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Analysts Gauge Impact after FDA Tells Illumina Client 23andMe to Cease Marketing its Services

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This article was originally posted on Nov. 27.

The US Food and Drug Administration's recent letter to consumer genomics firm 23andMe could have repercussions for the microarray industry's leading vendor.

Analysts for two investment firms released research notes last week after the FDA sent a letter to Mountain View, Calif.-based 23andMe instructing it to cease marketing its genetic testing services. Both notes concerned the impact the potential cessation of 23andMe's activities could have on Illumina, which supplies the chips 23andMe uses in its services.

23andMe has used Illumina chips since it introduced its services six years ago, and recently announced plans to move to a new, higher-throughput, custom designed array.

Goldman Sachs' Isaac Ro wrote that the investment firm believes the developments could have a "modestly negative" impact on Illumina's 2014 revenues, and he lowered the bank's estimates for the firm's fourth-quarter 2013 revenues by $1.5 million, and its fiscal year 2014 revenue forecast by $25 million to $1.57 billion.

Ro noted that Illumina CEO Jay Flatley has said previously that the firm expects consumer genomics sales to contribute $50 million in revenues this year. While Illumina supplies chips to the other three leading consumer genomics testing providers – Ancestry.com, Family Tree DNA, and National Geographic's Genographic Project – Ro wrote that 23andMe is the "largest customer in this segment," and estimated that sales to 23andMe account for half of the firm's consumer genomics-derived revenues, or about $25 million. This led the investment bank to remove any assumptions tied to 23andMe from its Illumina forecasts, Ro wrote.

William Blair analyst Amanda Murphy estimates that Illumina chip sales to 23andMe account for about $20 million in revenues, slightly less than Ro's estimate, based on 200,000 samples processed through the first eight months of this year at $75 per sample.

"Assuming 23andMe stops sales of the PGS immediately would lower our fourth quarter and full year 2013 revenue estimates by $1.67 million and [earnings per share by] less than a penny," Murphy wrote. "For 2014, we assume the $20 million in revenue from 23andMe would grow by 30 percent, representing roughly $26 million to revenue and $0.03 to EPS."

Like Ro, Murphy based her estimates on Flatley's forecast of $50 million in 2013 consumer genomics revenues.

While any cessation of 23andMe's activities could negatively impact Illumina, Ro wrote that Goldman Sachs believes that investors will likely "look past any incremental growth headwinds precipitated by the loss of revenues from 23andMe," as the firm's narrative is "still centered on the long-term potential for next-generation sequencing technology to penetrate the broader diagnostics market."

Murphy concluded that "although more FDA oversight would increase the risk and cost burden," the investment firm believes that it would be a "net positive for companies with a wealth of data supporting their assays, like Myriad Genetics, Genomic Health, and Veracyte."

It is unclear exactly how 23andMe intends to respond to the FDA's letter. A company spokesperson told BioArray News that she could not comment on the matter. Anne Wojcicki, 23andMe's CEO and co-founder, discussed the matter in a Nov. 26 post on the firm's blog. In that post she said that the firm's dialogue with the FDA was "new territory" for both 23andMe and the agency that will "help lay the groundwork for what other companies in this new industry do in the future." She added that 23andMe is "committed to making sure that 23andMe is a trusted consumer product."

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