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Illumina Says Array Sales Are 'Stabilized' Despite Decline in Q1 Chip Revenues


This article has been updated from a version posted April 29 to include additional information from the company's earnings call.

By Justin Petrone

Reporting a 16-percent jump in total first-quarter revenue, Illumina last week said array sales in the period were down year over year though orders for its next-generation genotyping arrays were up.

Illumina, which attributed its total revenue increase to strong demand for high-throughput sequencing consumables and instruments, also said it is optimistic about the array business going forward.

Total revenue for the three months ended April 4 rose to $192.1 million from $165.8 million in the year-ago period, Illumina said. Analysts, on average, had expected Q1 2010 revenues of $178.6 million.

Product revenue increased to $173.7 million from $156.2 million, while service and other revenue nearly doubled to $18.5 million from $9.6 million, the company added.

Christian Henry, Illumina's chief financial officer and general manager of life sciences, said during a conference call that even though first-quarter revenue generated by the firm's microarray business declined year over year, array sales did increase sequentially for the second consecutive quarter.

"We now believe our array business is stabilized," he said. He added that sales of the company's sequencing products grew significantly during the quarter.

Leerink Swan analyst John Sullivan last week said Illumina's array business appears stable. "We continue to think the combination of increased densities, new content arrays, and increased array-based validation work for [next-generation sequencing] will continue to support a flattish growth profile in arrays," Sullivan wrote in a research note.

Illumina's consumables revenues rose 11 percent to $114 million from $103 million during the first quarter of 2009. Though sales of microarray consumables fell during the period, they still represent more than half of Illumina's consumables revenue, said Henry. The company does not break out consumables sales by product.

Henry attributed the year-over-year decline in the array business to lower sales of whole-genome genotyping arrays, which was partially offset by growth in focused content arrays.

CEO Jay Flatley said during the call that array shipments were led by Illumina's Omni1-Quad BeadChip, followed by its 660W-Quad BeadChip. Still, while the Omni1-Quad had the "strongest quarter since its launch, our total whole-genome, or [genome-wide association studies] revenue declined sequentially and year over year," Flatley said. This decline was partially offset by demand for focused-content arrays, according to the firm.

Despite these declines, he said Illumina has been "encouraged by the fact that orders for whole-genome arrays have grown sequentially over the past two quarters."

Illumina estimated that around $21 million worth of Q1 orders were attributable to projects supported by the American Recovery and Reinvestment Act of 2009, though Flatley said it was "difficult" to discern which orders were linked to the stimulus and which ones would have been the "base business." Flatley declined to comment during the call on how the stimulus had impacted array orders.

New Chips

In October 2009, Illumina said that in 2010 it would debut a 2.5-million-variant BeadChip followed by a 5-million-variant BeadChip as content from the 1000 Genomes Project becomes available (BAN 11/3/2009).

Flatley said during the call that the development of the rare variant content for the Omni 2.5 BeadChip is complete, and that preliminary data indicate the product will increase genomic coverage by more than 50 percent over the 660W-Quad and nearly 40 percent over the Omni1-Quad.

"This increase of coverage indicates that there is a tremendous amount of genetic variation that simply was not represented during the first round of GWAS due to the limited SNP content available from the HapMap project," Flatley said. This increased coverage will provide a "very strong drive for customers to conduct rich GWAS to pursue missing heritability in common disease," he added.

"We now believe that our array business has stabilized, and that we have the industry-leading portfolio and pipeline to capitalize on the array opportunities for the foreseeable future," Flatley said. "It's our expectation, as we get into the back half [of 2010] and the 2.5M [chip] comes into the market, and later, [as] the 5M comes into the market, that we're going to start to see renewed growth in the overall GWAS business," he said.

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Illumina already has some "seminal studies" on the books that have committed to using its next-generation genotyping chips, Flatley added. "It's just a matter of getting those into the market and beginning to ship them. And once the initial data comes out, I think then, we'll really begin to build momentum for additional follow-on projects," he said.

Still, customers will be expected to pay more for premium content. Flatley said that prices for the 2.5M and 5M chips will be "higher than what you have traditionally seen on a per-sample basis, at least over the last year or so, because of the richness of the content."

At the same time, Illumina will "need to be a bit cautious about pricing them too high," because customers need to run larger sample sizes and could be limited by their total budgets for the study.

"As we get closer to launching these products, we'll be looking at those tradeoffs to make sure that we encourage customers to start the studies and really get aggressive in executing them, but also, that we maximize our revenue in terms of the combination of volume times price," Flatley said.

And New Instruments

Illumina's total instrument revenues for the quarter swelled 13 percent to $57 million from $50 million in Q1 2009. Sequentially, instrument revenues were down as the firm began to transition customers to its new HiSeq 2000 sequencing instrument. Henry said that microarray instrument revenue grew sequentially on a year-over-year basis.

Flatley attributed the instrument growth to "strong" demand for the firm's iScan system, and said the company expects this trend to continue. Last week, Illumina began shipping its HiScanSQ, which it said can support both microarray and sequencing applications. Flatley said the system sells for $400,000.

According to Flatley, the new system will appeal "mostly to mid-market customers." He gave, as an example, core labs that are seeing demand for array studies as well as sequencing. Flatley also recommended the system to customers who "want to begin to transition from doing array-based work into sequencing work or using sequencing as a follow up." A third set of potential customers are those that want to use sequencing in "examining hits that come out of an initial GWAS program," Flatley added.

The Rest of Q1

In addition to consumables and instruments, Illumina's service revenue, which includes genotyping and sequencing services, as well as instrument maintenance contracts, doubled in Q1 to $18 million compared to $9 million in Q1 '09. The primary driver of year-over-year growth was the increase in service maintenance contracts associated with the firm's growing installed base of sequencing systems, though Illumina also had a "particularly strong quarter" in its FastTrack genotyping services business "due to the completion of a few large contracts," Flatley said.

Illumina's net income for the first quarter rose nearly 13 percent to $21.2 million from $18.8 million year over year. R&D expenses increased 34 percent to $43.7 million from $32.7 million, while SG&A spending increased 18 percent to $50.3 million from $42.8 million.

The R&D expenses include stock-based compensation for employee stock options and stock purchases, Illumina said.

Illumina finished the quarter with $213.2 million in cash and cash equivalents and $534.8 million in short-term investments.

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