While many economists and analysts are projecting a diminished National Institutes of Health budget next year, Illumina's CEO doesn't believe such cuts will have a negative impact on the company's business.
Not only are these estimates gloomier than Illumina's internal projections, but the company is still seeing rising demand for next-gen sequencing as well as increasing array sales to applied markets such as agricultural biotechnology research and forensics, he said.
"We are clearly going into a cycle where government budgets are going to be tough, and so we are broadening as fast as we can into applied markets … for both sequencing and arrays," Flatley told investors last week at the Rodman and Renshaw Global Investor Conference in New York.
Also, Illumina believes NIH funding "isn't going to drop precipitously," Flatley said. "It may be negative for the next year or two, but the most important factor for our growth is to make sure that sequencing gets a bigger piece of the pie."
In addition to Rodman and Renshaw, Flatley last week presented at the Morgan Stanley Global Healthcare Conference and at the UBS Global Life Sciences Conference this week, both of which were also held in New York. Each of Flatley's presentations was webcast.
At each conference, Flatley sought to assuage investors that, while it is likely that NIH's fiscal 2012 budget will be reduced, the cuts will not be so deep as to affect the firm's top line.
Moreover, Flatley said Illumina internally predicts that the budget will decrease "modestly," which could be either unchanged from 2011 or between 1 percent and 3 percent smaller.
"This has been an area of significant concern in the marketplace with some of the deficit and debt-ceiling problems that have been in the news here over the last couple months," Flatley said at Rodman and Renshaw. "There are some scarier numbers that people are throwing around, but we don't think those are ones that will materialize."
Illumina is certainly exposed to cuts in NIH funding. Flatley said that about 80 percent of the firm's business overall comes from government and academic-funded sources — 65 percent from NIH and other government agencies both in the US and abroad; and 15 percent comes from endowments, philanthropic, and non-profit contributors.
"If you do the math in terms of our overall exposure to NIH, it comes out to be about a third of our business that comes directly from NIH funding," Flatley said.
The extent to which NIH budget reductions will impact Illumina depends on the outcome of Congressional budget negotiations. Based on the contents of the US Budget Control Act of 2011, Flatley said there are a number of outcomes for the 2012 budget, each of which would affect Illumina to a different degree.
One is that the Congressional Joint Select Committee on Deficit Reduction, known as the "super committee," manages to introduce a bill to Congress that would reduce the budget by $1.2 trillion through 2021.
The second is that the committee reduces the deficit by less than that, leading to an automatic 8-percent cut to the remainder of the budget, while the third option is that the committee could fail to agree on budget reductions, which would lead to an 8-percent across-the-board cut.
Also, Congress could pass new legislation that supersedes the Budget Control Act.
Of the different options, Flatley said that the third would have the most negative impact on the company.
A "broad 8-percent cut would be dire circumstance for lots of government agencies, NIH in particular," said Flatley. "Certainly, if that happens, it would affect our business."
At the same time, he said that Illumina has been in a "fortunate position" in that its share of NIH funding continues to increase due to growing demand for next-gen sequencing among federally funded researchers. He estimated that NIH allocations for sequencing-related projects have risen 16 percent compounded annually over the last few years.
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"The good news for Illumina is that sequencing as a percentage of the pie continues to grow … so against the backdrop of cuts in overall budget we are confident that our business will continue to have growth as a result of that change," he said.
At UBS, Flatley estimated that the first option, a $1.2 trillion cut, would be the "best outcome" for NIH-funded researchers and therefore Illumina. "As you have heard from many on Capitol Hill, nobody wants to vote against curing cancer," he said.
Meantime, at Morgan Stanley, Flatley said that despite concerns about the federal budget, NIH funding historically has been the "most reliable" source of Illumina's sales when compared to pharmaceutical and other companies, even though they, too, receive NIH funding.
Illumina is also not immune from European budget cuts, but Flatley said that the firm's 2012 revenues in the region should remain stable.
"The countries that are affected in Europe most acutely by the economic situation [there] are not the countries that tend to participate significantly in life sciences research," he said. "So the situations in Greece, Ireland, and Portugal don't really impact us. As a whole, Europe has some challenging economic situations that have yet to fully play out, so we are cautiously optimistic it will stay stable."
While Illumina continues to monitor congressional budget negotiations, the company is seeking to expand its reach into the applied markets to grow its business. At Rodman and Renshaw, Flatley called the applied markets a "billion-dollar" opportunity.
Illumina has launched a number of agbio products over the past few years, most of which were co-developed with different consortia. For instance, the firm sells catalog genotyping arrays for bovine, ovine, canine, porcine, and maize studies. And either available or in development are consortium-designed SNP chips for tomato, apple, peach, cherry, grapevine, and goat studies.
At Morgan Stanley, Flatley said that Illumina' iSelect HD Custom BeadChips are also favored by agbio researchers, particularly the quad format, which allows customers to run four samples on a chip containing four custom arrays comprising between 250,000 and 1 million markers apiece.
"This is very popular in the ag market, where organisms get sequenced and then the [researchers] might have a follow-up study where they want to do tens of thousands of samples but with several hundred thousand markers," Flatley said. Overall, he said the reduction in the price of sequencing has allowed ag researchers to obtain sequence information for their organism of interest and then migrate the most promising content over to arrays for large studies.
