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HD Chip Sales for GWAS, Agbio Apps Boost Illumina Q3 Revenues 54 Percent

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SAN DIEGO — Illumina last week posted a 54-percent rise in third-quarter revenue, though last year’s profit swung to a loss during the current period on charges associated with its acquisition of sequencing startup Avantome.
 
Illumina also said it plans to ramp up manufacturing in its new Singapore facility over the next year to generate 50 percent of all arrays produced by the company, after which it will determine whether to shift all array production there from San Diego.
 
Total revenue for the three months ended Sept. 30 jumped to $150.3 million from $97.5 million in the third quarter of 2007. Third-quarter product revenue climbed 56 percent to $140.3 million and receipts from services and other sources grew 32 percent to $9.9 million during the period.
 
Speaking during the firm’s Q3 earnings call, CEO Jay Flatley attributed the growth to strong sales of Illumina’s Infinium HD BeadChips to customers performing genome-wide association studies and agriculture-related projects.
 
He also discussed the role that Illumina’s array and second-generation sequencing platforms will play in the gene-expression market. Since the spring, Illumina has launched three chips in its new 2.3-million-feature HD family of arrays: the Human 610-Quad BeadChip, which pairs SNP content from the company’s HumanHap550 with 60,000 copy number variations in a four-sample format on one slide; the Human CNV370-QuadBeadChip, which features 380,000 SNPs and proprietary CNVs; and the Human1M-Duo, a two-sample version of its Human 1M BeadChip product that contains 2.4 million variations and updated CNV content (see BAN 1/8/2008).
 
“A critical product transition this year was the launch of our Infinium HD BeadChips,” Flatley said last week. “Through the end of the third quarter, we've shipped more Infinium HD [-generated] revenue than the entire company generated in all of fiscal 2005, representing what has been the most successful product launch in Illumina's history.” He did not elaborate. Illumina does not break out revenue by individual products.
 
Flatley said that the 610-Quad continues to be Illumina’s leading BeadChip product, followed by the Human1M-Duo, and the company’s 12-sample iSelect line of custom and focused-content arrays. Flatley said that demand for Illumina’s BovineSNP50 chip continues to be strong, citing “orders for over 53,000 bovine samples, representing the second quarter in a row with order value in excess of $6 million.”
 
GWAS and Agbio
 
According to Carsten Rosenow, Illumina’s senior marketing manager of DNA-analysis products, demand for the 610-Quad is coming largely from customers performing genome-wide association studies, which “have seen tremendous success over the past two years.”
 
“We have now over 180 publications related to successful GWAS projects over more than 50 disease types,” Rosenow told BioArray News last week at the company’s headquarters here. “All of them found significant associations, so the research community is very intrigued to run more, and to run more on different diseases,” he said.
 
“Clearly the message is that the more samples you run, the more significant variations you find,” he said. “So all of these consortia keep adding samples and finding more associations.”
 

“You can imagine some day where sequencing costs $500, but running a chip costs $5. And there will be a market for both, even at that point.”

Rosenow said that recently, GWAS efforts have trended towards more complex diseases with researchers focusing increasingly on rare variants. Additionally, he said that Illumina has seen interest in the HD arrays spread from academics to pharmaceutical and biotech clients. “Historically, [pharma] has tended to wait a bit before adopting something new,” he said. “I know they have been doing some pharmacogenetics and some genome-wide association studies” using the arrays.
 
He said that Illumina has also seen an increase in interest from the agbio community. To date, the firm has made available SNP arrays for bovine, equine, and canine studies.
 
“I think it became clear once we were approached by a few of the ag consortia, and particularly the bovine consortia, that there was a big interest in the ag community to do disease studies similar to the ones we do with humans, but also trait studies within animals and use that information to better understand these traits,” said Rosenow.
 
He said that Illumina will soon add two new content-themed arrays to its ag menu, though he declined to discuss for what research segments those arrays would be targeted. Rosenow added that Illumina has been hiring more specialists to work with its agbio customers. He declined to elaborate.
 
Flatley said in the call that, despite turbulence in the global financial market, Illumina expects demand from ag-bio customers to continue. “One of the characteristics that these companies are all looking for is the ability to screen up into the millions of samples at very low price points,” Flatley said. “That will enable these companies to be much more effective in producing crops, to do that more cheaply, and to create crops that are more disease-resistant, and certainly help to solve the world's food problem,” he said. “If anything, I think the tightness around the economy is putting more emphasis on investments in this area.”
 
