In September 2020, the manufacturer of genetic testing equipment Illumina (ILMN) announced that it would acquire Grail, a liquid biopsy company it had already created four years earlier. The price Illumina would pay – $ 8 billion in cash and stocks – raised eyebrows at the time, but it wasn’t investors’ biggest problem with Illumina’s desire to buy Grail.
Their biggest concern was that the European Commission and the United States Federal Trade Commission would challenge the merger and initiate review proceedings. That is, it was the main concern of investors with Illumina. To date, a new concern has emerged:
Ignoring protests from regulators, Illumina went ahead and completed its acquisition of Grail on Wednesday, before being given permission to do so.
Leerink analyst Puneet Souda’s reaction was typical of how Wall Street took this news. Souda downgraded Illumina stock to “market performance” and lowered its price target from $ 510 to $ 425 per share. (To see Souda’s record, Click here)
As Souda explained, the closing of the Grail acquisition without having received the approval of American and European regulators “raises uncertainty” about Illumina’s actions because, on the one hand, the European Commission has the power. fine Illumina for its action, charging it up to 10%. % of its worldwide turnover (approximately $ 400 million).
And on the other hand, it is possible that the Europeans will ask Illumina to unwind the deal if they end up disapproving it.
It’s bad enough, but Souda actually has other concerns about Illumina’s stock, beyond his concerns about the headlong rush to merge with Grail. On the one hand, Souda fears that after taking advantage of strong tailwinds in 2021 from reopening labs and upgrading their equipment to Illumina’s new NovaSeq gene sequencers, Illumina’s numbers will be faced with to “more difficult comparisons” in 2022. By next year, these upgrades will likely already be completed. , and they will not be repeated. At the same time, the analyst is concerned that sales of consumables for Illumina’s tests will not increase as rapidly in 2022 as in 2021, when the coronavirus pandemic is brought under control next year.
Covid tests, Souda points out, accounted for around 7% of Illumina’s revenue growth in the first half of 2021, but will only add half of that growth in the second half of the year. This could contribute even less to growth in 2022 and beyond, as, according to the analyst, “surveillance efforts” (i.e. Covid testing) begin to “stabilize around the world” . And that leads Souda to conclude that “this leaves limited growth prospects for COVID revenue in 2022, making it unlikely that the ILMN will significantly beat the projected revenue of $ 175 million in 2021.”
Finally, Souda fears that “the basic elasticity of demand [is] not as robust with ILMN increasingly used in clinical testing end markets. As the analyst points out, 45% of Illumina’s clinical test revenue now comes from the sale of sequencing “consumables”. testing activities, but Souda does not believe test volumes will increase “significantly” in the future to offset the price reductions planned by Illumina, to allow revenue to grow in the future.
Simply put, he doesn’t think Illumina can “offset the volume,” so to speak. Hence the downgrading.
Overall, the street is currently taking a cautious approach to ILMN. The Hold consensus score is broken down into 3 buys, 4 holds and 2 sells. Analysts expect the stock price to remain limited in the coming months, given the average price target currently stands at $ 484.75. (See the analysis of ILMN shares on TipRanks)
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