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Illumina Plans International Manufacturing Hub as it Expands San Diego Facilities

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Illumina is looking to establish an international manufacturing facility with the goal of manufacturing its BeadChips for gene expression and genotyping at a "high level" some time next year, according to the firm's CEO.
 
Jay Flatley told investors during a first-quarter earnings call two weeks ago that while the company is in the midst of a large-scale build-out at its San Diego manufacturing facilities, it now is committed to transferring some of its manufacturing off shore.
 
The move mirrors a decision by Affymetrix, which purchased a chip-manufacturing plant in Singapore in 2005. However, while Affy's intention was to increase capacity, cut tax cost, and to better serve its clients in the Asian market, Illumina's plan stems primarily from its desire to reduce its corporate tax rate.
 
"We are in the process of identifying an additional manufacturing facility in an international location," Flatley said during the call. "This is part of an overall strategy to mitigate our tax exposure as we are a very profitable company and have used most of our net operating loss carried forward. We expect to have this new manufacturing facility up and running in 2008," he said.
 
As Flatley explained during the call, Illumina is in the midst of a major manufacturing upgrade at its San Diego location, and the addition of an international manufacturing hub will be part of an expansion of capabilities, rather than one of moving Illumina's resources from San Diego to a place like Singapore, for example.
 
"The need for manufacturing resources in San Diego is growing," Flatley said. "In January, we entered into a lease for an 80,000-square-foot facility on our campus in San Diego," he said. According to Flatley, construction on the new building will begin in May and should be completed by the fourth quarter of 2008.
 
"This facility will enable us to continue growing our manufacturing, commercial, and R&D capabilities," Flatley added.
 
In a follow-up e-mail exchange with BioArray News this week, Flatley wrote that the proposed international plant will be "additional capacity expansion." The company will most likely start manufacturing BeadChips at that facility, although he wrote it could expand to include the manufacture of other Illumina products such as its Genome Analyzer next-generation sequencer or its digital microbead-based BeadXpress platform.
 
Additionally, Flatley wrote that Illumina plans to lease, not buy, a facility. He also wrote that the company is not prepared to discuss a specific schedule for bringing the plant on line until it finishes negotiations with the potential host countries, but at a "high level [Illumina] should begin some manufacturing offshore in 2008."
 

"This is part of an overall strategy to mitigate our tax exposure as we are a very profitable company and have used most of our net operating loss carried forward."

Last month, Illumina announced that it would shutter activities at its East Wallingford, Conn., facility, where BeadXpress was developed and manufactured, and transfer some of those activities to its San Diego facilities.
 
"We plan to wind down activities in Wallingford over the remainder of the year as we ramp up corresponding activity in San Diego," Flatley said during the Q1 call. Flatley said that Illumina will take a charge of approximately $2 million for fiscal 2007 related to the facility closing. He added that Illumina does not expect this charge to impact its guidance for the rest of the year.
 
No Bump for Asia?
 
As Illumina begins scouting locations for its new manufacturing facility, it’s likely that it may find several locations in Asia amenable, including Singapore and Taiwan — two countries that offer skilled and affordable personnel that are veterans of the semiconductor manufacturing industry. But Flatley wrote this week that locating a facility in Asia will probably not have an impact on the company's position in that market.
 
"I don’t think this is a big factor," Flatley wrote. "Shipment time differences of a day or two are not significant in the equation of market penetration."
 
Flatley wrote that the company does not disclose its sales by region, but that between 30 and 40 percent of Illumina's business is done abroad, depending on the quarter.
 
The company is currently represented in Asia by direct offices in Singapore, China, and Japan, and distributors in Malaysia, Vietnam, Thailand, Taiwan, Korea, and India.

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