Illumina: What Does a Hypothetical Bull Case Look Like? $ilmn
The Single-Cell and Spatial Opportunity
There’s been a lot of ink spilled on Illumina recently (see pieces here, here and here, all of which were published in the past two weeks and are worth reading). Over the past five years, the company’s been far from an ideal investment, with its shares falling more than 70% over that period. This performance is the consequence of a few different factors, which management had varying degrees of control over:
1) The company spent 8 billion acquiring Grail, an acquisition it went ahead with despite objections from U.S. and European regulators. This led to an activist battle with Carl Icahn, the ouster of Illumina’s CEO and CFO, multi-billion dollar impairment charges, and Grail eventually being spun-out in mid-2024.
2) China banned imports of Illumina sequencers in March of this year.
3) Increased competitive pressures from venture-backed players (Element and Ultima), BGI Genomics (which put pressure on Illumina’s China business before the ban) and Roche (although they haven’t yet entered the space). One point to keep in mind here is that Illumina serves the whole spectrum of the short-read sequencing market, not just customers who demand the most sophisticated/highest throughput instruments. Element Biosciences may only be aiming to serve mid-throughput customers, but that still presents a real threat.
4) Illumina’s core business, sequencing, is based upon Jevons Paradox holding true. Its newer machines are more expensive upfront, but able to perform individual sequencing runs at a more affordable price point than legacy machines. In theory, this unlocks increased demand which then leads to increased revenue etc. Whether or not the paradox holds in the long-term, what it leads to in the short-term is investor uncertainty as sequencing volumes grow without a correspondingly large increase in revenue. As Edward Larkin points out, consumables revenue grew at only 7% per year from 2019-2024 as consumables volume grew 25% per year.
The bear case for Illumina is straightforward: this is a company serving a market that’s maturing and increasingly competitive. The bull case is similarly straightforward. Illumina’s struggled with poor management, exemplified by its acquisition of GRAIL; now that Grail has been divested, you’re left with a company that remains the market leader in next-generation sequencing. This market’s growth may have slowed as of late, but this is a temporary blip rather than an indication of market maturity. Growth will re-accelerate as NGS Applications like liquid biopsy takeoff and interest in multi-omics grows. Illumina sits in the best position to benefit from that growth.
Both the bull and bear cases include, whether explicitly or otherwise, a view on the growth potential of single-cell and spatial sequencing. The bear will say that single-cell/spatial analysis is really the domain of 10x Genomics, and isn’t necessarily an attractive place to be anyway. 10x has run into substantial growth headwinds as of late, has a stock that’s down more than 70% over the past year (even after its 20% jump yesterday!), and isn’t afraid to be litigious with competitors.1 The bulls will say single-cell/spatial is one of Illumina’s many potential growth avenues. I think it’s worth exploring the single-cell/spatial space more thoroughly, as well as considering why these are areas where Illumina wants to compete.
Next-generation sequencing typically refers to the sequencing of DNA. All cells in the human body have the same DNA, but vary widely in function; this difference is thanks to transcription and translation. A portion of DNA is transcribed into coding and non-coding RNA, and this coding RNA (termed mRNA) is then translated into proteins. As one might expect, there’s value to sequencing more than just DNA. Sequencing RNA can provide insight into what genes are actually expressed in a certain sample type. Analyzing cancer tissues is a good illustration of where this is useful: looking at gene expression levels in cancerous vs non-cancerous tumors can give researchers and clinicians ideas on which genes to target in fighting a cancer and which RNA biomarkers are worth tracking over the course of treatment. For example, RNA-sequencing will tell you the enzyme tyrosine kinase is over-expressed in many cancerous tissues when compared to non-cancerous tissues.2 Tyrosine kinase inhibitors serve to prevent this over-expression.
Historically, bulk-RNA sequencing (which is not a growth area Illumina is pursuing nor an area where 10x Genomics plays) has been the dominant method for analyzing gene expression levels in tissues. While this gives you average gene expression levels in a sample, it doesn’t enable you to look at individual cell transcriptomes. This can present problems when rare cell types are driving things like treatment resistance – these cells express RNA at such low levels that they won’t show up in a bulk method! This is where single-cell RNA sequencing (scRNAseq) comes in, which allows you to study individual cell transcripts within a tissue sample. Again, this can be especially helpful when looking at cancer: scRNAseq has identified rare drug-tolerant RNA variants in breast cancer and which specific immune cells are associated with better outcomes in non-small cell lung cancer.3 This granularity just isn’t possible with bulk methods.
As with all methods, single cell sequencing has downsides. Most notably for the purposes of this note, neither bulk-RNA nor single cell methods include spatial information, and so don’t allow you to analyze how cells interact and communicate with one another. In the oncology space, this spatial information can provide another form of insight into the behavior of tumors. A view into a tumor’s microenvironment (the ecosystem surrounding a tumor) can help answer questions like why different tumor subpopulations within a patient might be responding differently to treatment. In other words, within the cancer context single-cell RNA sequencing is useful when tumor resistance is due to a variant’s transcriptome. Spatial is useful when tumor resistance is due to the environment said tumor resides in.4
Illumina has made forays into both the single-cell and spatial analysis spaces. It acquired Fluent Biosciences, a player in single-cell, back in July 2024, and management has said they will roll out a technologically sophisticated and competitively priced spatial platform in 2026.
The company sits in a privileged position when it comes to developing a product roadmap: It has a good sense of where sequencing prices are likely to trend over time and is embedded within its customers’ workflows. Its insights into where sequencing prices are headed is what led to the incubation of Grail in 2016: multi-cancer early detection from a blood test didn’t make economic sense under current sequencing prices, but it would a few years down the line as prices continued to fall.5 Consequently, Illumina gave Grail heavily discounted pricing based on where management believed prices would land.