Analog and Digital Expression
 
Though Illumina does not break out quarterly numbers for its DNA analysis and RNA analysis businesses, Flatley said that the firm’s gene expression-array sales continue to grow. “It doesn't necessarily grow every quarter sequentially to the next quarter, so it bounces around a little bit, but it's still a very healthy business for us,” he said.
 
At the same time, he acknowledged that expression applications designed to run on Illumina’s Genome Analyzer have encouraged more Illumina customers to switch from analog gene expression in arrays to digital gene expression on its sequencer.
 
Earlier this month, Illumina launched mRNA-Seq for mRNA sequencing on the Genome Analyzer. Flatley said that mRNA-Seq, which costs around $800 per experiment, could provide researchers with “vastly better data than you could ever get off an array.”
 
At the same time, Flatley tried to reassure investors that the firm’s sequencing business will not cannibalize its array-based genotyping business. “As rapidly as sequencing is coming down in price, we're driving down the cost of genotyping as well. And so, if you know what you're looking for, it is always going to be radically cheaper to do genotyping,” Flatley said.
 
“And as we do more and more sequencing, we're going to understand more about what never changes and what sometimes changes. And so, there's going to continue to be a very strong market for genotyping,” he said. “You can imagine some day where sequencing costs $500, but running a chip costs $5. And there will be a market for both, even at that point.”
 
Singapore Swing
 
Illumina’s third-quarter R&D expenses rose 39 percent to $27.6 million from $19.8 million in the comparable period of 2007. Illumina Chief Financial Officer Christian Henry attributed part of the increased R&D costs to the firm’s efforts to bring online its Singapore manufacturing facility.
 
Henry said that Illumina expects to ship 25 percent of its arrays from Singapore during the fourth quarter, which could result in an annual federal corporate tax rate “significantly lower” than the 36 percent it currently pays.
 
Flatley said that Illumina’s “first benchmark” is to ramp manufacturing in Singapore to 50 percent of all arrays produced by the company. “Once we get to 50 percent, we're going to determine what to do from there,” he said. “We have plenty of space in Singapore, and so we can continue to move more decoding machines over to Singapore from our factory in San Diego, but we're going to look at the mix, we're going to look at the international demand, look at the actual impact on tax rates, look at what our gross margins look like in Singapore versus San Diego, meaning what the cost structure really is once you get fully ramped up,” he added.
 
Flatley said that once Illumina evaluates those factors, the company will decide whether to manufacture more than 50 percent of its chips in Singapore and whether it makes sense to move other product manufacturing there.
 
“Probably by [the] middle of next year, we will begin to evaluate as well whether it makes sense to make any other part of our product line other than BeadChips over in Singapore,” he said. “That's an open question for us right now.”
 
Q4 in Full
 
Total receipts for the quarter ended Sept. 30 swelled 54 percent to $150.3 million $97.5 million year over year. Third-quarter product revenue climbed 56 percent to $140.3 million while revenue from services and other sources grew 32 percent to $9.9 million.
 
R&D expenses during the period climbed 39 percent to $27.6 million from $19.8 million in the comparable period of 2007. R&D expenses included $3.5 million and $2.6 million of non-cash stock compensation expense in the third quarter of 2008 and 2007, respectively, and, during the current period a $600,000 charge representing accrued contingent compensation associated with its acquisition of Avantome, which closed in the third quarter (see BAN 8/5/2008).
 
Selling, general, and administrative expenses for the quarter rose 62 percent to $39.4 million from $24.3 million in the year-ago period. They included $8 million and $4.9 million of non-cash stock compensation expense in the third quarter of 2008 and 2007, respectively.
 
Illumina said that its acquisition of Avantome brought a charge of $24.7 million associated with in-process research and development.
 
As a result of this charge, the company recorded a GAAP net loss of $7.3 million, or $.06 per share, compared to net income of $14.5 million, or $.12 per share, in the comparable period of 2007.
 
The loss also included non-cash charges of $12.7 million in stock compensation expense, $2.7 million associated with the amortization of intangible assets, and $600,000 in accrued contingent compensation associated with the Avantome buy.
 
Excluding the impact of these items, Illumina said that its third-quarter net income on a non-GAAP basis was $28.6 million, or $.22 per diluted share, compared to $19.9 million, or $.17 per diluted share, for the third quarter of 2007.
 
As of Sept. 30, Illumina had $355 million in cash and cash equivalents.
 
For the fourth quarter of 2008, Illumina expects revenues between $152 million and $156 million, which would represent year-over-year growth of between 35 percent and 38 percent compared to the fourth quarter of 2007.
 
The company said it expects full-year 2008 revenue to be between $564 million and $568 million, which would be year-over-year growth of between 54 percent and 55 percent.

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