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Illumina Posts Strong Q1 Revs, Targets Expression Market; Core Labs Receptive

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Illumina last week reported a significant gain in first-quarter revenues, while reiterating its pledge to bring a million-SNP-genotyping array to the market by mid-2006, and setting a new goal of picking off half of the homebrew microarray market with its new expression arrays.

The San Diego-based company is confident that its offering will convince homebrewers to put down their spotters and sign up for Illumina's commercial platform. Core labs interviewed by BioArray News, many of which spot their own in addition to working with various commercial platforms, said that they were receptive to Illumina's technology and enticed by its competitively-priced arrays, but hesitant about investing in a whole new platform.

The company reported a 40-percent gain in first-quarter revenues, as total receipts for the quarter ended April 3, 2005, climbed to $15.1 million from $10.8 million year over year.

"This is our 15th consecutive quarter of sequential growth," CEO Jay Flatley told investors during a conference call.

R&D spending increased 13 percent, to $5.9 million from $5.2 million in the first quarter of 2004, while net loss for the quarter fell to $1.2 million, or $.03 per share, from $3.9 million, or $.12 per share, in the first quarter of 2004.

The company had cash and cash equivalents of $62.1 million as of April 3.

Illumina expects second-quarter revenue to range between $15.5 million and $17.5 million, a year-over-year increase of between 35 percent and 52 percent. Illumina also said it expects total revenue for 2005 to range from $75 million to $82 million, a year-over-year increase of between 48 percent and 62 percent.

New Arrays in Pipeline

Flatley said that approximately 40 percent of the company's revenues were from consumables related to its SNP genotyping BeadStations. The company shipped 13 BeadStations in the quarter. He also reaffirmed the company's commitment to bringing a 1 million SNP array to the market by mid-2006. The company will release its 100K and 250K high-density SNP-genotyping arrays by the end of this year.

One of the newer BeadStation users is Roche Pharmaceuticals, which has integrated three of Illumina's BeadStations into its R&D efforts. Flatley told investors during the conference call that the sale to Roche represented a shift in the company's BeadStation clientele.

"Customers to date have been biased towards biochemical institutions, research institutions," Flatley said.

He said that more pharma customers had yet to materialize because of "the fact that the pharmaceutical industry has decided to treat genotyping activities as a service," rather than perform genotyping internally.

Central to the company's 2005 outlook is its expanding profile in the gene expression space. During the conference call, Flatley promised two new gene-expression products — whole-genome mouse and rat arrays — by the end of the year. The company will also launch its DASL assay this year, which analyzes RNA from paraffin-embedded samples, and will launch a custom array service for users.

The company launched its whole-human gene expression array on March 15.

While genotyping has been Illumina's primary application area, Flatley said that the company intends to gain a foothold in the crowded expression arena, which is dominated by Affymetrix, Agilent, GE Healthcare, and Applied Biosystems.

"The entire sales force is focused on selling gene expression as well as genotyping," Flatley said.

To get around the established chip vendors, Flatley said that the company plans to target the segment of researchers that still spot their own arrays, or have room to integrate Illumina into their existing platforms.

Flatley said that because of the lower cost of the arrays (roughly $160 per array versus $400 for an Affy GeneChip) as well as the array's high density, researchers would see the benefit of working with an Illumina system.

"The homebrew market is widely available to us," he said during the conference call. Later, in an e-mail to BioArray News, he estimated that the market for Illumina's expression array offering is approximately $100 million.

"We have a direct sales force that works the academic sector, including core labs. They know most of the homebrew guys," Flatley wrote.

"We think the overall homebrew market is about 30 percent of the total [gene-expression market], or around $200 million. Not all of that is addressable by us because some [research labs] spot exotic species and we have chips for human, mouse, and rat," he said.

"There is another subset that wants ultimate flexibility. They spot something different every day and they would not be likely prospects either. So we think perhaps half of the $200 million is the size of the opportunity."

Flatley said that core labs that run Affy arrays would benefit from switching to Illumina because of the high density of the arrays as Illumina's probes are spaced 3 microns apart.

In comparison, Affy CEO Stephen Fodor told investors last month that the company expects to release high-density exon arrays with probes spaced 5 microns apart in the second half of this year (see BAN 4/27/2005).