Of course, Grail wasn’t the only company working on cancer detection tests, which is why the FTC and European regulators objected to Illumina’s acquisition just a few years after initially spinning out the business. The conflict between Illumina and its non-Grail early cancer detection customers was straightforward to see: the company owning Grail meant it would be incentivized to give Grail preferential treatment over other customers. Illumina was chasing a worthy potential growth avenue, but at the expense of alienating its clinical customer base. If the sequencing giant was getting into early cancer detection, what would stop it from pushing further into the diagnostics market? (As an aside, I think this is a problem Roche will run into with its newly announced sequencer. It may pose a threat to Illumina on the research customer side, but I think those developing clinical tests will be more wary of using a provider with a large pre-existing diagnostics business).
Illumina’s deep familiarity with its customers’ workflows gives it a clear view into what these customers are using sequencers for and which use-cases are growing quickly. Presumably, this is what’s driving its forays into single-cell and spatial analysis. To be clear, Illumina already benefits from the growth of these segments: single-cell and spatial analysis require sequencers as part of their respective workflows. Its single-cell and spatial solutions are not attempts to enter a space it’s not a part of, but instead attempts to handle larger portions of those workflows and grab a bigger slice of the profit pools.
The degree to which Illumina succeeds in these new areas depends upon whether single-cell/spatial adoption is constrained primarily by pricing and ease of use or by functionality. Its single-cell product portfolio is far smaller than 10x Genomics’ and much more limited in the sample types it can accept. If gaining a foothold in the market near-term is dependent on functionality, then Illumina loses. If, however, the key bottleneck for market adoption is pricing and ease of workflow, then Illumina has a real opportunity to not only penetrate the single-cell/spatial markets but also (and critically!) drive incremental demand towards its sequencers. This is especially the case in 2025, when almost every sequencing/single-cell/spatial provider has cited elongated instrument purchase timelines as a revenue headwind. Unlike 10x Genomics, Fluent Biosciences’, and hence Illumina’s, single-cell solution doesn’t require the purchase of additional expensive equipment beyond a sequencer:
Not requiring an expensive instrument purchase is a significant advantage in a period of general macro uncertainty and NIH funding uncertainty. This gives Illumina a real leg-up against the current heavyweight in the single-cell space. 10x Genomics’ CEO of course believes success depends on more than just pricing, but he is also adamant that lower pricing unlocks further demand. This is exactly why 10x released cheaper consumables and instruments in 2024 that initially serve as revenue headwinds:
“Within our single cell portfolio, we introduced a number of new products that deliver a lower price per cell and per sample. We believe there is a great potential to grow single cell revenue by reducing prices to increase volumes over time.” – Serge Saxonov, 10x Genomics CEO, Q42024 Earnings Call
The final point to make on the single-cell and spatial opportunities is why they present more interesting routes for Illumina as compared to multi-cancer early detection tests. As discussed above, the challenge with developing MCED tests is that it put Illumina in direct conflict with a set of customers, which in turn sent a worrying message to all clinical customers that their sequencing provider might eventually compete with them. This dynamic isn’t present in single-cell/spatial, where Illumina is competing with its partner vendors rather than its own customers. If anything, Illumina offering additional parts of the single-cell/spatial workflow is helpful to its customers because they have one less vendor to deal with in the procurement process.
As much as Illumina harps on its instrument differentiation and lower cost of overall sequencing workflow on earnings calls, I find it hard to believe management hasn’t been aware for quite some time that they’re facing a more competitive market going forward. This is why the company tried to acquire PacBio back in in 2018, acquired and then divested Grail in recent years, and acquired Fluent a little under a year ago: these are all attempts to create new growth vectors. At the same time, management’s incentivized to keep reasonably quiet about any excitement in the single cell/spatial arena. It’s challenging to not be in regulators’ firing lines when you have 80% market share in the market you predominantly serve. The upshot of this dynamic is that single-cell/spatial would have to contribute meaningfully to Illumina’s bottom line before coming up with any real frequency during earnings calls and investor presentations.
Disclaimer: The information in this post is not intended to be and does not constitute investment or financial advice. You should not make any decision based on the information presented without conducting independent due diligence
Disclosure: as of 5/6/25 I have a small position in Ilmn. Somewhat embarrassingly I then sold it on 5/13. The China risk, combined with research consumables down in the mid to high single digit range in Q1, means that growth just needs to be a lot higher in other areas to compensate for those headwinds. I need to have more insight into China/the NIH/U.S. govt research budget to be comfortable holding it here.
There are more players in single-cell/spatial than 10x Genomics (Parse Biosciences, Bruker after its acquisition of NanoString Technologies, Curio Bioscience, and more). 10x is the current player to beat, and the company’s litigious nature is actually quite important for its bull case (see here and here).
This article summarizes different RNA sequencing methods and their applications to oncology.
This article from Nature has a good overview on the benefits/drawbacks of bulk-RNA, single-cell, and spatial cell analysis.
10x Genomics now offers spatial analysis at a single-cell resolution, something that allows the study of individual cell transcripts and the locations of those cells concurrently. This wasn’t possible until recently!
This is a great illustration of Jevons Paradox in action. Lower prices enable innovation, which in turns unlocks large new pockets of demand that wouldn’t have existed previously.
Thank you.
Do you (or the companies) have any numbers to estimate the size of the Single-Cell and Spatial Opportunity ? If that is the bull case what is the current market size (tam)?