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Challenges for Illumina as Shares Plummet

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Shares of Illumina Inc. are experiencing a significant decline, causing analysts to adjust their expectations for the DNA-sequencing company.

Illumina shares plummeted last week after the company revised its full-year sales and profit outlook. The downward trend continued on Monday, with the stock falling 5.7% and reaching its lowest level in a decade. As of Monday’s close, the stock had dropped 82% from its all-time high in August 2021. However, there was a slight recovery early on Tuesday, with the shares gaining about 5%.

Several factors contribute to the decline in Illumina’s stock. These include a leadership transition, underwhelming performance of a newly launched product, and potential complications surrounding the company’s acquisition of cancer test maker Grail due to antitrust regulatory issues.

Analysts are especially concerned about the slow adoption of the NovaSeq X Series, which Illumina introduced in late 2020 to accelerate genomic discoveries and reduce sequencing costs. The company recently revised its shipment projections for the full year 2023, expecting to send out 330 to 340 NovaSeq X instruments instead of the previously stated 390.

Canaccord Genuity analyst Kyle Mikson expressed his alarm about these revised expectations, stating in a report last Friday that the slower uptake is concerning considering the strong initial launch of a product that Illumina believed would fuel long-term growth. Mikson downgraded Illumina shares to hold from buy and reduced the price target from $210 to $120.

It is worth noting that Illumina is not alone in facing challenges within the life-science tools industry. Other lab equipment manufacturers, such as Mettler-Toledo International Inc. and Thermo Fisher Scientific Inc., have also revised their guidance for the full year due to difficult macroeconomic conditions.

During a call with analysts last week, Illumina CEO Jacob Thaysen acknowledged the challenging environment that the company and others are currently operating in. Thaysen, who took on the role only six weeks ago, mentioned that these hurdles are industry-wide. He replaced Francis deSouza, who resigned in June amidst a proxy battle with activist investor Carl Icahn.

Unwinding the Grail Acquisition: Illumina’s Challenge

The task of unwinding the Grail acquisition now falls upon Thaysen, as directed by the European Commission. Illumina has been ordered to divest the company within a year, leaving them with a range of options such as third-party sale or capital markets transaction. However, the path to undo the deal remains uncertain and potentially costly for Illumina.

Illumina expressed their disagreement with the Commission’s jurisdiction over the acquisition, stating their pending challenge at the European Court of Justice. Despite this, the company faces the challenge of complying with the divestment order.

When looking ahead, Thaysen highlighted that the 2024 results are expected to be similar to 2023. The macroeconomic environment offers little room for improvement in the near term, while geopolitical issues persist.

Considering this outlook, analyst Mikson suggests that Illumina’s revenue growth will likely remain stagnant for the third consecutive year. Without substantial growth, a premium valuation is not justified, and the “noise” surrounding the Grail transaction may limit share-price appreciation in the short term.

Bullish analysts have also revised their price targets. Leerink Partners, while maintaining an outperform rating on the stock, adjusted their price target to $140 from $205. They noted that the sales figures for NovaSeq X indicate a setback for a highly demanded instrument, which could raise questions about market demand and potential competition.

Evercore ISI analysts also uphold the stock’s outperform rating but reduced the price target to $160 from $180. The deceleration in NovaSeq X sales is concerning, although management has emphasized that customer interest remains high.

Year to date, Illumina shares have experienced a significant decline of nearly 52%. In contrast, the S&P 500 has seen a 17% increase during the same period.

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