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Illumina CEO Discusses ENCODE, GWAS, and NIH Funding at Investor Conference

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This article was originally posted on Sept. 13.

The dozens of new papers published recently by members of the Encyclopedia of DNA Elements, or ENCODE, consortium could have "significant implications" not only for science but for Illumina's business, according to the firm's CEO.

In 30 papers published last week in Nature, Science, Genome Research, and elsewhere, ENCODE members demonstrated that they were able to assign biochemical functions to around 80 percent of genome sequences — filling in large gaps left by studies that focused only on protein-coding sequences, which account for about 2 percent of the genome.

Illumina's Jay Flatley said that the ENCODE papers both helped to explain why array-based genome-wide association studies had not succeeded in correlating genomic variation with disease as anticipated, and pointed toward a need for more scientists to do whole-genome sequencing, as opposed to array-based genotyping or exome sequencing, going forward.

"This has significant implications for science and for medicine, clearly," Flatley told investors earlier this week at the Morgan Stanley Healthcare Conference in New York. During the conference, which was webcast, Flatley also discussed the academic funding environment in the US, stressing that, despite uncertainty about next year's National Institutes of Health budget, the dominance of sequencing, and whole-genome sequencing in light of the ENCODE papers, would play to the company's advantage.

"One conclusion is that sequencing the exome is not where you need to be," Flatley said of the ENCODE papers. "You need to sequence the entire genome to get access to the entire spectrum of variation and regulation across the entire genome."

Flatley added that the ENCODE findings "may in part be an explanation for why the earlier GWAS work didn't produce as significant a conclusion about the correlation of the genome to disease as we might have hoped."

Over the years, Illumina has sold whole-genome genotyping arrays of increasing densities to researchers interested in running such association studies. At the conference, Flatley acknowledged that these arrays "were focused densely on markers inside of the genes and not so densely on markers outside of the genes," areas that, according to the ENCODE papers, also have biological function.

"In fact, many of the GWAS hits fell outside of the genes — results that were largely not explained during the era of GWAS," said Flatley.

Illumina has seen diminishing demand for its whole-genome genotyping arrays in recent quarters. Flatley said during the firm's second-quarter earnings call in July that the high-density SNP chips were "trending downward," though the decline was offset by demand for the company's exome arrays and agricultural biotechnology-focused arrays. Because of this seesawing trend, Flatley at the time characterized the overall array business as "roughly flat" (BAN 7/31/2012).

'No Crystal Ball'

Last August, the US Congress voted to expand the country's debt ceiling in order to avoid going into default. The deal authorized a bipartisan committee to find ways to cut $1.2 trillion from the deficit over the next 10 years, but the panel was unable to reach an agreement. An 8 percent, across-the-board funding reduction, known as sequestration, is now scheduled to begin in January if Congress doesn't find other ways to cut the deficit.

Flat or declining public spending on research, both in the US and abroad, cost Illumina last year. Third-quarter 2011 revenues fell 1 percent compared to Q3 2010, array sales dropped 9 percent, the company suspended making financial forecasts indefinitely, and ultimately laid off 200 employees as part of a restructuring (BAN 10/25/2011).

This week, Flatley said that Illumina has "no crystal ball" in terms of what effect the planned sequestration will have on the NIH budget. While he said that "political views aside, the NIH budget is probably more favorable under a Democratic administration than a Republican administration," and that Illumina will be watching the presidential election "very closely," the company also "feels very positive that the NIH has strong bipartisan support." Because of this, Flatley speculated that an 8 percent sequestration over an extended period of time is "quite unlikely," and that it is "more rational" to expect a "flat" NIH budget in coming years.

"Nobody knows the answer," Flatley added. "We'll just have to wait and see."

From a company planning perspective, Flatley said that Illumina wants to continue its push into the clinical and applied markets to diversify its revenue sources — "not away from NIH and academic funding because that, quite frankly, is a great market, too," but to "create more balance in the portfolio and create growth in those markets that are less sensitive to the whims of government budgets."

As the firm heads into Q4 and the first quarter of 2013, though, Flatley said it will be "cautious" about its hiring plans.

"We typically have been hiring between 50 and 100 people a quarter. We have a fair number of requests for employees, and if sequestration hit, we'd slow that down," said Flatley. "I doubt we'd do anything dramatically different; I doubt we'd have any huge layoffs in the company if sequestration came on line, so we think that largely it's going to be business as usual" even with sequestration, Flatley said.

And if the NIH budget is cut by 8 percent, Flatley assuaged investors that the firm's exposure to NIH funding is "diminishing over time," saying that Illumina's academic exposure has declined to 70 percent from 80 percent over the past year. At the same time, he noted that the "sequencing part of the pie is getting bigger and bigger" as a percentage of total NIH funding, a trend that would benefit Illumina, even in the case of a budget cut.

"Research results like we have seen from ENCODE can make difference in the bias of dollars toward sequencing," said Flatley.

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