturing & patent disputes. Our coverage view is Neutral.
1. MILESTONES:
- Affymetrix vs. Illumina trial date (10/06) - Launch first Cyvera product (H2/06) -
Announce 1-2 diagnostic partnerships by end of 2006
2. RAISED 2006-08 ESTIMATES
For 2006, we increased our revenues by $18M to $138MM (+87% y/y) based on higher sale of
instruments, consumables as well as genotyping service revenues. Research and development
expenses as a percentage of revenues were decreased by 285bps to 25% to reflect greater operating
leverage. We also reduced SG&A as a percentage of sales by 135bps to 33%. Our net margin
(ex-ESO) was increased by 412bps to 11.7%. The net impact to our 2006 EPS (ex-ESO) was a
$0.15 increase to $0.35.
For 2007, we increased revenues by $28M to $186MM (+35% y/y). R&D as a percentage of
revenues decreased by 136bps to 23% while SG&A as a % of revenues decreased by 47bps to 32%.
Our net margin (ex-ESO) was increased by 154bps to 14.3%. The net impact to our 2007 EPS
(ex-ESO) was a $0.13 increase to $0.56.
For 2008, we increased revenues by $34M to $224MM (+20% y/y). We reduced R&D expenses as
a % of revenues decreased by 99bps to 20% to reflect greater operating leverage. Our net margin
(ex-ESO) was thus increased by 120bps to 17%. The net impact to our 2008 EPS (ex-ESO) was a
$0.15 increase to $0.79. Including stock options expenses, we forecast 2006-08 EPS of $0.10, $0.32
and $0.57, respectively.
3. GROWTH STRATEGY INTACT
a. Growing installed base and higher consumable consumption driving revenues
In Q1/06, Illumina shipped 24 beadstations, which is flat vs Q4/05 and up from 19 in Q3/05 and 18
in Q2/05. The total installed instrument base (including Beadlabs) reached 150 in Q1/06. There was
no sale of Beadlabs in Q1/06. Management noted that the distinction between the high throughput
Beadlab stations and the medium throughput Beadstations has become less clear as the high-end or
upgraded beadstations can be used for large scale genotyping studies. Management also indicated
that the average consumption of consumables per installation has risen over the past few quarters,
driving the increase in consumable sales.
b. Launch of 550K SNP Beadchip enhances competitive position in genotyping market
By the end of 4/06, Illumina plans to launch the HumanHap 550K SNP (single nucleotide
polymorphism) Sentrix Beadchip, part of the company's collection of whole genome genotyping
products, which can analyze 550,000 SNPs per sample. Illumina also launched the HumanHap240S
chip to supplement the 300K SNP Beadchip. The combination of the 300K and 240S Beadchips
expands the genomic coverage to the same level as the 550K SNP Beadchip.
The launch of the 550K SNP reinforces Illumina's position in the fast growing genotyping market.
Affymetrix first launched its 500K SNP Genechip in September 2005 but has encountered
manufacturing problems, thus allowing Illumina to gain share. Illumina's pricing of $1,000 per
sample ($600-700 for large volume agreements) is in-line with Affymetrix's products. Management
expects the market size for SNP genotyping, a growth driver for the company, to grow to $1B in
2010 from $200-300MM in 2005, which represents a CAGR of 30-40%.
c. Pharmacogenomics and molecular diagnostics represent longer-term market opportunity
We believe the longer term opportunity for Illumina lies in pharmacogenomic testing. Through
pharmacogenomics, pharmaceutical and biotech companies can potentially identify patient
sub-segments which would respond better to new therapies or be more susceptible to adverse events
based on SNP genotyping. We believe there is growing interest from pharma/biotech companies for
pharmacogenomics, however, adoption will be gradual mainly because the FDA does not yet
require pharmacogenomics in clinical trials (although guidance documents were issued in 3/05).
Illumina also plans to enter the molecular diagnostics market with its low-throughput Cyvera
platform. Management indicated that they could announce 1 or 2 partnerships by the end of the
year. We believe Illumina's initiative in the molecular diagnostics market will take time to build.
Affymetrix and Roche are selling the AmpliChip, the only array-based pharmacogenomic test for
about $175K. The Cyvera platform will cost about $75K.
4. MANUFACTURING CAPACITY TO DOUBLE BY Q3/06
Illumina plans to double manufacturing capacity by Q3/06 in order to meet demand, after already
having tripled capacity from Q2/05 to Q1/06. The additional expansion will cost about $8MM. The
company's manufacturing facilities are running at close to full capacity (24 hours per day/ 7 days a
week). One of the key factors affecting capacity is the number of bead array decoders, which are
used as a last step in the manufacturing process. Each decoder costs about $100,000. We believe
Illumina will likely meet demand. However, there is limited room for error in the near term.
I, Maykin Ho, Ph.D., hereby certify ... |
