
Illumina 3Q23 and Guidance Ugly, However Post-Grail Profitability Likely to Get Value Investors and Acquirers to Start Taking a Look
11-10-23 (by: Scott Gleason) Illumina has released its financial results for the third quarter with total revenue of $1.12 billion, which remained flat when compared to Q322 and 5% sequentially. Street estimates had called for revenue of $1.13 billion. It’s clear Illumina is facing challenges on a number of fronts with a leadership transition, challenging macro backdrop, increasing viability of competitors (PacBio, Oxford Nanopore, and new disruptive technologies), and the forced sale of GRAIL which is likely to command a fraction of its acquired value. However, at some point value-based investors or potential acquirers such as Roche and Thermo Fisher are probably beginning to circle at this point who could drive significant financial synergies in a sale. It is notable that GRAIL led to an approximate two-thirds drop in adjusted operating income due to its dilution setting up for a significant profitability rebound following its sale, even if the value of the asset ends up being nominable is a sale. That alone and the likelihood that not just GRAIL gets sold at this point probably warrants another look for Illumina by investors.
Core Illumina reported a flat revenue in Q3 2023 compared to Q3 2022. Consumable revenue declined 4% due to lower utilization by academic customers. Instrument revenue was up 10% due to NovaSeq X shipments. Illumina shipped 97 NovaSeq X instruments in Q3 2023 and now expects to ship 330 to 340 instruments for the entire fiscal year 2023. GRAIL reported revenue of $21 million in Q3 2023, up $10 million in the same period in 2022. Grail has negative gross margins and is highly dilutive with adjusted operating income of ($433) million. This fact, along with a likely extended commercialization path and a decline in valuations for similar assets will likely make a sale challenging. GRAIL has announced some new collaborations with HCA Healthcare, Inc. and some minor coverage decisions. Broad coverage for the test and technology is going to likely require substantial clinical utility and health economic data to address payer concerns given the challenges with false positives and potential patient diagnostic journeys associated with a positive result. The Pathfinder study also was not representative of a normalized population set, an area that is sure to come up in payer technical assessments.
The company took significant goodwill and intangible impairments of $821 million related to the GRAIL segment in the quarter. On a non-GAAP basis, Illumina reported diluted earnings per share of $0.33 for Q3 2023. Street forecasts called for adjusted EPS of $0.12.
Illumina lowered its full year outlook and now expects a 2% to 3% decrease in consolidated revenue compared to fiscal year 2022. Core Illumina revenue is expected to decrease by 3% to 4%, and GRAIL revenue is projected to be at the low end of the $90 million to $110 million range. This implies total revenue of around $1.03 billion, down from the 3Q in what is typically as seasonally strong quarter for capital equipment placements. The company anticipates non-GAAP diluted earnings per share in the range of $0.60 to $0.70. This implies negative non-GAAP earnings in the fourth quarter.
Jacob Thaysen, Illumina’s newly appointed CEO, remains optimistic about the company’s future. Despite challenges in the current environment, he is confident in Illumina’s ability to navigate them effectively and position the company for long-term success. While evaluating the company’s strategy, Thaysen stressed that Illumina will continue focusing on driving further placements of the NovaSeq X instruments to boost consumables demand. The company is also committed to optimizing its operations and enhancing execution.Receiving an order from the European Commission to divest GRAIL, with a commitment to resolve issues for the benefit of shareholders and GRAIL.