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Solexa Unable to Record Revenue from Sequencer Sales on Time

NEW YORK (GenomeWeb News) - Solexa said last week that an "accounting technicality" will likely delay until the third quarter its ability to recognize revenue from sales of its first early version sequencers.
The company is currently working on "every aspect" of the technology to deploy an early-access version to certain customers by the end of June. Solexa had originally planned to begin recording revenue from these placements by that time, but early-access customers will not have to pay for them until they have had a chance to try them out.
Solexa formally introduced its first-generation instrument, the 1G Genome Analyzer, in December. The company next month will begin its early-access program, during which it will ship early version instruments to large genome centers and a handful of other customers. Solexa plans to begin selling the fully developed instrument broadly by the end of the year.
Meanwhile, competitors like Agencourt Personal Genomics and Helicos BioSciences claim they are hard on Solexa's heels: Both companies told GenomeWeb News sister publication Genome Technology this spring that they plan to begin marketing their next-generation sequencers in 2007, the first time they provided a timeline. In the meantime, 454 Life Sciences, which launched its Genome Sequencer 20 in February 2005, sold close to 30 units as of the end of March.
According to Solexa CEO John West, the company is still "optimizing" its instrument for early-access customers. The early-access system will have "a fraction" of the performance of the fully developed instrument, which is supposed to be able to sequence at least 1 billion bases per run to reach the goal of a $100,000 human genome at 20- to 30-fold coverage, West said.
Current work on these early versions "covers really every aspect of the systems," including its biochemistry, hardware, and software, West said in a conference call to investors last week. "At some point you have to say, 'This is in fact good enough,'" he said. Potential early access customers, he added, have told the company they want to get their hands on the technology as soon as possible rather than wait for a fully finished product.
The company has not disclosed what the exact performance of the early access instruments will be. However, it has said in the past that its scientists were able to sequence 70 million bases in one run from a sample of the human genome, and "the amount that we are likely to be able to sequence on these [early access] systems is likely to be higher than that," West told GenomeWeb News. He added that "we are still optimizing the technology, there are variations on the performance side, [and] I don't want to be guaranteeing anything."
The reason the company may not begin pocketing revenue from the instruments until the third quarter instead of the second quarter, as it had maintained publicly since at least last fall, is because its early access program "involves several weeks of pre-agreed testing by customers after installation" before they accept the instrument, West told investors last week. Later he added that the company cannot recognize revenues "until after the completion of some of the work we are doing on a collaborative basis" for early access customers.
"This is an accounting technicality," West told GenomeWeb News, because the company wants to be careful not to book revenues before customers have accepted the instrument. West told investors in March that the criteria for customers to accept an instrument will be negotiated individually, "but our expectations are that they will be relatively modest" since the technology is so new, he said.
Nevertheless, Solexa's early-access customers will pay for their instruments, which is why the company does not call them beta-testers. The machine will list for $395,000 and early customers will receive a "modest" discount. West told investors last week that Solexa anticipates early -access instruments to be "priced at multiple hundreds of thousands of dollars each, and these will be real sales, not just test site placements."
In addition, the company will sell flow cells and reagents that will cost between $3,000 and $5,000 per run, depending on the application. The company anticipates that customers will buy $100,000 to $200,000 worth of these consumables per instrument and year, chief financial officer Linda Rubinstein told investors at a meeting earlier this month.
Early access customers have to meet a number of criteria: They have to have extensive experience sequencing DNA, handling large amounts of data, and working with new technologies. The large genome sequencing centers in the US and in Europe all meet these criteria.
Solexa has not identified its early-access customers by name, but it disclosed in its first-quarter earnings report with the SEC that it will ship an instrument to EI du Pont de Nemours, currently a customer of its MPSS-based genomics service. Terms of the deal, which represents a change in its contract with Solexa, calls for the company to pay Solexa up to $1.5 million --- less than it had under the MPSS deal -- for the instrument as well as for remaining genomics services. West would not comment on the reason for the change in contract. "This is related to du Pont's own situation," he said.
Ramping, Drumming, Fund Raising
Solexa is also building its manufacturing capability, technical support infrastructure, and marketing muscle, West said. In the coming months, it plans to hire a senior executive to organize a field organization to support the broad commercial launch, and another senior executive to run the manufacturing operations. Initially, the instruments will be assembled and shipped at Solexa's California facility, while consumables will be handled at the company's UK site. Longer term, the company said it plans to outsource manufacturing of both instruments and reagents and only be involved in quality control. 
Solexa has also said plans to phase out MPSS-base service work this year and replace it with services provided on its new sequencing-by-synthesis instrument  and is currently renegotiating its contracts with current customers to switch over to SBS-based services.
In the meantime, Solexa is improving its sequencing technology in-house and seeking validation from outside, as well as trying to drum up business for its instrument at a variety of conferences and tradeshows.
Specifically, the company is planning to finish resequencing a human genome by the end of the year, publishing its data over time, and is working on being able to perform paired-end reads, where sequencing information is obtained from both ends of a DNA molecule.
"It's a capability that researchers from virtually every large sequencing laboratory we have spoken to have requested support for," West said last week. The company has already shown proof of principle for being able to provide paired end reads, and is working on several different approaches at the moment. "We expect to be able to support that from a very early stage," West said, but would not give a concrete timeline.
Most recently, Solexa presented at this month's "The Biology of Genomes" conference at Cold Spring Harbor Laboratory, where chief scientist David Bentley gave a talk.
This meeting was also the first time that outside researchers presented studies using sequencing data obtained on Solexa's system. One set of tests by a researcher at a large genome sequencing center compared data from the same DNA sample generated on three platforms, ABI's 3730XL, 454 Life Sciences' GS20, and Solexa's instrument, West told investors last week. "This was a comparison particularly on sequencing accuracy, and Solexa was seen to be substantially more accurate" than 454's system, he said, because it is able to determine the number of bases of the same type in a homopolymer run more accurately.
Cash on the Horizon?
Separately last week, Solexa said it filed a universal shelf registration statement with the US Securities and Exchange Commission that could enable it to issue up to $100 million worth of common stock, preferred stock, warrants, or debt in one ore several offerings over the next two years. it filed a universal shelf registration statement with the US Securities and Exchange Commission that could enable it to issue up to $100 million worth of common stock, preferred stock, warrants, or debt in one ore several offerings over the next two years.
The company, which begins listing on the Nasdaq Biotechnology Index today, has no immediate plans to raise cash but merely wants to be able to obtain funds quickly if it becomes necessary. "The company is actually in a very strong financial position right now," West told GenomeWeb News. "This is just putting things in place, but there is no action plan."
At the end of March, Solexa had $68.8 million in cash and cash equivalents, enough capital to meet its needs for at least the next 10 months, according to CFO Rubinstein.

Julia Karow covers the next-generation genome-sequencing market for GenomeWeb News. E-mail her at [email protected]. GenomeWeb News

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