Six Reasons Why Illumina Has Nothing to Fear from Thermo/Life
Illumina doesn’t need luck. But the San Diego-based company just caught a break this month, which will make it easier to continue crushing all who dare challenge its supremacy in genomics.
The gift I’m referring to was the mega-merger a couple weeks ago between Waltham, MA-based Thermo Fisher Scientific (NYSE: TMO) and Carlsbad, CA-based Life Technologies (NASDAQ: LIFE). This deal, worth $13.6 billion, was heralded by the companies as a move to create “an unrivaled industry leader” that supplies biomedical research labs. Taken together, Thermo and Life Tech sell everything from mass spectrometers to chemical reagents to high-speed DNA sequencers that labs rely on every day. This is a huge mash-up of people and cultures and geographies, as Thermo has 39,000 employees and Life Tech has 10,000 people spread around the world.
I’m sure there are some rational, economically self-interested reasons behind this mega-deal. Harried executives see golden parachutes. Bankers and lawyers want to get paid for their sage advice. Shareholders see tax benefits, higher profit margins, and higher stock prices.
But when two really big companies collide like this, the story no one talks about is that internal confusion, uncertainty, and turf-battling will ensue for months or years. People get new bosses, and the new bosses try to figure out who’s who and what’s what in the new operation. The new bosses ultimately set new priorities. Committees reign. Office politics get rough. People aren’t motivated to do their best, most innovative work.
It all adds up to bad news for Life Technologies’ autonomous Ion Torrent Systems unit, the No. 2 player in the high-speed DNA sequencing industry. And bad news for Ion Torrent is good news for Illumina (NASDAQ: ILMN), the unrivaled No. 1 in this fast-emerging and important market.
Here are a few reasons why this deal is such a boon for Illumina.
—Illumina already has Ion Torrent/Life Tech on the ropes. Even with the “sequestration” crimping the budgets of academic researchers who buy lots of Illumina products, the company smashed Wall Street’s first-quarter sales expectations, seeing $331 million in revenue, a 21 percent bump. The company makes its money selling machines to researchers, selling the chemicals to run experiments, selling its own genomic diagnostic tests based on its DNA sequencing machine, and selling machines for other companies trying to ride the genomic diagnostics wave.
Ion Torrent had to look at that first quarter earnings report with envy. It hasn’t had news that good in a long time. Ion Torrent burst on the scene in December 2010, when it started selling a first-of-its-kind DNA sequencing machine that uses semiconductor-based technology to determine the sequence of DNA base units in a sample. This was supposed to be a grand move toward democratization of DNA sequencing, as it meant these tools could benefit from Moore’s Law-style improvements. The original Ion Torrent machine was cheap (original sticker price of about $50,000), small enough to fit on a lab bench, and fast. Little labs that couldn’t afford the existing Lexus on the market (Illumina’s HiSeq machine) could think seriously about buying a Toyota.
Things looked good for a while for Ion Torrent. But Illumina responded fast with its own lower-cost, benchtop instrument called MiSeq. And while Ion Torrent appears to have the edge in market share among desktop sequencers (about 60 percent share, according to JP Morgan analyst Tycho Peterson’s analysis in February), Illumina is making more money because people use its machines more, and buy more of the consumable chemicals needed. Peterson, in an April 22 note to clients, said that Illumina is winning on more than 80 percent of the competitive customer orders. That competitive dominance is continuing even after Ion Torrent released a higher-end Ion Proton machine last year.
Daniel MacArthur, a researcher at Massachusetts General Hospital, told me earlier this month that while his institution has access to all the various genomics machines, Illumina’s tools are the workhorses that get the most use.
“I know a lot of small labs that bought an Ion Torrent machine and then it sat dusty on the bench for a year or 18 months,” MacArthur says. “People bought these things because they were cheap. At the time [2010 and 2011], there was a lot of stimulus funding available. They wanted to get involved in next-gen sequencing because it was the next big thing, but then they realized it still costs a lot of money to run each experiment. And they had no idea what to do with the data. Ion Torrent doesn’t generate a lot of data, but by a small lab standard, it’s overwhelming.”
—Illumina has the more focused management team. If you’ve ever met Illumina CEO Jay Flatley or heard him on a conference call, you know this is an exceptionally focused, intense, disciplined individual. He has other smart, aggressive people working for him.
Ion Torrent’s leader, entrepreneur Jonathan Rothberg, is certainly a smart, focused and driven guy, too. He has a gift for gab and promotion. He once told me he couldn’t answer a basic business question because “this is like 1948 and we’re the Israelis” to drive home a point about how intensely competitive his industry is.
But in a merged entity with 50,000 people, Rothberg is just another guy running a small division who has to fight internal battles for resources. Rothberg sold his last company to Life Tech’s Greg Lucier, but the guy who runs Thermo Fisher is named Marc Casper. And Marc Casper just made a very big transaction to buy all of Life Tech, not just its Ion Torrent division. Casper may have a grand plan to leverage the heck out of Ion Torrent, but I didn’t hear it in his prepared remarks for his company’s first quarter conference call on Apr. 24. Ion Torrent and Rothberg’s name were visibly absent from the press release announcing the Life Tech merger, and Lucier only offered a shaky, hedged answer to investors who inquired about Rothberg’s future at the company.
A few analysts who follow Illumina smell weakness. “We have been bullish on Illumina but see significantly more upside following the strong quarter, especially given the distractions that are naturally going to set in at LIFE (Illumina’s key competitor in gene sequencing) as personnel there adjust to their company being acquired by Thermo Fisher,” said Vamil Divan of Credit Suisse, in an Apr. 22 note to clients.
—The top sequencing centers are wedded to Illumina, and Thermo won’t sway them. The Broad Institute, the University of Washington, Washington University in St. Louis and others set the standards for genomics research, and they are wedded to Illumina. They know Menlo Park, CA-based Pacific Biosciences (NASDAQ: PACB) exists, but mostly they marvel at the breathtaking money pit that it has become. While they play with newer technologies in development like those from U.K-based Oxford Nanopore, Mountain View, CA-based Genia Technologies, or Providence, RI-based Nabsys, these are still R&D curiosities at this point, not commercial players.
The larger point, though, is that these big-time scientists are discerning and demanding customers. They like … Next Page »