Market, Policy Trends Shift To Illumina’s Favor: Morgan Stanley Upgrade

The bearish case for Illumina, Inc. ILMN 1.44% has come to an end for four key reasons, according to Morgan Stanley.

The Analyst

Analyst Steve Beuchaw upgraded Illumina from Underweight to Equal-weight with a price target lifted from $210 to $320.

The Thesis

Illumina stands to benefit from multiple market developments and policy changes, Beuchaw said in the upgrade note. (See the analyst’s track record here.)

They are:

• The success of DNA-driven drug administration, which prompted the FDA’s support of DNA-based companion cancer diagnostics and expansion of Medicare reimbursements.
• Government funding for DNA analysis could expand globally.
• Consumer interest in DNA-derived applications.
• A global mix shift toward genomic research.

Morgan Stanley’s prior bear thesis on Illumina now appears “flawed,” but a bullish stance on the stock can’t yet be made for the following reasons, Beuchaw said:

• The stock’s more than 50-percent return since the start of 2018 implies it is trading at a 17-percent premium to its 10-year historical multiple.
• Expectations for NovaSeq to see a growth deceleration in the third year of its cycle in 2019.
• Any timeline for favorable reimbursement changes are difficult to model.
• Competition could intensify.

Illumina’s longer-term market opportunity is “undeniable,” but its valuation is stretched at current levels, according to Morgan Stanley.

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