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Illumina Seeing Strong Demand for New Platforms as Q1 Revenues Rise 148 Percent

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Illumina this week reported that its first-quarter revenues increased 148 percent with strong customer demand for its recently launched Genome Analyzer and BeadXpress platforms.
 
The firm now has three instrument platforms on the market and predicts significant revenue growth in 2007 driven by sales of the next-generation DNA sequencing platform it picked up through its acquisition of Solexa earlier this year, followed next year by gains in the molecular diagnostics market. Company officials said this week that both of the new platforms will play a role in Illumina’s plans for the molecular diagnostics field.
 
The company said this week that it brought in revenue of $72.2 million for the three months ended March 31, compared with revenue of $29.1 million in the first quarter last year.
 
Illumina’s product revenues nearly tripled in the quarter, rising to $61.2 million from $21.3 million, while service and other revenue more than doubled to $10.8 million from $5.2 million year over year.
 
During a conference call following the release of the results, CFO Christian Henry said that the firm is no longer reporting total unit placements for each of its three instrument lines. But he noted that the firm had total instrument revenue of $19.6 million in the first quarter compared with $5.8 million for the first quarter of 2006, and $13.2 million in the fourth quarter of 2006.
 
Illumina’s net loss grew to $298 million, or $5.58 per share, from $104,000, or $0.00 per share, in the year-ago period. The firm’s $600 million acquisition of Solexa in late January, which included a $303 million charge, was primarily responsible for the loss (see BioCommerce Week 11/21/2006).
 
Excluding the impact of the charges related to the Solexa acquisition and $7.7 million in non-cash stock compensation expense, Illumina’s net income for the quarter would have been $12.7 million, or $.22 per share.
 
The firm’s R&D spending almost doubled to $16 million from $8.2 million in the year-ago period, and company officials said during the call that R&D expenses will go up in the second quarter as the firm funds more research and development activities related to the Genome Analyzer.
 
Illumina’s SG&A costs rose to $23.6 million from $12.1 million year over year due largely to costs associated with the Solexa acquisition and litigation expenses.
 
Strong Start for BeadXpress
 
Illumina President and CEO Jay Flatley said during the conference call that initial demand for the BeadXpress platform “has been strong.”
 
The BeadXpress is based on the VeraCode digital microbead technology the firm gained through its $17.5 million acquisition of CyVera in April 2005. The instrument allows researchers to assay tens to hundreds of analytes in a single sample at one time. In addition to molecular diagnostics, Illumina anticipates the system will be used for biomarker research and validation, pharmaceutical development, industrial testing, and agricultural research.
 
Flatley said that since the firm launched the instrument in late March, four customers have ordered all three of Illumina’s instrument platforms.
 
He said that early adopters of the BeadXpress are doing mostly genotyping with the system. “On the proteomics side, it’s going to take some application development on the part of the customers,” he said.
 
The biggest potential market for the BeadXpress, though, is molecular diagnostics, and Illumina is currently working on getting the instrument into that market.
 
“We have to complete our program of ISO certification internally, and we need to feel comfortable that the instrument is stable and that the configuration is fixed and the early bugs are worked out,” said Flatley. “We don’t think that will take very long. Certainly, in the next six months we’ll be prepared to begin thinking about submitting it to the FDA.”
 
Flatley said the strategy is to pursue a number of diagnostic partnerships in parallel, such as its collaborations with DeCode Genetics and the Mayo Clinic. “We anticipate that the first test will be [a] myocardial infarction test with DeCode,” said Flatley. “Our goal is to get that through the FDA in 2008.
 
“We don’t think there will be significant revenue from that in 2008 — it will take a while to build up the marketing side of that — but we expect that that will be the first commercial product,” he said.
 
In terms of using the next-generation sequencing technology in diagnostics, Flatley said that he expects that it will eventually become a “very powerful diagnostic tool, particularly in areas where you have highly variant diseases,” such as cancer.
 
Illumina is currently scaling up production of the Genome Analyzer, which was recently commercially launched following completion of an early access program. Flatley reiterated that the firm expects the sequencing products to “represent a substantial portion” of Illumina’s 2007 revenue.
 
He said the user base for the Genome Analyzer is expanding rapidly, and sales efforts will initially be weighted toward the academic market. He also noted that the firm has received orders from all over the world and has received some orders from industrial customers.
 
Long Way to Go in Affymetrix Litigation
 
Flatley also addressed the current status of Illumina’s ongoing litigation with Affymetrix.
 

“Certainly, in the next six months we’ll be prepared to begin thinking about submitting [the BeadXpress] to the FDA.”

A jury for the US District Court for the District of Delaware last month decided that Illumina infringed all five Affymetrix patents at issue in the case and has awarded Affymetrix $16.7 million in damages (see BioCommerce Week 3/14/2007).
 
The jury’s award was based solely on a 15 percent royalty on sales of Illumina’s infringing products, but did not include any compensation for lost profits. Affymetrix originally had asked the jury to award $12.2 million in damages based on a 12 percent royalty rate on sales of infringing products sold by Illumina through 2005.
 
Illumina has said it would appeal the verdict and would continue selling the products that are the subject of the suit.
 
The second phase of the Affymetrix trial is expected to take place later this year and will address the validity of the patents at issue, Flatley said this week. In a third phase of the trial, the court will hear Illumina’s defense of inequitable conduct by Affymetrix and counterclaims for tortious interference and unfair competition.
 
“We believe that our defenses of invalidity and unenforceablity of the patent asserted by Affymetrix are very strong,” said Flatley. “Should we succeed in proving that any of these patents are invalid or unenforceable, it’s likely the judge will order a new trial on damages.”
 
He said appeals are expected to occur once all three phases of the trial have been completed.
 
Asked if the firm could disclose its litigation costs during the first quarter, Henry said Illumina does not break out those numbers, but “they were very significant during the quarter. That and adding the Solexa employees were the primary drivers for SG&A growth over the fourth quarter.”
 
Since it was the first phase of a multi-phase trial, it is unclear whether Illumina will ultimately have to pay Affymetrix the $16.7 million. Under accounting rules, the firm is only required to record the liability if “it is probable we would have to pay the damages and if we were able to estimate the amount of the damages,” said Henry. “Since we have not met the criteria for recording a liability, there is no expense recorded in the first quarter.”
 
Illumina finished the quarter with around $327 million in cash, cash equivalents, and short-term investments.
 
The company said it expects 2007 revenue to be between $305 million and $315 million.
 
It forecasts revenues of between $74 million and $78 million for the second quarter, and expects net income of between $12 million and $14 million and EPS of between $.19 and $.23 for the second quarter.

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