"You can do twice the amount of science on one chip," Flatley said. Flatley added that Illumina's data is very comparable to Affymetrix data.

"Our concordance is very good. In some ways it's even better than concordance that Affy has when they have a chip upgrade," Flatley said.

Of all the competitors, it is Affymetrix that Flatley credits with prompting Illumina to get into the expression market after Affy started selling its 10K and 100K Mapping arrays last year (see BAN 10/27/2004).

Affymetrix also has plans to release a 500K Mapping array this year.

"We clearly anticipated that Affy was coming into the genotyping space, and we didn't want to compete with them in just genotyping, we wanted to take our core technology into their markets and make sure that we had competitive strength against them there as well," said Flatley.

Flatley said that the firm's technical advantage coupled with its "aggressively priced" products would make it appealing to its customer base.

Core Labs Cautious, but Curious

As in any market, the promise of cheap, high-quality goods has caught the attention of the target customers.

BioArray News last week e-mailed inquiries to approximately 40 leading microarray and genomics labs from the University of Washington in Seattle to the European Molecular Biological Laboratory in Heidelberg, Germany, to gauge their opinion of Illumina's expression platform.

While the survey was hardly scientific, several of those surveyed revealed that they were in the midst of trying out the Illumina platform at their core facilities.

"Our lab will be demo-ing it next week," said Kyle Serikawa, manager of the Center for Expression Arrays at the University of Washington, Seattle.

Naftali Kaminski of Pittsburgh's Simmons Center for Interstitial Lung Disease also said that he was contemplating integrating the system into his lab's resources.

"It sounds very promising and my team is in the process of arranging an evaluation," Kaminski told BioArray News.

"We are looking at [the platform] — the central Genomics and Proteomics Core facility at the University of Pittsburgh purchased the set-up, mostly for genotyping — and if the quality and pricing are competitive, we'll seriously consider adopting the technology [for expression]," Kaminski said.

Kaminski agreed with Flatley that home brewers may be willing to make the switch to an Illumina platform.

"If you are using a mainstream organism like human, mouse, or rat, there's no sense in using homemade systems," he said.

Serikawa said that the homebrew market might be easier for Illumina to crack, as opposed to trying to steal customers away from Affymetrix.

"With homebrew, it's a lot easier to make a compelling argument that any commercial platform will be better. With Affy, in contrast, there's already been a huge investment in equipment and infrastructure, and the differences between quality of the platforms, in my opinion, is going to be far smaller," Serikawa said.

It is also the investment in equipment and infrastructure that has some core lab directors hesitant to jump head-first into using the Illumina platform.

"The bead arrays are nice, but the equipment is expensive," said Jim Woodgett of the Ontario Cancer Institute.

"My opinion is that it's pretty interesting and possibly quite exciting, but the start-up costs are extremely high," said Serikawa.

Illumina's BeadStation, which can run both expression arrays and SNP-genotyping assays, is priced at $260,000.

"If there was a way for us to get an Illumina system for cheap, we might be interested in it. Depending upon how our comparison works out — we're doing parallel experiments with Illumina and Affymetrix — that will tell us how to view Illumina. As good as Affy, poorer, better — that will influence how much we try to get a system installed," he said.

Serikawa said that despite the expensive initial investment, it was Illumina's competitively priced arrays that prompted him to try out the platform, and others agreed that price was essential to capturing a significant chunk of the market.

"If they are going to compete with Affy, performance and coverage will be important followed by price," said Shawn Levy, head of the Microarray Shared Resource at Vanderbilt University, in Nashville, Tenn.

Levy said it was possible that Illumina could translate its dominance in the genotyping arena to success in the gene-expression market but that Illumina still faced the daunting task of entering the market 10 years after Affymetrix launched its first expression product.

"Regardless of the target market, they are getting into the game a little late," he said.

"ABI is a good example of the efforts that are required to enter the market at this stage. It has taken them over a year to get any traction in the market and any success has not impacted Affy's market, but rather grab[bed] customers that are not satisfied with the Affy platform or its coverage," Levy told BioArray News.

Like others, he also voiced hesitations over Illumina's start up costs — costs that Flatley says are easily recovered by running less expensive, high-density arrays. He said the most responsive customers would be those that already do genotyping that want to run gene expression experiments as well.

— JP

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