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Genome Analyzer Sales Push Illumina’s Q3 Revenues up 82 Percent; Margins Decline

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
Illumina this week reported that its third-quarter revenues grew 82 percent to $97.5 million from $53.5 million in the third quarter last year, driven by a rise of more than 200 percent in instrument sales.
The firm’s Genome Analyzer was launched earlier this year, and sales have been robust with approximately half of the next-generation sequencer’s users coming from outside of the genome centers. The increased instrument sales came with one downside, however, with gross margins declining in the quarter.
Also, as of Tuesday afternoon, Illumina’s business has not been hampered by the outbreak of wildfires in the San Diego region, company officials said during the third-quarter conference call.
Of the $97.5 million revenue, $52.7 million came from sales of consumables, up 61 percent over last year’s third quarter. Consumables sales were driven by the Human 1M, Human Hap550, and Human CNV 370 Duo, as well as iSelect custom genotyping arrays, company officials said.
President and CEO Jay Flatley said the iSelect products grew “very rapidly” during the quarter — probably 70 percent to 75 percent growth. “To some extent it will over time cannibalize the Golden Gate assay,” he said.
Instrument revenues rose to $34.1 million in the quarter, up 206 percent year over year, driven primarily by the Genome Analyzer. The next-generation sequencing platform, which the firm acquired when it purchased Solexa for $600 million (see BioCommerce Week 11/21/2006), is expected to become an even greater proportion of instrument sales as Illumina rolls out new products related to the platform.
“Over the next several months we’re going to continue to increase the … throughput of the Genome Analyzer, the breadth of kitted applications directly through Illumina, and the overall performance of the system,” said Flatley.
“Our new paired-end read technology is in beta testing at a number of customer sites, and we’re encouraged by those results,” he said. “This technology provides much longer-range information and individual sequence reads and is key to detecting insertions, deletions, and rearrangements in the genome.”
Flatley said the firm is still on schedule to introduce paired-end reads before the end of the year, and noted that unlike competing platforms the firm’s technology does not restrict read length.
“Probably the thing that surprised us most is the rapid adoption outside of the genome centers,” said Flatley. “We initially thought that while that ultimately would happen that in the first year or so the genome centers would continue to be really the dominant place to sell these instruments, and that’s not been the case … over half of them are sold outside genome centers.”
He said that the firm also believes that roughly half of the customers have used the sequencers for non-traditional sequencing applications, which is something the firm had not expected to happen so rapidly either.
Flatley declined to provide any specific sales numbers for the Genome Analyzer or any of its other products. Flatley noted that the firm’s non-digital gene expression products continued to be a “solid performer” in the quarter but are a small part of its overall business.
With the greater instrument sales, however, came a decrease in the firm’s gross margins, which dropped to 63.1 percent from 70.1 percent in the comparable period a year ago.
“We have a ways to go to achieve the gross margin goals we have for the Genome Analyzer system,” said Flatley. “We have significant opportunity to improve procurement and supply-chain logistics, increase manufacturing automation, and lower the per-unit overhead cost of the instrument.”
Illumina reported third-quarter net income of $14.5 million, or $.24 per share, down from net earnings of $16.2 million, or $.32 per share, a year ago. The quarter included charges of $700,000 related to the Solexa acquisition and $8.7 million related to non-cash stock compensation expense. On a non-GAAP basis, the firm’s profit was flat with last year’s third-quarter result.

“Probably the thing that surprised us most is the rapid adoption outside of the genome centers.”

The firm’s R&D expenses rose to $19.8 million from $7.7 million, while its selling, general, and administrative costs expenses increased to $24.3 million from $14.1 million.
Illumina finished the quarter with $64.1 million in cash and cash equivalents.
The firm expects to report fourth-quarter revenue in the range of $100 million to $104 million, and full-year 2007 revenues of between $354 million and $358 million.
Despite surpassing analysts’ estimates for the quarter, in Wednesday morning trade Illumina’s shares dropped 6.4 percent to $58.40.
Little Impact from Wildfires
At the time of the conference call, which was 2:00 PDT on Tuesday, Flatley said none of Illumina’s facilities had been directly affected by the California wildfires. “Our buildings are fully operational, and our production lines are operating at near-full capacity.
“However, many of our employees live in areas impacted by the fires and many have been evacuated from their homes, making it difficult for them to get to work,” he said. “It’s possible there may be a modest impact on production over the rest of the week, depending on the progress in controlling the fires.”
As of Tuesday afternoon, he said the firm had not had any power problems, even though the San Diego area had been hit by power outages.
If there is any financial impact from the fires, Flatley said the firm would update investors next week.

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