Why 2017 Was a Year to Remember for Illumina, Inc.

Happy days are here again for Illumina, Inc. (NASDAQ: ILMN).

Shareholders were accustomed to huge gains for the stock in previous years, but they were sorely disappointed by the gene-sequencing leader in 2015 and 2016. But 2017 is turning out to be fantastic for Illumina, with its stock rising more than 70% so far this year.

There were hardly any disappointments over the last year -- and plenty of positives. Here's why 2017 was a year to remember for Illumina.

The big story

The biggest story by far for Illumina in 2017 was the launch of NovaSeq. On Jan. 9, the company officially introduced the new sequencing system. Illumina CEO Francis de Souza called the launch of NovaSeq "one of the most important inflection points of innovation in Illumina's history." That statement wasn't an exaggeration.

By the end of the first quarter of 2017, Illumina already had more than 135 orders for NovaSeq. In the second quarter, demand for NovaSeq was so great that the company blew past its revenue and earnings guidance. Illumina even increased its full-year 2017 revenue guidance due largely to better-than-expected results for NovaSeq.

Momentum picked up even more in the third quarter. Illumina again saw impressive sales for the new system. The company also yet again raised its full-year revenue guidance as a result of the strong demand for NovaSeq. By the end of September, nearly 200 NovaSeq systems had been shipped to customers with more on the way.

Perhaps the best news of all was who those customers were. Illumina expected that existing users of its HiSeq system would convert to NovaSeq. And that's exactly what happened. However, the company also found that around one-third of orders for NovaSeq were coming from organizations that had not previously been Illumina customers or were users of the company's lower-throughput bench-top systems.

Illumina originally planned to launch two versions of NovaSeq -- the 5000 series and the 6000 series. The version launched earlier this year was the NovaSeq 6000, with initial plans to launch the 6000 in early 2018. That launch won't happen, though. Illumina discovered that customers liked the 6000 series so much that it met all their needs.

Other important developments

NovaSeq was critical for Illumina's success in 2017, but there were other important developments. One of those was related to GRAIL, the separate company formed by Illumina to develop DNA tests that can detect multiple types of cancer at early stages. In the first quarter of this year, GRAIL completed a second round of financing that raised over $900 million.

How did this financing impact Illumina? GRAIL had been a drag on the company's bottom line. Illumina had also used some of its cash to fund operations for GRAIL. Both issues became much less significant for Illumina with the financing round. Illumina now owns less than 20% of GRAIL.

In August, Illumina and venture capital firm Telegraph Hill Partners launched another new company -- Verogen. The goal for Verogen is to drive adoption for next-generation sequencing in the global forensics market, including for criminal casework and other human and nonhuman forensic applications. If Verogen is successful, Illumina will benefit from higher demand for its MiSeq FGx forensic genomics system.

Illumina also launched other new products in addition to NovaSeq. In April, the company launched the VeriSeq solution for noninvasive prenatal testing (NIPT) in Europe. The next-generation sequencing (NGS) system allows labs to screen for fetal chromosomal abnormalities including Down syndrome, Edwards syndrome, and Patau syndrome in one day. In June, Illumina rolled out its companion diagnostic test kit for using NGS for evaluation of colorectal cancer.

Looking ahead

There are several reasons to expect that 2018 will be another very good year for Illumina. Early orders for NovaSeq primarily came from commercial customers, but there could also be solid demand from academic customers that are slower to order due to having to jump through more hoops to gain approval for spending on new systems. Most of Illumina's current HiSeq customers haven't switched to NovaSeq yet. Illumina still anticipates many of these customers to convert to the new system over the next few years.

Probably the greatest potential for NovaSeq is in fulfilling the goal that de Souza stated when the system was launched. He said in January that the NovaSeq architecture could eventually lead to a $100 genome. Such a low cost for mapping a genome would likely expand the market dramatically for gene sequencing. If Illumina really makes a $100 genome possible, happy days should hang around for a long time to come for the company and its shareholders.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool has a disclosure policy.