"We expect this to continue, and it will drive the broad use of arrays for doing plant and animal screening for food crops to improve their yield," said Flatley.
Another market in which Illumina is starting to gain some traction is forensics. Flatley predicted that labs and companies that offer forensics service will over time transfer to using SNPs to develop genetic profiles, from relying on short tandem repeat polymorphisms, which became the industry standard in the 1990s.
A company spokesperson told BioArray News this week that at least two forensics firms are using Illumina arrays. The first, Casework Genetics, is using the Omni1-Quad for the analysis of complex forensic mixtures. The Stafford, Va.-based forensics technology provider adopted the platform two years ago (BAN 10/20/2009).
Another firm that is using Illumina SNP arrays is Identitas. The spokesperson said that Illumina has recently synthesized and is running initial evaluation samples on a custom phenotyping array developed by the New York-based forensic phenotyping services provider. She did not elaborate.
GWAS and Gene Expression
At all three investor conferences Flatley also commented on the firm's offerings for genome-wide association and gene-expression profiling studies.
In terms of GWAS, Flatley at Rodman and Renshaw touted the firm's recently launched 5-million-marker HumanOmni5-Quad DNA Analysis BeadChip as the "highest complexity, most complete array including rare variant content of anything on the market today." Illumina launched the chip in July (BAN 7/26/2011).
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Illumina for years has promised investors a "second wave" of "rich" association studies driven by the availability of rare variant content generated from sources such as the 1000 Genomes Project. The firm in 2009 laid out a roadmap for introducing this next generation of rare content-containing, high-density SNP chips. Following that roadmap, Illumina launched the Omni2.5-Quad, a four-sample BeadChip that contains 2.5 million markers per sample, in June 2010. However, it had to delay the launch of the Omni5, which was originally supposed to launch in the fourth quarter of 2010, to the middle of 2011, as more content became available (BAN 11/2/2010).
Illumina officials in the past have linked broad adoption of the new chips to successful studies by initial adopters.
"We are optimistic that there will be some interesting discoveries here, but it is a wait-and-see situation for us," Flatley told investors at the Goldman Sachs Global Healthcare Conference in June (BAN 6/14/2011).
At Morgan Stanley last week, Flatley said that there are "four or five of these proof-of-principle studies underway" based on the Omni2.5. He said that the first results of the studies may be discussed at the American Society of Human Genetics annual meeting, to be held in Montreal next month.
"We'll get significant information over next six months on what was discovered using rare variant content on the Omni2.5," said Flatley. "No one knows yet how those are going to turn out but we know that human disease is heritable in the genome, and if it's not in rare variants, it's going to be in methylation or some other part of genomic structure."
Flatley also discussed a "very important study" underway comparing the performance of the Omni5 with low-pass sequencing. The Illumina spokesperson said that Flatley was most likely referring to a diabetes study led by David Altschuler of the Broad Institute, Mark McCarthy at the University of Oxford, and Mike Boehnke of the University of Michigan.
"These are very different scientific approaches," Flatley said. While low-pass sequencing allows researchers to look at every base — though "not at a very high depth" — arrays enable users to survey markers that are "signposts spaced carefully across the genome." The researchers will compare the two approaches for cost efficiency and scientific discoveries yielded.
"We are very curious to see how it turns out," said Flatley.
The "good news" for Illumina, at least from its own perspective, is that it claims to be a leader in both the array and sequencing markets. At Rodman and Renshaw, for instance, Flatley claimed Illumina held between 60 percent and 70 percent of the sequencing market.
"Whether the technology remains on arrays or moves back more towards arrays, we are the leader in the market for GWAS, and similarly we are the market leader in sequencing," said Flatley.
At UBS, Flatley also discussed the firm's expanding stake in the market for gene-expression profiling tools, which has for years been dominated by Affymetrix. Flatley said that RNA-seq is cutting into Affy's market share.
"We are seeing a rapid migration of gene expression to sequencing from arrays," he told the UBS audience.
Flatley has long argued that the digital gene-expression measurements provided by RNA-seq are superior to the "analog" measurements provided by microarrays. As early as 2007 he was telling investors that sequencing would overtake arrays and reinvigorate the mature expression market (BAN 6/19/2007).
Array vendors like Affy long denied the impact RNA-seq would have on their sales. During Affy's most recent quarterly conference call, though, new CEO Frank Witney admitted that the firm has been "slow to react to technology changes" and said it was clear that the firm had lost some business to sequencing-based applications (BAN 8/2/2011).
At UBS this week, Flatley said that more researchers are choosing RNA-seq over arrays because of "more accurate" data and the ability to measure a broader dynamic range, or abundance of transcripts, in a sample.
In terms of dynamic range, he claimed that arrays can "only measure three orders of magnitude," while sequencing offers measurements of "seven to eight orders of magnitude." Sequencing "detects any base, any splice site in the genome, while arrays only detect what has been printed on the array;" he added.
Flatley said that data challenges that initially slowed adoption of RNA-seq are increasingly being overcome. "Customers have moved applications from development labs into full production," said Flatley. "We are seeing very rapid uptake on the RNA side. We think the microarray market will continue to shrink as customers make the transition over to using sequencing."
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